NO Evidence of Intent to apply the “”Transition Tax” to Small Business Corporations of #AmericansAbroad

 

It appears that we are very likely at a breaking point in this intolerable situation faced by expatriates as regards U.S. application of citizenship-based taxation. Tax reform does not happen often. It is critical that relief for expats occur in the current legislation. Many of us simply will not be around in 30 years for the next shift. It will be completely unacceptable if there is no transition (at the very least) to territorial taxation for individuals. Some people may be forced at this point to renounce if only to put a stop on future tax liability. Some will not choose to become compliant simply because it is expensive, they have no ties to the U.S., no intent to go there, etc.

In addition, there is a very dangerous aspect (the “transition tax”) that appears in both the House and Senate bills; it is arguable that it does NOT apply to small corporations owned by US citizens residing outside the United States. The biggest danger here, is that it may remain unclear. We have seen what has happened in a number of situations when this is the case. Some examples are:

1) People who relinquished citizenship decades ago (and who do not have a CLN) have been told they are still U.S citizens. Not by the State Department, not even by the IRS. And not even by the banks per sé. It is the position of many members of the tax compliance community. This is completely unacceptable and no expat should accept such a conclusion without investigating the citizenship aspects of the situation.

2) Accidentals have been told the same thing; they are Americans and must become tax compliant. Again, not directly by the US government (as in “coming after them) but by members of the tax compliance community. This is also unacceptable and no one should become compliant without a complete examination of whether it is in his/her best interests (or not).

3) People who did NOT belong in the OVDP/OVDI programs were put there by tax professionals with hideous and tragic results. The law says one has to file, nowhere does the law say one had to enter one of those programs. If anybody should have known that, it would be the tax compliance community.

4)The IRS has not given a ruling on whether or not 877A is to be applied retroactively. This is another area where tax compliance professionals have decided it is the law. This is definitely NOT in the best interest of anyone renouncing their citizenship and most definitely should not be applied to anyone who renounced/relinquished before it became law.

5)One of the most egregious and limiting situations involves owning foreign mutual funds. There is nothing to support the practice of treating non-US mutual funds as PFICs. Again, guess who insists on this treatment?

All of the above points are as unacceptable as is a lack of change for Americans abroad in tax reform. We have had enough.
 
THIS HAS TO STOP
 
We, as a community, have to make a conscious decision that what they say does not apply to us, is not in our best interests. The application of U.S. law outside of its borders is highly questionable, and should not override the laws of the countries we are residents of. (The IGAs do not represent approval/acceptance of US policy; they are merely proof of what happens when the US threatens to destroy the economies of other nations). “It’s U.S. law.” This is always the argument used to justify application of these ridiculous actions, often with absurd results. Penalties, FATCA “outing” us, application of the Reed Amendment (or worse, the ExPatriot Act if it ever passes)- all can be quite frightening if applied as the tax community claims. Yet there is nothing to suggest that these things are realities. The only people who have been harmed by these things are the ones who are/or tried to comply.

It is time to resist not only the idea that U.S. law should run our lives but also, that the tax community should determine what courses of action we should take. We need to be consistent in our message on this, on FB, in tweets, blogs etc. No more. No more. No more…………

**********

Shortly before the House of Representatives released the Markup for H.R. 1 a Canadian tax lawyer Max Reed authored an article (also here ) claiming that:

New punitive rules that apply to US citizens who own a business. Currently, most US citizens who own a Canadian corporation that is an active business don’t pay tax on the company’s profits until they take the money out. The House plan changes this. It imposes a new, very complicated, set of rules on US citizens that own the majority of a foreign corporation. The proposal would tax the US citizen owner personally on 50% of the entire income of the Canadian corporation that is above the amount set by an extremely complex formula. At best, this will make the compliance requirements for US citizens that own a business extremely complicated and expensive. At worst, this will cause double tax exposure for US citizens who own a Canadian business on 50% of the profits of that business.
Imposition of a 12% one-time tax on deferred profits. Under the new rules, the US corporate tax system is transitioning to a territorial model. 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. Take a simple example to illustrate the enormity of the problem. A US citizen doctor moved to Canada in 1987. She has been deferring income from personal tax in her medical corporation and investing it. Now, 12% of the total deferred income since 1986 would be subject to a one-time tax in the US. That may be a significant US tax bill.
It is unclear what, if anything, will be enacted. However, US citizens in Canada – particularly those that own a business – should pay close attention as their tax situation could get significantly worse. Renouncing US citizenship may become an increasingly attractive option.

