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.
**********
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.
They’re talking to PRs.
Non-resident NRAs aren’t subject to US tax law and aren’t going to be taken to tax court or audited, so interpreting what they “should” put on US tax forms can be left to the condors, who can be relied on to maximise the confusion and the “tax due.”
@Portland
I am being the devil’s advocate here
“And yet right at the beginning they say “Dual status does not refer to your citizenship, only to your resident status for tax purposes…..”
But this is already wrong. This IS the process for dual status returns.
It appears they simply cannot believe that anyone would voluntarily renounce citizenship in the greatest country to ever exist.
I welcome correction if I’m mistaken.”
Don’t the US claim they can tax (for the whole taxable year)NRA visitors who outstay their permitted time in the US?
Then by extension can they not also claim to tax NRA’s (renouncers) who were once citizens who could be by extension defined as once ‘US tax resident’ for the whole of that year if they were at least over the maximum ‘residency’ requirement part of it. Or am I sounding like an IRS manual? 🙂
“Non-resident NRAs aren’t subject to US tax law and aren’t going to be taken to tax court or audited”
NRAs can be subjected to US tax law by having dividends or interest from US payers, or by marrying a US person, or (as pointed out numerous times) too long of a physical presence during the past 3 years.
No one gets taken to US Tax Court. As US Supreme Court explained in Bull v. US, the roles of plaintiff and defendant are reversed in tax cases because taxes are the lifeblood of the government. As courts explain when ruling that they lack jurisdiction on overpayments made by withholding, the roles of plaintiff and defendant are reversed in overpayment cases because overpayments are the lifeblood of embezzlers (IRS employee Monica Hernandez, numerous others, and likely some in the US Department of Justice).
The IRS won’t audit an innocent person when the IRS has something to hide, but that doesn’t depend on being an NRA or US person or anything else.
The IRS will penalize NRAs without due process, and seize refunds owing to NRAs even without further involvement by embezzlers because it’s illegal for NRAs to tell the truth on US tax returns just like it’s illegal for US persons to tell the truth. (Except for Rumsfeld, who told the truth and got off scotfree.)
“NRAs can be subjected to US tax law by having dividends or interest from US payers, ”
Yes I stand corrected on that point. NRAs with US assets/income may have US tax withheld and may be able to apply for a refund, depending on the relevant treaty.
My dad was not from US or never lived in US but had a 30 percent withholding tax as his country did not have a treaty on all his earnings from his dividends. HK does not tax offshore income, boom you are paying 30 percent withholding tax. Still people invested for years in USA as US sectors made a huge turn around in a few decades from dot com bubble.
@Portland,
If you can send an email to calgaryfouroneone@gmail.com with a valid gmail address, I will be able to put Lioness in touch with you. Thanks.
Can Nancy Pelosi spare a filibuster for America’s other Dreamers?
There are millions who, though born in the United States, left as children and were raised abroad. Some call them Accidental Americans. Others call them America’s “other” Dreamers.
They have grown up to become Premiers of Canadian provinces, Cabinet Ministers in Canadian and British governments, doctors, lawyers, judges, teachers , salespeople, factory workers and homemakers. Almost all live in countries that impose income and other taxes at levels that would make Americans faint.
Once proud of their birthplace, many have been reduced to paying thousands of dollars for the “privilege” of renouncing United States citizenship seeking only to live a normal life. Millions more resign themselves to living in continual fear that their employer, their bank, their accountant, their pension plan, their insurance company, their business partners or even their spouse will discover the dark secret of where they were born, such are the punitive consequences visited upon the Accidental American and anyone else who has the misfortune of dealing with him or her for the rest of their lives.
