February saw a massive number of legislative attacks on American emigrants and their children by ignorant or malign (un)Representatives which are only now coming to light as the Government Printing Office finishes typesetting and publishing the hundreds of pages of proposed laws. We’ve already discussed the various recent bipartisan attempts to repeal the Foreign Earned Income Exclusion, but another frequent theme is increasing the tax and compliance burdens on so-called “Controlled Foreign Corporation owners” and “outsourcers”, including people who have lived outside the U.S. all their lives but got the inherited genetic disease of U.S. citizenship from their parents. So here’s an overview of the latest proposals to make your life more difficult, whether you’re an employee or a boss.
Paying U.S. taxes on non-U.S. dividends before you pay local taxes
The first example can be found the “Corporate Tax Dodging Prevention Act” introduced by Bernie Sanders (D-VT). It includes the following:
Sec. 2. Deferral of active income of Controlled Foreign Corporations.
Section 952 of the Internal Revenue Code of 1986 is amended by adding at the end the following new subsection:
(d) Special Application of Subpart—
(1) IN GENERAL— For taxable years beginning after December 31, 2013, notwithstanding any other provision of this subpart, the term ‘subpart F income’ means, in the case of any controlled foreign corporation, the income of such corporation derived from any foreign country.
(2) APPLICABLE RULES— Rules similar to the rules under the last sentence of subsection (a) and subsection (d) shall apply to this subsection.
Inclusion in “subpart F income” means that the income of a non-U.S. corporation is attributed back to its U.S. Person owner and taxed by the IRS at ordinary income rates. This treatment applies even if the owner is a flesh-and-blood person in whose hands dividend income from the corporation would be qualified dividends; see this helpful write-up from Aman Badyal of Badyal Law, “Subpart F Income Not Treated as Qualified Dividends”. As Homeland legislative drafters refuse to understand, the vast majority of “controlled foreign corporation owners” are U.S. Persons resident abroad who chose to register their businesses in the country where they actually live and use government services, rather than in some hypocritical foreign tax haven with ironclad secrecy like Delaware.
In other words, a self-employed Homelander who forms a C corporation in the jurisdiction where he or she lives pays 15% U.S. tax on dividends only when dividends are actually paid out; but if you form a corporation in the jurisdiction where you live, you owe Uncle Sam a quarter or more of its profits even if those earnings are not paid out as dividends but are retained by the company with the intention of reinvesting them in growth. And then, when you finally do pay dividends to yourself in another tax year and the country where you actually live taxes them, good luck trying to claim a foreign tax credit for the taxes you paid on those same amounts to the U.S. in prior years! This is the vaunted “horizontal equity” between taxpayers abroad and taxpayers at home of which Homeland ivory-tower academics so often speak.
Son of FATCA returns again
Next is the “Cut Unjustified Tax Loopholes Act”, the handiwork of Sheldon Whitehouse (D-RI) and Carl Levin (D-MI). In addition to the disastrous proposals about non-U.S. corporations with U.S. bank accounts which Levin included the last time he proposed this bill in February 2012, this time he and Whitehouse go even further in making life difficult for U.S. Persons abroad:
Sec. 125. Repeal of Check-the-Box rules for certain foreign entities and CFC look-thru rules.
(a) Check-the-Box Rules— Paragraph (3) of section 7701(a) is amended—
(1) by striking ‘and’, and
(2) by inserting after ‘insurance companies’ the following:, and any foreign business entity that—
(A) has a single owner that does not have limited liability, or
(B) has one or more members all of which have limited liability.
Of course, the canonical example of “a single owner that does not have limited liability” is a flesh-and-blood person.
