— Two different members of the tax compliance industry are now saying that the House/Senate tax bills are harmful to US persons overseas.
Previously, Max Reed, a Vancouver tax consultant, expressed the opinion that the November House tax bill is bad news for Canadian citizens deemed to be US persons who have small businesses that are incorporated: see Max Reed article:
Now a second Tax Consultant (Kevyn Nightingale) has come up with the same interpretation of the House/Senate tax bill: In part, a one-time transition tax will be imposed on US persons overseas owning small incorporated businesses.
Like Max Reed, Nightingale feels that the harm in the tax reform proposal was “…not designed to catch individuals (I think), and certainly not Americans abroad – they are collateral damage. it’s incredibly unfair.” and suggests “Americans should call their Congressmen and Senators to complain. Ask that individuals – at least those residing abroad – be exempted from this level of unfair taxation and tremendous complexity.”
Here is Nightingale’s opinion:
“Here’s my commentary on the Senate’s version of tax reform dated November 9, 2017.
The United States is doing tax reform – a good idea for many reasons. The driver is the need to bring US corporate tax rates down, to make the country competitive with others. Also, they’re going to make the US corporate system “territorial”, meaning that most income earned by foreign subsidiaries will no longer be taxable.
To make that change politically palatable, they’re also dropping personal taxes.
But the cost of this is big – trillions of dollars. So legislators have to find some way to limit the revenue loss. They do that by increasing some other taxes.
— Accumulated deferred foreign income
One thing they will do is apply an immediate tax (well, sort of immediate – it’s to be paid over 8 years) to the retained earnings of those foreign subsidiaries. And there’s some logic to this as well. Those earnings have been tax-deferred until now. If they fell into the “exempt” system in future years, US multinationals will have effectively gamed the system by keeping them offshore long enough to completely escape tax. Yes, Congress could have developed rules to tax those earnings as they were eventually repatriated, but that would have been arbitrary, complex, and invited even more gaming of the system. And immediate taxation generates revenue. So this solution is reasonable – in principle.
One problem is that if you’re an American individual, and you own shares in a foreign corporation directly, this provision will create an immediate tax in your hands.
You won’t get a foreign tax credit for the corporate tax (like a US domestic corporate parent). You won’t get a special deduction (like a US domestic corporate parent). You just have to pay tax on the retained earnings.
It’s a double whammy if you live abroad
If you live in a country where it’s common to run a small business through a corporation (say, Canada), you already have enough double-tax issues to worry about (Subpart F, filing forms 5471, FINCEN 114, etc.). This new provision will probably lead to double taxation. And even if you can pay out dividends to limit that, it probably will create extra tax in your country. The US tax probably isn’t creditable in your country (in Canada, it isn’t).
— Global intangible low-taxed income (“GILTI”)
Yeah, isn’t that a giveaway – a foreign tax provision called “guilty”. This is the Senate’s version of the House’s “high-return income” inclusion I blogged about recently.
The ostensible objective is to stop American companies from putting intellectual property in foreign low-tax jurisdictions. That might make some sense. But that’s not how it actually works.
The title is deceiving – it’s not about intangibles. The shareholder (yes, including a US citizen living abroad, in the same country as the company) has to include an amount in his income.
The amount is the company’s total income less a deemed return (10%) on tangible assets. This means that any type of income is caught. Companies that provide services are especially vulnerable, because they typically have only a small amount of tangible assets. Incorporated professionals are going to be hit hard. They’ll be taxed on their companies’ incomes, even if the company doesn’t distribute it to them. And that tax will apply at full tax rates, not qualified dividend rates. And they’ll pay the local (say, Canadian) tax later, when they pay out a dividend.
There are provisions lessening the impact for US domestic corporations (a deduction and a foreign tax credit), but they don’t apply to individuals.
Can this be avoided?
This provision is not designed to catch individuals (I think), and certainly not Americans abroad – they are collateral damage. it’s incredibly unfair.
When I saw the House version, I expected that individuals would be exempted after a sober second (or third) thought. Or at least individuals living abroad would be exempted. But seeing a parallel provision in the Senate version makes me expect the worst.
These provisions are not yet law. Americans should call their Congressmen and Senators to complain. Ask that individuals – at least those residing abroad – be exempted from this level of unfair taxation and tremendous complexity.”
Still nothing about residency-based taxation. In fact, the international corporate tax proposals are going to make things significantly worse for Americans abroad who have corporations. https://t.co/iwdTtaJxDQ
— Kevyn Nightingale (@ustaxcanada) November 17, 2017
RT This article from @USTaxCanada which discusses how U.S. tax reform "may" (get the opposition going) impact #Americansabroad (including Canadian citizens living in Canada who own Canadian Controlled Private Corporations). Bottom line: It's confiscation of your retirement plan! https://t.co/OhskTGJAyj
— Citizenship Lawyer (@ExpatriationLaw) November 17, 2017
[Badger asks: “What is with the reverence for or tacit acceptance of US law on Canadian sovereign autonomous soil?”
— One answer: The majority of U.S.-tainted Canadians have answered this question by refusing to accept or revere U.S. IRS compliance.
— USCA responds in a comment below with a question “Is there a duty to obey a [foreign, U.S.] law [e.g., the transition tax in House bill] that clearly was NEVER intended to apply to you and can be construed to apply to you ONLY because of the literal wording? That is the question.”]