America’s “other” Dreamers risk financial ruin if they become partners or equity holding employees in a small business, it they have a joint account with their spouse, if they buy mutual funds in their home country to save for their retirement, if they buy or sell a house according to their local tax rules, if their job makes them responsible for banking on behalf of their employer, if they save for their children’s education, if they have a pension plan or even if they just try to open a new bank account in the post-FATCA world. Now the latest tax “reform” subjects small businesses who employ them to a devastating “transition” tax if their accidental American employees own as little as 10% of the business. If a Dreamer renounces this citizenship they didn’t ask for, they must pay a stiff “exit” tax to a country many have never lived in.
John Marshall once observed that the power to tax implies the power to destroy. Why does the US seek to destroy its diaspora?
Nancy, won’t you set your OTHER Dreamer’s free too? If you seek amnesty for innocent Dreamers living in the United States, find it in your heart to let Accidental Americans – America’s “other” Dreamers – live out their lives in peace. End citizenship-based taxation and give amnesty to long-term non-residents.
Excellent letter John Tidwell. I wonder if you will get answer like “Dear John. Please pay all your taxes, penalties, transition taxes etc etc and then renounce by paying our exorbitant fees and our exhorbitant condors fee for using our country, our water, our resources at least for a few days, months and years all using our excellent services to you. You owe us your skin also for our great fatherland that you are now ditching, You yellow belly tax evader.
Signed
Our great country’s Congress lady
😉
Bravo John! That’s beautifully written. Yes indeed, set these dreamers free, America.
The DREAM Act was a good thing for these undocumented residents.
Ours is a reoccurring nightmare, one where you’re trying to run across a railroad and your legs can’t move – while the train is bearing down on you.
John Marshall’s letter sums up a lot of stuff concisely. I bet some Forbes columnists would publish it. Maybe even the Wall Street Journal. Please give it a shot.
I agree that letter should be published somewhere.
(We’ll just leave aside the fact that in a number or more civilized countries, like Canada, financial ruin is only a risk for those who attempt to comply, and there is no sanction for not complying. Minor detail, something we can keep to ourselves.)
Another minor quibble that would detract from the impact of the letter:
I was never “proud” of my birthright. US citizenship was never more a convenience to me. Keeping it or not is a purely utilitarian calculation at this point.
Excellent letter, John Marshall.
One small clarification: You say:
Though I have seen this claim in published articles about tax reform, I think it overstates the applicability of the transition tax. A foreign company must be a CFC or have a US corporation that owns >=10% for the transition tax to apply. To be a CFC, >50% must be owned by US persons (including corporations and individuals) who own >=10%. So if there’s only one US individual on the share register who owns >=10% (but <=50%), the tax will not apply. Of course there are all sorts of convoluted attribution rules, so the whole thing gets messy.
My two CANADIAN cents worth on the compliance condors;
– I would have been better off if I had not ever have heard the 2011 exhortations of the US extraterritorial tax system – as helpfully amplified by the Canadian media – specifically the CBC – who apparently has no interest in following up on the issues, or the outcome and the impact on their fellow Canadians – while having helpfully provided free Canadian advertising for the US IRS and US Treasury – devoid of critical context.
– I would have been better off if I had not even tried to comply. Complying I would have been better off quietly backfiling.
– I would have been substantially better off without the services of the compliance condors I used – who greatly benefited from the gold rush created in Canada by the deliberate FBAR fear campaign tactics of the US and their OVDI crusade.
– I owed no taxes to the IRS and was not assessed with any penalties (in fact they had to pay me two years worth of ‘refunds’), but I lost significant amounts paying for help from ‘professionals’ here in Canada – who were imported from the US at the onset of the FBAR FEAR campaign. They smelled the gold in them thar hills early on – a forecast echoed later by the US Chamber of Commerce article author who noted that this was an area with significant profits to be made on the backs of those trying to rid themselves of their US extraterritorial ‘life control’ burden;
“…..Here’s a hot tip for accountants and tax attorneys: now is a good time to develop specialized expertise in advising clients who may be seeking to expatriate from the United States. That demographic looks more and more like a real growth opportunity.
