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.
If this is true, I am furious. Start writing your congresspeople and senators now.
What will it take for other countries to finally stand up and shout “NO” to the US government? Does the US have to completely collapse before other countries will resist this infringement on their national sovereignty and gross violation of international norms with regards to the law of dominant nationality?
People like Levin I can at least understand. He has an agenda and knows that what he is doing will look good to voters. He doesn’t care about the effects on those of us legally resident in another country.
Where I feel absolutely betrayed is by my country’s government, by the EU and all of the other countries that have completely rolled over and are now offering to circumvent their own privacy laws by having banks transmit our personal details to their respective governments first, which will then be transferred to the US. I wish I were Australian or Japanese, because at least these governments seem to be interested in protecting THEIR OWN CITIZENS from a hostile foreign country.
Either Levin secretly hates the US and is doing everything within his means to hasten the empire’s death, or he is incredibly stupid and naive.
@zucchero81: Like Don Pomodoro said, Carl Levin has a long history of single-mindedly pushing his agenda without thinking about the side effects. Basically he’s trying to fight tax haven and transfer pricing abuse by making life more difficult for U.S. owners of “Controlled Foreign Corporations” or “Foreign Disregarded Entities” — which he thinks of primarily as companies which sit in NYC or Silicon Valley and have shell subsidiaries in the Caymans.
I think Levin just plain old doesn’t understand that self-employed Americans abroad, who are fully subject to the whole Internal Revenue Code’s requirements, are also CFC/FDE owners. I don’t think he’s deliberately malicious — the malicious one is Chuck Grassley, who wants to eliminate the FEIE and tax 6 million expats just like they were living in the US, so he can get more pork for his 2 million constituents in Iowa.
Incidentally, Grassley’s a Republican while Levin’s a Democrat — isn’t it great to know that the godawful expat tax has bipartisan support? Brings to mind the old joke about the Stupid Party and the Evil Party.
See! It never gets better, only worse….
I honestly believe that they don’t want any Americans overseas, unless it’s under their bidding (military, foreign service, etc..). Shoot themselves in the foot, definitely. I just don’t care anymore…
@zucchero81- I vote for stupid. I actually would give all of Washington the same vote, given the quality of the legislation that has come out of the U.S. government, from the Patriot Act to the present. Witness their self inflicted near death experience last year over raising the budget ceiling.
I actually saw a recent interview with Carl on Mitt Romney’s tax status basically saying there was no reason for Romney to have an account in Switzerland unless he said with exasperation you were an American living in Switzerland.(It sounded like he was hearing about Americans living in Switzerland a lot) Someone is getting to him.
For those who don’t know who this guy is:
“Carl Levin is a U.S. Senator from Michigan. He is obsessed with tax Havens and is the architect of the proposed “Tax Haven Abuse Act”. Mr. Levin can’t seem to comprehend that there may be legitimate reasons to have a foreign bank account or to live outside the United States. He operates with a presumption that all foreign bank accounts are for criminal purposes. Jamie Downey writing for the Boston Globe notes that the disclosure requirements in FATCA (and presumably FBAR):
“… seem to create a presumption that those with foreign assets are evading taxes. In reality, most of the account owners are merely living abroad or have lived abroad in the past. The vast majority are complying with the tax law. So the significant minority evading taxes create a massive disclosure for the significant majority complying with the law.”
Senator Levin presumes the 30,000 people who entered the 2009 and 2011 OVDI programs are criminals. His comments clearly apply to the U.S. Canada dual citizens who entered OVDI. Is this 70 year old woman a tax cheat?
There is no confirmed evidence as to whether either of the following to dual citizens entered OVDI. That said: Is this Toronto writer a tax cheat? New Brunswick Premier David Alward is clearly not a tax cheat.
It’s no surprise that Ambassador Jacobson has promised relief to U.S. citizens legitimately residing in Canada. But, Carl Levin includes these long term Canadian residents in his description of “tax cheats”. Michigan lies along the Canadian border. Has he ever been to Canada?
Senator Carl Levin owes an apology to every U.S. citizen residing in Canada his following comment on OVDI:
Levin Statement on Closure of 2011 IRS Voluntary Disclosure Program for Offshore Tax Evasion
Thursday, September 15, 2011
WASHINGTON – Sen. Carl Levin, D-Mich., made the following statement today regarding the IRS announcement that its recently completed offshore program increased the total number of voluntary disclosures up to 30,000 since 2009:
“The 30,000 taxpayers who acknowledged they had avoided paying taxes by using offshore schemes show how rampant offshore tax abuse is,” said Levin. “Congress could do a lot more to stop offshore tax cheats who are costing this country an estimated $100 billion each year. That’s why I’ve sent a letter to the select committee urging it to include my Stop Tax Haven Abuse Act in its deficit reduction plan. Enacting that bill would not only protect honest taxpayers and increase tax fairness, it would bring in revenues allowing Uncle Sam to reduce the deficit.”
Check out Senator Levin’s proposed “Stop Tax Haven Abuse Act“. Once again, I don’t condone tax evasion. The problem is that these laws don’t make any distinction between hard working expats and U.S. residents uses foreign bank accounts and corporations for illegal purposes.
In the world of Carl Levin there is no good reason to have a foreign bank account. Maybe Senator Levin has never been outside the United States.”
Why don’t we pool our money and offer to bring Carl to Canada for the weekend? We can show him Canadian currency, Americans living in Canada, some of the banks, and feed him some Canadian beer.
Thanks for posting this. It is amazing. If your analysis is correct, this will operate largely through Subpart F of the IRC – which is completely unknown to the average person.
The U.S. is clearly on the way to building “Fortress America”.
50 years from today, the U.S.A. will be exactly what North Korea is today. I.e. a backward dictatorship, with nothing but nuclear weapons.
It will be littered with statutes of Obama, Levin and the like.
The reality in life is that “The most dangerous person is the stupidest one”. That’s where Levin, et all are bringing the U.S.
Renounce U.S. citizenship and rejoice.
@zucchero81: “Either Levin secretly hates the US and is doing everything within his means to hasten the empire’s death, or he is incredibly stupid and naive.”
@recalcitrantexpat: “I vote for stupid.”
I vote for both evil AND stupid.
Swiss article on this new Intolerable Act: http://www.tsr.ch/info/suisse/3768878-les-banques-suisses-dans-le-viseur-d-un-senateur.html
Like I said earlier on another IBS page (http://isaacbrocksociety.com/2012/02/08/u-s-treasury-says-that-when-taxpayers-overseas-avoid-paying-what-they-owe-other-americans-have-to-bear-a-disproportionate-share-of-the-tax-burden/#comment-4808):
I would say that if Levin (see SON OF FATCA http://www.levin.senate.gov/newsroom/press/release/levin-conrad-introduce-cut-tax-loopholes-act) continues his rants, somebody should make him persona non grata like they did with Bush a few years back (rumors of a criminal complaint to Swiss attorney general or Cantonal prosecutors for war crimes). He should be arrested under European discrimination laws! How the arresting country would claim jurisdiction or manage physically to arrest such a person despite his possible SS (read Secret Service, or leave to your imagination) escort is another matter, but I think he and those like him deserve to be prosecuted openly.
Let him explain himself in court! Let him explain how he could in his right mind propose such laws! Make him read the Constitution of the US, and the Declaration of Independence in open court and then cross-examine the guy!
If some of us are afraid to visit friends or family in the US because of this whole mess, let the Hon. Levin cancel his next vacation abroad if he wishes to avoid such an above-described episode!
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