cross-posted from Alliance for the Defeat of Citizenship Taxation
NB: While ADCT respects ACA’s positions and appreciates their lobbying efforts, this post in no way serves as an endorsement of their submission regarding RBT.
It bears repeating that no group approached Congress during the tax reform process and specifically requested RBT. Many chose to support RO’s effort (TTFI) assuming it more likely to succeed given Congress was clearly intent upon changing corporations to a territorial model.
ACA’s approach to RBT has been described by some as CBT with a carve-out (for those who are already compliant). It does not address the issues of Accidental Americans; becoming compliant for the express purpose of renunciation, etc.
TAX REFORM BILL AND AMERICANS ABROAD: WHAT HAPPENED? WHAT’S NEXT?
by Charles M Bruce
ACA’s Legal Counsel and Of Counsel to Bonnard Lawson-Lausanne
with contributions from Jonathan Lachowitz, Chairman, ACA, Marylouise Serrato,
Executive Director, ACA, and Jacqueline Bugnion, Former Director, ACA.
On the day President Trump signed the The Tax Cuts and Jobs Act (TCJA) , Mr. Bruce issued this letter (found on the ACA website).
EXCERPTS:
What happened?
Changes in the basic rules for Americans abroad were not made.
There are strong indications that Congress will soon return to the subject of tax law changes to make corrections in what was done and to address issues that were postponed. A couple of days ago Chairman Brady said, “I’m going to recommend that we do have some form of tax reconciliation in future budgets because there are still areas of the tax code I think . . . can be improved, including retirement savings, education, and streamlining,” Brady said. “And we had a number of good ideas from our members we weren’t able to accommodate. Plus, I think we’ll have to continue to modify the international code over time.”
What has not changed?
- The basic foreign earned income and housing cost amount exclusion (FEIE) has not changed
- The 3.8% net investment income tax to fund Medicare and The Affordable Care Act, remains in place and continues to apply in a way that, for Americans abroad, exposes them to double taxation because they are not allowed to credit foreign taxes against it.
There are some serious problems.
(a) The new participation exemption system adversely affects Americans abroad by not providing the dividends received deduction and yet taxing an individual on the deemed distribution.
(b) Special reduced rates for so-called “passthroughs” do not benefit Americans abroad that earn from a passthrough foreign income.
(c) Foreign real property taxes can no longer be deducted under the Act.
What are the good points?
Overall, the visibility of the subject of taxation of Americans abroad has greatly increased. The House Republican Blueprint for tax changes, developed early on, said that legislators would consider “appropriate treatment of individuals living and working abroad in today’s globally integrated economy.” Ways and Means Chairman Brady said that Congress is thinking about changes in the way American individuals abroad are taxed. Lawmakers, he added, take seriously the call for a shift from a citizen-based income tax system to a residence-based system that would only tax people on the income they earn in the U.S. Finance Committee
Chairman Hatch’s corporate integration proposal called for reconsideration of the taxation of nonresident citizens. Individual Members, such as, Representative Holding (Republican-North Carolina), have said that changing the way Americans overseas are taxed is high on their list of priorities. Late in the process, there was a very good floor colloquy between Representative Holding and Chairman Brady on the need to take up this subject afresh in the near future.
One of the most positive things that happened was that ACA successfully developed the best, most comprehensive baseline set of data for detailing the taxation of Americans abroad. This baseline information did not previously exist. It required five months of work by ACA and its independent revenue estimator, District Economics Group (DEG). Utilizing this information, ACA has been able to greatly refine its description of a possible approach to changes in the law and
to run revenue estimates. All of this shows that enactment of RBT can be made revenue neutral. This is an extremely important outcome. ACA has always said that for RBT to be adopted, it must be revenue neutral, tough against abuse, and fair for everyone, meaning among other things that no one would be worse off. ACA’s numbers-crunching shows that RBT can be adopted and the, at the same time, section 911 can be left in place.
What’s next?
Congress did not consider RBT and reject it. It’s noteworthy that no Member or committee arrived at the point where an RBT/territoriality-for-individuals proposal was put by a Member on the table, drafted in legislative language and “scored” for its revenue effects.Republican interest groups, as well as other groups such as Democrats Abroad, AARO, and FAWCO, all talked with many Members and “knocked on many doors”. They deserve great credit for their efforts……. However, the big, high-visibility subjects, including changes in the international tax rules for corporations, commanded most of the attention of decision-makers.Also, the approaches to these subjects, including the various versions of proposed changes in the corporate tax rules, resulted in a constantly changing landscape and made it difficult to insert residency-based taxation alongside them.
