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cross posted from citizenship solutions
    by John Richardson

I suggested to John that some might not understand why a similarity between OVDP and the Transition Tax was being made. He asked me to introduce the post to make sure it was clear that the U.S. government has demonstrated that confiscation is the name of the game (NOT tax).

Some of you may wonder why a connection is being made between the OVDP program and the Transition “Tax.” The reason is very simple. We need to change the language. We need to call it what it really is. In the beginning, people were too frightened to understand what the OVDP really was. It took years before it was clear it was nothing less than confiscation. Fortunately, we knew prior to the passage of the Tax Jobs Cut Act that the Transition “Tax” was a blatant confiscatory provision.

The “Offshore Voluntary Disclosure Program.” An “amnesty” program. Nine years and many destroyed lives have exposed it for what it really was. No one could really have considered it “voluntary.” The IRS and the tax compliance community certainly presented as one’s only option. In 2011, we did not have the advantage of what we know now; the limitations of being discovered, the extremely difficult/unlikely ability of the IRS to collect. People who had no tax liability among other atrocities, were fined from 20 – 27.5% of their assets. There was no taxable event. This revolved around not filing a piece of paper. FBAR. An appropriate term used was “The FBAR Fundraiser.” Another word would be confiscation. IOW, OVDP was NOT about TAX.

Some words have powerful associations. Sometimes those associations grow into clichés. We are all familiar with the association that anyone who has left America is rich has done so to avoid tax. We have been working at this since late 2011. Seven years. No amount of trying to educate via comments on online articles etc. has put a dent in this erroneous and damaging perception. Recently, some of us have started replacing “citizenship taxation” with “non-resident taxation.” Non-resident taxation describes what it really is and dissociates from the idea that a patriotic citizen (American) should pay it. It appeals to the notion that reasonable people accept i.e., that one pays taxes (only) where one lives. It may take time but the value of changing the language in this situation, is obvious.

To refer to this new requirement as a “tax” is to immediately justify it as being reasonable. Take the Canadian government for example. It’s position is that the U.S. has the right to tax it’s own citizens and that Canada has no business interfering with that. Thus the IGA. Nevermind that the majority of the people affected are Canadian citizens and residents FIRST.

So what’s wrong with the term “Transition Tax?” As we all know, any expat with a “foreign” corporation will be unable to transition to a territorial system as will major multinationals . So to call it a “transition” is completely erroneous. As for “tax”, a general notion is that a tax is connected with delivery of services or benefits i.e., there is some relationship between the exchange of income for services. It is nothing short of bizarre to levy a 30-year retroactive tax on a group of people who were not residents, nor receiving anything in exchange for surrendering a considerable portion of what is primarily, their retirement pensions.

A phrase John has used repeatedly to describe the Transition “Tax” is “the confiscation of the retirement pensions of the citizens and residents of other countries.” That’s what it really is. Like the OVDP, it is a punitive tool that destroys the lives of long-term expats. We need to get that message across.

****

    by John Richardson

Introduction

This is the fifth in my series of posts about the Sec. 965 Transition Tax and whether/how it applies to the small business corporations owned by tax paying residents of other countries (who may also have U.S. citizenship). These small business corporations are in no way “foreign”. They are certainly “local” to the resident of another country who just happens to have the misfortune of being a U.S. citizen.

The purpose of this post is to argue that (as applied to those who do not live in the United States) the transition tax is very similar to the OVDP (“Offshore Voluntary Disclosure Programs” which are discussed here. Some of initial thoughts were captured in the post referenced in the following tweet:


The first four posts about the “transition tax” were:

Part 1: Responding to The Section 965 “transition tax”: “Resistance is futile” but “Compliance is impossible”

Part 2: Responding to The Section 965 “transition tax”: Is “resistance futile”? The possible use of the Canada U.S. tax treaty to defeat the “transition tax”

Part 3: Responding to the Sec. 965 “transition tax”: They hate you for (and want) your pensions!

Part 4: Responding to the Sec. 965 “transition tax”: Comparing the treatment of “Homeland Americans” to the treatment of “nonresidents”

*A review of what what the “transition tax” actually is may be found at the bottom of this post.

This post is for the purpose of the arguing that, as applied to those who live outside the United States, payment of the “transition tax” in 2018, is the financial equivalent to participation in 2011 OVDI (“Offshore Voluntary Disclosure Program”.