The “check-the-box” rules, when they were first formulated in 1998, originally offered a balanced if not particularly fair choice to U.S. Persons abroad doing business in the countries where they actually lived. If you didn’t file a Form 8832 election, your business would be treated as a corporation for U.S. tax purposes — and thus you’d be required to file Form 5471 and worry about your income being treated as “subpart F income”, but without any obligation to pay U.S. SECA tax on its profits or your salary. Alternatively, you could “check the box” on Form 8832 to have your business be treated as a pass-through, or in tax jargon, a “foreign disregarded entity” — and thus you’d include its profits on your 1040 and pay SECA tax, but you wouldn’t have to file any complicated paperwork.
Unfortunately but not at all surprisingly, the IRS couldn’t stand the idea of traitors with foreign anything having less paperwork, so in 2004 they created Form 8858 for single owners of “foreign disregarded entities”, meaning that either way if you were one of those evil tax evaders who dared to do business in a country where you’d lived your entire life, you’d be forced to file expensive paperwork to the foreigners in Washington DC for which the fines for inadvertent errors started at US$10,000.
Still, Form 8858 is marginally simpler than Form 5471, so for a small businessperson outside the U.S. whom the IRS considers a “U.S. Person”, a Form 8832 election can be a valuable tool in reducing your overall U.S. compliance burden. Unless of course Levin manages to slip his “CUT Loopholes Act” into the end of some unrelated bill in the dead of night, the same way he did with FATCA — in which case you’ll no longer have that choice, and accountants will be laughing in glee at all the additional fees they’ll be getting out of you.
Are you a U.S. Person who refuses to work in the U.S.? You must be an “offshorer”!
Next, there’s the “Job Preservation and Economic Certainty Act of 2013”, another typically anti-emigrant proposal from Whitehouse and Levin which will destroy jobs and introduce massive economic uncertainty for U.S. Persons abroad:
Sec.301. Ending tax breaks for offshoring manufacturers.
(a) General Rule— Subsection (a) of section 954 of the Internal Revenue Code of 1986 is amended by striking the period at the end of paragraph (5) and inserting ‘, and’, by redesignating paragraph (5) as paragraph (4), and by adding at the end the following new paragraph:
(5) imported property income for the taxable year (determined under subsection (j) and reduced as provided in subsection (b)(5)).
Adding something to § 954(a) means it becomes “foreign base company income”, a type of “Subpart F income”. The effects of inclusion in “Subpart F income” were discussed above. In simpler terms Levin thinks that someone who unfortunately holds U.S. citizenship while living and paying taxes abroad should be forced to make a choice if he or she wants to start a business: either drop your entire life and uproot your foreign spouse and kids “back” to the U.S. (if you can get a visa for them — by no means guaranteed, particularly if you’re gay or Muslim) or give up the ability to export products to the U.S. for sale to “fellow” Americans without incurring onerous tax and paperwork burdens.
In the mean time, the mercantilists in the U.S. government will happily use lopsided “Free Trade Agreements” and tax treaties they bully other countries into signing, to ensure that Homelanders have no trouble whatsoever exporting products to wherever you live so that they can be sold to you and your neighbours without encountering tax or tariff barriers.
Tax breaks for firing U.S. Persons abroad and hiring Homelanders
And finally, just for good measure if you’re an employee rather than a boss, there’s the “Bring Jobs Home Act” (H.R. 851). Basically it’s the same as John Duncan (R-TN)’s bill from last year, but this time coming to us from the Donkey side of the Animal Farm aisle, courtesy of Bill Pascrell (D-NY), Allyson Schwartz (D-PA), Chuck Rangel (D-NA), John Lewis (D-GA), John Larson (D-CT), Ron Kind (D-WI), Richard Neal (D-MA), Xavier Becerra (D-CA), Danny Davis (D-IL), Sander Levin (D-MI), and Linda Sanchez (D-CA).
Sec 45S. Credit for Insourcing Expenses.
(a) In General— For purposes of section 38, the insourcing expenses credit for any taxable year is an amount equal to 20 percent of the eligible insourcing expenses of the taxpayer which are taken into account in such taxable year under subsection (d).
