Complex areas of tax are low hanging fruit for conspiracy theorists, politicians and agenda driven journalists. Clearly it is important that our public servants are held to the highest standards of probity, but we are often in danger of throwing the baby out with the bathwater because people are misinformed, and the truth becomes, at best, an after thought. I think the Green Card issue is blown out of all proportion. It’s a non-issue, but I would say that the idea that Sunak had the Green Card because of an oversight of some kind really doesn’t stack up.
Let’s start with the Green Card itself, officially a “Permanent Resident Card”. This caused quite the outrage – I’m not sure all the outraged were entirely sure why they were outraged, but there were certainly a few reasons for outrage – although no actual consensus over what the outrage was about.
Dan Hodges (@DPJHodges) of the Mail on Sunday tweeted that holding the Green Card meant that Sunak was “secretly pledging allegiance to a foreign state, and committing to make it his ‘forever home’”.
The Independent writes “Overseas applicants must declare an intention to eventually become US citizens”.
None of this is true. Rishi Sunak used to work in the United States after studying for an MBA at Stanford University. There are two forms that would have been completed – an I-140, and an I-485. An I-140 is completed by a prospective employer, and is a petition to the US Citizenship and Immigration Services (USCIS) to say why you, as an employer, require the person to immigrate to the US. There are various classifications EB1, EB2 etc and in exceptional circumstances you can apply for a National Interest Waiver so you don’t need the employment sponsor, but it’s really not necessary to go into any of that here.
Have a look at the I-485. Do you see a pledge of allegiance? No. Do you see a pledge to make the United States your “forever home”? No. Do you see a declaration that you intend to become a citizen? No. Most of the declarations are basically stating that you haven’t put a foot wrong. Ever.
There might be an expectation that applicants intend to stay permanently, but that is not what the applicant is asked to sign. In practice, people obtaining Green Cards and subsequently abandoning them is not uncommon. If you want to play football for LA Galaxy, but don’t know how long you’ll be there for, you’ll almost certainly obtain a Green Card. There is no actual expectation you will stay in the US forever.
So you would generally file the I-140 and the I-485 concurrently (you don’t have to but it will be quicker) with USCIS and will then, if successful, receive your Permanent Resident Card which is, as you might guess, green.
Once you’ve got your Green Card you are free to live and work in the US. You are not a US citizen – and you cannot, for example, vote.
However, you are a US resident for tax purposes according to US law, subject to tax on your worldwide income and gains. This causes a great deal of confusion.
Naomi Smith, Chief Executive of pro-EU Best for Britain campaign group said, “It shouldn’t take a foreign Government to point out that a UK minister should pay tax in his own country”. With a clear implication that there is an impairment to the UK tax due.
@Haggis_UK tweeted “Rishi Sunak held a Green Card for 18 months while being Chancellor, so the US expected him to pay taxes there first”.
There are lots of such reports. Some people actually thought perhaps it meant Sunak was non-dom. Perhaps he didn’t pay anything in the UK? Clearly all untenable for the Chancellor of the Exchequer. So what’s the reality?
Rishi Sunak, as above, was a Permanent Resident of the United States subject to US tax on his worldwide income and gains.
He was also a UK resident and domiciled individual subject to UK tax on his worldwide income and gains. How do I know he’s a UK resident and domiciled individual? It’s the law.
The Constitutional Reform and Governance Act 2010, Part 4, states (my emphasis):
“Tax status of MPs and members of the House of Lords
(1)Subsection (2) applies if a person is for any part of a tax year—
(a)a member of the House of Commons, or
(b)a member of the House of Lords.
(2)The person is to be treated for the purposes of the taxes listed in subsection (3) as resident and domiciled in the United Kingdom for the whole of that tax year.”
This in itself caused confusion. How do we know Rishi Sunak complied with this legislation? The legislation is not directed at him, it’s an instruction to UK authorities, including HMRC. This legislation is saying, “If you’re an MP, regardless of your other circumstances or arrangements, and whether you like it or not, you ARE a UK resident and domiciled individual while you are an MP.”
There have been similar allegations about Labour MP Stephen Kinnock this week saying he was non-dom. Again, that’s impossible as an MP.
So, back to Sunak. He’s subject to tax on his worldwide income and gains in both countries – so what happens? Does Sunak really have to pay tax to both jurisdictions? No - at least not the full extent to both.
We have Double Taxation Treaties for just such a conflict. Clearly if someone was going to be taxed twice this is a huge disincentive to cross border investment, so countries across the World have Double Taxation Treaties/Agreements. The UK has about 130 of them. So how does the Treaty help in Sunak’s case?
The issue here is residence, which is covered in Article 4 of the Treaty. Paragraph 1 states, “the term "resident of a Contracting State" means, for the purposes of this Convention, any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, citizenship, place of management, place of incorporation, or any other criterion of a similar nature.”
