Senator Carl Levin, not yet ready to rest on his laurels with the damage he’s done to Americans abroad by sneaking FATCA into the HIRE Act at the last minute, has apparently decided it’s a good idea to decrease American economic activity by making it even harder for Americans abroad, especially expat entrepreneurs, to do business with domestic American suppliers of goods and services. The full text of his newly-proposed “CUT
Exports Loopholes Act” is not yet available publicly, but he’s already put out a press release about it. In his floor statement, he described it as a subset of what he attempted to get implemented in the “Stop Tax Haven Abuse Act” (S.1346). We can guess the contents of his new bill by looking at his past efforts. In his press release, Levin says he would like to:
Establish rebuttable presumptions to combat offshore secrecy (§102) in U.S. tax and securities law enforcement proceedings by treating non-publicly traded offshore entities as controlled by the U.S. taxpayer who formed them, sent them assets, received assets from them, or benefited from them when those entities have accounts or assets in non-FATCA institutions, unless the taxpayer proves otherwise.
Similar language was included in S.1346 (direct link to section):
(a) Control- For purposes of any United States civil judicial or administrative proceeding to determine or collect tax, there shall be a rebuttable presumption that a United States person (other than an entity with shares regularly traded on an established securities market) who, directly or indirectly, formed, transferred assets to, was a beneficiary of, had a beneficial interest in, or received money or property or the use thereof from an entity, including a trust, corporation, limited liability company, partnership, or foundation (other than an entity with shares regularly traded on an established securities market), that holds an account, or in any other manner has assets, in a non-FATCA institution, exercised control over such entity.
To understand the full effects of this, think about what’s happening with FATCA right now: Americans abroad are being driven out of banks which aim to become FATCA-compliant. Regardless of what mitigating regulations the IRS may emit later, those banks already see Americans abroad (and at home) as toxic liabilities who will increase their red tape and their likelihood of being fined for inadvertent reporting errors. Indeed, the “CUT Loopholes Act” act also includes provisions to “strengthen FATCA … by clarifying when, under the Foreign Account Tax Compliance Act, foreign financial institutions and U.S. persons must report foreign financial accounts to the IRS” (see the corresponding section of S.1346) — which will make it even harder for foreign banks to comply with FATCA, and make them more likely to dump American expat customers.
Turned into personae non gratae by FATCA, many Americans abroad may end up opening personal and business accounts with non-FATCA-participating institutions if they want to keep buying groceries and paying the water bills. But under Levin’s proposed §102, every time an American abroad sends money from a non-FATCA foreign account to buy something from a U.S. business, Levin will accuse that U.S. business of being the owner of its customer’s foreign account — and, if the sending account was a business account, the U.S. business will be accused of being the owner of its customer’s whole business too! This puts extra burdens on every American expat entrepreneur who wants to hire an American contractor with whom he shares a native language in order to do some complicated technical work, and quite possibly every American abroad who wants to do some online shopping in the U.S. to buy birthday presents for his relatives. Even in the unlikely event later regulations include a sensibly high de minimis exception exempting transactions under a certain threshold, American suppliers will be forced to waste time filling out reams of red tape to prove that they do not own their American expat customers, or face unwarranted taxes and penalties. In fact, those suppliers will have to do the same thing when they make a big sale to any customer outside the U.S. who uses a non-FATCA bank. In short, it’s an export tax.
But it gets worse. Levin also introduces a new provision not contained in S.1346, in which he claims he would like to:
Close the foreign subsidiary deposits loophole (§106) by treating deposits made by a controlled foreign corporation (CFC) to a financial account located in the United States as a taxable constructive distribution by the CFC to its U.S. parent.
American expat entrepreneurs naturally do the majority of their business banking in the countries where they reside, to make it easier to deal with customers and tax authorities there. However, when dealing with American suppliers, it can get quite costly to have to pay international wire fees on every single transaction, especially if recurring payments or refunds are involved. So many American expat entrepreneurs open a U.S. bank account, deposit a single lump sum into that bank account every month or so, and then use domestic transfers or checks drawn on that bank account to pay American suppliers and contractors. This is a common-sense way to save on bank fees.
Without full text it is difficult to tell what Levin means by this, but §106 basically sounds like it would make the above common sense taxable — by applying Subpart F “constructive distribution” (deemed dividend) treatment to amounts deposited by an American-owned foreign company (what is known in tax parlance as a “Controlled Foreign Corporation”) into a U.S. bank account. These amounts will be taxed under §951 as if they were a dividend to the American expat business owner, even if they are not profits but are actually costs of paying American suppliers. And even more insultingly, Levin calls this a “loophole”, as if American expat entrepreneurs were doing something unethical by saving on bank fees and doing business with American banks and American suppliers.
American expats who decide to take that great leap of faith and start small businesses in their countries of residence already have much higher overhead costs than their local competitors, thanks to the U.S.’ unique system of taxing and red-taping citizens who do not reside in the country. They have to set up a parallel accounting system in U.S. GAAP (in addition to whatever the tax authorities of their countries of residence demand), and file obscure and complicated international tax forms like Form 926 or Form 5471 to the IRS every year. But an American starting a small business in Brazil, or in Hong Kong, or in Germany, is far more likely than a native Brazilian, Hongkonger, or German to be familiar with American brands and companies, and so to purchase goods and services from Americans back home. This could increase US exports and cut the US’ trade imbalances — if Congress and the IRS would just get out of our way and stop adding compliance burdens for people who don’t even live in their jurisdiction.
American expat entrepreneurs could be at the forefront of increasing exports of American goods and services, just as Japanese and German expat entrepreneurs lend their strength to helping their high-wage, high-regulation home countries create trade surpluses with China. Instead Levin would like to make it even more difficult and costly for American expat entrepreneurs to do any business with American suppliers, by threatening both sides with red tape, taxes, fines, and accusations of tax evasion — in a classic example of how American politicians, whether out of ignorance or malice, keep making it harder and harder for Americans abroad to live normal lives.