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:
@Plaxy: I don’t want to belabor this discussion about Portuguese tax policy, nor do I want to spend time searching for the documents I saw. Yes, it is Hong Kong (or any other country) sourced income which is subject to taxation in Portugal, regardless of whether you live there, as long as you are a Portuguese tax resident.
However, tax treaties notwithstanding (I haven’t read them, except the summaries you posted), I saw specific documents from Portuguese government sources advising new residents about the 10-year exemption of foreign income. They listed “disqualified tax havens”, and Hong Kong and Singapore were both on the list. End of story. My point was that countries other than the USA ‘punish’ people who live in or earn income from supposed ‘tax havens’.
Let’s not continue this.
The ACA plan comes from the other point of view, it seems to me – that of US-centered, compliant US-tax payers who really are just seeking tax breaks – not an end to CBT.
Barbara – “My point was that countries other than the USA ‘punish’ people who live in or earn income from supposed ‘tax havens’.”
Ah. I thought you were exploring the possibility of moving to Portugal, lol.
The Portuguese offer is an interesting variation, and a good illustration of the contortions that countries are going through nowadays, trying to attract investment while complying with OECD/US/EU restrictions. Strange world.
Plaxy, Portugal is simply one of the citizenships of convenience options I’ve been exploring, meaning their Golden Visa program. Not necessarily moving there, as nice as it seems. Since I have now officially and once-and-for-all given up all hope of even the slightest relief coming from the US government, and since hubby and I are in the absolute worst of all situations–US tax compliant (more or less) and within all radar fields, while living in a place where citizenship is neither desirable nor easy to obtain, and at the same time close to retirement age in which we have zero social security, and all our future income will be “passive”, i.e. fully double-taxed locally and by the IRS (not to mention our primary retirement funds possibly being subject to windfall tax by the USA the day we turn 65)–I’m ready to go for any citizenship we can afford. Sadly, ones like Portugal’s, while attractive, don’t bestow actual citizenship for 6 years. Their double taxation of “tax haven” income doesn’t really affect us. I brought it up as an example of the hysteria and prejudice many governments attach to other jurisdictions which happen to be smart and efficient enough to get by with low tax regimes.
Lexology article on the Portuguese offer, in case anyone is interested:
https://www.lexology.com/library/detail.aspx?g=a4086f82-4841-4a3d-9993-03c362a1aa39
Looking at a summary of ACA’s previous RBT proposal (https://www.americansabroad.org/media/files/files/d768b14a/rbt-and-tax-reform-august-2016.pdf, dated August 2016), they seem to have moved from arguing against an exit tax to incorporating it into their proposal.
Confirming (for me) the suspicion that the purpose of the exit tax is revenue-neutrality.
@Barbara you and I are facing the same crisis. Being compliant and facing all the problems. ACA proposal seems dumb. They are still not on page with the correction of fixing the problem but just trying to get something by trying here and there with no aim to end CBT.
@Barbara you should check into non EU citizenships as EU is also trying to get CBT of some sorts and Portugal is worst for people living in territorial tax jurisdictions.
Harrison: what are the noises being made about CBT in Europe? I have the notion that France has a type of exit tax, but you can still move away. France, again, does not, I believe, allow its citizens to escape tax by moving to Monaco. I believe EU countries do tax worldwide income though (Portugal being an exception, with conditions).
Plaxy: the August 2016 ACA document you link to seems to me quite reasonable. I am afraid of terms like “Anti-abuse provisions would prevent RBT from being used as a loophole to avoid U.S. taxes.” But I do understand the idea if it means truly having to reside abroad. For instance a rule could say that someone who is actually in the US for 10 (or 6 or whatever) months a year cannot claim foreign residence.
As for the exit tax, that too can be understood, as it is written, meaning one has to pay captial gains upon exiting, for instance. I don’t condone it, but I don’t really care. It brings us back to the French example. You can still be free, once you pay some taxes. Big whoop.
What I did not like at all in other proposals were the “IRS user fee” of $2350 for the privilege of “acquiring” RBT (where was this again?)
Harrison – Can you elaborate on your comment about the EU and CBT?
Fred(B) – There’s a footnote on that Aug 2016 summary to a 2013 paper in which ACA did express the view that:
and:
https://www.americansabroad.org/media/files/files/770403c2/finalsubrbtmarch2013.pdf
Unfortunately they seem to have shifted away from that clear anti-CBT position and are now (it seems to me) actively trying to preserve CBT, and especially FEIE, by offering expats nothing more than a carve-out, as mentioned in the post starting this thread. And potentially a very expensive carve-out, identical to the vindictive “covered expatriate” provisions.
