AMERICA'S PUNISHING WORLDWIDE TAX SCHEME.

PositionECONOMICS

YOU KNOW WHO'S really thrilled about American actress Meghan Markle's engagement to Britain's Prince Harry? Uncle Sam. Although Markle will live in the U.K., Washington will get a cut of her income, because Americans owe taxes on money earned abroad.

Even if Markle becomes a British citizen, she will be required to file a tax return in the States unless she also renounces her U.S. citizenship. Depending on her levels of assets, she may have to share very private information about her holdings.

There are some advantages to matrimony with a prince. If she were marrying a regular Jack, she would also find it hard to open a bank account in the United Kingdom: The Foreign Account Tax Compliance Act (FATCA), which was enacted under Obama, deputizes overseas financial institutions to snoop on and collect taxes from Americans, making banks reluctant to take on U.S. clients. But she will still suffer under a tax regime that is all but unique to the United States.

Until recently, only five of the 33 countries belonging to the Organization for Economic Cooperation and Development (OECD) had a worldwide tax system for corporations. Just one other country, Eritrea, has a citizen-based individual tax scheme. America's policy is a legacy of the Revenue Act of 1862, which implemented the collection of taxes from Americans regardless of where they reside to discourage draft dodgers from fleeing to Canada during the Civil War.

This is how it works: If you're an American living and working abroad, you report your income in that country and pay taxes to that government. You must then pay U.S. taxes on the same income. Yes, there is an exclusion for foreign earnings of about $100,000. And yes, you get a tax credit for the foreign taxes paid. If you're lucky, filing the U.S. return is simply a time-consuming hassle. But depending on your income level and location, the tax credit may be too small to let you avoid paying extra taxes to the IRS. And if your assets are above $300,000, there are additional forms to file and taxes to pay.

FATCA is best described as the ugly love child of Uncle Sam and Big Brother. Passed in 2010, it requires law-abiding Americans with legitimate bank accounts outside the country and...

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