Here is the full legislative text of the Senate Tax Reform bill that just passed the Senate Finance Committee and which now will be likely modified and later voted on by the entire Senate.
It is entitled ‘‘Tax Cuts and Jobs Act’’ which is an amendment to the 1986 IRS code.
SEE LINK See also SECTION SUMMARIES in simpler language.
Anything in this latest version that helps or harms us?
“IN GENERAL.—In the case of any dividend received from a specified 10-percent owned foreign corporation by a domestic corporation which is a United States shareholder with respect to such foreign corporation, there shall be allowed as a deduction an amount equal to the foreign-source portion of such dividend.”
Here’s where you’ll find a link to the file linked above plus a section by section summary: https://www.finance.senate.gov/chairmans-news/the-senate-tax-proposal-delivers-benefits-directly-to-the-middle-class
Plaxy – that’s how they’re implementing territorial tax for corporations. It’s the same as in the House bill.
Karen – thanks for the correction. I misinterpreted it.
Real Tax Reform is the last think to expect from this group. They are the SWAMP personified. They are dedicated to keeping the Marxist Income Tax. Not for ideological reasons, but financial reasons.
They would rather eat their children and we know how much they love their children, than construct a tax code that would provide enough money to run the government and have a structure that lobbyist’s could not write a large check to each Ways and means committee member, and get a big tax break for his benefactor.
I mean a tax we all have a stake in. The FairTax members cannot compete unless we get an overwhelming number of members or get a benefactor with a burning desire to fix the tax code once and for all. Neither seems possible in my remaining years. They pretend every so often to fix the code and all they do is add a new chapter to s code larger than the Holy Bible and just as confusing as the Bible.
They amended the tax code 9,000 times since reform in 1986 and each time money changed hands and their congressman never pays, so you know the direction money always flowed. 30 years from now when tax reform is about to take place again, nobody will remember that the fix didn’t hold.
You forgot to mention the Constitution.
Marxism and the Fair Tax are covered, so that’s good.
This looks like extra regulation for companies.
Think small business, making payment of wages, dividends, or expense rembrsement to a foreign person “related party.” Will it include to the benefit of so as to snare in payments to local government mandated retirement accounts [local equivalent of 401K]?
Could be colossal paperwork. For a larger business, they have compliance departments to deal with it and the portion of payments to a foreign person “related party” [10%+ ownership] are potentially much smaller than for a small business.
No doubt the requirement will be backed up by bankrupt penalties if not complied to.
‘‘(b) FOREIGN RELATED PARTY PAYMENTS
.—Any taxpayer who makes a payment to a foreign person which
is a related party (as such terms are defined in section
59A) of the taxpayer during the taxable year shall make
a return according to the forms and regulations prescribed
by the Secretary, setting forth—
‘‘(1) the amount of such payments by type and separately stated, and
‘‘(2) any amount paid which results in a reduc-
tion of gross receipts to the taxpayer.
working my way through this bill (and it will take some time). I didn’t notice this provision in the House Bill (not that I really looked):
Deduction for Qualified Business Income (p 21 of bill text, p 5 of section summary document) – This is the provision to reduce tax rates on pass-thru business income, but it only applies to business income that is effectively connected to the US. So most expat pass-thru entities will not get this lower tax rate on their business income as most will be doing business “overseas” – I mean, where they live.
I’m not going to read it, but appreciate those who do. My comprehension for these things is so bad that I usually interpret things to mean the opposite of what they do.
Search for “Foreign”
@Bubbles….”My comprehension for these things is so bad that I usually interpret things to mean the opposite of what they do.”
Do you mean you will read something and say; They could not mean THAT because if they meant THAT, they would be skinning expats alive and then you realize they intended to do actually that?
Comparing House and Senate versions – I haven’t seen any discussion here of the state and local tax deduction. The Senate bill disallows all personal deductions for state and local tax. The House bill allows up to $10,000 of state and local taxes to be deducted, but disallows foreign real property taxes.
At the bottom of page 62 of the section by section summary:
Clearly, the Senate intends for the deferred foreign income to be taxable only to corporate shareholders. I’m not sure how the actual legislative text accomplishes this.
It starts out simple and a lobbyist steps in with the offer, now the member gets something and the accountants get something and the member gets something–shafted.
