Posted by Barbara on the Media thread. Cross-posted from there.
UPDATE: Emailed letters will be delivered to the White House on OCTOBER 2. Deadline for sending emails is SEPTEMBER 30!!!
Write your letters, people!!
——————————————————–
YOU MUST ACT NOW!! NO EXCUSES!! PLEASE SHARE WITH ALL FELLOW AMERICANS OVERSEAS (regardless of party affiliation or non-affiliation) & ACCIDENTAL AMERICANS!! If you do nothing, nothing will change!!
We need your help. The Senate Finance Committee and the House Ways and Means Committee are working on tax reform, and we need to get overseas Americans’ voices heard. We have not had tax reform for 31 years, and if we miss our window now, we will not see another chance for 20 more years.
At the initiative of Republicans Overseas, the RNC recently adopted a White House approved resolution supporting the change from citizenship based taxation (CBT) to residence based taxation via RO’s proposed Territorial Taxation for Individuals (TTFI). We have champions and sponsors in both the House and the Senate. We have found tax loopholes that TTFI would close, thereby making TTFI revenue positive. The ingredients for success are lined up–but we’re missing one: the massed voices of ordinary overseas Americans.
What we need now is for our representatives to hear from as many overseas Americans as we can gather. We believe that the vast majority of overseas Americans support the inclusion of TTFI to the tax reform package, and we need to hear from thousands of them. We want to collect as many letters supporting TTFI and tax reform as we possibly can, which Solomon Yue will then present to the White House.
Can you please support our initiative by writing a letter to President Trump and copying your Congressman and Senator.
Here’s how it will work:
1) RO is providing a letter template along with an example which can be found here:
https://republicansoverseas.com/territorial-taxation-individuals/#sample-letters
We urge letter writers to share their own short stories, but also to link their letters to the themes outlined by the White House in their press release on tax reform by focusing on two points: \
(a) TTFI reduces the cost of hiring Americans working overseas, increases U.S. exports, and creates more American jobs within the U.S., and (b) it reduces tax preparation costs for overseas Americans. The sample letter already does this, but it is important to reiterate that we need to reinforce the White House’s points and link those points to individual situations.
2) The letters should be emailed to taxreform@republicansoverseas.com and copied to their local representative and Senators. Links to government databases providing this information can be found at
https://republicansoverseas.com/territorial-taxation-individuals/#contact-congress
3) Solomon Yue will print out the letters and take the physical package to the White House. Clearly, the more the better!
Thank you for your support! If you have any questions or suggestions, please contact Kym Kettler-Paddock at kym.kettler-paddock@republicansoverseas.com.
Regards,
Michael DeSombre
Worldwide President, Republicans Overseas
JC: Do have a link to where you learned about the September 25 date? If so, I’ll update this post. Thanks!
The more associations which join together, the more force behind the push towards TBT/RBT so I take heart from this part of the ACA/ACA Global Foundation submission to the Senate Finance Committee:
Maybe someone can explain under TBT how a non-resident with US sourced income would file this income with the IRS. Would there be, for instance, a threshhold below which no tax would be owed (and hopefully no filing required) or would tax be owed on every dollar earned? Or … would some US sourced income like SS payments be “less taxed” than say investment dividends? Just wondering …
“Maybe someone can explain under TBT how a non-resident with US sourced income would file this income with the IRS.”
The usual way is that the payer files it with the IRS.
If the beneficiary is a non-resident alien then the person doesn’t have to file anything unless the withholding differs from the correct amount of US tax. This is why it used to be so easy for IRS employees to embezzle the withholding without taking further actions to cover it up.
If CBT stops then I expect that if the beneficiary is any kind of non-resident then the person won’t have to file anything unless the withholding differs from the correct amount of US tax.
Rates of withholding vary by kind of payment (interest or dividends or SS etc.) and vary by country of residence. This won’t have to change.
But come to think of it, if a person is tax resident in multiple countries, I wonder how the withholding is calculated.