The effect of work on the other subjects can be seen from the fact that many effects on Americans abroad were simply overlooked or not fully appreciated until very late in the game, if it (sic) all.
ACA believes that Members, including Chairman Brady, Chairman Hatch, Representative Holding, and others, are sincere in saying that they want to change the tax rules for Americans abroad. We don’t think they would’ve made the statements they did if this was not the case.
In light of what was not addressed in TCJA and some of the overlooked outcomes, ACA strongly believes NOW IS THE TIME FOR CONGRESS TO HOLD HEARINGS ON THE TAX TREATMENT OF AMERICANS ABROAD. These can lay out the existing rules, including the rules added by TCJA. The Joint Committee on Taxation, the lead committee on matters having to do with tax, can construct its own baseline for dealing with the subject. ACA is making the results of the ACA/DEG study available. Hearings can also identify the key topics, including, for example, treatment of tax havens, various anti-abuse topics, etc. All the interested parties can present their views. It’s an opportunity for everyone generally to “get on the same page” or say why they choose not to be on that page. Of course, there will be differences in opinion as to what changes should be made. ACA suggests that the hearings be held by the Ways and Means Subcommittee on Tax Policy. It looks to Members, both Republicans and Democrats, who have historically taken an interest in the subject to support hearings.
*******
On the Transition Tax:
The Merry-go-Round of Unintended Consequences
No Evidence of Intent to Apply the Transition Tax to Small Business Corporations of #Americansabroad
ADSC-ADCT Letter to US Congress
Seven Simple Points to be made re Transition Tax and CFCs
It’s the Subpart F Rules Stupid
ACA Papers:
submission to the Senate Finance Committee April 2015
Side-By-Side Analysis: Current Law; Residency-Based Taxation
Representative Holding’s comments:
Well- I had already thrown in the towel and now there is hope again?
Hearings seem like a good idea.
A chance for the issues to be brought to the attention of Congress, at the least.
ACA no doubt hope that Congressional hearings would focus on ACA’s own proposal as a replacement for CBT. ACA emphasize repeatedly that their proposal has been “scored” by an independent consultant as revenue-neutral.
This seems to me ill-judged. The US should stop claiming the (unenforceable) right to tax non-US income of non-US residents; if it wants to continue the practice, it should explain its justifications, as suggested by Cabezas in “Reasons for Citizenship-Based Taxation?” (http://www.pennstatelawreview.org/wp-content/uploads/2016/10/ARTICLE-3-CABEZAS.pdf). “Because we want the revenue” is not an acceptable justification for demanding money with menaces.
If I understand it correctly, the ACA proposal would require all US citizens outside America to cover America’s losses, either by accepting continued CBT or by paying a huge charge. That’s how they make their proposal revenue-neutral, am I right?
If hearings come to pass, I hope witnesses will be called who will make the point that charging people not to be taxed is just taxation under another name. And that lifting the cap on the FEIE is also not a satisfactory solution, though no doubt it would suit the Treasury as it would leave the US free to continue claiming the right to tax unearned income i.e. retirement.
What’s needed is a coherent statement: does the US want to continue taxing non-US income of non-US-residents, and if so what is the 21st-century justification for doing so?
As Cabezas says:
The US doesn’t need a switch from CBT to RBT, when in reality it is the only developed nation that practices CBT in addition to RBT – an important distinction that highlights the unique, extraterritorial nature of what it’s doing.
@Plaxy…..I had thrown in the towel like Polly states and have now grabbed it back, squeezed the sea water outer and sent it through the wash. The towel is now on the clothes line in the sunshine…..
Your strategy comment is very helpful. Keith Redmund has had some good thoughts too…we are getting sharper…..
Here is another tact that we can take with our home governments. Using Canada as an example as this is a Canadian based forum…..
The government of Canada has rejected my Canadian Citizenship in favor of imposed US Citizenship against my own will.
The government of Canada has signed treaties that treat a Canadian Citizen as being resident in the USA.
The ONLY and SOLE way to survive is to structure ALL of my business affairs and personal affairs as being a defacto US Citizen resident in the United States.
This means that my personal banking right down to my needed checking account instead of being with a local Ontario Credit Union shall instead be with State Department Credit Union denominated in US Dollars and benefitting a credit union in the state of Virginia.
