NB: STAY TUNED – a 7-part video on the Transition Tax, with
John Richardson & Karen Alpert are available here .
NB: For anyone with time to spare/the interest/needing specifics to make the point regarding the “intention” of the law, here are some of the relevant House/Senate hearings and/or documents:
Oct 3, 2017 Full Committee Hearing -Senate Finance
Nov 6 – 9, 2017 H W & M Markup
Nov 13, 2017 Open Executive Session to Consider an Original Bill Entitled the Tax Cuts and Jobs Act Sessions also continued Nov 14, 15, 16 with videos at the page)
Supporting Document Markup – Senate Finance Committee
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Another day, another set of articles and comments where the #TransitionTax & #GILTI are being stuffed down the throats of expatriates who have their own small corporations. The proliferation of articles on this issue, all proclaiming the U.S. can now inflict a deeper cut into the retirement savings of non-residents, is infuriating. The first two articles at least expressed the idea that these provisions do not might affect non-resident U.S. taxpayers.
Max Reed , posted on November 3, 2017:
As part of this transition, the new rules impose a one-time 12% tax on income that was deferred in a foreign corporation. Although perhaps unintentional, since US citizens will not benefit from a territorial model, the new rules impose a 12% tax on any cash that has been deferred since 1986.
Kevyn Nightengale, posted on November 10, 2017 (I have not included the updated comments because this is what we saw at that time):
This provision was not designed to catch individuals (I think), and certainly not Americans abroad – they are collateral damage. it’s incredibly unfair.
When I saw the House version, I expected that individuals would be exempted after a sober second (or third) thought. Or at least individuals living abroad would be exempted. But seeing a parallel provision in the Senate version makes me expect the worst.
Seems fairly obvious that the biggest clue that the #TransitionTax IS NOT meant to apply to small CFC’s is that they are not “transitioned” from a worldwide system to a territorial one. This is so basic it is hard to believe nobody just calls these people out on this. How many tax professionals watched all of the House/Senate hearings? Many of us did, all hoping to hear that the move to territorial would include individuals; or at least some mention of us. There simply was nothing to suggest that this tax applied to anyone except large multi-national corporations.This provides the context in which the law was conceived. It should be considered just as thoroughly as the plain reading that professionals claim catches expats in the net. Just exactly who is really making the law here?
Now, on to the two prominent articles of the week. The Financial Post has U.S. tax reform to bring double taxation to some Canadians by Julius Melnitzer. Mr. Melnitzer is well-known for making huge distortions of reality. Canadians are familiar with the fact that he perpetuated “the biggest personal loan fraud in Canadian banking history.”
The biggest personal loan fraud in Canadian banking history was the work of a wealthy, respectable London, Ontario lawyer, Julius Melnitzer. When he left the board of Vanguard Trust, a small firm with which his law firm had been dealing, he just happened to take a copy of the corporate seal that Vanguard had used, among other purposes, to attest to the validity of certain forms which it issued in lieu of custom-designed share certificates. Melnitzer’s first trick was to create fake shares by simply typing in the share amounts and stamping the certificates with the company seal. He created five certificates representing a total of almost 900,000 shares. Then he used these “shares” as collateral for personal lines of credit. He also forged financial statements of a company that his father had founded, in which Melnitzer owned 20% of the shares, along with a pledge from the company that it would guarantee Melnitzer’s debts. Using the Vanguard shares and the phoney loan guarantees Melnitzer received a total of $5.6 million in lines of credit from five major Canadian banks. The scam went on for years. Each time a bank would start to press him for repayment, he would threaten to take his business elsewhere. He would also request a letter of recommendation from one bank, then use it to obtain funds from its competitors. A few years later, the banks pressed him to either pay up or come up with better collateral. Emboldened by the fact that no one had questioned the veracity of the forged documents, he decided to do the second.
Melnitzer went to a small local printing company that his law firm had done business with for years. He told them he was representing a client charged with using forged stock certificates to get loans at banks. He wanted to prove in court that printing technology had improved so much, even a small shop like theirs could do a credible job. When the company agreed, he ordered single shares of five blue-chip companies in the name of his daughter to avoid suspicion. He then altered them to put in his own name and bumped up the amounts until they had a face value of about $30 million. Not only did the great majority of the financial institutions he dealt with accept these in the place of the initial collateral, but some even significantly increased his line of credit. Alas, when an officer at National became suspicious about how Melnitzer’s personal wealth had risen so quickly, the officer asked bank experts to inspect the stock certificates. Melnitzer was arrested three days later.