(b) Eligible Insourcing Expenses— For purposes of this section—
(1) IN GENERAL— The term ‘eligible insourcing expenses’ means—
(A) eligible expenses paid or incurred by the taxpayer in connection with the elimination of any business unit of the taxpayer (or of any member of any expanded affiliated group in which the taxpayer is also a member) located outside the United States, and
(B) eligible expenses paid or incurred by the taxpayer in connection with the establishment of any business unit of the taxpayer (or of any member of any expanded affiliated group in which the taxpayer is also a member) located within the United States,
if such establishment constitutes the relocation of business unit so eliminated. For purposes of the preceding sentence, a relocation shall not be treated as failing to occur merely because such elimination occurs in a different taxable year than such establishment.
There’s really nothing new to say about this, besides the same thing I wrote last year when Duncan’s bill came out:
U.S. Persons abroad are never intended as beneficiaries of U.S. legislation, and are read out of the definition of “Americans” — until it comes time to pay for all these subsidies for which Congressional porkers have voted, at which point Homelanders like Hale Sheppard opine that we’re only being asked to pay “our fair share” for “the significant benefits” of U.S. Personhood, and that those who do not are “free riders”.
Renounce U.S. citizenship and be free of all these demagogues who have no respect for your right to live a normal life in the country of your choosing.
Just got two words to say. DUMBASS HOMELANDERS!!!
It is hard to imagine how any group of supposedly educated people engaged in the “service of their country” can be so incredibly narrow, close-minded and viscious. What do they gain?
Agreed, renouncing and getting out is the only reasonable reaction. Perhaps at all costs, before it gets worse.
All Democrats, all economic donkeys…
Funny how they are “cutting” so-called loopholes, only to replace them with new loopholes.
Is this the America you REALLY think represents freedom ? Yes two classes of freedom and yes U.S. Persons abroad are never intended as beneficiaries of U.S. legislation, and are read out of the definition of “Americans” . No more common sense – We all want to believe in a government that is by, for and of the people. Inherent in that statement is the notion that those governed will be treated fairly. This is a case where fairness has dropped out of the equation and been replaced by a rigid adherence to form, and a blind insistence on lumping all Americans with foreign bank accounts into a box titled “suspicious” or “highly suspect”. For long term ex-pats, citizenship-based taxation and paying their “fair share“provides nothing in return other than a never-ending misery. Long term ex-pats have little chance to remedy the situation because they are disenfranchised from the US legislative process. The Americans Abroad Caucus is not a representation. Its members are not elected by ex-pats and it casts no votes in Congress in the interests of ex-pats.
@Eric
All of this is frightening. Focusing on the SubPart F aspect of your post:
1. For those who don’t understand and/or have never heard of this, what the Subpart F income provision does is to make a U.S. citizen shareholder include in his income his share of the company’s passive/investment income and be taxed on it at ordinary income rates. Were this change in the law to take place, and you are a U.S. citizen in Canada with a CCPC you would be obliged to pay taxes to the US on your share of ALL the company’s profits (passive and active) whether distributed or not.
2. I really believe (or maybe I would just like to believe) that these provisions are designed to go after Homelander tax cheats. As we know the problem is that U.S. citizens abroad are caught by the same rules.
3. Now, here is how this information needs to be used: rather than read and complain (which will go nowhere) all of this information needs to be organized in a nice binder as part of the overall arguements (already advanced by ACA) to change to a system of residence based taxation. Although it is clear that Homelander politicians do NOT care about U.S. citizens abroad, there is also no evidence that they are targetting them specifically either (even in the case of FATCA).
Therefore, we MUST take this wonderful research and organize it to strenghen the arguments for abolishing citizenship-based taxation. Put it another way: whether this becomes law or not, it is very helpful to develop arguments that citizenship-based taxation must go.
I don’t think it is helpful to take the position (even if true) that this stuff is aimed at U.S. citizens abroad.
Homelander politicians are clearly our enemy (but they are also the enemy of homelanders), but as the great line in the GodFather movie said:
You keep your friends close and your enemies closer.