My retirement accounts shall all be held in US IRA accounts and US pension plans.
My self employed business will now be a Deleware Corporation.
ALL actions will be taken so that any possible tax is ALWAYS paid to the USA first and foremost.
To be honest this idea is now germinating across the pond where American professionals are suggesting it be enacted over here!!
Here is the choice where you have to look at risk exposure.
To be blunt…..it is far easier to live in Canada as an American financially than the current status quo.
Canada and your government do not want to protect you nor do the banks want your business…….
http://www.telegraph.co.uk/news/2017/12/30/bank-england-plots-bitcoin-style-digital-currency/
Real interesting question – central banks are exempt from FATCA at present. Will the BoE go into the snitching business as well? In theory the Sterling Bitcoin would be like the vurtual currency.
In a better world, maybe things would be about justice and doing what is right. In the world as it is, with America facing crippling national debt, the argument that it is “revenue neutral” is what counts. A LOT.
And maybe that is understandable when we see the poor and needy living in America who are now supposedly getting their welfare cut. America needs every dime which is what makes getting rid of CBT so impossible to achieve.
To hell with all of this. Time to ditch the US citizenship and move on.
I have looked into the idea of simply moving my money over the US and just accepting that in order to be a good little American, I effectively need to be in America. Even this is not a solution: If you have non-US pensions, you will end up paying a terrible price in order to move the money to America. American 401(K)s simply do not allow for lump sum transfers from non-US pensions. You would have to cash in your pension in your current country of residence and that generally means paying some kind of early redemption tax. Perhaps there is a way of doing it with some degree of tax efficiency, but I have not been able to find one.
No, time to leave.
Polly – “the argument that it is “revenue neutral” is what counts.”
Sadly, I’m afraid you’re right (though I doubt if it would make any difference to the American poor, who continue to suffer in all scenarios).
But the present “system” is the cheapest imaginable: the law requires expats to file and pay, and some do.
The only change that wouldn’t cost significant money – either in diminished tax revenue or increased administrative costs – would be a rule change that would encourage more to comply, such as lifting the cap on FEIE. Holding already mentioned that as a possibility:
“Among options Holding is considering would be legislation to allow full RBT, or instead changes to the foreign earned income exclusion.”
https://www.americansabroad.org/media/files/page/c8931293/U.S._expats_may_be_out_of_luck_in_tax_reform_By_Aaron_Lorenzo_171124.pdf
ACA:
Rand Paul:
I fear that individual international taxation reform that mandates revenue neutrality will result in
ACA memberslobbyists, lawyers, and accountants being the winners, while most everyone else gets nothing or loses out.@plaxy
Although what you say is true- and I agree that a fair tax system might get more people to want to comply- it still remains that America cannot afford to take in LESS taxes than before. So in general- tax “neutrality” means no loss for the treasury. The rest is all up to the people and I agree that in any scenario, those with the expensive tax accountants will fare better.
Polly – yes, I agree they’ll only change CBT if there’s a gain for them — a gain for the Treasury, and/or the politicians, and/or the donors.
But someone has to pay for those gains, if it’s going to be revenue neutral. A change that benefits the Treasury and the rich taxpayers and the politicians, won’t be good news for other taxpayers.
The change could be much worse than the status quo, if it involves closer tracking of US citizens outside America (in order to get that “exit fee”).
It’s a case of “Be careful what you wish for.”
Renunciation would be better than the ACA proposal – or any proposal that’s likely to have a chance of happening. Renounce, then go for PR if right of entry is desired. A much better deal than citizenship, and virtually FATCA-proof.
ACA:
Rep. Holding:
ACA wants to keep CBT + FEIE, charging those who want to jump through the hoops to (sort of) opt-out. (In reality the only way to opt out of US tax law would be to renounce, same as now.)
Holding wants full RBT or CBT + FEIE.
Full RBT is the only one of these three proposals or suggestions that would be any use (depending, obviously, what Holding means by “full RBT).
So I’ve changed my view: Congressional hearings now would not be helpful, and could be harmful if dominated by ACA supporters.
Expecting significant change in US tax policy re overseas Americans is , I’m afraid, magical thinking. The current regime has been in place for 100 years. Americans with offshore accounts are regarded with profound suspicion. This is not going to change because of a few thousand tweets or names on petitions. The only tiny hope lies with the courts.
At the same time, America’s place as a pre eminent tax haven will be protected .
