712 thoughts on “11/16/2017 UPDATE: HOUSE TAX REFORM BILL PASSES FLOOR VOTE; SENATE TAX BILL PASSES SENATE FINANCE COMMITTEE — Do not have final versions yet but strongly suspect that we are not helped in either bill”

1. “This provision, if enacted, would be a clear instance of double taxation. Owners would have a right to raise a complaint under the Mutual Agreement Procedures. There is no need to bend over and meekly accept the whipping,”

   Except in cases where FIs report to the IRS and the aggrieved has not the means to raise such a complaint.

   “Alternatively, the owner could make arrangements to avoid “covered” status, and renounce US citizenship.”

   Forgetting, as always, those of us you can not.

   Or the owner could remain a US citizen, wait to see if this US tax bill passes, and when it fails, as looks likely, breathe a sigh of relief and continue in this state of extreme vulnerability – thanking the Republicans for all their help.

   Up to the owner to choose.

   Not a lot of choice for many.

2. Nononymous –

   “Would it surprise you to learn that W should have filed Form 5471 because she is a “100% shareholder” of H’s corporation?”

   No, but it would surprise me if W was dumb enough to do so.

   Indeed.

3. “This provision, if enacted, would be a clear instance of double taxation. Owners would have a right to raise a complaint under the Mutual Agreement Procedures. There is no need to bend over and meekly accept the whipping,”

   Except in cases where FIs report to the IRS and the aggrieved has not the means to raise such a complaint.

   It only takes writing a letter.

   “Alternatively, the owner could make arrangements to avoid “covered” status, and renounce US citizenship.”

   Forgetting, as always, those of us you can not.

   No, not forgetting those who can’t renounce – listing the option for those who can.

4. ““This provision, if enacted, would be a clear instance of double taxation. Owners would have a right to raise a complaint under the Mutual Agreement Procedures. There is no need to bend over and meekly accept the whipping,”

   Except in cases where FIs report to the IRS and the aggrieved has not the means to raise such a complaint.

   It only takes writing a letter.”

   And this letter would irretrievably remove the sent data from any and all data banks other than the original FI’s data bank?

5. (1) Where a resident of a Contracting State considers that the action of one or both of the Contracting States results or will result for him in taxation not in accordance with this Convention, he may, notwithstanding the remedies provided by the national laws of the Contracting States, present his case to the competent authority of the Contracting State of which he is a resident. Should the resident’s claim be considered to have merit by the competent authority of the Contracting State to which the claim is made, it shall endeavor to come to an agreement with the competent authority of the other Contracting State with a view to the avoidance of taxation contrary to the provisions of this Convention.

   The competent authorities of the Contracting States shall endeavor to resolve by mutual agreement any difficulties or doubts arising as to the interpretation or application of this Convention. In particular, the competent authorities of the Contracting States may consult together to endeavor to agree —

   (a) To the same attribution of industrial or commercial profits to a resident of a Contracting State and its permanent establishment situated in the other Contracting State;

   (b) To the same allocation of income, deductions, credits, or allowances between a resident of a Contracting State and any related person;

   (c) To the same determination of the source of particular items of income; or (d) To the same meaning of any term used in this Convention.

   (3) The competent authorities of the Contracting States may communicate with each other directly for the purpose of reaching an agreement in the sense of this article. When it seems advisable for the purpose of reaching agreement, the competent authorities may meet together for an oral exchange of opinions.

   (4) In the event that the competent authorities reach such an agreement, taxes shall be imposed, and refund or credit of taxes shall be allowed, by the Contracting States in accordance with such agreement.

   https://www.irs.gov/pub/irs-trty/japan.pdf

6. plaxy –

   There are two separate issues:
   1) what does the law say?
   2) what will an individual taxpayer do about what the law says?

   When the answer to the first is ambiguous, then the taxpayer has the right to interpret the law advantageously.

   I agree that, if the law is interpreted by the IRS or the courts to mean that the IRS gets to confiscate 12% of retained earnings of a foreign corporation owned by a nonresident citizen, then the taxpayer needs to fight. The Mutual Agreement Procedure is one possible avenue for those who live in a treaty country. Renunciation and/or refusal to file or acknowledge the tax are other possibilities.

   This provision is why I suggested up-thread that one could try now to get a renunciation appointment in late December – then when the appointment comes one could show up or not depending on whether this provision has become law.

7. That does not answer the question of the sharing of the data in the first place. I know many here seem to not care a wit about the automatic sharing of personal financial data, but it is a BIG issue for many.

8. @Karen,

   “This provision is why I suggested up-thread that one could try now to get a renunciation appointment in late December – then when the appointment comes one could show up or not depending on whether this provision has become law.”