Our goal is to get the dialogue going and keep it going!
@Mike
I thought that you already saw the USA for what it is. It is NOT the friend of freedom. I know homelanders believe it, but as they say: The bigger the lie, the more likely people are to believe it.
Americans are now among the least free people on the planet. It’s just that it takes leaving the US to see it for what it truly is.
All U.S. citizens abroad realize that they could solve many of their problems by moving back to the U.S. Why don’t they? Answer: Because they know in their hearts they are more free in thier countries of residence.
@Nobledreamer
Re your comment:
Agreed, renouncing and getting out is the only reasonable reaction. Perhaps at all costs, before it gets worse.
________________________________________________________________
If tax reform does not abolish citizenship-based taxation, then the question facing every U.S. citizen abroad will be:
To have a life or not not have a life, that is the question.
If you want a chance at a life you must renounce. It’s that simple.
For many though a question of a change in the law is now irrelevant. For these U.S. citizens abroad:
1. They have been so abused
2. They have been so mistreated
3. They have been so frightened
4. Their view of what the U.S. stands for has been so changed that they must renouce regardless.
I’ve often wondered if the number skyrocket if the U.S. government will start obstructing attempts to renounce.
Screwing ex-pats is a great American tradition.
The tradition was inherited from the British who eventually understood it was counter-productive and stopped doing it themselves.
@USCitizenAbroad ………. no I think I do but unfortunately sometimes it is harder to follows ones believes and execute ….“renouncing and getting out is the only reasonable reaction. Perhaps at all costs, before it gets worse“ 🙂
@Mike
I know what you mean – it is hard to adapt to a belief system that has been drilled into you your whole life.
There is a great scene in the movie Chicago where a woman walks into her bedroom and finds her man in bed with another woman. His response to her was:
Should you believe what you see with your own eyes or should you believe what I tell you?
So, the question is:
Should you believe what you are experiencing as U.S. citizen abroad or should you believe what they tell you?
wow.. I’m trying my darnest to hold out until my citizenship gets approved here, but it’s getting harder and harder. I really don’t think I’m going to be able to wait this one out.
Mona – they have to maintain the fascade of freedom, so I don’t think they’ll outlaw renunciation . They’ll just manipulate the statistics. I have a really hard to believing that less people renounced in 2012 than in 2011.
MonaLisa, making it near impossible to renounce (I don’t think they can outright forbid it without changing the constitution) will be the next phase of locking down USPs. I am fairly certain I will be able to relinquish without too much hassle but I worry about my minor child. She will have to renounce and I fear the steps, the cost and the window of opportunity for doing so will have all changed by the time the USG considers her old enough to make the choice of her own volition.
They are all such a bunch of short-sighted and selfish numbnuts and tools down there. Even my more educated and “open-minded” friends drive me insane with their nationalism and blinked worldviews.
Now that it looks like the KeystoneXL is a go, I know that the province here is going to step up the luring of Americans and I am fairly certain they have little idea of the tax nightmare and how it will effect province coffers. The sneaky taxation is a drain on the province in revenue either through taxes go back to the US or disposable income being sucked up by compliance.
I still have hopes of being free by year’s end but as the child will still be considered USP and I refuse to have her traveling on their passport once we are Canadians, I fear we won’t be seeing family down there again. I really hate what the USG has done to us. I was never much of a nationalist but I am probably more cynical and anti-American than I have ever been in my life (and I came of age under Reagan, so that’s saying something.)
@a,
You bring up another huge area of concern — workers (especially labourers) who will not be educated (full disclosue) or covered by the companies they hire on with in Alberta and elsewhere in the oilpatch: http://isaacbrocksociety.ca/2012/11/17/full-disclosure-needed-just-what-is-us-tax-compliance-requirement-for-albertas-recruitment-of-oilsands-workers/
nobledreamer –
t is hard to imagine how any group of supposedly educated people engaged in the “service of their country” can be so incredibly narrow, close-minded and viscious.