“Notice how rich foreigners are mentioned, haven’t we hard this before when expats were accused of being rich expats overseas.”
Maybe we really are, when compared to the average homelander who has less than $1,000 in savings.
@MuzzledNoMore.
Perhaps a correction: “tax reform framework, due for release the week of Sept. 25”
https://www.reuters.com/article/us-usa-fiscal-mnuchin/treasurys-mnuchin-says-no-tax-cut-for-wealthy-idUSKCN1BP30L
I can not find the exact reference to: Mnuchin plans to release details on tax reform plan Sept. 25, says objective is for wealthy not to have income tax reduction.
Michael DeSombre’s letter to Trump:
https://twitter.com/SolomonYue/status/909514216947769345
Please RT
A point there is he is really asking for territorial for individuals. I was thinking it may just be called “territorial” but in the detail be more like “residential.” Some of rhetoric from RO was “only taxed once on worldwide income.”
In regards to problems with this, and in review of @Karen’s letter.
There is no compliance regime in the U.S. to capture these gains. Once captured, then what portion is capital gains and what is return of capital, as Karen points out? A hefty payment may actually represent a loss.
Theoretically, the beneficial owners need not be identified as it could be done on a security by security / asset by asset basis. High frequency trading and no doubt other situations complexes the compliance.
I don’t see tax treaty problems as it is the source country with first right of taxation, and the U.S. tax may be used as a tax credit in the other country. “Capital Gains Tax” is very well accepted throughout the world. It should not now be called by a different name, as naming it different may guarantee double taxation.
Karen points out this tax as a disincentive to investing in the U.S. This is not only because the proposed 30% rate is greater than in most countries. It might also be that these gains are not declared in the other country – so it would not be a case of going from 20 to 25% tax to 30% tax, but for them going from 0% to 30% and attracting extra scrutiny. How much is reported currently?
In Australia there is extra stamp duty, land tax, and talk of a vacancy tax on property investment by non Australian nationals.
Karen also points out in regards to phantom currency gains. If you invest from one country to the next then that is called currency risk. Some hedge this risk. The real problem of phantom gains is the U.S. claim of U.S. residency when one lives overseas, and the currency risk introduced in variance with one’s neighbors who are not subject to double taxation.
Also-
Would a 30% U.S. territorial tax cause companies like Apple to issue a nonUS market securities in other stock exchanges?
@JC – currently the “source” of capital gain (not dividend/interest) on shares and other personal property (as opposed to real property) is defined in the US tax code (sec. 865) as being based on the residence of the owner (unless the asset is effectively connected to a US business). So an Australian resident (including US citizens) investing in US shares earns US source dividends, but Australian source capital gains – this makes sense as the capital comes from Australia. AFAIK, other countries use the same convention. If the US unilaterally changes the source to the country the company is incorporated in, you will have a case where the same income is claimed by two jurisdictions as source. Will either country allow a credit then?
And, yes, I would expect to see more companies dual list (list their shares in two or more countries) to get around any US territorial tax on capital gains. BHP has a unique structure listed in Australia, UK, and South Africa with two legally separate corporate structures (UK and Aus) – this might work under the RO proposal to attract capital from outside the US.
‘currently the “source” of capital gain (not dividend/interest) on shares and other personal property (as opposed to real property) is defined in the US tax code (sec. 865) as being based on the residence of the owner (unless the asset is effectively connected to a US business). So an Australian resident (including US citizens) investing in US shares earns US source dividends, but Australian source capital gains – this makes sense as the capital comes from Australia.’
If the investment is in US shares and earns US source dividends, isn’t the asset effectively connected to a US business?
‘AFAIK, other countries use the same convention.’
This can’t be completely true. When I had shares of a Canadian limited partership, an Interpretation Bulletin said I was supposed to separate the Canadian and non-Canadian portions of the flowthrough, and only declare the Canadian portion on my Canadian returns. The general partner never cooperated so the only information I had was the total.[*] Revenue Canada always said I was declaring them wrong, making me switch back and forth between calling them capital gains[**] and partnership income, so now I know it was wrong half the time. But Revenue Canada never told me to stop declaring them.
