— 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
https://www.linkedin.com/pulse/american-own-shares-foreign-corporation-get-ready-pain-nightingale/
[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.”]
@plaxy
Is that “right thing to do” from a moral or practical perspective?
I’m talking about those who see complying with CBT as the right thing to do morally or ethically.
@plaxy
I guess that makes the 99% of the world that practices RBT ethically and morally inferior to the United States. Amazing what crimes against humanity can be hidden behind the fig leaf of American Exceptionalism.
Deckard – it’s not hard to come across forums in which compliance with CBT is regarded as morally correct. I don’t suppose most of those who see it in this way would actually describe their country of residence as morally inferior to the US but they do prioritize the CBT tax claims over the RBT claims. Sometimes new arrivals are quite taken aback at discovering that their residence country will be expecting them to pay tax “on top of” what they pay to America.
@plaxy
Let us not forget that only the United States and that other paragon of virtue, Eritrea, practice CBT. THEY are the outliers in this world of RBT and no pseudo-religious ethical/moral/patriotic brainwashing of these two countries’ citizenry will ever change that fact.
Good point. Why should any person who carries a current U.S. passport ever be required to pay tax to any country that is not the USA?
It seems to me that many U.S. citizens (depending on their circumstances) could simply argue that the treaty tie breakers rules mean that as Americans they cannot and should not be considered tax residents of any other country. This would be completely consistent with Cook v. Tait which notes that U.S. citizenship benefits all U.S. citizens regardless of where they live.
So, many U.S. citizens in Canada should probably just say:
1. The Government of Canada is helping the USA reclaim its citizens living in Canada.
2. As a U.S. citizen, I am required to pay taxes ONLY to the Homeland..
3. Therefore, I will no longer (with the full support of the U.S. military and especially the Marines) pay taxes to Canada.
4. I want a refund of any HST paid
5. I except to receive Canadian government benefits anyway.
Very true. Not that their outlier status seems to cause them any problems.
@plaxy
Yes, the very definition of American Exceptionalism. The US thinks it can get away with whatever it wants because God’s light shines brightest upon them.
I think it’s more about the US dollar.
And the world’s most obscene military spending.
Clearly Congress has no idea how the specific legislation in HR 1 works. My (admittedly rough) understanding is that:
1) territoriality for corporations is implemented by allowing corporate shareholders of foreign subsidiaries (which are, by definition CFCs) a 100% dividend received deduction for dividends that can be traced to foreign source income. This means that businesses with foreign operations run through any other structure do NOT get any advantage of the new “territorial” tax regime. (I hope I am wrong here – so please point out any provisions I’ve missed)
2) Congress does not want to benefit corporations (like Apple) who have been holding those foreign earnings overseas (by not declaring dividends), so they want to tax NOW any deferred profits that (under their US-centric logic) should have been taxed in the US previously. To “fix” this “loophole”, Congress have required all shareholders of CFCs to include these “deferred profits” into income currently – without realising that non-corporate shareholders will not get any future benefit from the “territorial” tax regime.
Clearly imposing this tax on non-corporate shareholders is contrary to the intent of Congress. It also results in double taxation – even when considering US tax alone – because these shareholders, when they actually declare a dividend, will not get any dividend received deduction. The only way to avoid double taxation is to immediately declare a dividend of all affected retained earnings – which is going to be costly (and difficult due to the timing of the legislation so close to the end of the calendar year).
IF this law is passed as currently drafted (and passage is not yet certain), individual shareholders of CFCs will have to think long and hard about how to respond. For many, not filing may be the answer. If non-compliance is not an option, then perhaps the best course of action is to just ignore these provisions and be prepared to fight in court should the IRS assert the right to tax “deferred foreign profits”.
@Karen
I would say that your understanding of this is generally accurate. With respect to:
I assume that this paragraph assumes that people have been filing and that they have been filing 5471s. Let’s also add to the hypothesis that they have been using a high priced CPA firm to manage the filing and that the CPA firm is of the view that the retained earnings since 1986 are to be properly confiscated by the transition tax. Then it gets a bit more problematic.
1. See how the CPA firm wants to treat this problem. If the CPA firm wants insists that the person pay the tax, then fire the CPA firm IMMEDIATELY!!! If the CPA firm is of the view that the tax does not apply (which I think is defensible for the reason you give) then let them file.
2. If the CPA firm has been fired, then the decision must be made as to whether to file or not.
Remember that, people cannot:
“Respond to the call of the condor by allowing the condor to make the law!”
@plaxy
NP. I understand what you mean.
I think for those who knew to be compliant say, 30 years ago, might have the attitude they had to do it (I am thinking of some specific individuals I know here in Canada). They didn’t do it out of any great love for the US. That seems different than the Homelanders Abroad (in Europe) who do communicate that sense of they “owe” it to America. They want to be Americans.
This I absolutely cannot understand given the horrific treatment beginning in 2009……..
Just wondering if Americans living overseas could make a deal with the devil. Offer to give up their right to vote in US elections in exchange for complete abolition of CBT/FBAR/FATCA, with no catch-up filing and no penalties. It might even be revenue neutral — no voting forms to send out and no IRS agents required to scrutinize tax forms filed from overseas or to search for FBAR/FATCA errors. After all, over 90% of overseas tax filers owe zero US taxes anyway. (I think that percentage is right but I could be wrong.)
I’d have taken that deal. That’s what’s actually on offer in many countries around the world, including mine.
