John Richardson discusses how six categories (some winners, some losers) are affected by the s. 965 Transition Tax and how the biggest loser of all is US citizens living outside the US who are tax resident of another country, in particular:
“ . . . . a US citizen living outside the United States will be subject to “double taxation” when dividends are paid to the shareholder. This is because:
1. The 965 transition tax is a U.S. levy on “deemed (without a realization event) income” and no realization event in the other country which would trigger tax; and
2. A non-US tax payable in the country of residence when there is an actual distribution/realization event.
Because the U.S. tax and the foreign tax liabilities are not triggered at the same time there is no opportunity to use the U.S. transition tax paid as a tax credit against the foreign tax paid. The likely result is double taxation. . . . .”
As for background on this tax, John has noted elsewhere that “the 965 transition tax was a one time retroactive tax (going back to profits accrued since 1986) on earnings that were not subject to taxation at the time that they were earned. . . .But, (as usual) little thought was given to the fact that some CFCs were owned by individuals. No thought was given to the fact that many Americans living outside the United States had small business corporations in their country of residence.”
Part I: Introduction – What Is The Transition Tax?
“Tell me who you are. Then I’ll tell you how the law applies to you!” I’ll also tell you whether you are a “winner” or a “loser” under this law.
At the end of 2017, Congress was enacting the TCJA. A major purpose of the TCJA was to lower U.S. corporate tax rates from 35% to 21%. This was a huge benefit to U.S. multinationals. One Congressional concern was how to find additional tax revenue in order to compensate the Treasury Department for the reduction in tax revenue which would result in lower receipts from corporations. Congress needed to find some additional tax revenue. They found this additional tax revenue by creating “new income” from the past and taxing that newly created income in the present. In fact, Congress said:
Significantly, Congress didn’t create any real income. No taxpayer actually received any income to pay tax on. The income created by Congress was not “real income”. Rather it was “deemed income”. But, this “deemed income” was intended to appear on tax returns. Real tax was payable on this “deemed” income.
Such, is the beginning of the story of the IRC 965 Transition Tax. The Transition Tax was a benefit to U.S. multinationals and destroyed the lives of individual U.S. citizens living outside the United States who organized their businesses, lives and retirement planning (as did their neighbours) through small business corporations.
This post identifies different groups impacted by the Transition Tax and the “winners” and “losers”.