“Dewees was hit because he was NOT a Canadian citizen. For Canadian citizens (or residents of countries without the mutual assistance clause in their treaty), it is not clear that the IRS would be able to actually collect any judgement (unless the taxpayer paid voluntarily).”
OK, I agree with that. But the person still had better not fight the IRS in court. The US can sue the person in a US court, so the person had better prepare by never having any seizable property in the US. If they have to visit the US, do not bring their own car or wedding ring or cash.
“Once you file the return (including form 5471), the IRS has at most 6 years to audit”
If the IRS proves fraud they can audit forever. If the IRS alleges fraud I don’t know how to prevent them from proving it except by letting them audit anyway and finding that you told the truth (though of course telling the truth causes other problems).
If you don’t send the IRS any bullets at all, they might skip the chance of using some of their own bullets on you. People disagree on whether this is risky, but we know that filing is definitely risky.
Karen – it depends on the forms and the instructions. If the forms and instructions allow scope for just assuming the provisions don’t apply, fine, no problem. IRS forms are usually designed to preclude that assumption – the foreign accounts question, for instance, “no” answers to which are regularly used by the IRS to substantiate a “wilful” charge.
If the forms allow the provisions to be simply ignored, then I agree – ignoring would be safe. If the forms make it impossible to ignore the provisions, and no plausible treaty position can be found (preferably one for which reporting is waived), the person will have to decide: lie, tell the truth but refuse to pay, or not file. In descending order of risk (I would say).
However, there’s no knowing if these provisions will ever become law in their present form, and no knowing what the forms and regulations may require.
It strikes me that far too much of this discussion is focused on the USA and the IRS – each of which which can makes new laws, new interpretations, etc.
Much better to focus on yourself. The time has come for people to take whatever steps they need to break all citizenship ties.
Some of the most interesting people I know and have known are those who escaped Communist dictatorships. Each of their stories is unique. Each of their stories is fascinating. Each of their stories reflects courage. In each of their stories you will find one simple fact:
They simply escaped. They did NOT negotiate with with their captive government.
My instinct that the window of opportunity for formal expatriation may be closing.
“Seize the day!!”
USCA: “It strikes me that far too much of this discussion is focused on the USA and the IRS – each of which which can makes new laws, new interpretations, etc.
Much better to focus on yourself. The time has come for people to take whatever steps they need to break all citizenship ties.”
Absolutely, but for some it may not be possible to do that, or not immediately possible. A person in that position, who has previously reported the existence of their CFC shareholding, may have no choice but to continue dealing with US laws, at least for the present.
“My instinct that the window of opportunity for formal expatriation may be closing.”
I don’t think they can do that, under international law. They can keep putting the price up though. And they can keep making it harder and harder to exit so-called US tax citizenship. Fortunately, exiting US tax citizenship is entirely optional.
But I do agree we should all bear in mind that this new proposal may never become law. They’ve got an uphill job reconciling the House and Senate proposals, finding a way to claim they’re paying for it all, and then getting the ensuing mess passed and onto the desk of the uncontrollable child in the Oval Office.
As I said:
“Much better to focus on yourself. The time has come for people to take whatever steps they need to break all citizenship ties.”
Well, yes, but preferably breaking those ties without destroying themselves in the process.
“it depends on the forms and the instructions. If the forms and instructions allow scope for just assuming the provisions don’t apply, fine, no problem.”
This intuitively “obvious” statement is false. People have been penalized for relying on forms and instructions published by the IRS and instructions in IRS telephone calls and letters. There are limited circumstances where penalties can be abated for relying on instructions in IRS letters but none at all for instructions in IRS publications or telephone calls.
Statutes apply when courts want to uphold them. Case law (precedents from other court rulings) apply when courts want to uphold them. Regulations (CFRs), Internal Revenue Manual, Internal Revenue Bulletins, and some kinds of IRS memoranda apply when courts want to uphold them. But even when these are on your side, courts will ignore them if they have embezzlers to protect. Courts will even ignore their own rulings, and will even issue two mutually contradictory decisions in a single ruling, to get what they need. But anyway, these are what can be relied on theoretically.
Reliance on a condor, oops I mean tax advisor, can sometimes result in abating penalties too, but the IRS itself does not qualify as a tax advisor.
By the way the Department of Justice – Canada also told me that publications of the former Revenue Canada cannot be relied on when they disagree with the law.
“I think it’s more about the US dollar.”
The world could de-dollarise itself, as we do have more credible reserve currencies out there. I am, however, unsure about the logistics in doing so…
“And the world’s most obscene military spending.”
America is and will always be an obscenity.
Article about GILTI tax, noting that much of what’s going to be taxed is neither “intangible” nor “low-taxed”.
It fails to mention that the tax also falls on income that’s not “global” either, but local to US Persons abroad who own local companies. But aside from that, it’s a reasonably balanced balanced article, particularly surprising given who wrote it (Lynnley Browning).
Maybe the editors at Bloomberg insist on more neutrality than she showed back when she was still with Reuters. Or maybe she’s just more willing to listen to sources who criticise GILTI than she was willing to listen to sources criticising FATCA, because this time it’s the Elephants’ fault rather than the Donkeys’ fault.
Article from tax firm setting out their interpretation of the
transition tax / state tax implications. They seem to think state tax on the confiscation will fall due for the 2017 tax year with no 8-year instalment plan. But I may have misunderstood.