They get viscous from drinking ever-sweeter kookaid. Oops, typo, make that koolaid.
usxcanada, you had it right the first time. KOOKAID; drink of the blithely unaware.
@geeez, simple really. You cannot renounce on US soil, as the US requires you to enter on a US passport and as such considers you as its property. This is entirely for the prevention of dual nationals exercising legal rights of consular representation which they might otherwise be allowed.
As for other legalities involved, I see it as quite simple really. The US will eventually require not only citizenship in a foreign country, but established residency as well. As you can see from the laws being passed, they are doing their best to make foreign residency as difficult as possible. Furthermore, you see more and more Americans unable to emigrate simply due to costs, as a result of the paycheck-to-paycheck culture which has emerged. To make it even better, the majority of those who might renounce, don’t do it on a whim. Generally, it’s due to moving overseas for whatever reason and then settling down, deciding to stay and then due to the increasing hostility towards expats, ditching the albatross.
If, however, you can prevent that first step from happening, you win.
You also see the hilarious propaganda and brainwashing that happens in the US. Like how they issued a travel warning on basically everywhere. It’s scary and dangerous out there, you see… best stay home. Any stories about renunciations are filled with derisive tones, downplaying it and making it appear to be some kind of scam. Any story involving immigrants must be bright and cheery. Any story about illegals must at all times make it appear that everyone is fighting to get in (while ignoring the fact that the numbers are way down and many are going the other way now) so as to make the US appear to be “the best”. Dehumanize “foreigners” as much as possible as well in the media, unless they have decided to run to the US and cry about their home nations for a quick buck. Tone is everything, contextual manipulation is everything. I can write an article, while technically stating facts, and with slight of hand get whatever reaction I want out of a brainwashed population. This is stock and trade for the US propaganda machine. Those who resist it are ignored and shut out of the information loop entirely. Free media, but unequal levels of access… typically reserved for those who play the game as intended.
Hell, I live in China, I am a permanent resident in China and have been here for the majority of my life. I have a good business in China, I have my family in China, I own property in China. China treats me very well, and the instant the passport becomes a bit more useful for travel, I’m renouncing. Them’s just the facts. Now, see the media about China from the other side of the ocean. The US essentially considers my adopted nation as an “enemy state” or at best, “hostile” and does everything they dare to do to harm it. Their policies are squarely aimed at harming my wellbeing and that of my family and livelihood. It has nothing to do with the “communist” government, and everything to do with demanding “reforms” which open the nation up for exploitation and manipulation. They would love nothing more than to see my business fail, my property become worthless and my family torn apart by civil war. They would love nothing more than for me to run to the embassy and beg for evacuation at an obscene charge (which they would gladly demand).
Please though, do tell me why I should in any way shape or form support this nation of imperialist swine that seems to think they deserve a penny from me, or know anything at all about my life. Meanwhile, it seems as if the new spin is that I must obviously “benefit from America Inc.” simply by virtue of my little passport. Funny, other expats from other nations here do just as well if not better, mainly because they don’t have to deal with the US and its bullshit. Good luck being an American when they bomb your country’s embassy, or illegally land spy planes after murdering a pilot. The greatest threat to my security here is the US, plain and simple.
And they’ve gone bicameral now!
The “Corporate Tax Fairness Act” by Jan Schakowsky (hey look, the Americans Abroad Caucus hard at work again screwing Americans Abroad), which seems to be basically the House version of Sanders’ “Corporate Tax Dodging Act”
http://www.opencongress.org/bill/113-h694/text
And Whitehouse and others introduced the “Bring Jobs Home Act” in the Senate:
http://www.opencongress.org/bill/113-s337/text
I can give two examples of how the stroke of a pen and the whim of a government has dramatically changed the course of this citizen’s life:
As many here are aware, my husband (he a born in Canada USP) and I had a US tax liability on the sale of our principal residence in 2010. This would not have been the case prior to 1997 when the law allowed a taxpayer to reinvest in another home of equal or greater value without bring taxed. (Now that so many home owners in the US are ‘under water’, will lawmakers in their greed view the current $250k gain exemption on the sale of a principal residence as a “loophole” for the wealthy?)