In fact I’d barely call it a deal with the devil. A real deal with the devil would be “RBT in exchange for even crazier foreign trust & PFIC provisions” (which would murder immigrants or returned expats who have foreign assets they can’t get rid of because of vesting or retirement age or whatever, etc.), “full amnesty for accidentals in exchange for stricter enforcement on adult emigrants”, or “TTFI in exchange for banishment of everyone who renounced up to now”.
“Sometimes new arrivals are quite taken aback at discovering that their residence country will be expecting them to pay tax “on top of” what they pay to America.”
I just came across a post from a homeland American that suggested that US citizens abroad paying taxes to the USA should take up the double taxation issue with their country of residence, not the USA.
I swear, they are on a different planet.
Regardless, this latest bit of news totally vindicates all I have said about getting out before they find something to get you with. It matters not if their efforts are deliberate efforts to hurt US citizens abroad, the fact is they will continue to find new ways as long as the US citizen abroad is a US taxable person.
You might be compliant now with all your retirement ducks in a row and BAM, they change the law with not the slightest regard for the US citizen abroad.
The US citizen abroad with a “corporation” who was managing to comply now possibly has another possible life destroying tax to face, as will his entire family.
What next?
Get out, renounce, stop filing,
Embee: “Just wondering if Americans living overseas could make a deal with the devil. Offer to give up their right to vote in US elections in exchange for complete abolition of CBT/FBAR/FATCA, with no catch-up filing and no penalties.”
What you’re describing sounds very much like “national but not citizen” status, currently available only to certain natives of American Samoa.
‘If non-compliance is not an option, then perhaps the best course of action is to just ignore these provisions and be prepared to fight in court should the IRS assert the right to tax “deferred foreign profits”.’
That will yield the worst results of all. Dewees’ punishment will look like a slap on the wrist in comparison to anyone who tries this.
@ Norman Diamond
You just couldn’t get any more encouraging, could you.
@BB
I expect you are correct but hope that even a tiny morsel might be offered…………after all. Canadian BUSINESSES represent more $$$ than individuals (I think…….) they certainly cared about the banks. What I find interesting is the attitude about NAFTA. What clout is there to flaunt not giving in to the U.S.?
What leverage do we have there (NAFTA) but not FATCA? All we heard was it would “prevent Canada from participating in the capital markets” – were any figures ever validated? Was it ever discussed how unlikely the U.S. would be to apply that to Canada? Oh, forgot……..talking about the spineless CDN govt…..oops
“You just couldn’t get any more encouraging, could you.”
You want someone in America’s diaspora to fight the IRS in a US court? You think they should be encouraged?
When Russia’s courts made two contradictory rulings against Mikhail Khodorkovsky, America’s president and secretary of state criticized Russia’s lack of due process, and the second Russian judge made facial expressions showing he didn’t like the verdict that the Russian government forced him to read.
When America’s courts made two contradictory rulings against a former member of America’s diaspora, America’s president and secretary of state don’t give a shit about America’s lack of due process, and America’s judges jump for joy. As if that weren’t enough, when an American judge makes two mutually contradictory decisions in a single ruling, he/she jumps for joy.
No, I’m not going to encourage anyone in your situation to keep US citizenship or send the IRS the bullets to use for slaughter or fight the IRS in court. Innocent people don’t have a chance.
@ Norman Diamond
I see Karen and USCA as trying to be helpful. You … not so much. BTW, I do not have US citizenship and never have had.
“You … not so much.”
The recommendation ‘If non-compliance is not an option, then perhaps the best course of action is to just ignore these provisions and be prepared to fight in court should the IRS assert the right to tax “deferred foreign profits”’ is far from helpful. We have seen what happens when people send IRS the bullets to use for slaughter.
“BTW, I do not have US citizenship and never have had.”
Sorry, I had you confused with someone who said that renunciation wasn’t an option. That person will get slaughtered in court.
Karen:
The risk is that if the person filed without complying with these provisions, the case probably would not come to court, even if the non-disclosure was spotted. (The IRS doesn’t like testing tricky cases in court.)
With no day in court and no opportunity to put their case against the injustice of the provisions, the non-disclosing filer would simply have put themselves in permanent jeopardy. Not a nice situation, for a person who has never done anything wrong. And if eventually the person was able to renounce and wished also to exit the US tax system, the non-disclosure would then be likely to come to light and could be used to inflict covered status.
Not filing (and refusing to respond to any subsequent enquiries) might be a less-bad option, for a person who can’t renounce. Not filing allows the IRS not to take any action, if it turns out the provisions, like the rest of CBT, will never be enforced.
@USCA – agreed – the question of whether/how to comply with this law is only relevant for those who are already “compliant” (or think they are). Those who are currently flying under the radar should certainly keep doing what they are doing.
@ND – 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).
@Plaxy – I don’t see how filing a return which takes the position that the deferred income inclusion does not apply to non-corporate shareholders would put someone in “permanent jeopardy”. This is a one-time only inclusion in income that applies only to the last tax year beginning before 1/1/2018 (i.e. 2017 for calendar year taxpayers). Once you file the return (including form 5471), the IRS has at most 6 years to audit, but realistically, if you haven’t heard from them after 3, you’re unlikely to. If they audit you and decide not to proceed, then you’ll have a closing letter and they won’t be able to come back to that year. And this is unlikely to “come to light” on renouncing. Even if it did, the IRS would have to assess the tax, at which point you would have a chance to have your day in court.
Clearly, filing under this basis is a calculated risk. If the IRS interprets the law literally and ignores Congressional intent and the “logic” behind the inclusion of “deferred foreign earnings”, then you could be forced to either challenge the assessment in court, pay up, or become non-compliant.