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:
And then there’s the OECD’s blacklist, which named only one country as a tax haven: little Trinidad&Tobago, which tried hard to refuse to sign up to FATCA.
@plaxy
Might it go so far as to distinguish between types of finance when deciding which countries are tax havens or not? For example, I pay higher income tax where I live, but get better retirement fund deals; so for tax purposes my income wouldn’t be considered from a tax haven, but my pension would? (I hope I explained that well enough). Could this type of a la carte taxation happen or would a country always be all tax haven or not? I know this is hypothetical – I’m just curious.
As far as I know, when a country gets labelled as a tax haven it’s because it offers opportunities for the avoidance and/or evasion of taxation. Ireland, for instance, had a sweetheart deal to attract MNEs (Apple etc) – come to Ireland and we won’t tax you sort of a thing. Another approach is to attract investment by offering shell companies which allow the true ownership to be concealed. That’s how Delaware and other US tax haven states do it, I believe.
I don’t know how ACA envisage tax haven countries being defined for the purposes of their CBT- with-added-enforcement plan.
Only US citizens are at risk of being accused of living in a low-tax country for the purposes of evading tax. For non-USCs, living in a low-tax country is not a crime. It only becomes a crime if an American does it.
Potential crime I should say.
Example of the Delaware approach:
https://amp.theguardian.com/business/2016/apr/25/delaware-tax-loophole-1209-north-orange-trump-clinton
@Plaxy comments:
Oh come on! U.S. citizens are the property of the United States Government and are to be used in any way that the U.S. government sees fit. On the most basic level, U.S. citizens are ALWAYS available to be exploited as instruments of foreign policy. At a bare minimum, every U.S. citizen abroad is now being used as an “instrument of extraction”.
Extraction of capital: specifically to attack the economies of other nations and to extract capital (via taxation) from the capital bases of other nations.
Extraction of information: FBAR and the collection of International Information returns
This theme of U.S. citizens being instruments of U.S. foreign policy has been written on for years and years … For example:
https://renounceuscitizenship.wordpress.com/2012/02/12/citizens-as-property-of-government-the-tragic-story-of-robert-james-bobby-fischer/
and a recent series of posts at citizenshiptaxation.ca
Once the world begins to better understand this, I predict:
First, countries will ban immigration of U.S. citizens.
Second, all residents will be required to disclose all citizenships they may hold (Russian currently requires disclosure of all citizenships)
Third, residents of countries that have U.S. citizenship will be asked to renounce that citizenship
Fourth, those who do not renounce will be deported.
No country can afford the risk of allowing U.S. citizens to reside in that country.
lol
I still don’t comply…
…And never Will.
Not afraid of gangster banksterland USA !
“It appears there is no radar”
Comment of the year, thus far.
“At a bare minimum, every U.S. citizen abroad is now being used as an “instrument of extraction”.
Extraction of capital: specifically to attack the economies of other nations and to extract capital (via taxation) from the capital bases of other nations.
Extraction of information: FBAR and the collection of International Information returns”
Lol. In practice they’re not though, given that most USCs outside the US don’t file US tax returns or FBARs or FATCA forms (8938?)
I have to say, the USG never showed any interest in me, from the day I was born to the day I renounced. And the only money they extracted, from the day I left till the day I renounced, was passport renewal fees.
Of course the DoS did relieve me of $2350 on the day, but that was paid voluntarily and accepted reluctantly, so it hardly counts as extraction.
“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?”
I don’t think Japan ever had CBT, but in 2017 Japan adopted extraterritorial inheritance tax. I’d better not die within 5 years of leaving Japan.
An older thread has a list of countries that tried CBT for income tax. As we well know the last two are going to extend past 2018, but I think a few others reached this millennium before giving up. I think they discovered that they didn’t profit from forcing their diaspora to renounce and never bring their savings to their birthplace.
“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.’
Dewees.
‘Individuals resident in a “tax haven” country would not qualify for RBT.’
Oooooh. Residents of the US will have to stop filing US tax returns.
“Do spies file US tax returns? That could certainly wreck a good disguise.”
How about them FBARs ^_^
@ Plaxy, who opined: “Only US citizens are at risk of being accused of living in a low-tax country for the purposes of evading tax. For non-USCs, living in a low-tax country is not a crime. It only becomes a crime if an American does it.”
Not exactly true.
Having looked into Portuguese nationality, I note Portuguese policy: new permanent residents to Portugal can opt out from Portugal’s taxation of worldwide income for 10 years. That is, their Portugal-based income is taxed, but their foreign income, which is normally also taxed, would be exempt from taxation for 10 years. UNLESS that foreign income is from a designated “tax haven”, which includes just about every country with a <20% income tax rate, such as Singapore and Hong Kong. Hence, if I were to live in Portugal for half the year plus one day (giving me Portuguese tax residency), and the rest of the year in Hong Kong, my Hong Kong income is taxed twice. Whereas if I lived in Canada for the rest of the year, my Canadian income would be exempt from Portugal tax for the first ten years.
I know, not quite the same situation as American CBT, but nevertheless, Portugal presumes that living/working in low tax countries for even part of a year is for tax evasion purposes. It wouldn't surprise me to learn that other EU countries have similar policies.
Barbara – interesting. Portugal is helping thousands of people, such as many retired Belgians, escape their native land’s income taxes (on retirement income). Funny they’d accept non taxation of income in a high tax country but not a low tax one. Just goes to show that the definition of tax haven is whatever people decide it is. Overall however this just illustrates how people are free to move around and choose. Except US Persons, of course.
“Dewees”.
Sought advice about complying and was advised to enter OVDP. No radar.
Only (according to ACA) if the US listed itself as a tax haven country.
Barbara – isn’t it because the income is HK source, rather than because the recipient lives in Hong Hong for more than half a year?
https://blog.degroofpetercam.com/en/estate-planning/1432/marie-melikov-portuguese-tax-regime-non-habitual-residents-rnh
Compare that with US tax law (not an opt-in offer, or dependent on residency, but law applicable to all USCs everywhere): a USC living in a high or low tax country, is required to pay tax at US rates on all passive income (e.g. pensions), including pensions earned in and paid by the country of residence.
If the residence country isn’t taxing the passive income (whether because it’s a low-tax country or because the pension is from pre-taxed contributions or because the taxpayer is below the residence-country tax threshold), or is taxing below US rates, the US claims the difference.
Hong Kong says:
http://www.ird.gov.hk/eng/ppr/archives/11032201.htm
The text of the Hong Kong – Portugal treaty:
https://www.elegislation.gov.hk/hk/cap112BW@2012-08-02T00:00:00?pmc=0&m=0&pm=1
ACA:
Still no statement on the unjust nature of citizenship based taxation, especially for accidentals.
What they say is more along the lines of tax reform, tax relief needed which is more acknowledgement and reaffirmation of a system that those resident overseas and paying taxes as residents to other countries should also pay tax as residents of the U.S. A revenue neutral approach to it all also reaffirms the existing system.
More needs to be said that in no way should the U.S. also consider these persons U.S. residents for tax purposes.
“…reaffirmation of a system that those resident overseas and paying taxes as residents to other countries should also pay tax as residents of the U.S. A revenue neutral approach to it all also reaffirms the existing system.”
Agree.
Until ACA, DA, RO etc. are willing to publicly advocate non-compliance for dual citizens, they are not worthy of support.
They are only worthy of support if they advocate complete residence based taxation with no exceptions and no bullshit workarounds and no interim taxes.