— 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.”]