This is what the Senate summary says. This may even be what the Senate actually intends. I have spent considerable time trying to read through this crap to determine whether the “literal reading” of the proposed statute (regardless of legislative or Senate intent) can be interpreted to apply to the shareholders of Canadian Controlled Private Corporations. Although I do NOT believe that the intent is to apply this “transition tax” to Canadian Controlled Private Corporations, I believe that the literal reading of Sec. 14103 would include Canadian Controlled Private Corporations. So, the Senate Bill is no improvement (with respect to Americans abroad than the House bill).
What follows is my reading/parsing of the proposed legislation. I hope that those who are “wiser than I” can demonstrate why I am wrong.
1. What is the purpose of Sec. 14103?
The purpose is to confiscate a percentage of the retained earnings of certain corporations as a way of funding the move to territorial taxation for corporations.
2. Do the U.S. individual shareholders, including Americans abroad get the benefits of territorial taxation?
3. To what kind of corporations does Sec. 14103 apply?
The section applies to any “deferred income corporation”.
4. What is a “deferred income corporation”?
“The term ‘deferred foreign income corporation’ means, with respect to any United States shareholder, any specified foreign corporation of such United States shareholder which has accumulated post-1986 deferred foreign income (as of the close of the taxable year referred to in subsection (a)) greater than zero.”
Note that U.S. citizens are United States shareholders. So the question becomes …
5. What is a “specified foreign corporation”?
“For purposes of this section, the term ‘specified foreign corporation’ means— (A) any controlled foreign corporation,”
By “this section” they mean Sec. 14103 – noting that Sec. 14103 is the section that prescribes who is pay the “transition tax”. It does NOT mean Sec. 14101 which is the section that prescribes who gets the benefit of “territorial taxation”.
So, a “specified foreign corporation” appears to include any “controlled foreign corporation” which would include a very large number of Canadian Controlled Private Corporations!
Notice how similar the language in Sec. 14103 “specified foreign corporation” (who is subject to the tax/confiscation) is to the language in Sec. 14101 (who gets the benefit of territorial) “specified 10-percent owned foreign corporations”. The definition of “specified 10-percent owned foreign corporations” in Sec. 14101, is restricted to U.S. corporations that are the owners of a foreign corporation. See:
The language in both the House and Senate bills seem to allow for the confiscation of the retirement plans of some Shareholders of some Canadian Controlled Private corporations. (In July of 2017, Mr. Morneau – of Trudeau Government Finance Minister fame) began a discussion of how the Government of Canada could attack this same pool of earnings. It appears that the U.S. Government may be interested in that same earnings pool.)
Actually, I remain convinced that this is not the intent. So, I will conclude with the question that I asked in my last comment on this issue:
What follows is a very parsed down excerpt from Sec. 14103
1 SEC. 14103. TREATMENT OF DEFERRED FOREIGN INCOME
2 UPON TRANSITION TO PARTICIPATION EX-
3 EMPTION SYSTEM OF TAXATION.
4 (a) IN GENERAL.—Section 965 is amended to read
5 as follows:
6 ‘‘SEC. 965. TREATMENT OF DEFERRED FOREIGN INCOME
7 UPON TRANSITION TO PARTICIPATION EX-
8 EMPTION SYSTEM OF TAXATION.
9 ‘‘(a) TREATMENT OF DEFERRED FOREIGN INCOME
10 AS SUBPART F INCOME.—In the case of the last taxable
11 year of a deferred income corporation which begins before
12 January 1, 2018, the subpart F income of such foreign
13 corporation (as otherwise determined for such taxable year
14 under section 952) shall be increased by the greater of—
15 ‘‘(1) the accumulated post-1986 deferred for-
16 eign income of such corporation determined as of
17 November 9, 2017, or
18 ‘‘(2) the accumulated post-1986 deferred for-
19 eign income of such corporation determined as of
20 December 31, 2017.
1 ‘‘(d) DEFERRED FOREIGN INCOME CORPORATION;
2 ACCUMULATED POST-1986 DEFERRED FOREIGN IN-
3 COME.—For purposes of this section—
4 ‘‘(1) DEFERRED FOREIGN INCOME CORPORA-
5 TION.—The term ‘deferred foreign income corpora-
6 tion’ means, with respect to any United States
7 shareholder, any specified foreign corporation of
8 such United States shareholder which has accumu-
9 lated post-1986 deferred foreign income (as of the
10 close of the taxable year referred to in subsection
11 (a)) greater than zero.