   May work for those who have dual citizenship but not at all doable for those who do not unless the are at the tail end of getting their new citizenship.

9. Karen – “This provision is why I suggested up-thread that one could try now to get a renunciation appointment in late December – then when the appointment comes one could show up or not depending on whether this provision has become law.

   I think that’s a very good suggestion. Also – the Senate bill proposes delaying the corporation tax break until 2019. If a bill does eventually pass, and it includes that delay, that would give quite a bit of time for corporation owners to break any financial ties with the US and reduce net worth to avoid covered status.

10. This transitional tax is also post-hoc taxation, which almost never appears in a US law, probably because it would never stand up in court. The transition tax also applies only to subpart F income, which smart managers of CFCs would have avoided like the plague. True, the 5471 nonsense is so over-the-top that many didn’t know about it, because no-one could ever imagine that such a nutty law might get created.

    Finally, there’s the question of ‘retained earnings from whose point of view?’ I know people who paid US tax on such retained earnings at the time they were retained, but did not pay tax on them in their local country.

    This is why the US should never have come up with inanities such as this, and should butt out of extraterritorial overreach entirely. It’s simply delusional to think that the US could ever come up with fair regulations that take into account the manifiold quirks and idiosyncrasies of all the other tax systems in the world. This is the main reason to put a stop to the nonsense forthwith, yet I’m not even sure if the TTFI people have been talking about does this.

11. “True, the 5471 nonsense is so over-the-top that many didn’t know about it, because no-one could ever imagine that such a nutty law might get created.”

    The same can be said of this whole mess in the first place, CBT, FATCA and FBAR.

12. “This is why the US should never have come up with inanities such as this, and should butt out of extraterritorial overreach entirely. It’s simply delusional to think that the US could ever come up with fair regulations that take into account the manifiold quirks and idiosyncrasies of all the other tax systems in the world. “

    They are delusional.

13. TTFI would have had the effect of facilitating this 14% raid, plus no doubt future raids down the line.

    “Sign here to get taxed by the US only on US-source income: US-source income shall include all income received by a specified US Person.”

14. Senate bill summary from http://uk.businessinsider.com/trump-gop-tax-reform-senate-bill-text-details-rate-2017-11?r=US&IR=T:

    Here’s a breakdown of what the Senate bill proposes and where it differs from the House:

    -Delays the massive corporate tax rate cut: The bill would wait until 2019 to slash the corporate tax rate to 20% from the current 35%. This would help the bill’s immediate deficit impact.

    – Keeps the number of individual tax brackets at seven: The Senate bill keeps the same number of brackets as the current code but shifts the income that qualifies for each one others brackets’ rates. The rates would be 10%, 12%, 22.5%, 25%, 32.5%, 35%, and 38.5% under the new bill.

    – Eliminates the state and local tax deduction: The bill completely eliminates the SALT deduction, as opposed to the House bill’s compromise position that allows up to $10,000 in property tax deductions but no state sales or income deduction. The issue has been a key sticking point in the House. It’s an easier go for Senate Republican leaders, since the Senate GOP has no members in states like New York and California that heavily use the deduction.

    – A new 12.5% tax on patents and intellectual property overseas: The plan includes a provision that would tax patents and other IP filed overseas. This targets firms like US pharmaceutical companies who file patents for drugs overseas and book the profits for those drugs in lower-taxed companies.

    – Keeps the estate tax, but raises the threshold: The estate tax would remain intact in the Senate bill, instead of being phased out like in the House bill. The threshold for an estate to qualify, however, is immediately doubled. The current threshold for 2018 is $5.6 million of individuals and $11.2 million for a couple.

    – Increases child care tax credit: The credit per child is $1,650 in the Senate plan, above the current $1,000 credit and the $1,600 credit in the House GOP bill.

    – Maintains the mortgage interest deduction: The bill keeps the cap for the deduction at $1 million, as opposed to the House bill, which would cut it to $500,000. The House’s proposed cut caused an uproar from homebuilder and realtor groups.

    – Maintains many itemized deductions for adoption and medical expenses: The House bill stirred up controversy for eliminating popular tax credits like those for medical expenses and adoption. The Senate bill keeps both of those credits, sidestepping those issues.

    – Eliminates the House bill’s “bubble tax” on the wealthy: The House bill included a provision that would attempt to claw back some of the benefits for wealthier people. Essentially, wealthier individuals would see their tax rate increase be 6% for income between $1 and $1.2 million. The Senate bill contains no such provision.