There has been much discussion of whether or not this is going to happen (assuming a tax reform bill containing these measures actually is passed).
A very good argument for why this should NOT apply to #AmericansAbroad is
here.

The following comment appeared today on Brock. It reiterates the position that the “transition tax” cannot be viewed as applying to Americans abroad who own small corporations. We can expect that tax professionals are going to claim it does. Start now to learn why it doesn’t make sense and why no one should listen to the notion they owe a tax to the US based upon this new “tax reform.”
 
USCitizenAbroad
November 14, 2017 at 7:16 pm
 
@ Patricia Moon

With respect to the discussion of whether there is a tax on the retained earnings of Canadian Controlled Private Corporations:

First, pick this discussion of the changes to the territorial tax system for corporations at the 35 minute mark here:

https://www.finance.senate.gov/hearings/continuation-of-the-open-executive-session-to-consider-an-original-bill-entitled-the-tax-cuts-and-jobs-act

There is NO evidence of any intention to apply the “transition tax” to anything other than large corporations and certainly not to small business corporations owned by Americans abroad.

Second, an interesting summary was published by the Toronto law firm Oslers which talks about U.S. tax reform and makes NO reference to a possible tax on the retained earnings of CCPCs.

TaxAuthorities/US Tax Reform for Busy Canadians

Note no mention that this could affect CCPCs owned by Canadians:

” Foreign minimum tax – Current taxation of “Foreign high returns”:

Under this provision, a U.S. parent corporation would be subject to
current U.S. taxation (at the new 20% rate) on 50% of its controlled
foreign corporations’ (CFCs’) “high returns.” Tax would be required
to be paid on these imputed income streams regardless of whether the
corresponding earnings were actually distributed to the U.S. parent.
“Foreign high returns” are the excess of the CFC’s net income over a
baseline return (7% plus the federal short-term rate) on the CFC’s
adjusted tax bases in depreciable tangible property, reduced by
interest expense included in the CFC’s net income. “Foreign high
returns” would be defined to exclude certain types of income (including
“effectively connected income,” income from the disposition of
commodities produced or extracted by the taxpayer, and income subject
to tax at an effective rate of at least 18%). This provision, which
cuts against the theory of a “pure” territorial tax system, was
designed to counterbalance incentives that may otherwise linger for
U.S. companies to locate high return generating assets/activities (like
intangible property) in offshore locations.”

My feeling is that regardless of the language that this was not intended to apply to Americans abroad.

What should be done:

The danger is that the compliance community will make the law by interpreting this to apply beyond its obvious intention. The obvious solution is to NOT use the services of any tax firm who interprets the law as applying to CCPCs. After all, it was the compliance firms who created the notion that Canadian mutual funds are PFICs.

The Ownership and use of the US Person Which Includes a Citizen as an Instrument of Foreign Policy – Part II

 
cross-posted from citizenshipsolutions
originally published July 7, 2016
 

The Ownership and use of the U.S. Person which includes a Citizen as an Instrument of Foreign Policy

 
Part II – U.S. Citizens living abroad – “Life in the penalty box”

by John Richardson

I do NOT want to devote a major part of this post to this issue. The bottom line is this:

U.S. citizens living abroad are subject to ALL provisions of the Internal Revenue Code (and other U.S. laws – see below). The effect of this is to:

– subject them to double taxation on their incomes (the tax preparers and accountants who claim this is NOT true are dead wrong)

– deem all of their non-U.S. assets as “foreign” triggering numerous penalty provisions

– make it very difficult (in some cases impossible) for them to engage in normal financial planning – this is a “Buy American” provision

– make divorce (if they are married to a non-U.S. citizen potentially much more costly) – this a “Marry American” provision

– report the details of virtually all of their “non-U.S. activities” and investments to the IRS under threats of draconian penalties (this is what makes interaction with Americans “toxic” – see below)

In short, Americans abroad are NOT permitted to fully integrate into the societies where they live (and are often citizens). For more details on this see:

The above tweet references a post describing the difficulties. It includes the 10 Commandments imposed on U.S. citizens who attempt to live and outside the United States AND “commit personal finance abroad”.

http://isaacbrocksociety.ca/2015/09/14/how-to-live-outside-the-united-states-in-an-fbar-and-fatca-world/

Here are the ten commandments of “Living Clean” that apply to U.S.
citizens abroad. They are designed to ensure that:

if a U.S. citizen lives outside the United States that he lives according to the principle that:

“When in Rome, live as a Homelander” does, when elsewhere, live as they live elsewhere.