 

Seven Reasons Why The U.S. Transition Tax as applied to “nonresidents” is similar to the “Offshore Voluntary Disclosure Program As Applied To “Nonresidents”

Reason 1: Both the U.S. Transition Tax and the “Offshore Voluntary Disclosure Programs” were based on a payment of the percentage of assets and NOT on a “realization event”.

In the case of OVDP, the penalty was based on a percentage of the value of assets what were used to generate income.

In the case of the “transition tax”, a payment is demanded based on a percentage of the “retained earnings” of the company (which exist to earn income).

In neither case is the payment based on a specific “realization event”. In other words, in most cases a tax is levied on a purchase or a sale. In this case the payment is demanded based simply on the fact that the asset (pool of capital exists).

Both programs operate on the: “Oh my God,” “we see capital assets”. “Turn a percentage of them over”, principle! We are going to seize them!

For this reason, both the “transition tax” and OVDP are/were “wealth extractions” that operated more like “confiscations of capital” rather than taxation based on a “realization event“.

Reason 2: Both the “transition tax” and the OVDP programs are/were, when applied to “nonresidents”, the confiscation of wealth that actually belongs to another country.

In both cases, the “programs” result in the confiscation of assets over which the “nonresident’s country of residence” has primary taxing jurisdiction. For example, Canada has primary taxing jurisdiction over Canadian Controlled Private Corporations. This principle is explicitly recognized in Section 5 of Article X of the Canada U.S. Tax Treaty which specifically prohibits the United States from imposing taxation on the “undistributed earnings” of Canadian corporations. The whole purpose of the “transition tax” is to impose U.S. taxation on the “undistributed earnings” of Canadian corporations.

5. Where a company is a resident of a Contracting State, the other Contracting State may not impose any tax on the dividends paid by the company, except insofar as such dividends are paid to a resident of that other State or insofar as the holding in respect of which the dividends are paid is effectively connected with a permanent establishment or a fixed base situated in that other State, nor subject the company’s undistributed profits to a tax, even if the dividends paid or the undistributed profits consist wholly or partly of profits or income arising in such other State.

Reason 3: Both the “transition tax” and OVDP were/are programs that benefited Homeland Americans were incredibly destructive to “nonresidents” (Americans abroad)

For long term Americans abroad, most of their assets would be considered to be “foreign”. For Homeland Americans a much smaller percentage of their assets would likely be “foreign”.

For long term Americans abroad, their “foreign assets” were almost certainly “after tax” assets accumulated in their country of residence. For Homeland Americans their “foreign assets” were more likely to have been used to avoid taxes.

Conclusion: Although Americans abroad were more likely to be innocent, they were likely to pay a higher price to participate in OVDP, than a Homeland American. As previously discussed, the “transition tax” is a benefit to Homeland Americans but an instrument of “pension confiscation” for Americans abroad.

Reason 4: For Americans abroad both the “transition tax” and OVDP operate primarily as pension confiscations.

For many nonresidents, the retained earnings in their small corporations are considered to be their pensions. They represent a lifetime of work, savings and labor. Entrepreneurs do not typically have the “private pension plans” available to certain kinds of “salaried employees”.

In the same way that (for Americans abroad) the OVDP program confiscated “after tax paid” assets owned by Americans abroad, the “transition tax” is confiscating after tax paid capital that operates as a private pension plan.

Both the “transition tax” and OVDP confiscate assets that are regarded as the “pension plans” of their owners.

Reason 5: In both cases it is difficult to find competent professional advice concerning how the program/statute works and what the terms of the program/statute really are.

During the 2011 OVDI panic it was very difficult to find competent professional help that could help one understand, evaluate and estimate the costs of participation in the program.

During 2018 it is very difficult to find professionals that are competent to help you understand how the “transition tax” works and possible offsets.

Looking for help with “transition tax”? Good luck to you! Reason 6: Both the OVDP programs and the “transition tax” come with very very significant compliance costs!

If you are able to find someone to assist you with “transition tax” compliance, it will come with very high professional fees. For the “transition tax” the issues include:

– how much income is subject to the “transition tax”?

– of the included income, what is the ratio of “cash” to “fixed” assets?

– what is the total tax owing?

– how is this tax to be paid? By using tax credits from Canada (either personal or corporate)?

– does the installment option make sense?

– etc.

If you were able to find someone to help you with OVDP compliance the professional fees could easily have been six figures.

Think of it: participants in the OVDP and “transition tax” programs are paying huge professional fees to commit financial suicide!