My second example is a change in law that was more to my advantage. As the law stood at the time I moved to Canada with my Canadian mother, I had to naturalize to become a Canadian citizen, which I did in 1996. Since then, Canadian law changed to allow for many of the children of Canadians born elsewhere to become Canadians at birth. This means for me, aside from the psychological relief of now being a Canadian at birth, should I ever be fortunate enough to have enough assets (or should the USD be devalued to 25% of its current value), I no longer have to live under the threat of having to pay a US exit tax upon renunciation 🙂 (unless they close this loophole).
@Bubblebustin
“Since then, Canadian law changed to allow for many of the children of Canadians born elsewhere to become Canadians at birth.”
Smart move of Canada. When I was born in the US my Canadian parents registered me as a Canadian Born Abroad as that was needed at the time to stake my claim as a Canadian. We moved back home to Canada when I was a child. Because I was already a Canadian, I never needed to become a Canadian which means fast forward 40 + years & relinquishing my US citizenship was not a possibility. I know of others in similar situation whose parents did not know to register them as a Canadian Born Abroad & they had to become Canadian. Now they would be Canadian from birth but I presume might also be able to say they relinquished US citizenship. Now I do have one little concern. My children are not US persons because I did not live in the US after the age of 14. So when will the US change it’s laws so that all children born of any US citizen regardless of circumstances would also be US citizens & make that retroactive? It’s one of the issues listed on the ACA. Somebody somewhere up higher on the food chain is going to think this is a great idea.
Eric, I read those Senate bills and get gibberish. I don’t understand the content of them.
@northof49, re “….when will the US change it’s laws so that all children born of any US citizen regardless of circumstances would also be US citizens & make that retroactive…?”
That is something that I think many of us would be worried about, and that is a serious concern that I have with ACA efforts. Any such effort by the ACA and the like MUST contain a protective provision that any children affected retroactively, or even going forward, should have to proactively affirm as adults, their acceptance of the conferred USP status, and a notice that the decision includes the US extraterritorial citizenship-based tax burden and thus negative consequences.
I do NOT want my child/ren who are NOT USPs, made into US citizens and ‘taxable persons’ retroactively. I see the problem for those in certain circumstances, but I do not want it to be automatic.
@USCitizenAbroad,
It took me 4 months from time of becoming aware of all this, to renouncing. As much as I didn’t like it initially, it was clearly the only choice to make. I am lucky in that I am nowhere near exit tax status and already had CDN citizenship. I cannot imagine having to endure the terror as long as those who still have not been able to get free. 🙁 Certainly, your blog and comments from the very beginning, had a strong influence as well as Phil Hodgen’s “Get out now, while the going is good.”
@usx, I agree with Animal, the “kookaid” is superb!
I am so unclear about what they can/cannot do in terms of retroactive laws. If they were able to do whatever they wanted retroactively, why are there the different options regarding renouncing on or before June whatever of 2004, the 2008 date and those after 2008? It would seem there must be some mitigating issues.
@Noble, I’ve reached the same conclusion.
@northof49, re “….when will the US change it’s laws so that all children born of any US citizen regardless of circumstances would also be US citizens & make that retroactive…?”
I actually agree with the idea that all children born of US parents should be US at birth, but if and only if the child is obligated to reconfirm their intentions of keeping their US citizenship between the ages of 18 and 21. This way the US will have no automatic CLAIM over them after turning 21.
This might seem harsh at first, but I think we all would agree, at the present time, that automatically loosing US citizenship might just be a great thing. I think the parents of all disabled children would give a sigh of relief!
I believe this is how the Swiss regulate the situation. I’m also under the impression that if a person wanted to regain Swiss citizenship after automatically loosing it that it is not very hard to do.