February saw a massive number of legislative attacks on American emigrants and their children by ignorant or malign (un)Representatives which are only now coming to light as the Government Printing Office finishes typesetting and publishing the hundreds of pages of proposed laws. We’ve already discussed the various recent bipartisan attempts to repeal the Foreign Earned Income Exclusion, but another frequent theme is increasing the tax and compliance burdens on so-called “Controlled Foreign Corporation owners” and “outsourcers”, including people who have lived outside the U.S. all their lives but got the inherited genetic disease of U.S. citizenship from their parents. So here’s an overview of the latest proposals to make your life more difficult, whether you’re an employee or a boss.
Paying U.S. taxes on non-U.S. dividends before you pay local taxes
The first example can be found the “Corporate Tax Dodging Prevention Act” introduced by Bernie Sanders (D-VT). It includes the following:
Sec. 2. Deferral of active income of Controlled Foreign Corporations.
Section 952 of the Internal Revenue Code of 1986 is amended by adding at the end the following new subsection:
(d) Special Application of Subpart—
(1) IN GENERAL— For taxable years beginning after December 31, 2013, notwithstanding any other provision of this subpart, the term ‘subpart F income’ means, in the case of any controlled foreign corporation, the income of such corporation derived from any foreign country.
(2) APPLICABLE RULES— Rules similar to the rules under the last sentence of subsection (a) and subsection (d) shall apply to this subsection.
Inclusion in “subpart F income” means that the income of a non-U.S. corporation is attributed back to its U.S. Person owner and taxed by the IRS at ordinary income rates. This treatment applies even if the owner is a flesh-and-blood person in whose hands dividend income from the corporation would be qualified dividends; see this helpful write-up from Aman Badyal of Badyal Law, “Subpart F Income Not Treated as Qualified Dividends”. As Homeland legislative drafters refuse to understand, the vast majority of “controlled foreign corporation owners” are U.S. Persons resident abroad who chose to register their businesses in the country where they actually live and use government services, rather than in some hypocritical foreign tax haven with ironclad secrecy like Delaware.
In other words, a self-employed Homelander who forms a C corporation in the jurisdiction where he or she lives pays 15% U.S. tax on dividends only when dividends are actually paid out; but if you form a corporation in the jurisdiction where you live, you owe Uncle Sam a quarter or more of its profits even if those earnings are not paid out as dividends but are retained by the company with the intention of reinvesting them in growth. And then, when you finally do pay dividends to yourself in another tax year and the country where you actually live taxes them, good luck trying to claim a foreign tax credit for the taxes you paid on those same amounts to the U.S. in prior years! This is the vaunted “horizontal equity” between taxpayers abroad and taxpayers at home of which Homeland ivory-tower academics so often speak.
Son of FATCA returns again
Next is the “Cut Unjustified Tax Loopholes Act”, the handiwork of Sheldon Whitehouse (D-RI) and Carl Levin (D-MI). In addition to the disastrous proposals about non-U.S. corporations with U.S. bank accounts which Levin included the last time he proposed this bill in February 2012, this time he and Whitehouse go even further in making life difficult for U.S. Persons abroad:
Sec. 125. Repeal of Check-the-Box rules for certain foreign entities and CFC look-thru rules.
(a) Check-the-Box Rules— Paragraph (3) of section 7701(a) is amended—
(1) by striking ‘and’, and
(2) by inserting after ‘insurance companies’ the following:
, and any foreign business entity that—
(A) has a single owner that does not have limited liability, or
(B) has one or more members all of which have limited liability.
Of course, the canonical example of “a single owner that does not have limited liability” is a flesh-and-blood person.
The “check-the-box” rules, when they were first formulated in 1998, originally offered a balanced if not particularly fair choice to U.S. Persons abroad doing business in the countries where they actually lived. If you didn’t file a Form 8832 election, your business would be treated as a corporation for U.S. tax purposes — and thus you’d be required to file Form 5471 and worry about your income being treated as “subpart F income”, but without any obligation to pay U.S. SECA tax on its profits or your salary. Alternatively, you could “check the box” on Form 8832 to have your business be treated as a pass-through, or in tax jargon, a “foreign disregarded entity” — and thus you’d include its profits on your 1040 and pay SECA tax, but you wouldn’t have to file any complicated paperwork.
Unfortunately but not at all surprisingly, the IRS couldn’t stand the idea of traitors with foreign anything having less paperwork, so in 2004 they created Form 8858 for single owners of “foreign disregarded entities”, meaning that either way if you were one of those evil tax evaders who dared to do business in a country where you’d lived your entire life, you’d be forced to file expensive paperwork to the foreigners in Washington DC for which the fines for inadvertent errors started at US$10,000.