It’s possible there have been changes in ACA personnel with consequent changes in policy (when exactly did Charles M. Bruce get involved, I wonder?)
I think this proposal would not be good news for most USCs outside the US. Its underlying assumption (that the US Government is justified in taxing not only on the basis of source, residence, and consumption, but also on the basis of nationality) is toxic; any proposal that perpetuates that claim is objectionable in my view. Taxation on nationality needs to be challenged, not endorsed. And challenging the presumed right of the US to tax who-so-damn-ever-it-pleases is in my opinion not ever likely to happen through US courts or congress. It’s just not the way they think.
Fred(B) – “What I did not like at all in other proposals were the “IRS user fee” of $2350 for the privilege of “acquiring” RBT (where was this again?)
The user fee (equal to the renunciation fee) is part of the current ACA proposal. (https://www.americansabroad.org/media/files/files/e547e516/Residency-Based_Taxation_ACA_Side-By-Side_Comparison_Vanilla_Approach_171101_v2_.pdf)
Smoking gun:
https://www.taxnotes.com/editors-pick/theories-us-expatriation-numbers-abound-answers-elusive
ACA’s Charles M. Bruce, who claims sole authorship of the current ACA proposal, is interested in compliance, not RBT. Offer expats a “benefit” (SCE, or faux-RBT), just to get them to sign that jurat.
Spider, parlour, fly.
@plaxy. You are correct mate on every point. ACA proposal is just trying for compliance. Does not offer a RBT. Move on folks. Those of EU who are interested in EU, please look at residency requirements of EU countries that you want to be a citizen of. Every EU country and U.K. are trying now to find any citizen living overseas if they are truly resident or just using this as an exception. This is the current info I have from CPAs. For those of you living in Panama or any tax haven country and also an EU citizen , entire EU is now black listing tax haven countries. Google more for info. Oh yeah the famous Luxembourg and EU tax havens are not considered by them as tax havens and not black listed.
Harrison:
Sure, enforcement is picking up, as is harrassment. My French bank keeps sending ominous warnings that they have figured out that I live in Belgium (could it by from the mailing address? How cunning) and will report my account to Belgium, so can I please certify where I live (perhaps they can look at that same address), and by the way am I a USP? Those letters now go straight to recycling (I used to stress and keep them on a pile, but my desk space is scarce). They can report my account to Belgium, where I reside, “pas de problème”, that’s what I expect anyway. Savings interest are double taxed, both by France and Belgium (at the source in France, on the tax return in Belgium), it’s documented and nobody cares (and current returns are so low it’s barely an issue anyhow).
So indeed CRS is apparently in full swing, and if you own property with a foreign address, that’s dutily reported to the country where you reside. But overall it’s just high taxation and paperwork.
But nothing comes close to the US’s CBT absurdity and impossible compliance. And nobody else has to contemplate renouncing a citizenship, much less for such an outrageous fee. Say what you will about the EU, in many ways it’s much more sane and free than the good ole US of A.
@Fred(B) I am not European so I have no idea. I have heard from a lot of European friends that it is not fun as CRS is in full force. Plus I don’t live in Europe so I don’t know but I know some friends who acquired Portugal and Spain citizenship and are having issues residing outside of EU so they got a Comoros passport by investment. As Comorrian you don’t get issues whatsoever if not living inside EU.
Harrison, the Comoros citizenship-by-investment was terminated last May, so no longer an option. As for getting an EU passport such as Portugal, we did consult with a Portuguese immigration lawyer, one who normally works with high net worth individuals from Saudi and China. He said that as long as we live in the country less than 6 months per year, we are not resident for tax purposes and are not liable for income tax on non-Portugal income, even though we would have the Golden Visa residency status for immigration purposes. I expect he knows what he’s talking about, considering his clientele. So the tax situation regarding EU citizenship doesn’t worry me. If we end up living there full-time, then of course we pay taxes there, with no regrets. This isn’t a tax avoidance scheme we’re looking for, but a way out of US citizenship.
@Barbara, I wasn’t aware Comoros has killed their citizenship by investment program but I did know they were having issues with it for past 2 years before 2017. As they would often change their requirements in the middle of application process. Many EU citizens, Canadians and US citizens got Comoros passport just in case their govts pulled a switch and curb their traveling benefit as I know US congress had passed laws to curb traveling for non compliancers, terrorists (whoever they defined to be one was immediately stopped at Mideast airports for months ) and child support evaders. It was in the news all over the world and from different offshore service providers to ditch these passports as I know a Canadian who was providing offshore services himself got a Comoros passport by investment.
