Andrew Hubbard

Written by: Andrew Hubbard

Andrew Hubbard

Consultant

What Meghan Markle teaches us about the tax status of US citizens

We at the Weekly tax brief don’t normally find ourselves covering gossip about royalty, but when it involves taxation our interest is piqued.

The story is of course that as an American citizen Meghan Markle is subject to US tax and hence the IRS (the US Revenue Authority) could have a reason to look at the wider finances of the royal family.

I’ve no idea whether there is anything more to this story than speculation but it did get me thinking about the different ways that countries determine which individuals are within their tax net.

The starting point for virtually all tax systems is that if a person is living in a country he or she is taxed on the income arising in that country. So somebody with a job in the UK pays UK income tax on those earnings. But once you move away from that simple position all sorts of possibilities arise.  What happens for example about income arising in country B to a resident of county A?

Generally country A will want to tax that income – so in this country a UK resident pays tax on income arising anywhere in the world. Country B might also want to tax that income, because it arises in their country, and so complex rules and a network of double tax treaties exist to sort out which country’s rights take precedent. But different countries have very different approaches to deciding how they will tax non-residents or the foreign income of residents.

Citizenship does not, however, generally play a part in determining taxing rights. A British citizen who lives abroad is treated in exactly the same way as any other non-resident. But this is where the US differs.

US tax operates on a citizenship basis and so US citizens are within the US tax system wherever in the world they live and regardless of where their income arises.

There are a complex set of reliefs and exemptions which will often mean that no US tax is actually payable but all US citizens are required to complete a US tax return even if they have no US income. There is, as far as I am aware, only one other country which has the same policy of taxing all of its citizens on their worldwide income and if you are looking for a good pub quiz question for Christmas asking people to guess which one it is might produce some interesting responses (the answer is at the bottom of this brief*).

The US has the political clout to enforce its citizenship policy. The IRS has agents working throughout the world and many governments have concluded agreements with the US to assist enforcement of the policy.

But these things don’t work in reverse. So if a future US President were to marry a British citizen who was tax resident in the US, HMRC officials could not go knocking at the door of the White House asking questions about family wealth. If they did I suspect that they might be reminded in no uncertain terms about the Boston tea party and the capacity of tax disputes to escalate into something much worse.

 

 

*The answer to my pub quiz question is Eritrea

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