The specific problem in the U.S. tax reform bills related to U.S. person-owned incorporated businesses in Canada, Australia, France, UK, etc. appears to have been identified.
However, apart from the general solution of changing the bills’language to end U.S.-imposed worldwide taxation on individuals, WHAT IS THE ONE SENTENCE CHANGE IN WORDING OF THE TAX BILLS LANGUAGE THAT WOULD FIX THE PROBLEM IDENTIFIED IN THIS POST?
This one sentence change could be sent to the drafters and supporters-antisupporters of the bills.
IF YOU ARE INTERESTED, YOU CAN FORWARD OUR PRESS RELEASE WITH YOUR COMMENTS TO POLITICIANS AND OTHER ORGANIZATIONS IN U.S., CANADA, AND ELSEWHERE.
Tricia has some thoughts that you might include (in a comment below).
— In this press release we ask United States Congress to fix a problem in the present House/Senate tax bills that targets certain Canadian citizen/residents who own an incorporated business — and more broadly — to “stop imposing worldwide taxation on any Canadian resident”.
The press release is being sent in part to members of U.S. Congress and also to Canadian politicians who should be in the business of defending Canadian citizens from harm caused by a foreign state.
The focus of the press release is intentionally on “Canadians”. The word “American” is not mentioned. Our use in the text of the now-offensive term “U.S. person” (defined by the U.S. Internal Revenue Service) does not imply that U.S. person law applies to any Canadian resident or that any of these so-designated (by the U.S.) Canadians have ever consented to be U.S. persons.
Here is the link to the press release.
November 24, 2017
For Immediate Release
U.S. CONGRESS: DO NOT CONFISCATE OUR SMALL CANADIAN BUSINESSES AS PART OF YOUR TAX REFORM
On November 16, 2017 Rep George Holding, of the House Ways and Means Committee, in an exchange with Chairman Brady, urged that as part of tax reform that: The United States join the rest of the world by adopting “residence-based taxation”. This would END the U.S. current practice of imposing worldwide taxation on certain residents of other countries.
As U.S. law currently stands, many Canadian citizen/residents (who are deemed by the U.S. to be “U.S. Persons”) find themselves subject to U.S. taxation (ON THEIR CANADIAN INCOMES and CANADIAN ASSETS), even though they live in Canada and pay taxes to Canada.
The application of U.S. tax law into Canada – a principle enforced by FATCA – has profoundly negative consequences, some of which are intended and some of which are unintended.
This is a request that the wording of the United States “Tax Cuts and Job” bill be revised so as not to harm, even more, small Canadian businesses possibly included, we believe inadvertently, by your proposed tax reform legislation.
As your tax Senate and House tax reform bills are presently worded, Sec. 14103, for example in the Senate bill, might be interpreted to confiscate a significant percentage of the retained earnings of certain small “Canadian Controlled Private Corporations”. This is evidently part of broader legislation to implement “territorial taxation”, in order to enhance the competitiveness of publicly traded U.S. multinational corporations.
We believe that this section is intended to apply ONLY to the foreign subsidiaries of U.S. domestic corporations. However, a strict reading of the language of the bill suggests that this “transition tax” MIGHT also be paid by those who are deemed by your country to be “U.S. persons” living overseas who happen (as is common in Canada) to own an incorporated small business. The “minnows” swept up by your bill will then include small businesses such as a one-person incorporated medical doctor’s clinic, should the owner be designated by U.S. law to be a “U.S. person”.
We do not believe that this was your intention and ask that you fix the language of the bills accordingly. Surely you would agree that “territorial taxation” for U.S. multinational corporations does NOT mean that the United States should extend its taxable “territory” to Canadians who happen to own small Canadian Controlled Private Corporations!
As part of U.S. tax reform, we conclude by asking that the United States stop imposing worldwide taxation on any Canadian resident AND clarify that the “Tax Cuts and Jobs” Bill does NOT apply to Canadian residents who are shareholders of Canadian Controlled Private Corporations.
On behalf of the
Alliance for the Defence of Canadian Sovereignty (www.adcs-adsc.ca) Information@adcs-adsc.ca;
Alliance for the Defeat of Citizenship Taxation (www.citizenshiptaxation.ca)
Contact Mr. John Richardson at firstname.lastname@example.org
Alliance for the Defence of Canadian Sovereignty/Alliance for the Defeat of Citizenship Taxation 283 College Street, P.O. Box 67678 Toronto, Ontario, CANADA M5T 3M1
Thanks for posting a link to our blog post, JC. The post includes an open letter to the Australian PM outlining how Australia can mitigate the impact of the problem identified in the ADCS/ADCT press release at the top of this thread.
EU finance ministers issue warning to Trump over tax reforms
Updated / Monday, 11 Dec 2017 18:22
No mention of FATCA.
@JC – also no mention of the impact of the transition tax on individuals. The focus is on corporate tax provisions.
As currently drafted, the Tax “Reform” bill is legislative malpractice. Almost everyone will be better off if it does NOT pass.
