The Repatriation tax and the 962 Election for Americans with a U.K. corporation

by Monte Silver
reprinted with permission of the author

The U.S. 2017 tax reform has made it very problematic for an American residing in the UK to conduct business through a UK corporation. Operating through a UK corporation exposes the expat to two new taxes: Repatriation and GILTI. This article will discuss the little known 962 election, how it can be used to reduce Repatriation tax liability, and some issues that must be considered before doing so.

A numerical example is helpful. An American living in the UK has been operating a CPA sole practice or family restaurant for 30 years through a wholly owned UK company. After paying UK corporate income tax on profits over the years, the company has $500,000 in retained earnings in its bank account, which the expat is counting on for retirement. Under the Repatriation tax, the expat is now personally liable for $87,700 (17.54% * $500,000) of that amount.

How is this tax paid? In eight annual payments, with the first payment of 8% (or $7,016) being due June 15, 2019 (as a result of the extension achieved from the U.S. Treasury).

Let’s assume that the expat has no personal foreign tax credits to use to offset to the Repatriation tax. In other words, in previous years the expat has already used all personal income tax paid in the UK to offset U.S. income tax.

Section 962 of the U.S. Internal Revenue Code (“IRC”) may help. Section 962 allows the expat to be treated as a corporation for a specific year (say in 2017) solely for purposes of the Repatriation tax (and other Subpart F income which taxpayers rarely have).

Why does this help? Simple. If we assume an average UK corporate tax rate of 20% over the past 10 years, then approximately $100,000 ($500,000*1.20%) of UK corporate tax has been paid. As the UK corporation never owned U.S. taxes, it never utilized these taxes as credits on any U.S. corporate tax return.

And if the expat utilizes the 962 election in 2017, there are two potential benefits: (1) ability to use the corporate taxes paid in the UK to offset the Repatriation tax, and (2) enjoy the lower corporate Repatriation tax rate.

In the real world, situations are rarely black and white – i.e. lots of corporate credits but no personal credits. For example, if the expat has some personal tax credits available, the point at which the 962 election becomes beneficial requires analyzing different numerical scenarios, taking into account many factors, such as gross-up rules under section 78. However, in cases where the UK corporation has a significant pool of unused tax credits and the expat has none, the 962 election may make sense.

The remainder of the article will discuss one significant landmine that may arise when using the election. And it is important to state until now, 962 has rarely been used, so there may be others:

Post-2017 distributions. What happens when the UK corporation finally distributes the $500,000 to the expat? If no 962 election was made, no additional U.S. tax is paid by the expat (IRC 959). UK tax, however, may be due. And if 962 election was made? Bad news: all the distributions out of the accumulated earnings, beyond what was paid on the Repatriation tax, are subject to U.S. tax (IRC 962(d))! Ouch. At what rates? Most likely personal marginal rates. Double ouch.

An example will help illustrate this. In the above example, if no 962 election is used and no personal tax credits are available, the expat would be liable for $87,700 in Repatriation tax, but no more U.S. tax would be due upon distributing the $500,000. But under 962, let’s assume that the $100,000 in corporate tax credits eliminated any Repatriation tax liability. Upon distribution of the $500,000, the expat would pay U.S. taxes at the marginal rate, or as much as $185,000 ($500,000 * 37% – the highest marginal rate). Triple ouch!

Does 962 make sense? It may in the following three situations, but careful analysis is required: (1) When the UK corporate tax credits far outweigh the personal income tax credits available, and/or (2) when the expat has no plans to withdraw the money in the corporation, and/or (3) the UK taxes due at the time of distribution may render any U.S. additional taxes minimal.

In summary, in planning around the Repatriation tax, the 962 election is an option. However, careful analysis is required to achieve the best results under U.S. and UK tax law. A totally different analysis exists for the 962 election with regard to GILTI in 2018 onward.

Nothing herein shall be deemed legal advice
American Tax Solutions

Interrupting our regularly scheduled programming: It appears that there is a delay to the June 15, 2018 @USTransitionTax payment

cross-posted from Brock
by USCitizenAbroad

I haven’t had time to really read and digest this Bulletin from U.S. Treasury.