12 ‘‘(2) ACCUMULATED POST-1986 DEFERRED FOR-
13 EIGN INCOME.—The term ‘accumulated post-1986
14 deferred foreign income’ means the post-1986 earn-
15 ings and profits except to the extent such earnings—
16 ‘‘(A) are attributable to income of the
17 specified foreign corporation which is effectively
18 connected with the conduct of a trade or busi-
19 ness within the United States and subject to
20 tax under this chapter, or
21 ‘‘(B) in the case of a controlled foreign
22 corporation, if distributed, would be excluded
23 from the gross income of a United States share-
24 holder under section 959.
1 ‘‘(e) SPECIFIED FOREIGN CORPORATION.—
1 ‘‘(1) IN GENERAL.—For purposes of this sec-
2 tion, the term ‘specified foreign corporation’
4 ‘‘(A) any controlled foreign corporation,
6 ‘‘(B) any section 902 corporation (as de-
7 fined in section 909(d)(5) as in effect before the
8 date of the enactment of the Tax Cuts and Jobs
A lot could happen (or not) between now and tax filing time.
Imagine the popularity of any tax compliance professional who takes your POV! When the majority of USC’s can not or will not comply, the question for me at least right now is, do condors have enough clients filing 5471’s that it would be suicide for them to take a literal interpretation of the legislation?
Is there any significance to the fact that in the amended IRC section 965, 965(a) refers to a “deferred income corporation” but 965(d) defines only a “deferred foreign income corporation”? Is this just more evidence of the sloppy drafting of this bill? Could such sloppy drafting be used to bolster a position that including non-corporate shareholders is contrary to the congressional intent of the legislation?
And, in 965(e)(1) defining “specified foreign corporation” – you’ve quoted “(A) any controlled foreign corporation” – but there’s also “(B) any section 902 corporation…”. Is (A) necessary? Would there be any corporation whose dividends would qualify for the new 100% dividend received deduction which would NOT be a section 902 corporation?
And…not that it makes any difference to your analysis, but I read “for the purposes of this section” in this case to mean for the purposes of IRC section 965 as amended, not section 14103 of the bill.
Thank you for your thoughts. I will read all this again later. Of particular interest is the part of your comment that includes:
Interesting point. Would you be able to go through the legislation and identify all instances of “deferred income corporation” and all instances of “deferred foreign income corporation”. If there is some significance to this, it will be uncovered by seeing where and in what context the various terms are used. I simply don’t know. But, I would guess that this is sloppy drafting.
With respect to your:
It strikes me that what is significant is that the words “controlled foreign corporation” are used.
I will get back to this later (appreciate any help you can provide). But, leaving all the technical BS aside, it is crystal clear to me that:
1. This is NOT and was NEVER intended to apply to the small business corporations of Americans abroad
The fact is that Americans abroad do not have “offshore earnings” and do NOT benefit from territorial taxation (so why would they be expected pay a “transition tax” when they cannot “transition” to territorial taxation.
2. No shareholder of a Canadian Controlled Private Corporation should even consider paying this without a very very clear directive from Congress that was INTENDED to apply to them (and even then …)
I don’t understand where or how people would get the money to pay this anyway. Furthermore, as you have previously noted, it is not clear how this is even to be calculated.
3. The struggle for individuals will NOT be with the IRS. The struggle will be with the ‘tax professionals” who may claim that their clients must pay this!
Remember that the IRS does not enforce U.S. taxation on Americans abroad. It is the tax compliance community that enforces these rules on Americans abroad! Remember:
“It’s The Call Of The Condor”
The LAST place I would go for an interpretation of these rules is to the tax compliance community. They don’t have any access to any thinking or information that is not in the public domain. Furthermore, i guarantee you that they have not analyzed this as much as the participants on this site!
@USCA – a quick search of the document doesn’t turn up any other instance of “deferred income corporation” and 12 instances of “deferred foreign income corporation”. Given the way line breaks are shown in the document, a ctrl-F search will only turn up hits where the whole phrase is on a single line. I searched for “deferred income corporation”, “deferred income” and “income corporation”
Yes, it may be significant. If I’m right (and this is not really my area of expertise) that specifying section 902 corporations would be sufficient for what Congress intends, then eliminating clause (A) may be a quick and easy way for a sympathetic Senator to amend the bill and avoid any unintended consequences.