Julius Melnitzer, a London, Ont., lawyer, was brilliant in the courtroom and had a stable of powerful clients, including some of the province’s biggest landlords. Thanks to a tip from an observant middle manager at a bank, the police discovered Melnitzer had printed up more than $100 million worth of stock certificates bearing blue-chip names like Exxon Corp. and used them to secure around $67 million in loans from several banks. He also bilked several friends out of more than $14 million by getting them to invest in a bogus property deal in Singapore. In 1992, Melnitzer pleaded guilty to 43 counts of fraud. He was sentenced to nine years in jail but was out on day parole after a couple of years and full parole in 1995. Melnitzer is now a well-known and respected Canadian legal affairs writer.
For Mr. Melnitzer’s point of view see here.
So why am I making such a big deal out of Mr. Melnitzer’s background? Irony. Hypocrisy. Disgraceful. Despicable. Along with government and the tax compliance community, the media is guilty of presenting only one side of the picture, consistently. We are labelled as “tax cheats” “scofflaws” and so on for not filing pieces of paper we knew nothing about. This man, who cheated banks out of $67 million, his friends out of $14 million, is promoting a questionable point of view that seriously affects the lives of millions of expats. Sorry, I cannot consider him a “well-known and respected Canadian legal affairs writer.”
The article quotes Roy Berg on the Transition Tax issues and Paul Seraganian on estate tax issues. An example of the Transition Tax issue:
A doctor who is a dual citizen practising in Canada,
with $2M of accumulated earnings in a private Canadian corporation,
would have a one-time U.S. tax liability of $300,000 this year
Roy Berg, director, U.S. tax law, Moodys Gartner
“A one-time tax liability of $300,000.” Incredible. Just a “fact.” Doesn’t matter at all how immoral this tax is in the first place. Doesn’t matter that this likely represents the doctor’s retirement savings. He/she likely worked very hard to earn that.This is a real-life person, not a hugely wealthy individual such as a corporate CEO who makes far more than $2 million a year in bonuses alone. It’s not small potatoes to confiscate that from a non-resident “U.S.” person. A Canadian citizen and resident. It is unbelievable that anyone, in any country would simply accept that U.S law applies outside it’s borders. It seems to me that “tax professionals” need to think carefully about what they are doing, who they are hurting and their role in what is truly an amoral regime at best and an immoral regime at worst. And people affected by this should think long and hard about parting with such amounts. I sincerely hope renunciations will be off the charts next year. One can at least be certain that “unofficial” renunciations, people “just walking with their feet” (as in non-compliance) will continue. There is a limit to the value of anything and U.S. citizenship is quickly becoming something non-residents simply cannot afford to keep.
An excellent comment by Karen Alpert on this article:
It is patently clear that Congress was not thinking about the impact of tax reform on non-resident US citizens. None of the discussion in the lead-up to tax reform, or in the committee hearings, indicated that Congress intended to punish the citizens and residents of other countries who happen to be claimed by the US as citizens. Nothing written by the IRS so far has indicated that they believe this applies to non-resident individuals – every example in the IRS notices has specifically looked at corporate shareholders. The only indication that this might apply to non-resident individual shareholders is from the tax compliance industry that stands to earn a large amount of fees on attempts to comply with this extra-territorial over-reach by the US.
If applied to non-resident individuals, the “transition” tax would be a pre-emptive grab at the tax base of Canada and every other country where US emigrants and Accidental Americans are living. The “deferred foreign income” that would be confiscated is money that was never subject to US tax, and is only claimed by the US because of a fictional “deemed repatriation”. Think about what that really means – the US is pretending that US emigrants are “repatriating” funds back to a country where they don’t live, and that they may no longer really identify with. The only good that could possibly come from this is the long overdue realisation that US taxation of the citizens and residents of other countries is contrary to the national interests of those countries and contrary to normal international practice.
The comments section is still open; Brock SWAT please go over and make your views known.
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The other major article this week is at the Financial Times.