Ten Commandments:

1. Thou shalt NOT have a bank or brokerage account outside the United States. If you do so, it must be reported to U.S. Financial Crimes on an annual basis. Failure to disclose is “Form Crime”. You may be fined an amount that is more than 300% of the value of the account.

2. Thou shalt NOT marry an “alien”. If you do so, you will have difficulty leaving your estate to him or her. Better to return to the Homeland to search for a suitable spouse.

3. Thou shalt ensure that your “alien” spouse agrees to be a U.S.
taxpayer. Failure to do so, will result in your having the punitive filing status of “married filing separately”. This will guarantee greater exposure to the Alternative Minimum Tax, the new 3.8% Obamacare surtax, higher tax brackets and lower thresholds for reporting (including FATCA Form 8938) requirements.

4. Thou shalt NOT believe that the sale of your principal residence is a “tax free capital gain”. In fact, the sale of your principal residence will trigger a 23.8% capital gain which means that your house cannot be used as a retirement investment.

5. Thou shalt NOT buy non-U.S. mutual funds. If you do, you will have your gains confiscated in the form of an “Excess Distribution” Tax. Buy American. Buy U.S. mutual funds.

6. Thou shalt buy ONLY “term insurance”. Any other form of “insurance that has cash value” will be treated as a sacred instrument of tax evasion. Furthermore, if you purchase a “foreign insurance policy” thou shalt pay a special excise tax.

7. Thou shalt NOT buy or participate in an RESP, RDSP, employer pension plan, or any other kind of retirement planning vehicle which will be considered to be a TAXABLE “Foreign Trust” (with all the attendant penalty laden reporting requirements).

8. Thou shalt neither be self-employed NOR carry on business through a non-U.S. (AKA “Foreign”) corporation. If you do, punitive taxes, deemed income, and expensive reporting requirements will descend on you.

9. Thou shalt NOT relinquish U.S. citizenship. In the event that you do, you may be subjected to an “Exit Tax” which applies to your “non-U.S.”
pension, “non-U.S.” assets, and assets that accumulated after you ceased to live in the United States. In addition, there are certain “Form People” who claim that you may be banished from the Homeland forever.

10. Thou shalt file, every year, file the following forms with the IRS:
1040 and all required schedules, FBAR, FATCA, 8938, 8965, 3520, 3520A,
709 (up to a maximum of up to about 45 forms). Understand that this will cost you thousands of dollars.

And this ladies and gentlemen, is why your problem is NOT “coming into U.S. tax compliance”. Your problem is “living as a tax compliant U.S.
citizen abroad”. It really can’t be done (if you want any kind of life).

 
Posts in this Series

Prologue U.S. citizens are “subjects” to U.S. law wherever they may be in the world

Part IThe U.S. “Giveth” and the U.S. “Taketh” – How the U.S. uses “citizenship” as a weapon against individuals

Part II – U.S. Citizens living abroad – “Life in the penalty box”

Part IIII’m a “Toxic American”, but it’s not my fault – How U.S. regulation makes “U.S. citizens undesirables in other nations

Part IVThe use of U.S. citizens as instruments of foreign policy

Part VWhy Americans abroad are renouncing U.S.
citizenship

Part VIThe injustice of the S. 877A “Exit Tax” as applied to Americans abroad

The Ownership and use of the US Person Which Includes a Citizen as an Instrument of Foreign Policy – Part I

 
cross-posted from citizenshipsolutions
originally published July 7, 2016
 

The Ownership and use of the U.S. Person which includes a Citizen as an Instrument of Foreign Policy

 
Part I – The U.S. “Giveth” and the U.S. “Taketh” – How the U.S.
uses “citizenship” as a weapon against individuals …


by John Richardson

 
The U.S. Taketh: Draft Resistors in Canada in the 60s and 70s – The use of stripping people of “citizenship” as a mechanism to control the people
 
In my recent post: “Muhammad Ali, draft resistors, loss of US citizenship, the “Rumble In The Jungle” and a trip down memory lane“, I wrote:

During the last few years I have met many former Americans who came to Canada to escape service in the Viet Nam war. Their circumstances vary greatly. This was clearly a tumultuous time and difficult time. Many of them have commented that it has similarities to the circumstances of today. In both the 70s and present day, certain Americans abroad and former Americans abroad, feel uneasy and unsure about their U.S. citizenship. It’s also interesting how in both cases the United States is using “citizenship” as a mechanism to exercise control over individuals who do not live in the United States. In the 70s the United States was punishing people by stripping them of their citizenship. In 2016 the United States is punishing people by imposing citizenship on them. Either way, it’s clear that “citizenship”
(and a U.S. place of birth) is a powerful weapon to be used against people to achieve governmental objectives.