Still, Form 8858 is marginally simpler than Form 5471, so for a small businessperson outside the U.S. whom the IRS considers a “U.S. Person”, a Form 8832 election can be a valuable tool in reducing your overall U.S. compliance burden. Unless of course Levin manages to slip his “CUT Loopholes Act” into the end of some unrelated bill in the dead of night, the same way he did with FATCA — in which case you’ll no longer have that choice, and accountants will be laughing in glee at all the additional fees they’ll be getting out of you.
Are you a U.S. Person who refuses to work in the U.S.? You must be an “offshorer”!
Next, there’s the “Job Preservation and Economic Certainty Act of 2013”, another typically anti-emigrant proposal from Whitehouse and Levin which will destroy jobs and introduce massive economic uncertainty for U.S. Persons abroad:
Sec.301. Ending tax breaks for offshoring manufacturers.
(a) General Rule— Subsection (a) of section 954 of the Internal Revenue Code of 1986 is amended by striking the period at the end of paragraph (5) and inserting ‘, and’, by redesignating paragraph (5) as paragraph (4), and by adding at the end the following new paragraph:
(5) imported property income for the taxable year (determined under subsection (j) and reduced as provided in subsection (b)(5)).
Adding something to § 954(a) means it becomes “foreign base company income”, a type of “Subpart F income”. The effects of inclusion in “Subpart F income” were discussed above. In simpler terms Levin thinks that someone who unfortunately holds U.S. citizenship while living and paying taxes abroad should be forced to make a choice if he or she wants to start a business: either drop your entire life and uproot your foreign spouse and kids “back” to the U.S. (if you can get a visa for them — by no means guaranteed, particularly if you’re gay or Muslim) or give up the ability to export products to the U.S. for sale to “fellow” Americans without incurring onerous tax and paperwork burdens.
In the mean time, the mercantilists in the U.S. government will happily use lopsided “Free Trade Agreements” and tax treaties they bully other countries into signing, to ensure that Homelanders have no trouble whatsoever exporting products to wherever you live so that they can be sold to you and your neighbours without encountering tax or tariff barriers.
Tax breaks for firing U.S. Persons abroad and hiring Homelanders
And finally, just for good measure if you’re an employee rather than a boss, there’s the “Bring Jobs Home Act” (H.R. 851). Basically it’s the same as John Duncan (R-TN)’s bill from last year, but this time coming to us from the Donkey side of the Animal Farm aisle, courtesy of Bill Pascrell (D-NY), Allyson Schwartz (D-PA), Chuck Rangel (D-NA), John Lewis (D-GA), John Larson (D-CT), Ron Kind (D-WI), Richard Neal (D-MA), Xavier Becerra (D-CA), Danny Davis (D-IL), Sander Levin (D-MI), and Linda Sanchez (D-CA).
Sec 45S. Credit for Insourcing Expenses.
(a) In General— For purposes of section 38, the insourcing expenses credit for any taxable year is an amount equal to 20 percent of the eligible insourcing expenses of the taxpayer which are taken into account in such taxable year under subsection (d).
(b) Eligible Insourcing Expenses— For purposes of this section—
(1) IN GENERAL— The term ‘eligible insourcing expenses’ means—
(A) eligible expenses paid or incurred by the taxpayer in connection with the elimination of any business unit of the taxpayer (or of any member of any expanded affiliated group in which the taxpayer is also a member) located outside the United States, and
(B) eligible expenses paid or incurred by the taxpayer in connection with the establishment of any business unit of the taxpayer (or of any member of any expanded affiliated group in which the taxpayer is also a member) located within the United States,
if such establishment constitutes the relocation of business unit so eliminated. For purposes of the preceding sentence, a relocation shall not be treated as failing to occur merely because such elimination occurs in a different taxable year than such establishment.
There’s really nothing new to say about this, besides the same thing I wrote last year when Duncan’s bill came out:
U.S. Persons abroad are never intended as beneficiaries of U.S. legislation, and are read out of the definition of “Americans” — until it comes time to pay for all these subsidies for which Congressional porkers have voted, at which point Homelanders like Hale Sheppard opine that we’re only being asked to pay “our fair share” for “the significant benefits” of U.S. Personhood, and that those who do not are “free riders”.
Renounce U.S. citizenship and be free of all these demagogues who have no respect for your right to live a normal life in the country of your choosing.