Keith Redmond talks about this from ~ 3.20 impact on small companies overseas:
I have not seen opinion of a small business accountant as to where this double tax on retained earnings has gotchas. I think getting such opinion would be useful in “fighting the beast.”
I believe the treatment of retained earnings to be double taxed are earnings not distributed. Here are some cases I can think of:
Business pays down/pays off a loan. That is out of profits yet not distributed to owners. That is not money going into the pockets of owners, it goes to the banks.
Business builds up cash reserves as buffer against a turn in the business cycle.
Business builds up cash reserves for relatively large purchase of plant & equipment.
Business invests into itself. That can be a business expense so as to reduce earnings, yet there may be differences in depreciation application (as in differences with one’s county of residence which may allow more immediate deductions than U.S. law).
Here I think is an important timing one: I believe for some businesses they may have an end of year distribution. This is kind of like seeing what is in the account at the end of the year, then determining that distribution depending on how well the business did that year. For Canada this is not an issue as the tax year is the calendar year, just like for the U.S. For the U.K. the tax year ends early April. So for a business in the U.K., they may do the end of year distribution in March instead of December. That would mean perhaps carrying extra cash aka “retained earnings” right over December 31 and potentially open the business up to extra retained earnings slug. For Australia the tax year end is 30 June.
There is some commentary on Facebook.
FYI – the IRS has some initial guidance regarding CFC changes in the tax bill.
@Georgette Sawan: interesting that in the text, they refer consistently to “United States shareholder” but every single provided example begins: “USP, a domestic corporation, …”
Section 5: “the Treasury Department and the IRS request comments on what additional guidance should be issued to assist taxpayers in applying section 965.
Seems to me they see the problem clearly. Perhaps input/uproar/also foreign govt. intervention on behalf of their local businesses would be helpful? Professionals and also “taxpayers may submit comments electronically to Notice.email@example.com. “
Has anyone approached members of these foreign governments and asked them to bring up this issue directly to the U.S.?
I’m sure the Canadian government is not so happy that the U.S. is extracting money from Canadian citizens who live and work in Canada, and making their lives a living hell
A recent response to me from the Canada’s Finance Minister’s office would indicate that they don’t give a damn. To them, my obligation to pay US tax take precedent over any rights I have as a Canadian and that I should seek advice from the IRS or a US tax specialist. Unlike the previous government, there was no mention of the Revenue Rule, or any way whatsoever we are protected from collection. Just pure capitulation.
It’s been suggested, “The best strategy is to pay out enough of the retained earnings to pay tax to Canada and claim the US tax credit. Otherwise double tax seems likely to occur.”
The Canadian government would like nothing more than to get a hold of this money.
@BB, re, your best strategy. There are traps in that. See my 19 Dec post. We may benefit if a business accountant in the know of double taxation provides a viewpoint.
@JC & @BB
First – these comments are not meant to imply that I believe the transition tax applies to CFCs owned by non-resident US taxpayers. The whole idea of “repatriating” earnings from a Canadian/Australian corporation owned by a Canadian/Australian citizen is just absurd. The comments below are just looking at the mechanics of how the compliance industry might try to apply this tax.
Assuming a calendar year corporation (CFCs with an individual US Person as majority shareholder are either December or November year end for US tax reporting, regardless of their local tax reporting year – see section 898), the transition tax will be due on the shareholder’s 2017 US tax return, so any foreign tax generated to offset the transition tax via FTC will need to be paid or accrued by 31 December 2017. Congress really didn’t give shareholders enough time to use this strategy. Plus, I think there may be other problems with this dividend strategy.
A section 962 election is more useful. It allows the shareholder to treat foreign tax paid inside the company as deemed paid by the shareholder and available for FTC. Of course, the past records and computations required to determine the amount of FTC available will be extensive and costly. There may be drawbacks to this strategy because it will change the US tax status of future dividends – timing and expected returns will affect the trade-off that the sec 962 election implies.
Also, note that when measuring the “foreign cash position”, paying a dividend just prior to 31 December may not help reduce the taxable cash balance. Foreign cash position is measured at the end of the CFC’s last tax year that starts before 1 Jan 2018 (calendar year 2017 for most of the CFCs we’re discussing), and again as an average of the previous two tax year ends (2015 and 2016) – the larger of these two measurements is what is taxed at the “15.5%” rate.
This provision has way too many moving parts. Anyone who actually tries to apply this to an individually owned CFC will be up for outrageously high accounting fees this year as the actual impact will depend on not only the CFC and it’s tax history (all the way back to 1986!), but also the individual’s tax return, other sources of income, and FTC carryover position.
If you read the IRS notice, it looks like they are focusing on the impact on CFCs owned by domestic corporations – with no mention of whether this applies to individuals who are shareholders of CFCs. Several lay people on FB/twitter/etc. are interpreting this as meaning that the IRS believes the transition tax does NOT apply to individual shareholders.
@Sam – see http://fixthetaxtreaty.org/2017/12/04/call-to-action/ – we have not yet received an official response.