You can see the article on the
citizenshiptaxation facebook group
Financial Times
Americans abroad hit by Trump’s new repatriation tax rules
by Andrew Edgecliffe-Johnson in New York – FEBRUARY 4, 2018
John Richardson comments:
(A previous comment of John’s is here . )
@Mitchell @WBY @Brian Lillis @Monte
@Mitchell gives us an excellent description of the reality of this situation.
We are dealing with a situation where the “tax compliance community” says: “Resistance is futile” and the reality is “compliance is impossible”.
What will be people do? Those who have long term relationships with “tax compliance people” are probably in the worst situation. They will be under enormous pressure to transfer their pensions (in reality this is how these corps are often used) to the IRS. These people will be confused, frightened and “easy prey”for the amoral individuals who populate the industry. I saw one explanation of the “transition tax” from a highly regarded tax firm that noted that they must search their client base for “victims”.
Notably, this is also taking place against a backdrop where VERY FEW “tax professionals” even understand how this (so called) tax works and how to work with it (or against it).
It is laughable that the only way any individual could even know that this exists is because of the combined efforts of the media and the “tax compliance industry” (frankly the last group of people I would trust).
I would also like to stress that members of the tax compliance community do NOT know more about this than the individuals impacted. Sure, they may be able to calculate the tax better (assuming that it applies to Americans abroad at all.) But their insight into this is limited by the thought (if you want to call it a thought):
The law is the law – the intent of the law was irrelevant – the unintended consequences are irrelevant.
The unfortunate truth is this:
People are going to have to choose between following the advice from their tax professional that “the law is the law” and retaining their life savings.
It will be interesting to see what happens.
@lioness – Even if the transition tax applies to non-resident US citizen shareholders (and I’m not convinced it does), I don’t see how it can possibly apply to a non-resident alien. And, if you renounced in the last week of December, you would have been a non-resident alien on the date that the deemed repatriation occurred (31 December).
Admittedly, I am not an expert on how the CFC rules interact with changes in tax residence. I thought that all of the deemed distributions (subpart F income, transition inclusion) occurred on the last day of the corporation’s tax year. I would have thought that your Canadian corporation would have ceased being a CFC on the day you renounced, and that any distribution deemed to occur on or after that day would not be taxable by the US.
@Karen the transition tax applies to everything set up and deferred since 1986 in a foreign corporation anywhere in the world. If you have more than 10 percent or more this is applicable. This is what I read in accounting today news available on google search. Anyways, hopefully sooner or later some CPA is going to give us better idea as most definitely I am also panicking.
@Karen I think it applies to even people outside USA resident in their native countries or adopted countries. Sorry to give you all the bad news but I am reading on google search.
Harrison – if a non-US citizen owns a company in Canada or Australia, there is no way the US can impose any tax on the non-US-source income of that company. Once a US citizen has renounced, they are no longer liable for US tax.
If lioness had renounced in 2016, we wouldn’t be having this discussion. If lioness had renounced in October 2017, I don’t think it would have been an issue either. The fact is, lioness renounced BEFORE 31 December, and the transition tax inclusion occurs on the last day of the corporation’s tax year that includes 31 December. I don’t see how lioness can be liable for this tax.
Harrison – btw, I don’t think any nonresident individual should be paying this tax. The compliance condors are all salivating over the accounting fees this will generate, but they are the only ones who say it applies to Canadians or Australians or Israelis or anyone else who happen to be US Persons. If you read the IRS notices – they describe it as a tax on the foreign subsidiaries of US corporations. All of the examples are of US corporations with foreign subsidiaries. And none of the discussion during the (very short) hearings on the bill discussed the impact on non-resident US taxpayers.
The transition tax is based on a pretend transaction. It reaches into a foreign corporation and pre-emptively taxes the retained earnings. If applied to non-resident individual taxpayers, this is a grab at the tax base of every country that has US emigrants. For countries with a US tax treaty, it is clearly contrary to the spirit of the treaty.
@Karen noted. Maybe I am incorrect. As everyone else is discussing it applies to Canadian owned business started in Canada with no US branches just owned by US citizens that have to pay transition taxes. Am I incorrect or am I missing something here. My company does not have a US source income or any money derived even from US to start the company. It is just owned 100 % by a dual national such as me. Is there a transition tax reaching back to 1986 as I understand from all the posts ?