The U.S. Giveth: “Accidental Americans” in Canada and throughout the world – The imposition of “U.S. citizenship” as a way to raise tax revenue
 
There is no one definition of “accidental American”. The group includes primarily those who were born in the United States (often with no memory of having lived there) and have spent all their lives in other nations.
I have previously written about the horrible situation of “accidental Americans” in Stanstead, Quebec. Many Stanstead residents were born in Vermont because it was the closer hospital.
 
The problems of “accidental Americans” worldwide, are well described (on an ongoing basis) by Jude Ryan in his Facebook “Hunger Strike to President Obama”.
 


 
The problems experienced by “Accidental Americans” are that at the present time:

– they (in many cases) did not even know they were considered to be U.S.
citizens

– if they did know they were U.S. citizens they did not know about the uniquely American practice of “taxation-based citizenship

– they are deemed to be U.S. citizens and are therefore subject to U.S.
regulations

– they don’t reside in the United States AND are citizens of other nations

– they are being identified by FATCA and in some cases are having banking problems

– they can’t afford the financial costs of the tax compliance to formally renounce U.S. citizenship

– they can’t afford the $2350 fee to renounce U.S. citizenship

– they live in a state of terror and uncertainty (many don’t believe this or laugh it off)
 
In short, the forced imposition of U.S. citizenship (or at least the CURRENT unavailability of an easy out) is destroying their lives.
 
I highly recommend the following presentation by McGill Law Professor Allison Christians in which she puts the problems of “accidental Americans” in perspective.
 

 

Posts in this Series

Prologue U.S. citizens are “subjects” to U.S. law wherever they may be in the world

Part IThe U.S. “Giveth” and the U.S. “Taketh” – How the U.S. uses “citizenship” as a weapon against individuals

Part II – U.S. Citizens living abroad – “Life in the penalty box”

Part IIII’m a “Toxic American”, but it’s not my fault – How U.S. regulation makes “U.S. citizens undesirables in other nations

Part IVThe use of U.S. citizens as instruments of foreign policy

Part VWhy Americans abroad are renouncing U.S.
citizenship

Part VIThe injustice of the S. 877A “Exit Tax” as applied to Americans abroad

The Ownership and use of the US Person Which Includes a Citizen as an Instrument of Foreign Policy

 
cross-posted from citizenshipsolutions
originally published July 7, 2016
 
Prologue – U.S. citizens are “subjects” to U.S. law
wherever they may be in the world

 

by John Richardson
 
Welcome and a bit of an introduction

This post turned out to be longer and cover more topics than I originally intended. The problem with discussing the problems experienced by Americans abroad is that there are many “moving parts”. I have broken SOME of the “moving parts” into, well six parts and a “prologue”.

In addition, as the title suggests, the original intention of the post was to discuss how the U.S. Government uses its citizens as “instruments of foreign policy”. The obvious question is: how can they possibly do this? Doesn’t U.S. law end at U.S. borders? How can the United States impose law on the rest of the world. The answer to that question raises other issues (which are discussed in the other parts of this post).

I guess I need a new title for the post.

I would also like to say that I am hopeful that there will be change.
That said, change is possible ONLY (regardless of intention) if all of the issues are understood individually and how they interact.
 
Posts in this Series

Prologue U.S. citizens are “subjects” to U.S. law wherever they may be in the world

Part IThe U.S. “Giveth” and the U.S. “Taketh” – How the U.S. uses “citizenship” as a weapon against individuals

Part II – U.S. Citizens living abroad – “Life in the penalty box”

Part IIII’m a “Toxic American”, but it’s not my fault – How U.S. regulation makes “U.S. citizens undesirables in other nations

Part IVThe use of U.S. citizens as instruments of foreign policy

Part VWhy Americans abroad are renouncing U.S.
citizenship

Part VIThe injustice of the S. 877A “Exit Tax” as applied to Americans abroad

___________________________________________________________________________________

Prologue – U.S. citizens are “subjects” to U.S. law wherever they may be in the world …

Yes, it’s true. In 1932 (eight years after the Supreme Court decision in Cook v. Tait), Justice Hughes of the U.S. Supreme Court, in the case of Blackmer v. United States ruled that:

