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FATCA Causes Chinese to ditch US passports

The long arm of the American taxman has many wealthy mainlanders ruing the day they decided to get US citizenship, and more are considering trying to get rid of it.
Formany wealthy mainland Chinese who immigrated to the US, an American passport is a genie that cannot be put back in the bottle. More and more of them are thinking about renouncing their US citizenship, something that would have been almost unimaginable a decade ago, when getting a US passport was the ultimate status symbol in China.
afp.jpgWu, a 31-year-old housewife who asked to be identified only by her family name, said she started toying with the idea about a year ago. "I regret it to death, all of my friends regret it to death," said Wu about taking out US citizenship. "I'm never going back."
Behind her change of heart is tax. Under US law, American citizens and permanent residents, known as green card holders, are taxed on their worldwide income regardless of where they live. Other countries, including China, tax their citizens' global income. But it is the US, with its sophisticated systems and the long arm of its taxman, that has the highest profile.
In March 2010, Washington stepped up its tax collection efforts by enacting the Foreign Account Tax Compliance, or Fatca, aimed at cracking down on tax dodgers abroad. The regulations are set to be finalised before year's end, and the US Internal Revenue Service (IRS) expects the tightened compliance to generate as much as an extra US$9 billion over the next decade.

But it's not just having to pay up that's a problem. Americans and green card holders face onerous US reporting requirements, often have trouble opening bank accounts outside the US and frequently find it hard to form business ventures overseas because potential partners fear getting on the IRS' radar screen.

The number of Americans renouncing their citizenship rose to about 1,780 last year from just 280 in 2006, according to data from the US Federal Register compiled by the Sunday Morning Post. The figures don't distinguish between US-born and naturalised citizens, and don't include permanent residents who have given up their green cards.
But this bears risks. Take, for instance, Steven Ng-Sheong Cheung, a Hong Kong-born economist who became a naturalised US citizen. He fled to mainland China from Hong Kong after he was indicted by the IRS in 2003 for tax evasion. He is still holed up on the mainland, which doesn't have an extradition treaty with the US. But Cheung could be extradited to the US if he travels to jurisdictions that do have such treaties, and according to the US State Department, that is more than half the jurisdictions on the planet, including Hong Kong.
Renouncing US citizenship is also expensive. Deng, the Hong Kong lawyer, said it usually took one to two years to complete the process. To avoid an individual becoming stateless, the US requires anyone giving back citizenship to be a citizen elsewhere.
There is also the fee for legal advice, which runs up to US$30,000 at Deng's firm. And there's a so-called expatriation tax, a charge that has to be paid when the US passport is surrendered, and which is subject to a complicated calculation. Different rules apply depending on the date of surrender. For instance, people giving up their citizenship since June 16, 2008, can be taxed as if their worldwide assets were sold at fair value at the time, even though there are no actual sales.
People who gave up their US passports before June 16, 2008, and who are deemed to meet a certain threshold of income or net worth are generally subject to continued US tax on a certain amount of their income for 10 years following the date they are no longer considered to be US citizens.
Still, the number of mainland Chinese immigrating to the US continues to swell. Last year 34,693 did so, more than double the number in 1992, according to the latest available figures from the US government.
Many are seeking better health care, a better environment or asset protection. Political risk is also a key reason, said independent economist Andy Xie, a Chinese citizen who lives in Shanghai and does not hold a US passport.
Unlike the US, China doesn't recognise dual nationality, and Chinese who acquire foreign nationality are supposed to automatically lose their Chinese nationality, says Patrick Phua, a Beijing-based partner at law firm Ashurst.
Many mainlanders, like Wu, retain their Chinese citizenship while holding US citizenship, betting they will not get caught.
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Read more at: Tax Times blog

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