@Karen do you even realise that every foreigner in the world does not want me as a partner even since I am a US person. I can’t get bank accounts in HK anymore since they hate my toxic passport and complaining to congress man gets a general response. Simply get out as no one is forcing you to be a US citizen. These are our laws that we all live by. My child can get his account opened online in USA in ten min or in a branch but HK banks would tell me sorry not welcome. Dump your ugly passport as we are too chicken to stand up to the might of the mighty US. Brokerages same way. Make sane laws not stupid laws
@Karen these laws are designed by condors working in tandem with IRS to pluck feathers off. That’s about it. The compliance industry owns these laws to maximize their income.
Harrison – yes, the compliance industry would have you believe that this tax applies to your company if the company was incorporated outside of the US and you are a US citizen. This is another case where the compliance industry is being “conservative” and maximising the tax due to the IRS in order to minimise their own liability and the chance of penalties.
This is an unintended consequence of a literal reading of the tax reform bill. It does not reflect congressional intent – how could it. To intend something, Congress would have to actually consider it. There was absolutely no discussion of the impact of this or any provision on non-resident US taxpayers.
A large proportion of the potential victims of this legislative overreach are citizens or permanent residents of countries other than the US. Reaching into their local corporations with this sort of pretend transaction to preemptively confiscate the tax base of another country is an affront to the sovereignty of every country with entrepreneurial US emigrants.
“ Reaching into their local corporations with this sort of pretend transaction to preemptively confiscate the tax base of another country is an affront to the sovereignty of every country with entrepreneurial US emigrants.”
As is the US claiming that residents of other countries owe taxes or info returns to the US on assets earned and held by individuals held outside the US. All of this does, yet it exists.
Either most countries are dupes or chicken.
This does not end well.
Karen – “Reaching into their local corporations with this sort of pretend transaction to preemptively confiscate the tax base of another country is an affront to the sovereignty of every country with entrepreneurial US emigrants.”
Won’t tax be payable to the residence country anyway, as if the transition tax had never occurred? The residence country has primary taxing rights and has not conceded so presumably will not forego its right by giving credit.
@Karen.
“This is an unintended consequence of a literal reading of the tax reform bill. It does not reflect congressional intent – how could it. To intend something, Congress would have to actually consider it. There was absolutely no discussion of the impact of this or any provision on non-resident US taxpayers.”.
Oh Karen I have got news for you. Congress knew it too well before passing it and the ways and means committee think every angle before they pass their laws. It was fully intended to tax the small business owners overseas to make up for lost revenues by big corporations by slashing their taxes from 37 to 21 percent. Every action is fully thought of before they pass FATCA too just because they knew what FATCA would reel in. Don’t make the Congress so innocent please that they are going to pass laws (maybe some have done all this to hurt us not all) without thinking. It’s the compliance industry who writes these (absured to us but money maker to them ) laws.
“As is the US claiming that residents of other countries owe taxes or info returns to the US on assets earned and held by individuals held outside the US. All of this does, yet it exists.
Either most countries are dupes or chicken.”
It’s not the residence country that pays the US tax; the taxpayer pays it. The residence country generally only allows credit on items of income where the US has primary taxing rights – not “saving clause” rights. As I understand it.
Well we all know that all countries are chicken against the world’s mightiest country since the Roman Empire. We have FATCA now all over the world. Yes every country is a chicken even Iranian banks have FATCA operating in other countries. Not sure about Iran itself.
“If applied to non-resident individual taxpayers, this is a grab at the tax base of every country that has US emigrants. For countries with a US tax treaty, it is clearly contrary to the spirit of the treaty.”
Worth noting that the G5 wrote to Mnuchin expressing concern that three of the Tax Act provisions contravene DTT and/or WTO rules. The transition tax is not mentioned – perhaps suggesting that the G5 assume the transition tax does not apply to non-US-taxable earnings such as the earnings of a resident corporation.
http://www.taxanalysts.org/content/eu-finance-ministers-fire-warning-shot-us-tax-reform
@Harrison – When accountants swear to uphold all laws, is that binding to the laws of other countries or just the country they’re practicing in? Would the accountants be subject to ramifications from their home country’s licensing board, etc. for choosing not to take part in helping to enforce another country’s extraterritorial tax laws?
@Kelly. I have spoken to a Canadian accountant who is good in doing both Canadian and US taxes. Although he is US certified but does not think too much about US as he is based in Canada. US cpas certified in HK or other countries all swear to uphold US laws instead of local laws as they are more scared of loosing US business with IRS.