While it appears that the petitioner removed his residence to France in the year 1924, it is undisputed that he was, and continued to be, a citizen of the United States. He continued to owe allegiance to the United States. By virtue of the obligations of citizenship, the United States retained its authority over him, and he was bound by its laws made applicable to him in a foreign country. Thus, although resident abroad, the petitioner remained subject to the taxing power of the United States. Cook v. Tait, 265 U.S. 47, 54 , 56 S., 44 S. Ct. 444.
For disobedience to its laws through conduct abroad, he was subject to punishment in the courts of the United States. United States v. Bow-
[284 U.S. 421, 437] man, 260 U.S. 94, 102 , 43 S. Ct. 39. With respect to such an exercise of authority, there is no question of international
law,2 but solely of the purport of the municipal law which establishes the duties of the citizen in relation to his own government. 3 While the legislation of the Congress, unless the contrary intent appears, is construed to apply only within the territorial jurisdiction of the United States, the question of its application, so far as citizens of the United States in foreign countries are concerned, is one of construction, not of legislative power. American Banana Co. v. United Fruit Co., 213 U.S. 347, 357 , 29 S. Ct. 511, 16 Ann. Cas. 1047; United States v. Bowman, supra; Robertson v. Labor Board, 268 U.S. 619, 622 ,
45 S. Ct. 621. Nor can it be doubted that the United States possesses the power inherent in sovereignty to require the return to this country of a citizen, resident elsewhere, whenever the public interest requires it, and to penalize him in case of refusal. Compare Bartue and the Duchess of Suffolk’s Case, 2 Dyer’s Rep. 176b, 73 Eng. Rep. 388; Knowles v. Luce, Moore 109, 72 Eng. Rep. 473.4 What in England was the prerogative of the sov- [284 U.S. 421, 438] ereign in this respect pertains under our constitutional system to the national authority which may be exercised by the Congress by virtue of the legislative power to prescribe the duties of the citizens of the United States. It is also beyond controversy that one of the duties which the citizen owes to his government is to support the administration of justice by attending its courts and giving his testimony whenever he is properly summoned. Blair v. United States, 250 U.S. 273, 281 , 39 S. St. Ct. 468. And the Congress may provide for the performance of this duty and prescribe penalties for disobedience.

It’s that simple. If you are a U.S. citizen, some would argue that you are the property of the U.S.government.

On the other hand (and this will be the subject of another post), the Supreme Court decisions in Cook v. Tait and Blackmer v. The United States were decided in an era where there was no U.S. recognition of dual citizenship. It is reasonable to argue that these decisions have no applicability in the modern world.

There will be those who will say: Come on! Get real! The United States would never rely on these old court decisions. Well, they still do cite Cook v. Tait. Mr. FBAR lay dormant until it was resurrected by the Obama administration as the “FBAR Fundraiser“.

US tax reform bill appears to confiscate 12% of retained earnings of certain Canadian Controlled Private Corporations

 

UPDATE November 9, 2017

Today Chairman Brady concluded the “Mark Up” period of his proposed tax legislation. The “Mark Up” period contained NO move to “territorial taxation” for individuals. It did increase increase the “proposed confiscation” of the retained earnings of certain Canadian Controlled Private Corporation, from 12% to 14%.

See the “Manager’s Amendment” here:

summary_of_chairman_amendment_2

Now back to our regular programming …

*******

cross-posted from citizenshipsolutions

by John Richardson, J.D.

US tax reform bill appears to confiscate 12% of retained earnings of certain Canadian Controlled Private Corporations

 
Kudos to Max Reed for his quick analysis of the how the proposed U.S.
tax reform bill might affect Canadians citizen/residents who also have hold U.S. citizenship. You will find the bill here. His analysis, which has been widely discussed at the Isaac Brock Society (beginning here) includes provisions that are very damaging to those who are the owners of Canadian Controlled Private Corporations (noting they are also under assault from Messrs Trudeau and Morneau). The damaging provisions are both prospective and retrospective.

Continue reading US tax reform bill appears to confiscate 12% of retained earnings of certain Canadian Controlled Private Corporations

Twelve % Tax on Deferred Earnings Likely to Apply ONLY to Larger/Multi-National Corporations

 
UPDATE November 6 2017 – see below
 


 
Since the new House GOP Tax Bill came out, many are looking beyond the obvious and trying to analyze what this might really mean in peoples’ lives. This post appeared on the Isaac Brock Society on Nov 2 by Stephen Kish. The following sections are excerpts from that post:

Here is the United States House “Tax Cuts and Jobs Act” bill of November 2, 2017.