Reason 7: Both the 2009 and 2011 OVDP programs came with “This is your last best chance to come into compliance” deadlines. Interestingly, the “transition tax” comes with a close “payment deadline” that works like this:

“By April 15 you must agree to turn approximately 20% of the value of your company to the U.S. Government. If you do agree to this by April 15, 2018 you can stretch the payment over 8 years. If you do NOT agree to pay by April 15, 2018 you CANNOT stretch the payment over 8 years.

In other words:

April 15, 2018 is your last best chance to come into compliance!!! Does this sound familiar?

OVDP is different from the “transition tax” because OVDP was “voluntary” and the “transition tax” is mandatory.

One wonders:

Does the end of #OVDP signal a move FROM the “voluntary disclosure” model TO the “enforcement model (calling it a tax)”? _______________________________________________________________________

*As a reminder, as explained in this comment, the essential characteristics of the Sec. 965 “transition tax” as applied to the residents of other countries include:

Interesting article that demonstrates the impact of the U.S. tax policy of (1) exporting the Internal Revenue Code to other countries and (2) using the Internal Revenue Code to impose direct taxation on the “tax residents” of those other countries.

Some thoughts on this:

1. Different countries have different “cultures” of financial planning and carrying on businesses. The U.S. tax culture is such that an individual carrying on a business through a corporation is considered to be a “presumptive tax cheat”. This is NOT so in other countries. For example, in Canada (and other countries), it is normal for people to use small business corporations to both carry on business and create private pension plans. So, the first point that must be understood is that (if this tax applies) it is in effect a “tax” (actually it’s confiscation) of private pension plans!!! That’s what it actually is. The suggestion in one of the comments that these corporations were created to somehow avoid “self-employment” tax (although possibly true in countries that don’t have totalization agreements) is generally incorrect. I suspect that the largest number of people affected by this are in Canada and the U.K. which are countries which do have “totalization agreements”.

2. None of the people interviewed, made the point (or at least it was not reported) that this “tax” as applied to individuals is actually higher than the “tax” as applied to corporations. In the case of individuals the tax would be about 17.5% and not the 15.5% for corporations. (And individuals do not get the benefit of a transition to “territorial taxation”.)

3. As Mr. Bruce notes people will not easily be able to pay this. There is no realization event whatsoever. It’s just: (“Hey, we see there is some money there, let’s take it). Because there is no realization event, this should be viewed as an “asset confiscation” and not as a “tax”.

4. Understand that this is a pool of capital that was NEVER subject to U.S. taxation on the past. Therefore, if this is a tax at all, it should be viewed as a “retroactive tax”.

5. Under general principles of law, common sense and morality (does any of this matter?) the retained earnings of non-U.S. corporations are first subject to taxation by the country of incorporation. The U.S. “transition tax” is the creation of a “fictitious taxable event” which results in a preemptive “tax strike” against the tax base of other countries. If this is allowed under tax treaties, it’s only because when the treaties were signed, nobody could have imagined anything this outrageous.

6. It is obvious that this was NEVER INTENDED TO APPLY TO Americans abroad. Furthermore, no individual would even imagine that this could apply to them without “Education provided by the tax compliance industry”. Those in the industry should figure out how to argue that this was never intended to apply to Americans abroad, that there is no suggestion from the IRS that this applies to Americans abroad, that there is no legislative history suggesting that this applies to Americans abroad, and that this should not be applied to Americans abroad.

7. Finally, the title of this article refers to “Americans abroad”. This is a gross misstatement of the reality. The problem is that these (so called) “Americans abroad” are primarily the citizens and “tax residents” of other countries – that just happen to have been born in the United States. They have no connection to the USA. Are these citizen/residents of other countries (many who don’t even identify as Americans) expected to simply “turn over” their retirement plans to the IRS???? Come on!

 

26 thoughts on “Part 5: Responding to the Sec. 965 “transition tax”: Shades of #OVDP! April 15/18 is your last, best chance to comply!”

  1. Hear hear!

    And I’d say the same of CBT altogether – based as it is, like the TCJA demand on foreign corporation owners”) on a fictional premise.

  3. In the clearest possible terms John has called this latest attempted assault on USC’s and deemed USP’s what it actually is — a blatant, ill-conceived, pre-emptive confiscation strike on foreign (to the USA) assets. The IRS is claiming “first dibs” where “first dibs” legally (according to treaty) belong to another country. It is essentially a global, highly UNcivil forfeiture racket. Words fail when I think about the chutzpah of congress and the IRS trying to implement this retroactive atrocity with an absurd deadline to boot. May this post and #NotPayingThis go viral.

  4. “Does the end of OVDP signal a move from the voluntary disclosure model to the enforcement model?”