[* And because of that, I reported on US Forms 1116 that my Canadian taxes were estimated. In those days I didn’t know that it was illegal to tell the truth on a US return. Isn’t it strange that the IRS didn’t call me frivolous for reporting that my estimates were estimates, in years when the IRS didn’t have to cover up embezzlement by IRS employees.]
[** The Tax Guide and another Interpretation Bulletin said they were supposed to be income gains, but Revenue Canada never supplied a schedule to compute gains which were supposed to go on income account instead of capital account. I guess I’ve forgotten how many reasons there were that my declarations on US Forms 1116 said “estimated”.]
@Karen. Then at minimum capital gains in the U.S.
1) Would involve extra paperwork with the U.S. They may just withhold 30% of the gross and ask for verification in regards to the cost basis & net sales. So the payer withholds and gives to the IRS, then would the IRS refund all or a portion of the witholdings depending on what portion of the gross represented capital gains? What about short term vs. long term capital gains?
2) Would then involve extra paperwork with the country of residency claiming the tax credit.
@MuzzledNoMore
This is straight from the Republicans Overseas website:
Please write yourself and ask your expat friends to write. We will deliver your letters and emails to the White House in person on Oct 2.
@JC – it’s more than just a change in the paperwork. Changing the source of capital gains from residence of investor to the US means that a) if other countries accept the source change, they receive less revenue because they have to allow a credit for US tax paid OR b) if other countries do NOT accept the source change, they will not allow a credit for US tax paid resulting in clear double taxation (unless the US allows a credit, which will greatly reduce the expected revenue).
There’s no reason both countries have to have the same source rules – this one of the reasons we have tax treaties: to agree on the source rules between the two countries, thereby determining which government gets the first bite at the tax revenue.
“So the payer withholds and gives to the IRS, then would the IRS refund all or a portion of the witholdings depending on what portion of the gross represented capital gains?”
This question is still in the courts. It was in court in 2011 but the IRS told Tax Court that my only frivolous position was that I thought I was supposed to sign honest declarations, so Tax Court ignored the question of whether it’s frivolous to declare the actual amount of withholdings.
In 2016 I accidentally discovered that in 2010 the IRS revised its list of specified frivolous positions, and one new frivolous position is a position that it’s OK to declare an amount of withholding that is obviously false because it exceeds the amount of income or is disproportionate. Well of course withholding of 30% of gross sales proceeds exceeds the amount of income because the capital gain is the income. So even though the IRS didn’t tell Tax Court that my declaration of withholding was frivolous, it seems to have played some role in the case.
Furthermore, US Court of Appeals for the Federal Circuit overturned the IRS’s acceptance of my refiled 2005 return but upheld the IRS’s acceptance of my refiled 2007 return. The IRS doesn’t know why and the court refused to say why. My accidental discovery in 2016 appears to give a clue. My 2005 return declared withholding from gross proceeds of sale of 1,700 shares of Intel, and my 2007 return didn’t. The actual amount of withholding is “obviously false” and therefore frivolous.
However, frivolous or not, one law says the amount of withholding is a credit to the beneficiary and another law says the IRS has to investigate if the Form 1099 was correct or not. So even though my declaration is frivolous, I should still get my refund minus the penalty for being frivolous.
I’d have to recommend not experimenting to see if you’ll have better luck than me in getting the IRS to refund excessive withholding.
@Karen I could see with that how Australia may have issue with China – especially for houses as one can not buy real estate in China. Then it truely is a one way street as Australia does not get any gains out of China while China gets gains from Australian real estate (if reported in China).
One of the lines with territorial was to end people making money off of real estate in the U.S. but then not paying tax there on gains.
The U.S. has a track record of getting its way in tax “agreements” with other countries.