This is a first pass proposed repeal/amendment etc. of the 1986 Internal Revenue Code of 1986 and is permanently stored here.

November 3 UPDATE:

I was just made aware of an article by Max Reed that apparently indicates that US persons overseas who own small business corporations might be harmed by the new tax legislation. In particular, the imposition of a one-time 12% tax on deferred earnings [THIS INCLUDES LOCAL EARNINGS] would hit not just the intended giant corporations overseas, but also the tiny incorporated businesses (e.g., family or one person farming or medical doctor “corporation”). This would include “U.S. Persons” who have no meaningful relationship with the U.S.

From the Max Reed article:

“… New punitive rules that apply to US citizens who own a business. Currently, most US citizens who own a Canadian corporation that is an active business don’t pay tax on the company’s profits until they take the money out. The House plan changes this. It imposes a new, very complicated, set of rules on US citizens that own the majority of a foreign corporation. The proposal would tax the US citizen owner personally on 50% of the entire income of the Canadian corporation that is above the amount set by an extremely complex formula. At best, this will make the compliance requirements for US citizens that own a business extremely complicated and expensive. At worst, this will cause double tax exposure for US citizens who own a Canadian business on 50% of the profits of that business.

Imposition of a 12% one-time tax on deferred profits. Under the new rules, the US corporate tax system is transitioning to a territorial model. 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. Take a simple example to illustrate the enormity of the problem. A US citizen doctor moved to Canada in 1987. She has been deferring income from personal tax in her medical corporation and investing it. Now, 12% of the total deferred income since 1986 would be subject to a one-time tax in the US. That may be a significant US tax bill…”

November 4 UPDATE:

Republicans Overseas responds to the above concern:

“Stephen Kish, Your comments were forwarded to a House Ways and Means Committee member’s office. His legislative counsel is looking into this. We will report once we receive their reply.

*******

Needless to say, while many hoped there would be improvements in our situation, virtually no one voiced concerns about something appearing that would make things worse. Imagine being an incorporated individual (such as a doctor, accountant, lawyer etc, in Canada) and suddenly being told any retained/deferred earnings left in the corporation since 1986 would be taxed at 12%! While there are no guarantees at the moment, before this idea takes firm hold, particularly in the minds of the tax compliance community, here is an analysis which suggests such a notion could most definitely seen as out-of-context if viewed as a standalone. It really only makes sense when applied to the corporations who moved overseas for whom the U.S. is trying to entice to come back.

*******
 
USCitizenAbroad says
November 5, 2017 at 9:29 pm

@Stephen Kish

You refer to the “frightening prospect” of the 12% tax on the retained earnings of Canadian Controlled Corporations suggested by Max Reed as follows:
 

Imposition of a 12% one-time tax on deferred profits. Under the new rules, the US corporate tax system is transitioning to a territorial model. 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. Take a simple example to illustrate the enormity of the problem. A US citizen doctor moved to Canada in 1987. She has been deferring income from personal tax in her medical corporation and investing it. Now, 12% of the total deferred income since 1986 would be subject to a one-time tax in the US. That may be a significant US tax bill…”

 
@Eric in a later comment confirms that Mr. Reed’s analysis comes from a reference to Sec. 4004 (the transition tax).
 

@Stephen Kish: Yes, he’s referring to Sec 4004 (the transition tax)

 
Although this is unclear and generally difficult to read, I believe that the 12% transition tax (dealing with past retained earnings) does NOT apply to the retained earnings of Canadian Controlled Private Corporations which are owned by INDIVIDUAL shareholders.
 
My reasoning follows …
 
Sections 4001 – 4004 are part of Subtitle A in the proposed bill which appears to deal specifically with the “foreign source” dividends received from certain specific 10-percent owned foreign corporations”. The point is that it deals with domestic corporations that are shareholders of “foreign corporations”.

If you analyze Sections 4001 – 4004, they appear to achieve their objective by amending two different Subchapters of the Internal Revenue Code.
 
Amendments to Sec. 245 which is in the Subchapter of the Internal Revenue Code that describes the computation of taxable income
 
Sec. 4001 is an amendment to the current Sec. 245 which deals very specifically with the deductions available to corporations in the computation of taxable income. Furthermore, by its plain terms Sec. 4001 describes domestic shareholders that are shareholders of foreign corporations. In general the section allows domestic corporations to deduct foreign dividends from the calculation of taxable income. This is the way the USA moves to “territorial taxation” for corporations ONLY.
 