    – Does not repeal Obamacare’s individual mandate: Some GOP senators, including Ted Cruz and Tom Cotton, have pushed for the bill to repeal Obamacare’s penalty for not having insurance. While the move would help generate more revenue for the bill, it would also leave 13 million more people without insurance over the next 10 years and introduce healthcare issues into an already volatile process.

    The IP tax seems especially likely to affect US citizens in non-US countries in unpleasant ways, if implemented.

15. “There are two separate issues:
    1) what does the law say?
    2) what will an individual taxpayer do about what the law says?”

    Sure.

    “When the answer to the first is ambiguous, then the taxpayer has the right to interpret the law advantageously.”

    That sounds like a human right not a legal right. As I said a few hours ago, when the answer to the first is ambiguous, a court will likely give two contradictory answers in the same ruling. Anything to screw an innocent person.

    “The Mutual Agreement Procedure is one possible avenue for those who live in a treaty country.”

    Sure, it’s one possible waste of time. CRA’s competent authority might care enough to waste their time trying too, but an IRS who doesn’t obey US court orders isn’t likely to care about CRA’s competent authority.

16. “This transitional tax is also post-hoc taxation, which almost never appears in a US law, probably because it would never stand up in court.”

    Post-hoc taxation has already stood up in US courts.

    “It’s simply delusional to think that the US could ever come up with fair regulations that take into account the manifiold quirks and idiosyncrasies of all the other tax systems in the world.”

    The quirks and idiosyncrasies of the US tax system outnumber the rest of the world. This is why the IRS’s Taxpayer Advocate reported to Congress in 2011 that thousands of honest taxpayers were forced to renounce US citizenship. It’s delusional to think the US will ever care.

17. Charles Buckley,

    It is quite possible that the transition tax would be successfully challenged in court – though probably not before it had been assessed on a large number of small corporations without the means to hire an army of tax lawyers.

    The transition tax defines a new type of Subpart F income. From the Senate Finance Committee Chairman’s Mark of the bill:

    The mechanism for the mandatory inclusion of pre-effective-date foreign earnings is subpart F. The proposal provides that in the last taxable year of a specified foreign corporation that begins before January 1, 2018, which is that foreign corporation’s last taxable year before the transition to the new corporate tax regime elsewhere in the bill goes into effect, the subpart F income of the foreign corporation is increased by no less than the accumulated deferred foreign income of the corporation, determined as of November 9, 2017, or other applicable measurement date as appropriate (“measurement date”). The transition rule applies to all U.S. shareholders of a specified foreign corporation, which includes any foreign corporation in which a U.S. person owns 10 percent of the voting stock. Consistent with the general operation of subpart F, each U.S. shareholder of a specified foreign corporation must include in income the shareholder’s pro rata share of the foreign corporation’s subpart F income attributable to its mandatory
    inclusion. (page 222, footnotes omitted)

    For “retained earnings” they appear to be using the term “earnings and profits” which is computed in accordance with sections 964(a) and 986 of the Internal Revenue Code (whatever that means, I haven’t read those sections in detail).

18. Plaxy,
    “Also – the Senate bill proposes delaying the corporation tax break until 2019. If a bill does eventually pass, and it includes that delay, that would give quite a bit of time for corporation owners to break any financial ties with the US and reduce net worth to avoid covered status.”

    Unfortunately, it looks like the effective date of the 12% transition tax is not tied to the change in corporate tax rates. It looks like both the House and Senate would impose this tax in 2017 for calendar year taxpayers.

    btw – the Senate Finance Committee has a press release about the Senate version of the bill (https://www.finance.senate.gov/chairmans-news/hatch-unveils-pro-growth-pro-jobs-pro-family-tax-overhaul-plan-) – there are several useful links at the bottom of that page.

19. “CRA’s competent authority might care enough to waste their time trying too, but an IRS who doesn’t obey US court orders isn’t likely to care about CRA’s competent authority.”

    Canadian citizens probably do, though. Since it’s clear double-taxation would indeed be the effect of this law (if passed), Canada can’t agree to it without violating international law.

20. “It’s delusional to think the US will ever care.”

    Couldn’t agree more.

21. Karen – thanks for the link.

22. Expats pleaded for a life jacket.

    Congress threw them an anvil.

    Everyone that now renounces needs to blame and hold up how the republicans not only lied but they lied in writing.

23. Karen – “It is quite possible that the transition tax would be successfully challenged in court – though probably not before it had been assessed on a large number of small corporations without the means to hire an army of tax lawyers.”

    That’s the advantage of bringing a complaint under the MAP article. It costs nothing and assessment is suspended while the complaint is considered.

