June 8, 2011
Panama City, Panama
This morning I enjoyed a sumptuous buffet breakfast at the Hotel RIU with my longtime friend and Panamanian attorney, Augusto. He’s just had a new baby, and from the way he was pounding the coffee, Augusto’s not getting much sleep.
He’s also swamped at the office; Augusto is a key figure in a rapidly growing practice area for his Panamanian law firm– tax compliance. Funny thing, though, it’s not Panamanian tax compliance, it’s US tax compliance.
There are a lot of Panamanians who, for one reason or another, have US citizenship. During Latin America’s tumultuous times several decades ago, many families with means temporarily moved to the United States so that they could watch the turmoil from their television sets instead of their living room windows.
Most of these families popped out a child or two while living in the US, and, per US law, those children were automatically US citizens.
A few years later, they moved back. The kids grew up in Panama, became adults in Panama, went on to take over the family business, etc. Along they way they had a number of bank accounts in Panama, owned Panamanian companies, formed Panamanian foundations, and definitely earned healthy profits.
As it turns out, however, those Panamanians who were born in the US were required to file tax returns and disclosure forms annually with the IRS, as well pay the US government its “fair share” of their income. And now, with so much stink being raised about offshore tax compliance for US citizens, these dual nationals find themselves caught in a tough situation.
Most were completely unaware and were recently tipped off by their local banker here in Panama, a conversation that went something like:
“Hey don’t you have US nationality as well as Panamanian? The US government is breathing down our necks to make sure customers are in compliance. You should see these stupid regulations they expect us to follow.”
“Um… compliance for what?”
After a few uncomfortable phone calls, they find out that they’re obliged to file 10+ years’ worth of 1040’s, 5471’s, and FBARs, as well as pay steep tax bills with penalties and interest.
I have no doubt that a great many of these dual nationals are going to march down to the US embassy to renounce their citizenship. Unfortunately for them, they won’t even be ‘allowed’ to do so until they become tax compliant.
It’s amazing– many of these folks have never lived in the US, have never earned a penny of US-source income, and have never even heard of an FBAR… yet literally by accident of birth, they are now obligated under penalty of imprisonment to pay a huge portion of their assets to another government despite never having been made aware of such obligations.
What’s more, they can’t get out of it. They can’t even renounce this obligation without first paying off the debts that they never signed up for.
In 1762, Genevan philosopher Jean Jacques Rousseau argued in Du Contrat Social that while people are born free, they surrender a bit of sovereignty in exchange for the benefits of living in a society. For Rousseau, who is commonly held with John Locke as an important influence on US constitutional principles, this social contract has two willing counterparties.
In other words, the individual must volunteer to accept the obligations of society, as well as be free to leave at a time of his or her own choosing. Furthermore, the contract cannot be unilaterally altered without overt acceptance of the other party– if they decide to put their hands down our pants… to impose a draft… to triple tax rates, we should be free to leave.
Yet the system we have today is one in which people are simply born into obligations beyond their control, whether they like it or not, whether they even know it or not. Despite all of our plasma screen TVs, SUVs, and McMansion mortgages, this is nothing more than dressed-up serfdom, a system in which people exist to serve the state, not the other way around.