Amendments to the subpart F rules which are found in Subchapter N and used to attribute the income of controlled foreign corporations to U.S. shareholders (Sec. 956, Sec. 961 and Sec. 965)
 
Sec. 4002 is an amendment to the current Sec. 956 which speaks only to the application (or non application) of the section to corporations. In other words, Sec. 4002 applies only to corporations.
 
Sec. 4003 is an amendment to the current Sec. 961 which applies ONLY to corporate shareholders of foreign corporations.
 
Sec. 4004 replaces Sec. 965 which is a section that deals specifically with “the case of a corporation which is a United States shareholder”. I agree that Sec. 4004 (if read outside the context of Subtitle A) could be interpreted to apply to individual shareholders. That said:
 
1. Sec. 4004 replaces a section that deals specifically with corporations; and

2. For Sec. 4004 to apply to individuals would make it the “odd man out” in Subtitle A (in the proposed bill) which is clearly descriptive of how corporations would transition to “territorial taxation”.
 
For these reasons I don’t see how the 12% “transition tax” would apply to individual shareholders.
 
But, Mr. Reed also describes a “prospective tax” (found in Sec. 4301) of the proposed bill on the U.S. citizen shareholders of Canadian Controlled Private Corporations as follows (which I think may be accurate):
 

It imposes a new, very complicated, set of rules on US citizens that own the majority of a foreign corporation. The proposal would tax the US citizen owner personally on 50% of the entire income of the Canadian corporation that is above the amount set by an extremely complex formula. At best, this will make the compliance requirements for US citizens that own a business extremely complicated and expensive. At worst, this will cause double tax exposure for US citizens who own a Canadian business on 50% of the profits of that business.

 
Renounce & Rejoice!

*******

UPDATE November 6 2017

Stephen wrote to Max, asking him to explain his conclusion and why it differed from USCitizenAbroad’s. Unfortunately for us, he is sticking to his initial analysis. Let us hope this gets clarified ASAP.

 

Max Reed has just reviewed USCA’s analysis for me but still feels that, irrespective of intent of the drafters, the proposed tax reform bill, as stated, captures ALL owners of foreign corporations (bad news for us if true).

I am passing this analysis on to Republicans Overseas hoping that it will be passed on to the mark-up folks.

 

Max’s November 6, 2017 response sent to me:

“The purpose of the two sections 4004 and 4301 are to transition the US federal corporate tax regime from a global model to a territorial model. To accomplish this, they create new categories of Subpart F” income that relies in large part on the existing controlled foreign corporation US citizens abroad are already familiar with these rules as they apply to those who own foreign corporations.

As a result, the way the sections are drafted provides for a broader application than the drafters may have intended (I’m not sure).

The technical reasons for this result are briefly summarized as follows. Both sections 4004 and 4301 apply to “United States Shareholders”.

That term is currently defined in Code section 951(b) to mean a US person defined in 957(c) who owns 10% or more of the voting stock of a foreign corporation. Section 957(c) essentially adopts the definitions 7701(a)(30) including US citizen.

There is no change to either Code section 951(b) or Code section 957(c) in the House bill that would alter this. Consequently, 4004 and 4301 apply to “US Shareholders” including all US citizens, US green card holders, US trusts as well as US corporations who own 10% or more of the voting stock of a foreign corporation.

There is no carve out elsewhere in the bill.

The fact that other provisions in the same section only apply to corporate shareholders does not affect the reading of 4004 and 4301. Those sections specifically note the limited application of those provisions whereas 4004 and 4301 do not. Further, the fact that existing section 965 only applied to corporate shareholders also does not matter as it is being replaced in its entirety by new section 965.

In short, the purpose of the provisions may be to assist in the transition to a territorial corporate tax system.

But, as drafted, from a technical perspective the legal effect of them will be so much broader. It will apply this 12% one-time tax to US citizens who own an interest in CFCs [e.g., an incorporated medical doctor’s clinic].

It will further apply an ongoing complex new tax regime to US citizens that own a foreign business that earns active business income. These provisions may not be passed in their current state. I certainly hope not. But if they are the effects on US citizens outside the US will be significant.”

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a response from USCitizenAbroad

@Stephen Kish

Re: The Max Reed response to you vis-a-vis my suggestion that that the proposed should NOT be read to include the Canadian Controlled Private Corporations for the “one off 12% tax”.