24. @Karen

    Re your comment here:

    http://isaacbrocksociety.ca/2017/11/02/here-is-the-2017-u-s-house-tax-cuts-and-jobs-act-bill-does-it-help-or-harm-us/comment-page-14/#comment-8049399

    Of course I agree with you.

    I am intentionally describing this as a tax on Canadian Controlled Private Corporations because:

    1. This will make it very real and not so abstract.

    2. If it is called a tax on “foreign corporations” or “CFCs” people are less likely to see the danger.

    However, I am simply providing a rationale for how one could argue that the tax would not apply whether rightly (from the perspective of those who are affected) or wrongly (from the perspective of the USA).

    The simple fact of the matter is this:

    People will not be paying this, restrospective confiscation of their retirement assets UNLESS the heed:

    “The Call Of The Condor”

    and are terrorized into paying.

    What people need to be on the lookout for is a form letter from the major compliance firms saying something like this:

    “Hello Friend:

    Hope that you and your family are doing well. As 2017 comes to an end, we would like to take this opportunity to wish you and your family a happy end to 2017 and an exciting start to 2018.

    We thought that we would also keep you up-to-date on some of the most important developments in the world of tax and the your Canadian Controlled Private Corporation.

    The highlights include:

    First, the good news: In July Finance Minister Morneau proposed changes to the taxation of your corporation. It appears that the happy days of being able to use your corporation for a pension have come to an end. Morneau and Justin are working on new legislation to ensure that the days of capital accumulation in your company are over. After intense lobbying from the accounting industry, including our firm, we were able to get Justin and Bill to allow you to keep the retained earnings that you have. This was a great victory – your retained earnings will stay in with you – with no immediate confiscation (from the Government of Canada).

    2. Now, the bad news: On November 9. 2017 the U.S. Ways and Means Committee (in this case known as the “Brady Bunch”) agreed on some amendments to the Internal Revenue Code that are designed to transition the USA to a system of “territorial taxation”. A U.S. move to “territorial taxation” means that the U.S. is expanding its “territory” for the purposes of taxation to include Canada – specifically those Canadian businesses with U.S. shareholders. As you know, on February 1, 2014 the Government of Canada signed a FATCA IGA which allowed the USA to define “U.S. person” and “U.S. citizen” any way that it chooses. Additionally, the Government of Canada has been actively assisting the USA in “finding” those Canadian residents which the USA has decided to claim as “U.S. persons”.

    The USA has claimed the retained earnings in your corporation as a pool of capital that they have decided to tax. At present (and we are actively lobbying on your behalf in Washington) they have generously agreed to confiscate only 14% of the retained earnings. It’s sort of “Welcome Tax”. A “Welcome” to the world of U.S. corporate territorial taxation in which the USA claims the whole world is subject to its tax jurisdiction.

    You may be shocked to know that this applies to you. But, we fully expect that the shareholders of Canadian Controlled Private Corporations will be defined by the USA as “U.S. persons”. Remember that in the FATCA IGA, Canada specifically agreed to:

    1. Allow the USA to define ANY Canadian as a “U.S. person” and;

    2. Once defined, assist the USA in locating those persons.

    So, although this is less than an ideal situation (you might have thought your money belongs to you), for purposes of ease and practicality, the U.S. will be starting with those shareholders who were “Born In The USA”. But, don’t worry by “surrendering early” you will pay at ONLY the 14% rate. Chairman Brady, Secretary Mnuchin and President Trump (with full support from Former President Obama) have made it clear that:

    Those who pay early will pay the least! Those who delay will pay more!

    For shareholders of Canadian Controlled Private Corporations:

    This is your last best chance to pay the USA “Welcome Tax” on your retained earnings.

    Please make an appointment with your tax advisor and/or legal advisor today!!!

    It’s all part of the new OVDP program for Canadian residents with Canadian Controlled Private Corporations!

    Happy Holidays!

    P..S.

    This is:

    “The Call Of The Condor!”

    Please heed it!!!!!

    The simple reality is that …

    This will be paid ONLY by people who seek advice from the compliance community! Don’t seek that advice. This will be enforced ONLY by the Condors who are really “bounty hunters”.

    The real tragedy is that those who will bear the brunt of this are those Canadian citizen/residents who have a history compliance with U.S. tax laws. Your previous Form 5471 filings have provided a trail to you.

25. “The real tragedy is that those who will bear the brunt of this are those Canadian citizen/residents who have a history compliance with U.S. tax laws. Your previous Form 5471 filings have provided a trail to you.”

    USCA – while I agree that only those who have been complying need to take steps to protect themselves, I don’t think we should talk of their filings having provided a “trail” to them.

    People don’t have to rely on hiding from the US. Those who can’t or don’t want to renounce can object under the treaty (MAP complaint).