As for Ran Paul- be careful who you sleep with. He is at heart a libertarian who would cut taxes to starve the government. He is right that those with the most power benefit from tax reform. The recent GOP tax bill takes from the poor and gives to corporations and the very wealthy. It isn’t revenue neutral so the next stage will be to reduce the social safety net.
We should stick to our knitting- helping individuals navigate this mess and persuing the Canadian gov. in court. We raised a million dollars. No easy task. We shouldn’t spread our resources too thinly.
Sauve qui peut.
I officially threw in the towel, as far as change within the US, quite some time back. Still support the Canadian lawsuit and UN complaint. With the very large and ever increasing US debt, it is doubtful CBT or US tax policy towards Americans overseas will ever change for the better. Renunciation was the best choice for me.
I agree with Portland, “The recent GOP tax bill takes from the poor and gives to corporations and the very wealthy.” This seems to be the trend in the US.
Portland: “The only tiny hope lies with the courts.”
I can’t see that. Only US courts could change US tax law, and SCOTUS put the lid on that long ago.
This Congress could certainly change US law, by ramming the change through without allowing Democratic input, as they’ve just done with the tax act. But it seems unlikely that any change that would be genuinely helpful to non-rich US citizens outside America would ever be considered, let alone enacted.
The ACA proposal has been designed to be acceptable to a Democratic administration – hence the emphasis on preventing “abuse.” If a functioning Democratic Congress ever happens again, maybe the ACA plan will re-surface, bringing new burdens for non-rich Americans outside America. The ACA plan combined with FATCA due diligence could easily force US citizens to choose between compliance, “Departure Certificate” or renunciation in order to open a bank account. Non-compliance, as a viable option, could disappear.
“As for Ran Paul- be careful who you sleep with. He is at heart a libertarian who would cut taxes to starve the government.”
Not my government.
If I were a USC living in America I would be voting Democrat, as ever, because I think that would be better for the country. But it wouldn’t be better for persons born in the US and not living there. I don’t support any American politicians. Not my country.
“Sauve qui peut.”
Renounce while CLNs are comparatively cheap and can be bought without showing proof of compliance.
What happened? Nothing.
What’s next? Renunciation, if you haven’t already done so .
The Republicans just demonstrated beyond a shadow of doubt that they don’t care about this issue. The Democrats? Well, don’t expect anything from them….they’re the ones that invented FATCA in the first place.
“The current regime has been in place for 100 years. Americans with offshore accounts are regarded with profound suspicion. This is not going to change because of a few thousand tweets or names on petitions. The only tiny hope lies with the courts.”
Says someone who’s never been in a US court (except maybe Tax Court which is less abusive than the others, sometimes). When the government’s lies aren’t sufficient, the judge will make up more for them. If a witness’s notarized affidavit would embarrass the government, the court will even destroy it and deny having received it, even when the server has a postal reply card signed by a court employee.
“Sauve qui peut.”
Yes. Those who can stay off the radar can avoid the renunciation fee, but keep watching over your shoulder. The rest have to pay the renunciation fee. The longer you wait, the worse it will get.
Why is it that countries like Japan gave up CBT a few years ago? Weren’t they the iast country to do so in the 1950s or something like that? What motivated them to do so? Maybe we need to examine that more closely?
“Those who can stay off the radar can avoid the renunciation fee, but keep watching over your shoulder.”
It appears there is no radar, and no need to watch over one’s shoulder. It’s just bank access that’s the problem, and yes, that could indeed get worse. Or not.
“…force US citizens to choose between compliance, “Departure Certificate” or renunciation in order to open a bank account…”
What a nightmare-inducing, dystopian thought for starting 2018!
Indeed. But maybe not that likely to become reality. The ACA proposal looks like it would need a lot of policing to be effective and achieve the boasted-about “revenue neutral” status.
But it is bizarre that ACA presents this plan as being helpful to USCs outside America. It’s anything but.
A particularly strange provision in the ACA plan:
It never occurred to me to consider whether my presence in my country of residence might be of strategic importance to the United States. Do they mean spies? Do spies file US tax returns? That could certainly wreck a good disguise.
“Do spies file US tax returns?”
ROTFL!
Also, how would a tax haven country be defined exactly, and by whom? Seems ambiguously dubious.
Tax haven countries would be identified by the US Treasury Dept, which of course wouldn’t count the US. Just as the EU didn’t include any of the EU tax haven countries in its recently published “blacklist.”