And, as much as I enjoy the mental gymnastics of digging into the detail of the bill, I am not personally affected by it. If I were, I’d be with BB – #NotPayingThis
Thanks – so thinking out loud …
IRC 909(d)(5) defines a 902 corporation as:
(5) Section 902 corporation
So now going to (a) or (b) of IRC 902(a) where the company is defined as:
This does seem to be the definition of the kind of company that receives the benefits of “territorial taxation”. i agree that this could be fixed by simply deleting the words “any controlled foreign corporation”.
Although “all controlled foreign corporations” WITH U.S. CORPORATE SHAREHOLDERS are S. 902 corporations (I think), it’s not true that “all 902 corporations are controlled foreign corporations” (I think). Do you think that by the words “any controlled foreign corporation” they intended “any controlled corporation” where the controlling shareholders are domestic U.S. corporations?
Interestingly the Senate bill (Sec. 14103) provides an exemption to the “transition tax” for Chapter S corporations. The exemption may be based on:
1. All income of the Chapter S corporation is subject to taxation without deferral in the hands of the individual shareholders; and/or
2. A recognition that because the tax is born by individual shareholders the “transition rules” should NOT apply to individuals.
Still thinking out loud…
I’m assuming that meeting “the ownership requirements of subsection (a) or (b) of section 902” means that the foreign corporation does not have to actually declare dividends in a given year to be a “section 902 corporation” in that year.
If the bill summary accurately reflects the intent of the Senate Finance Committee, then yes, they must mean only the domestic U.S. corporation shareholders of CFCs. I also find it interesting that they specifically exempt S corporations. Note that at the top of page 380 (part of section 14101 of the bill), the Secretary is authorized to prescribe regulations for the case where a “specified 10 percent owned foreign corporation” is owned through a partnership, even though the definition of “specified 10 percent owned foreign corporation” is with respect to corporate shareholders.
On a side note – I think the definition of “specified 10 percent owned foreign corporation” at the top of page 376 is also sloppy – it could be read as not requiring any particular level of ownership/control.
Came across a comment by David Pinto here:
This reinforces the idea that the income exclusion is from ONLY the foreign source dividends from foreign subsidiaries. It is NOT a general exclusion of foreign source income. It is NOT intended to apply to corporations without subsidiaries.
To ask another possibly unanswerable question:
If either RO-style TTFT or ACA-style RBT is included in the final bill, and if the bill passes, how might that change the impact of these “specified foreign corporation” confiscations?
Would either TTFT or RBT be beneficial for the US owner/shareholder of a company incorporated in a non-US country? Would TTFT be better than RBT, or vice versa?
I’m thinking that it sounds like these seemingly incomprehensible corporation provisions could affect quite wealthy and influential US citizen shareholders – people who might be significant GOP donors. Could adoption of TTFT / RBT allow these influential Americans an escape route?
If so, that would be good for the prospects for change.
That might explain the sudden interest shown by e.g. Brady in proposals for changes to the taxation of US citizens abroad.
Of course this is unanswerable. Nevertheless, here is what I think the answer would be.
Territorial – Speaks to what income is taxed: Only income earned in U.S. territory would be subject to U.S. taxation
In this case the definition of “tax resident” has not changed. Note that Subpart F income is imposed on the shareowner because it can’t be imposed on the foreign company. It’s hard to say. But, I think an argument could be made that taxation would continue.
Residency – Speaks to who is a “tax resident” – in this case NO U.S. residence (however that is defined) then no taxation
In this case, I suspect that the rule would not apply to a person who did NOT meet the test of U.S. residency. At the present time Green Card holders who use the tax treaty tie breaker to break U.S. tax residence are NOT subject to Subpart F income (although they are still subject to the 5471 requirement).
A move to residency-based taxation is preferable.
@Plaxy and @USCA
IF relief for non-resident citizens is included in the final bill, I would expect such relief to be effective for 2018. The inclusion of “deferred foreign income” is in 2017.
It’s also important to remember that TTFI as proposed by RO isn’t really territorial; it taxes foreign source passive income of US residents. And, the “RBT” proposal from ACA isn’t really RBT; it’s CBT with a carveout for those wealthy enough to buy their way out after a qualifying period of foreign residence.