That’s one potential lesson we can draw from recent years’ explosion of U.S. citizens living and working overseas who are now renouncing their citizenship……”
Aug 18, 2014
https://www.uschamber.com/above-the-fold/exit-strategy-fatca-tax-law-keeps-pushing-americans-give-citizenship
The ‘professionals’ made numerous egregious errors on at least two of my FBARs ( the first one was sent me too late for me to get them to correct in time – so I had to redo and submit the first one myself in order to meet the filing deadline), and other forms were riddled with mistakes – at one point they completed a crucial form incorrectly – wrongly identifying me as a US resident. Their math error on another form caused me grief in a later year. I finished the ordeal on my own, and did so with the information and support I got here from the IBS and other sites, my own research – and some help from the Taxpayer Advocate office.
If I had followed the conservative advice of the condor I would have been even more in the hole in terms of professional fees. And, one of those ‘professionals’ tried to pull my non-US minor child into the compliance morass as well (which would have made their RESP and birthday savings bank accounts liable for FBAR and other reporting forms, generate even more professional preparation fees, and create potential US tax and penalty pitfalls ) – they touted the future benefits of US citizenship – despite my well-informed and accurate statements that I did not meet the minimal period of US residency required to pass on the US extraterritorial burden.
Despite high fees and supposedly professional expertise, the condors sent me a generic fill in the blanks one-size-fits-all reasonable cause / non-willful form letter for me to complete – rather than assisting me with drafting that crucial statement based on my specific facts and circumstances.
Beware of condors bearing gifts of any kind.
Relinquish or renounce if you can – and rejoice.
I posted this over in the Australia thread, but probably should have posted here as well.
The videos referred to in this post have been published.
You can find blog posts at
http://www.citizenshipsolutions.ca/2018/02/13/u-s-tax-reform-and-the-nonresident-corporation-owner-does-the-sec-965-transition-tax-apply/ and
http://fixthetaxtreaty.org/2018/02/13/more-on-the-transition-tax/
The videos are here
It’s a shame John can’t keep quiet and let Karen get on with the job. He rambles she explains.
I think they’re a great combination and play off of each other nicely. They have sychronicity and obviously enjoyed doing this work together – which I am grateful for. They took a very dry subject and injected enough into it to make it interesting.
I’ve just about had it with those who do nothing to lift a finger and have nothing but criticism for those who devote their time and effort to try and fix this situation. Go get a life more than just complaining on these pages. DO SOMETHING!
Ditto BB. I just made this comment on another thread.
I’ve just about finished watching the videos you did with John and I can’t tell you how many times I’ve exclaimed “GOOD GRIEF!” already. And like plaxy I’m in awe of how well you and John understand the latest tax legislative debacle as it pertains to non-res USCs. Thank you both for doing this very educational series. If I were affected by the dubious “transition tax” I would definitely be #NotPayingThis.
Thanks EmBee.
Nice comment.
Anyone who thinks they can do a better job, then I challenge you to it!
Thanks, all. I did enjoy working with John on this (except for the editing, I hate watching myself on film), and I hope we can work together on similar projects in the future.
“This is going to be the Boston Tea Party, only in reverse,” Silver said. “There is no way there’s going to be taxation without representation. We will not allow these types of shenanigans…. A US-based attorney with a corporation does not face this tax. I’m being discriminated against because I’m an expat. And because I’m here in Israel, they’re treating me like Google.”
http://www.jpost.com/Israel-News/Thousands-of-Israeli-Americans-to-be-hit-by-Trump-corporate-repatriation-tax-542645
“Today’s revenue procedure (Rev. Proc. 2018-17) prevents changes to the annual accounting periods of certain foreign corporations in 2017 under either the existing automatic or general procedures if such change could result in the avoidance, reduction, or delay of the transition tax.”
https://www.taxconnections.com/taxblog/irs-issues-guidance-on-changes-in-accounting-periods-related-to-the-transition-tax/
Earlier I commented on this being applied to individuals overseas. I should have writted overseas corporations.
Still crazy.