Mr. Reed’s interpretation is characterized by a the notion that one section of the IRC can/should be divorced from the context in which it appears. Perhaps he is right. Perhaps not. But interestingly the IRS specifically warns that the individual sections of the IRC should be read in the context of the entire code (and therefore obviously the individual subtitles).

Specifically note IRS Official Guidance:

Finally, the IRC is complex and its sections must be read in the context of the entire Code and the court decisions that interpret it. At a minimum, please do not be misled by the false interpretations of the IRC promoted by the purveyors of anti-tax law evasion schemes.

The idea that a a move to territorial taxation for corporations (who have the opportunity to repatriate their earnings at a discount) should be applied to the individual shareholders of Canadian Controlled Private Corporations, is absurd.

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Will Territorial Taxation Solve All the Problems of #AmericansAbroad?

 


 
Tomorrow’s the big day! Will there be something for us in tomorrow’s Ways & Means Committee bill? Lots of hints suggest something is there. Most seem to expect a shift to territorial taxation for individuals. That’s a great start! There are still likely to be lots of issues remaining and this comment from the Isaac Brock Society lays it out.

This is not meant to be negative in any way. However, to expect that suddenly ALL of our issues will simply disappear is extremely unlikely. Better to have a reasonable expectation to offset disappointment! But, who knows? Tomorrow will tell….
 

USCitizenAbroad says
November 1, 2017 at 9:26 am

Fred (B)

I’m sorry, but anything that truly makes life easier for US persons abroad is fine by me. I have been skeptical of TTFI, and dream of true simple RBT. But frankly, at this point, if the US says what you do abroad stays abroad, I’ll take it.

I wonder if TTFI would do away with FBARs. After all, if they don’t need to look at your income abroad, they don’t need to look at your accounts abroad. Well, I know that’s not true — they want to make sure people aren’t spiriting funds abroad to hide them there.

Fred (IMHO) they will NEVER get rid of FBAR. The FBAR statute in its purest form requires any person who enters the USA on business to report his/her foreign bank accounts. The original purpose of FBAR was not primarily about taxation. Treasury has considered getting rid of FBAR for Americans abroad and declined to do so. Recent events make it clear that FBAR is an effective tool of intimidation … Mr. FBAR embodies what it means to be an American.

A move to “territorial taxation” (what income is subject to U.S. taxation) has nothing to do with (1) the definition of “tax resident” (what persons are subject to the U.S. tax system) and (2) the FBAR requirements found in Title 31.

It follows from this that a move to “territorial taxation” (absent further legislative change) would in no way affect:

– FBAR rules
– the FATCA IGAs (which are based on the U.S. definition of “tax resident”)
– Chapter 4 of the IRC (Sections 1471 – 1474 which are FATCA)
– the requirement to file a tax return and other information returns
– the draconian “Exit Tax” rules
– gift tax rules
– estate tax rules (unless the estate tax is abolished)

and much more.

ONLY a move to RBT can affect the above …

Of course a move to “territorial taxation” is helpful to Americans abroad. But, (without additional changes) it is only a beginning.

What a move to “territorial taxation” would probably achieve is, that foreign source income would not be subject to U.S. taxation. I would think (but wouldn’t count on) that territorial taxation would lead to the elimination of certain information return requirements: 8938 and 8621 (which have already been eliminated for Green Card holders who make a treaty election).

But, these are just some thoughts. Who knows what the final product will look like? It’s possible to move to “territorial taxation” for individuals and retain A LOT of the pain for Americans abroad. On the other hand, a lot of the pain could be removed.

Neither RO nor ACA has proposed the elimination of CBT. The RO proposal makes CBT more tolerable for Americans abroad. The ACA proposal reinforces CBT, but allows a “buy out” for specified individuals (and is ultimately better for those who can take advantage of it).

DA has yet to make a specific proposal. But, in the DA worldview, CBT is essential to ensure that a small group of people don’t escape paying their “fair share”. For this reason, DA does NOT really support RBT – time for the loyal Democrats to stop drinking the “Kool Aid”.

The ONLY proposals for RBT are found in the some of the individual submissions to House Ways and Means (2013) and Senate Finance (2015).

But on the other hand: We don’t know what the proposed legislation will look like. It could incorporate various suggestions from various proposals and could actually be RBT. But, given the fact that there has been no organized support of RBT, I think this is unlikely.

I read somewhere (or did I just dream it) that:

“All roads lead to renunciation!”