@Kelly. The Canadian accountant was genuinely upset at why US practices extra terroritoriality and people resident in other countries
@Kelly. Some US accountants would even tell you to break the law but would be the first one to report you should you do it. Trust me there are CPAs always looking for chicken to pluck their feathers and will give you very crooked ideas but don’t trust them. These condors are very dangerous as per my attorney friend.
With respect to the “transition tax”:
Why would anybody be concerned about paying a tax, when:
1. It is unclear whether it applies to “tax residents of Canada and other countries”
2. The only people aggressively claiming that it applies to “tax residents of Canada” are Canadian tax accountants (With friends like these, who needs enemies)
3. Even it it were to apply, the accountants AKA “Form People” are clear how it applies
4. In reality, it is not a tax on “foreign corporations” but a confiscation of Canadian pensions.
So, please, why are people considering sighing up to:
– first figure out whether the tax does apply to them
– then figure out if it applies, how it applies
Isn’t the better idea to simply ignore it?
There’s an old rule that goes like this:
“He who has the gold makes the rules.”
If you pay this you no longer have the gold.
Somehow this whole discussion reminds of these Old Brock Classics:
Compliance Condors don’t work within the system, they ARE the system:
https://isaacbrocksociety.ca/2014/12/17/another-gem-from-embee/
More on Form People (no songs):
https://isaacbrocksociety.ca/2014/11/26/form-people/
Are “tax professionals required” to uphold the tax laws of other countries?
With respect to the internal laws of Canada
No
With respect to their own codes of professional conduct
In Canada no.
But, for those who are in the U.K. ….
I know of at least one well known tax compliance person who believes that it is his duty to ensure compliance with NOT ONLY U.K. tax laws, but also with U.S. tax laws.
It’s pretty obvious that a necessary condition to retain U.S. citizenship is that you must:
1. “Resist the call of the Condor”; and
2. Live a “Condor Free Life” (do your own tax returns).
_________________________________________________________
Also, remember that accountants do NOT give you “privilege” that you can get from lawyers. In other words, they can’t even pretend to be anything but agents of the taxing authorities.
@USCitizenAbroad. Many of the US attorneys are also agents of the taxing authorities. Once a friend was threatened by his tax attorney to comply after revealing his info to him or face consequences of being reported. A very well known attorney writing on major magazines about FATCA. Truthfully all of them are compliance condors no matter what. The Canadian CPA told me not to comply with any of their nonsense ever as this is extra territorial. This is sometime ago maybe now things have changed.
There is no friend of yours in a compliance condor ever.
The tax compliance industry keeps saying that the TT “may” apply. Yes it’s true that as long as US persons everywhere have to pay US tax on their worldwide income (realized or not the TT would imply) US lawmakers will keep moving the compliance goal posts. TT represents too great a distance this time.
I’m with Karen, and don’t believe that this was congress’ intention, and urge everyone to behave according, which may mean finding an accountant who will do your taxes as though this tax doesn’t apply. How can a corporation which has never and will never have a presence in the US “repatriate” or “transition” into one? It’s absurd! CBT is absurd too, but at least there’s a taxable event on which to base some tax.
That said, in my desire to stop the siren song of the condor before they do too much damage, I decided to bring this matter to the attention of my Congressman, and this is where my progress stands. From Mr Posey’s Legislative Director yesterday:
“We are taking the Transition Tax issue up with Chairman Brady of the Ways and Means Committee next week. We also have several discussions scheduled with the Treasury Dept. next week [re FATCA]. I am hopeful we will make some progress!”
You can give up, or you can fight with every bit of strength you can muster. That means write, write, write, and call, call, call your representatives, including anyone on the W & M Committee – until someone starts listening!
“In reality, it is not a tax on “foreign corporations” but a confiscation of Canadian pensions.”
In reality USCs who don’t live in America don’t live in America. The US just pretends that they do. The US just pretends that they do.
The whole of CBT is based on pretence. Pretending that owners of foreign corporations owe 30-odd years of retrospective US tax is no more or less untrue than pretending that non-US-citizens owe the US 40% of their non-US assets. Or that USCs who “fail to” (i.e., don’t) join in the pretense that their local accounts are foreign owe the US $10000 per account.
Angels on pinheads, all of it.