So is Rishi Sunak a resident of both? Here’s where it gets a little complicated and beyond the character limit on Twitter. We have to understand the domestic laws of each state, and the way the treaty operates between the two. There is no doubt that under the domestic law of each state Rishi Sunak is (or rather was) a tax resident. However, Article 4 Paragraph 2 of the treaty complicates matters, which doesn't seem to have been picked up on elsewhere:
“2. An individual who is a United States citizen or an alien admitted to the United States for permanent residence (a “green card” holder) is a resident of the United States only if the individual has a substantial presence, permanent home or habitual abode in the United States and if that individual is not a resident of a State other than the United Kingdom for the purposes of a double taxation convention between that State and the United Kingdom.”
What is this saying? For the purposes of the treaty a person is only a resident of the United States if he “has a substantial presence, permanent home or habitual abode in the United States.” This doesn’t mean he isn’t a tax resident for US domestic tax law, this means he wouldn’t be a tax resident just for the purposes of the treaty. The consequences of that would be that if Sunak had retained his Green Card and that was it, he was living just as a UK person, he wouldn’t be able to avail himself of the treaty benefits and would be subject to more tax in the United States.
Rishi Sunak maintains a home in the Santa Monica, California – which is one reason why I think it is unlikely that Sunak’s Green Card is an oversight. Having a Permanent Home will allow him to benefit from the treaty - if it didn't I think he would have abandoned his Green Card long ago.
So having established that Rishi Sunak is resident in both jurisdictions for the purposes of the treaty so far, we then go to the tie-breaker provisions in paragraph 4. You go through each until the situation is resolved.
“Where by reason of the provisions of paragraph 1 of this Article, an individual is a resident of both Contracting States, then his status shall be determined as follows:
(a) he shall be deemed to be a resident only of the State in which he has a permanent home available to him; if he has a permanent home available to him in both States, he shall be deemed to be a resident only of the State with which his personal and economic relations are closer (centre of vital interests);
(b) if the State in which he has his centre of vital interests cannot be determined, or if he does not have a permanent home available to him in either State, he shall be deemed to be a resident only of the State in which he has an habitual abode;
(c) if he has an habitual abode in both States or in neither of them, he shall be deemed to be a resident only of the State of which he is a national;
(d) if he is a national of both States or of neither of them, the competent authorities of the Contracting States shall endeavour to settle the question by mutual agreement.”
What do we think? It’s probable it’s resolved in a), he lives and works in the UK so his personal and economic relations are closer to the UK. Let’s say it isn’t, go onto b) where does he have a habitual abode? I’m not sure his California home is used enough to be habitual. Again, let’s say it is, we go on to c), Rishi Sunak is not a US national so, if not before, taxing rights are provided to the UK based on him being a UK national. As I indicate, it probably doesn’t get as far as c) but it certainly goes no further.
So, what happens? Rishi Sunak completes his UK tax return as normal – the US Green Card need not be an issue when it’s being completed. He’ll pay all UK taxes due regardless. Then, when he completes his US tax return he (his accountant!) will calculate how much tax is due for each stream of income, and he will claim a credit for UK taxes paid.
To be clear, if Rishi Sunak didn’t have a US home, and failed to qualify as a resident under the treaty, it would increase his US liability – his UK liability is unaffected regardless.
There is no route at all to Rishi Sunak holding a Green Card resulting in a lower UK tax liability. Whatever the issue is, it definitely isn’t because it’s detrimental to UK tax revenue.
However, even if the treaty results in no tax US tax being paid he still has to file a tax return each year, and will also have FBAR obligations, with substantial penalties for non-compliance. Again, another reason why maintaining the Green Card couldn’t plausibly be an oversight.
What about a conflict of interest, Dan Hodges writing in the Mail on Sunday writes, "From the moment he became Chancellor, Sunak was responsible for negotiating with the US on behalf of the British people. For example, over a post-Brexit trade deal, which we are told is the most important in British history.
Over global tax rates. Over everything from agriculture and food tariffs, through healthcare and drug pricing, to digital trade and services. So while Sunak was supposedly trying to drive the best deal for the British people, he was secretly holding discretionary permanent residency of the foreign state he was negotiating with. He was secretly obliged to file tax returns to the foreign state he was negotiating with. And he was secretly under obligation to pay taxes to the foreign state he was negotiating with.
It's difficult to think of a more direct and egregious conflict of interest for a senior UK Government Minister. Staggeringly, his allies still can't see how wrong this is."
It's difficult to argue for or against this point without understanding the inner thoughts of Rishi Sunak. For what reason did he maintain the Green Card? It's perfectly possible that Sunak was intending to keep his California home into his retirement. Is this really going to colour his negotiation over tariffs? Whilst in the EU if a Government Minister had in his mind that he planned to retire to the South of France should that bar him from inter-EU negotiation? Is Dan Hodges saying the right to live and work in another country must temper your commitment to your own? David Beckham has a Green Card. Would he feel conflicted should the USA play England?
In summary, Rishi Sunak hasn't pledged allegiance to the United States and he hasn't committed to become a citizen. There is no route to any detriment to the UK tax revenue from Sunak holding the Green Card - although it could lead to him paying US tax, but only in addition to his UK liability. The "egregious" conflict of interest argument seems absurdly far fetched, but it is, at least, subject to opinion.
If any of the Rishi Sunak/Akshata Murthy arrangements has legs as a political scandal of any kind it would be Akshata's non-dom status, where there is an actual tax implication.
Personally, I think the Green Card is a non-story.