Wealthy Americans line up to give up passports in Switzerland
About 1,780 expatriates gave up their nationality at U.S. embassies last year, up from 235 in 2008. The embassy in Bern, the Swiss capital, redeployed staff to clear a backlog as Americans queued to relinquish their passports.
Rich Americans renouncing U.S. citizenship rose sevenfold since UBS whistle-blower Bradley Birkenfeld triggered a crackdown on tax evasion four years ago.
About 1,780 expatriates gave up their nationality at U.S. embassies last year, up from 235 in 2008, according to Andy Sundberg, secretary of Geneva's Overseas American Academy, citing figures from the government's Federal Register.
The embassy in Bern, the Swiss capital, redeployed staff to clear a backlog as Americans queued to relinquish their passports.
The U.S., the only nation in the Organization for Economic Cooperation and Development that taxes citizens wherever they reside, is searching for tax cheats in offshore centers, including Switzerland, as the government tries to curb the budget deficit.
Shunned by Swiss and German banks and facing tougher asset-disclosure rules under the Foreign Account Tax Compliance Act (FATCA), more of the estimated 6 million Americans living overseas are weighing the cost of holding a U.S. passport.
"It started with the fallout from UBS and non-U.S. banks feeling it's too risky to deal with Americans abroad," said Matthew Ledvina, a U.S. tax lawyer at Anaford in Zurich. "It will increase because FATCA will require banks to track down people, some of whom will make voluntary disclosures before renouncing their citizenship."
Renunciations are higher in Switzerland because American expatriates expect extra scrutiny of their affairs after the UBS case and as the U.S. probes 11 other Swiss financial firms for aiding offshore tax evasion, said Martin Naville, head of the Swiss-American Chamber of Commerce in Zurich.
"Most of the real cross-border tax troubles have been around Switzerland," Naville said. "We've got absurd tax laws coming into force because of the activities of certain people who tried to hide money."
During a 10-minute renunciation ceremony in a booth with bulletproof glass windows, embassy staff ask exiting Americans whether they are acting voluntarily and understand the implications of giving up their passports. They pay a fee of $450 to renounce and may incur an "exit tax" on unrealized capital gains if their assets exceed $2 million or their average annual U.S. tax bill is more than $151,000 during the past five years.
They receive a certificate within three months telling them they are no longer American citizens and not entitled to the services and protection of the U.S. government.
The U.S. embassy in Bern declined to comment on renunciations. The U.S. State Department doesn't disclose annual figures, said Elizabeth Finan a spokeswoman for the department, adding that "on average" 1,100 people give up their citizenship each year.
While the U.S. taxes citizens regardless of where they reside, overseas income of as much as $95,100 is exempt and credits help compensate for foreign taxes paid. Americans living in Switzerland can't take advantage of the absence of a capital-gains tax or tax deductions allowed on pension contributions.
"Every dollar you save, you lose to the U.S. tax man," said tax lawyer Ledvina. "That's one reason why people give up citizenship."
Americans, who disclose their non-U.S. bank accounts to the IRS, must file the more expansive 8938 form beginning this year that asks for all foreign financial assets, including insurance contracts, loans and shareholdings in non-U.S. companies.
The 2010 FATCA law requires banks to withhold 30 percent from "certain U.S.-connected payments" to some accounts of American clients who don't disclose enough information to the IRS.
"There is incredible frustration at the audacity and imperial overreach of this law," said David Kuenzi, a tax adviser at Thun Financial Advisors in Madison, Wis., referring to FATCA.
Failure to file the 8938 form can result in a fine of as much as $50,000. Clients can also be penalized half the amount in an undeclared foreign bank account under the Banks Secrecy Act of 1970.
American Citizens Abroad, a Geneva-based organization that campaigns for taxation based on residency, said the government doesn't always distinguish between U.S.-based tax dodgers with offshore accounts and expatriates that need foreign banking services.
"The perception is that any American living overseas is there for a nefarious reason," said Marylouise Serrato, executive director of the organization that has members in 90 countries. "There isn't a deep understanding in the U.S. of why American citizens would move overseas."
The additional compliance costs for companies to ensure that Americans they hire are filing the correct U.S. tax returns and asset-declaration forms are at least $5,000 per person, said Ledvina. Where individuals are getting their returns prepared, the expense may amount to $1,500 to $2,000, which is pushing expatriates to consider giving up citizenship.
"The compliance costs are high and they're getting worse," Ledvina said. "It's hard to serve two authorities and the problem for Americans abroad is that the IRS doesn't care."