Yes as long as you don’t live in Portugal for more than six months you are off the hook but banks and brokerages will still report you to Portugal as they would want to get it off the hook with EU/OECD requirements. It’s up to you to convince any EU govt or Canada, Australia,etc that you are not living there. I know many Canadians who acquired Canadian passport by naturalization are now looking for other non western passports.
@Barbara. These people who got non western passports like Comoros, Dominica etc didn’t get one for tax avoidance. They got it to protect themselves from future CBT like laws that might be put in place to increase revenues as govts around the world are getting desperate for funds and that is why CRS/FATCA was passed. They were smart to realise the potential harm carried by their western passport early enough and got non western for themselves and their future generations. US passport is the most dreaded one I know exists for you all as well as for me. A lot of offshore service providers are not recommending high networth clients EU passports like Cyprus, Portugal or Spain anymore as their govts are getting desperate too.
@Barbara I feel for you reading all your posts as I am in the same situation as you being tax compliant and fully within radar. Now I feel horrible about being tax compliant. I am a resident of tax free haven considered by Portugal and entire EU now. I think ACA proposal also blocks me of getting SCE due to my living in tax free haven. It is not tax free by any chance as we do have to pay taxes here too. Barbara did you try looking at DR too? As I understand Dominican Republican grants you a passport in 2 years or more by showing 1500 dollars per month income.
I didn’t know where to post this, but since there’s a discussion on wealth extraction on this thread, I thought it would be okay.
https://www.express.co.uk/news/world/900198/Chancellor-Sebastian-Kurz-cut-benefit-payments-for-children-living-abroad-Freedom-Party#ampshare=https://www.express.co.uk/news/world/900198/Chancellor-Sebastian-Kurz-cut-benefit-payments-for-children-living-abroad-Freedom-Party
What’s my point?
Austria objects to sending money abroad because that money will not be spent in Austria – or perhaps not even in the EU (e.g. Turkey). I fail to understand why Austria has a problem sending (tax) money abroad for children, yet doesn’t balk at the US’s extraction of other tax-funded subsidies. US citizens who are permanent residents of Austria are eligible to receive any number of monies paid for by taxes; some of these are tax-free in Austria, but taxable in the US, and other benefits would be double-taxed.
I’m not sure how many US citizens live in Austria as long-term residents. Maybe it’s not a lot (I’m sure the number is small when compared with the US expat community in Germany). I know from experience that there is a high turnover rate for short term residencies (less than 5 years) among university students and industrial/technology workers. However, even someone staying for only a year or two might qualify for certain benefits, depending on their situation.
Why one form of extraction should be viewed as a problem while another, more insidious form goes unchecked, baffles me.
“Why one form of extraction should be viewed as a problem while another, more insidious form goes unchecked, baffles me.”
For the same reasons this FATCA and US tax code monstrosity has gone on the for years unchecked. Very few people have any idea it’s happening. Of the few that do, most so not see the problem, after all there’s $103000(or whatever) before any tax is due and besides, it must be worth having the US citizenship or they would renounce. There’s tax treaties, right?
The few who see this for what it is, a global human rights abuse and abuse of power by the USA are simply too few and too powerless to do anything about it.
Oh, and those who might actually have enough power to make a difference are usually too busy sucking up to the USA to bother standing up to them and telling them to get the IRS out of countries and to cease terrorising our residents for illegitimate taxation.
Stopping payment of benefits for non-resident children is an action the Austrian government might be able to take (if not contra EU law).
Preventing USCs from trying to comply with (a misguided interpretation) of US tax law is probably not within the power of the Austrian government.
“Preventing USCs from trying to comply with (a misguided interpretation) of US tax law is probably not within the power of the Austrian government.”
True. But this issue could provide fodder for Austria’s government to reconsider its tax treaties, totalisation agreements and IGAs, no? The right and far-right parties with their stong nationalism don’t like to see revenue leaving the country never to be seen again.
Also, the new, nationalistic coalition in Austria is going to be stirring up trouble with the EU based on what it feels are infringements of its sovereignity. I think Austrian politicians just haven’t realised yet to what extent US imperial tactics have infiltrated the country via the treaties, etc. The EU looms larger on their radar. I just wish that all the respective nations US citizens reside in would stand up against the US instead of always rolling over so easily. Maybe the lack of respect globally for the new administration in D.C. will have this effect eventually.