@JC – this is not about real estate. Currently gains on real estate are taxable where the real estate is located. In Australia the purchaser of any real property over A$750k now needs to determine whether the seller is an Australian resident and must withhold 12.5% of the proceeds if the seller is NOT an Australian resident. The seller must file a non-resident Australian tax return to report the actual gain. (https://www.ato.gov.au/General/New-legislation/In-detail/Direct-taxes/Income-tax-for-businesses/Foreign-resident-capital-gains-withholding-payments/). Gains on US real estate are similarly taxable in the US – whether the enforcement is adequate is a completely different issue. The RO proposal does not change the source of capital gains on real estate.
The problem is with shares (equity) – non-American investors purchasing shares (directly or indirectly) on US exchanges have never paid capital gains tax to the US.
Yes, the US has a track record of getting its way – that’s why every other country rolled over when it came to FATCA.
“Changing the source of capital gains from residence of investor to the US means that a) if other countries accept the source change, they receive less revenue because they have to allow a credit for US tax paid OR b) if other countries do NOT accept the source change, they will not allow a credit for US tax paid resulting in clear double taxation (unless the US allows a credit, which will greatly reduce the expected revenue).”
Treaties and agreements and tax code definitions don’t change the underlying truth about what is source (income that arises in a country and can therefore be taxed), and what is not (income that doesn’t arise in a country and can’t be taxed). If a country refuses to allow a resident taxpayer credit for tax paid on foreign income, that’s a domestic matter.
@JC: “I don’t see tax treaty problems as it is the source country with first right of taxation, and the U.S. tax may be used as a tax credit in the other country.”
You don’t? Because I see two distinct problems right here.
The first is that most countries have capital gains tax rates much lower than the 30% proposed here. Many have no capital gains tax at all. Heck, even the UK, never regarded as a ‘low-tax’ country, has a capital gains rate of 0% on the first £11k or so of annual gains, then 10% to maximum 20% beyond. The majority of UK investors would see their capital gains tax on US shares rise from 0% to 30%, with none of that creditable against other UK tax. Suddenly, non-US stocks will look very attractive in comparison. Same for many other countries. No need to invoke the spectre of tax evasion by ‘hiding’ assets in the US here either. It will be a vast number of entirely legitimate investors that get get stitched up.
The second is that applying 30% tax to US capital gains, previously none, and then expecting the residence country to provide a credit for all of that is a blatant tax-grab on the part of the US. Countries may have rolled over on FATCA partly because several perceived something in it for them, even if only the potentially illusory reciprocity that would help them find their own ‘tax evaders’ and a pathway to CRS. But an obvious US tax-grab of this magnitude is different. It is purely one-way, and would totally eviscerate most other countries’ collection of any capital gains taxes on US investments. Few would stand for this. The result is either a stand-off over treaties or double-tax on the investor daft enough to hold US shares under these circumstances.
Finally, these effects are most noticeable with capital gains, but also occur for dividends and interest. Again, many countries tax these either lightly or not at all, and the introduction of a 30% US tax provides a massive disincentive against US investment for residents of such countries. Even those countries that do tax these, perhaps heavily, will not willingly just roll over and double (or more) the amount of tax credit they provide for US tax without a whimper.
@Plaxy: “If a country refuses to allow a resident taxpayer credit for tax paid on foreign income, that’s a domestic matter.”
The RO proposal requires the US to renegotiate treaties to allow the US to tax capital gains and other currently un-taxed or lightly taxed income at 30%. Until done, either this income is still taxed at 0% or other low rate, or the US unilaterally reneges on this treaty.
If the treaty is renegotiated, how willing will that country be to give up a large amount tax by providing a credit for an entirely new US imposition of tax without some quid-pro-quo? Or if the US simply reneges, what retaliatory action could be expected from the treaty country?
In tax treaty terms, the RO proposal as applied to non-resident aliens would amount to a declaration of war!
“The RO proposal requires the US to renegotiate treaties to allow the US to tax capital gains and other currently un-taxed or lightly taxed income at 30%.”
“Requires” in the sense that renegotiation of treaties is part of the RO proposal?