    Do they have an enforcement model? At present they’re limited by tax treaties (no collection assistance except where the target is USC-only and has been assessed and all rights of appeal have lapsed or been exhausted) and some of the IGAs (Model 1 does not allow account closure for non-filing).

    They can torment and threaten and extort money from those who need to comply or want to comply, but not from the huge majority who don’t, as far as I can see.

  5. I like the term “non-resident taxation”, which explains citizenship-based taxation in another light.

    I also like the idea that we should be, or feel, “unconcerned”, as in “this doesn’t apply to me”. We live in a country where we pay our taxes. We may have been US residents in the past, but we no longer reside there, FATCA and transition taxes obviously are not applicable.

    And yes, diapora taxation is correct too. Well, if Erithrea does it, …

  6. Both “gotcha” tactics, one that resulted in people voluntarily coming forward to take their punishment, the other only made vulnerable because of their existing full “compliance” and disclosure.

    #NotPayingThis

  7. Gotchas – yes, maybe.

    Or:

    It could be correct that this transition tax isn’t aimed at USC owners of foreign corporations.

    They haven’t actually switched to full territorial taxation for corporations because they want to keep taxing non-US-resident corporations (GILTI). To do that, they need the Subpart F rules, which catches the individual as well as the MNE.

    It seems to me if they had intended to try to get individual owners/shareholders to actually pay such an absurd demand, they’d have thrown in a carrot since they appear to have no stick. There’s a biggish carrot for MNEs, but none for individuals.

    But who knows.

  8. @ EmBee and plaxy

    It’s evident that this was not intended to include single shareholder CFCs. The IRS is NOT the source of the push to meet a deadline for the confiscation of retained earnings. We’ve witnessed in real time, the “making of law” reality of condors erring (?) on the conservative side vs lip-smacking (?) on the other end. The degree doesn’t matter. The fact is the condors are the SOLE source for implementation of the confiscation.

    They may not have the ability to enforce now. But the trend toward erosion of protection via info sharing does not bode well.

    One can only rely on correctly reading one’s situation and taking whatever course there is to protect oneself.

    Get out “officially” if you can. Or disappear “well.” No one is going to stuck their necks out for us.

  9. @plaxy

    OVDI wasn’t aimed at minnows either, as we know from the resultant Streamlined. But it didn’t stop those affected from believing it was their “last best chance” to avoid having the book thrown at them, especially if you let the compliance industry guide you.

  10. BB – there’s a lot more at stake with the transition tax, isn’t there? And the absurdity of telling people to hand over so much for no reason is surely clear to all.

    As I understand it, with OVDI people didn’t know they were going to be treated so abominably. If they had known, they might not have followed the bad advice.

    This time they know they’re being robbed.

  11. I agree. As someone else I know affected by the TT says, “first the US will tax me, then Canada. The rest will go to accountants. What’s left for me?”

  12. @ Patricia Moon
    “The fact is the condors are the SOLE source for implementation of the confiscation.”
    Yes but congress and the IRS could stop them in their tracks. All they have to do is truly clarify that which the condors are misinterpreting. Still no definitive word from them that I know of. We’re all waiting for them to clearly state that the TT is for homelanders only. They must do this before outlanders once again fall for condor scaremongering.

  13. Surely no one’s going to pay to play this absurd US deeming game just because a tax adviser tells them to.

  14. ‘I like the term “non-resident taxation”, which explains citizenship-based taxation in another light.’

    The phrase “non-resident taxation” already describes the perfectly innocuous taxation by the country where income is sourced before the remainder goes to a non-resident. It has nothing to do with citizenships the payee might hold.

    When Canadian banks paid interest and I lived in Japan, the 10% NRT was not affected by my Canadian citizenship. When Japanese companies paid dividends and I lived in Canada, the NRT (I’ve forgotten the rate) was not affected by my lack of Japanese citizenship.

  15. Patricia – “They may not have the ability to enforce now. But the trend toward erosion of protection via info sharing does not bode well.”

    I think the onset of AEOI is much more to do with Big Data than erosion of protection. There is no protection of dual citizens from demands made on them by either of their countries. The exchange of information has been going on for many many years; as personal information becomes commoditised, and analytic power multiplies, more data gets exchanged, and legal barriers such as privacy rights are eroded – generally with the consent of the owner of the information, as with social media

    IRS-compliant US citizens outside the US also give consent, and hand over not just their data but their money without being compelled to do so. It’s a deal. The option to renounce or stop filing exists.

    “One can only rely on correctly reading one’s situation and taking whatever course there is to protect oneself.

    Get out “officially” if you can. Or disappear “well.” No one is going to stuck their necks out for us.”

    Yep. No one will and no one can. If US law changes it will be because a majority of US legislators think it’s in their interest to change the law. Which is not likely to have anything whatever to do with concern for the well-being of USCs outside America. Postponing a decision, hoping the need to decide will be removed by legislation in the US, doesn’t look like a good plan.

  16. Embee:

    “The fact is the condors are the SOLE source for implementation of the confiscation.”

    Yes but congress and the IRS could stop them in their tracks. All they have to do is truly clarify that which the condors are misinterpreting. Still no definitive word from them that I know of.

    According to Politico, there’s a struggle going on between Mnuchin and Mulvaney as to who has the final say in the issuing of regulations which interpret legislation.

    But that spat’s not relevant for USC owners of foreign corporations, as far as I can see, because the problem can’t be solved through issuing regulations.

    The Republicans may not have deliberately intended to include individual USC owners in the scope of the transition tax, but since their corporations are covered by Subpart F, and have been for many years, and Subpart F now includes the transition tax obligation, something would have to be done to extricate foreign corporations (retroactively) from Subpart F and/or CFC status.

    That something would presumably have to be new legislation (or a SCOTUS decision). We’re told that “fixing” the transition tax problem for USC foreign corporation owners is on the lengthy list (way way down apparently), which would imply it may eventually be resolved through legislation. Whether that will ever actually happen, or when, seems unknowable.

  17. Plaxy: “Surely no one’s going to pay to play this absurd US deeming game just because a tax adviser tells them to.”

    Of course not…

  19. I said:

    The Republicans may not have deliberately intended to include individual USC owners in the scope of the transition tax, but since their corporations are covered by Subpart F, and have been for many years, and Subpart F now includes the transition tax obligation, something would have to be done to extricate foreign corporations (retroactively) from Subpart F and/or CFC status.</blockquote

    In other words, they can’t just un-deem the distribution; they would have to un-deem the long-standing deemed deferral of US tax on the non-US-source E&P of foreign corporations touched by USness.

    Tangled webs…

    Once legislators un-hook law from reality, by basing taxation on lies, unforeseen consequences (generally for others) are perhaps inevitable.

  20. I only makes sense that the opposite of “residence based taxation” would be “non-residence Based Taxation” 😉

  22. Plaxy: I was assuming irony on your part. Indeed, surely nobody has gotten into trouble from taking professional advice.

    Just the other day (OK, last year) my friend went to the US tax preparer guy in Brussels and asked about his American (but born abroad) wife. Two things could’ve happened:

    1) tax guy said: hey, you’re not American, your wife has a passport but she’s more local than American, you’ve both lived here all your lives, why are you even in my office? Get out of here, never think about this again in your life, oh, and the coffee’s on me.

    2) tax guy said: hmmmmmmmmmm. Wellllllllll. You each own companies, are self-employed, you have investments, you have houses, lots of accounts, retirement planning…. It’s gonna take me a while and a few thousand euros, but I can try and get you in order with the IRS.

    I’ll let you guess what the tax guy said.

  23. “I’ll let you guess what the tax guy said.”

    We know what he said, but I hope you kept your friend on the right track? Course you did. 🙂

  24. Fred – did your friend follow the tax adviser’s advice?

    I wasn’t speaking ironically. If a USC seeks advice from a tax adviser about US tax compliance, presumably it’s because they want to comply, are considering complying, or want to comply-to-renounce. They’re asking how, not whether.

    A person who is told by a tax adviser that in order to comply they’ll have to pay the transition tax and associated fees, would surely consider their options rather than handing over their future because the tax adviser told them to.

    OVDI is a different situation, because people were misled about the cost of compliance. With this absurd deem-based transition tax, the magnitude of the potential cost is clear to all concerned. I can’t believe anyone would pay that cost, throwing away their future, just because a tax adviser was telling them to.

  25. I’m digging this “deem meme” we’ve got going here lately. Actually I dug it several years ago after I recognized the insanity of US taxation vexation. Having called a spade a spade, I picked that tool up, dug a deep hole and buried my deemed US personhood AND deemed US residency (for tax purposes only). The memory lingers enough to keep me protesting against that devil deem, along with its cadre of creators (US congress), enablers (Canadian parliament), enforcers (IRS) and advocators (compliance condors). Thank goodness for the Brock angels with all their angles of attack. It would have been a lonely, terrifying burial without their company.

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