Or “requires” in the sense that the RO proposal can only increase revenue as projected if the treaties are renegotiated?
“The second is that applying 30% tax to US capital gains, previously none, and then expecting the residence country to provide a credit for all of that is a blatant tax-grab on the part of the US. Countries may have rolled over on FATCA partly because several perceived something in it for them, even if only the potentially illusory reciprocity that would help them find their own ‘tax evaders’ and a pathway to CRS. But an obvious US tax-grab of this magnitude is different. It is purely one-way, and would totally eviscerate most other countries’ collection of any capital gains taxes on US investments. Few would stand for this. The result is either a stand-off over treaties or double-tax on the investor daft enough to hold US shares under these circumstances.”
Not that different. It would be a tax treaty override, as with FATCA:
From “Why FATCA Is A Tax Treaty Override”, by Allison Christians:
https://www.lexisnexis.com/legalnewsroom/tax-law/b/fatcacentral/archive/2013/01/21/why-fatca-is-a-tax-treaty-override.aspx?Redirected=true
The source country has the power. The US was able to impose FATCA on the world because of its power to withhold on US source pass-through payments.
That’s not likely to happen in this case, though, because the RO proposals aren’t likely to be considered.
“or the US unilaterally reneges on this treaty.”
That’s called the “Last In Time” rule. The rule has lasted a long time and will last another long time.
Plaxy says ““The RO proposal requires the US to renegotiate treaties to allow the US to tax capital gains and other currently un-taxed or lightly taxed income at 30%.”
“Requires” in the sense that renegotiation of treaties is part of the RO proposal?
Or “requires” in the sense that the RO proposal can only increase revenue as projected if the treaties are renegotiated?”
It is part of the RO proposal – in the table detailing the changes from current law there are several places where it says “Instruct Treasury to negotiate for removal of Treaty Benefits and provide for full taxation through 30% withholding”.
For dividends and interest, withholding is currently 30% for residents of countries without a US tax treaty. Treaties modify the withholding rate in the tax code, generally to 15% or 10%.
I’ve just looked through the Australian treaty to see how it would deal with the US unilaterally changing the source of capital gains on US shares.
Article 13 (Alienation of property), paragraph 7 (added by the 2001 protocol): “Except as provided in the preceding paragraphs of this Article, each Contracting State may tax capital gains in accordance with the provisions of its domestic law.”
Article 27 (Miscellaneous), paragraph 1(b): “Income derived by a resident of Australia which, under this Convention, may be taxed in the United States, other than income taxed by the United States in accordance with paragraph (3) of Article 1 (Personal scope) solely by reason of citizenship or by reason of an election by an individual under United States domestic law to be taxed as a resident of the United States, shall for the purposes of paragraph (2) of Article 22 (Relief from double taxation) and of the income tax law of Australia be deemed to be income from sources in the United States.”
So, it would seem that if the US changes its domestic law to tax non-residents 30% of the capital gain on shares of US companies, then Australia must treat these gains as US source income and allow a credit for the US tax (up to the amount of Australian tax on the gain, which will be less than 30% on long term gains). No re-negotiation of the treaty appears to be required (at least for this change). Dividends, interest, and royalties have specified rates in the treaty that are lower than 30% – those would need to be re-negotiated under the RO proposal.
I wonder how many other treaties have similar provisions.
This would be a huge tax grab by the US. Given the size of Australia’s superannuation industry, and the fact that super funds pay either 10% or zero on capital gains, the change could have a significant effect on Australia.
The RO proposal seems to assume that not taxing capital gains of non-residents is a loophole. However, given that the source of capital gains on shares is explicitly mentioned in the Internal Revenue Code, and that US capital markets rely heavily on inward portfolio investment, I think that the current rules are a feature rather than a bug.
And the way forward…
Sounds like when the plan gets revealed then there will be more focus on strengths and weaknesses of it.
Thanks Karen.
That’s probably what would happen, if the proposal were to be adopted – a Protocol.