You will have to read and draw your own conclusions, but it appears that paragraph 16 speaks to this issue:

Q16: If an individual fails to timely pay his or her first installment of tax due under section 965(h), will the IRS assess an addition to tax for failure to pay? Will the taxpayer’s requirement to pay all subsequent installments be accelerated under section 965(h)(3)?
A16: If an individual meets the criteria in this paragraph and pays the total amount of the first installment on or before the due date for the second installment, the IRS will not assess an addition to tax for failure to timely pay the first installment and will not accelerate subsequent installments under section 965(h)(3). An individual with a net tax liability under section 965 is required to report the liability on his or her tax return for the year in which or with which the inclusion year of the deferred foreign income corporation ends and pay the full amount of that liability on the unextended due date of that return, unless the individual elects to pay the liability in eight annual installments pursuant to section 965(h)(1). However, the IRS has determined that, if an individual’s net tax liability under section 965 in the individual’s 2017 taxable year is less than $1 million, the individual makes a timely election under section 965(h), and the individual did not pay the full amount of the first installment by the due date under section 965(h)(2), the failure to make the payment will not result in an acceleration event under section 965(h)(3) so long as the individual pays the full amount of the first installment (and its second installment) by the due date for its 2018 return (determined without regard to extensions). For this purpose, the relevant due date generally is April 15, 2019. In the case of United States citizens or residents whose tax homes and abodes, in a real and substantial sense, are outside the United States and Puerto Rico, and United States citizens and residents in military or naval service on duty, including non-permanent or short term duty, outside the United States and Puerto Rico, the relevant due date is June 17, 2019, which is provided by Treas. Reg. §1.6081-5(a)(5) and (6). Although the IRS will not assess an addition to tax for failure to timely pay the first installment, a taxpayer will be liable for interest on such amount from the due date of the installment. See I.R.C. §6601.

If the IRS sends a taxpayer a notice of an addition to tax for failure to timely pay the first installment, and the taxpayer meets all the conditions for relief described above (including making the required payment by the due date for the second installment due under section 965(h)), the taxpayer should contact the IRS office that issued the notice and request abatement of the addition to tax for failure to timely pay the first installment in accordance with the provisions in these FAQs.

Posted: 06/04/2018

Note that this does NOT apply to all people (appearing to give relief only to small businesses).

The “Pax Americana” to the “Tax Americana”: How the USA is imposing a separate, punitive tax regime on “nonresidents”

cross-posted from storify

The “Pax Americana” to the “Tax Americana”: How the USA is imposing a separate, punitive tax regime on “nonresidents”

Tax Colonization by exporting the Internal Revenue Code to other countries

by John Richardson

Part 9-1: Responding to the Sec. 965 “transition tax”: From the “Pax Americana” to the “Tax Americana”


 
 
 
 
 
 
 
 
cross-posted from citizenshipsolutions by John Richardson

Part 9: Responding to the Sec. 965 “transition tax”: From the “Pax Americana” to the “Tax Americana”

This is the ninth in my series of posts about the Sec. 965 Transition Tax and whether/how it applies to the small business corporations owned by taxpaying 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.

(Links to the first eight posts in this series can be found at the end of this post)

Introduction – The purpose of this post is …

to demonstrate that the “transition tax” is an example (particularly egregious) of the principle that (1) not only does the United States impose “worldwide taxation” on the “tax residents” of other countries, but (2) it imposes a separate tax regime on certain “tax residents” of other countries that is different and far more punitive than the regime imposed on Homeland Americans. Yes, you read correctly! Continue reading Part 9-1: Responding to the Sec. 965 “transition tax”: From the “Pax Americana” to the “Tax Americana”

Part 8: Responding to the Sec. 965 “transition tax”: This small business thought it was saving to invest in business expansion – Wrong, they were saving to be robbed by America!

by John Richardson

This is the eighth in my series of posts about the Sec. 965 Transition Tax and whether/how it applies to the small business corporations owned by taxpaying 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.

Continue reading Part 8: Responding to the Sec. 965 “transition tax”: This small business thought it was saving to invest in business expansion – Wrong, they were saving to be robbed by America!

Part 7: Responding to the Sec. 965 “transition tax”: Why the transition tax creates a fictional tax event that allows the U.S. to collect tax where it never could have before

 

cross posted from citizenshipsolutions

    by John Richardson
 

Introduction

This is the seventh in my series of posts about the Sec. 965 Transition Tax and whether/how it applies to the small business corporations owned by taxpaying 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.

Continue reading Part 7: Responding to the Sec. 965 “transition tax”: Why the transition tax creates a fictional tax event that allows the U.S. to collect tax where it never could have before

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

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

Part IV-Sec 965 Transition Tax – Comparing Treatment of Homeland Americans to the Treatment of Non-Residents

 
cross posted from citizenshipsolutions     by John Richardson
 

CLICK TO ENLARGE

 
 
 
 
 
 
 
 
 
 

Attorney Monte Silver has organized a worldwide petition to prevent the application of the “transition tax” and GILTI to “tax residents” of other countries. Please support him by participating. You will find his petition and further information here:

https://www.democratsabroad.org/remedy_repatriation_gilti_taxes

And now, back to our regularly scheduled programming.

Introduction

This is the fourth 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 first three posts 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!

Last night I was discussing the “transition tax” with an “individual” who is impacted by the tax AND is a Homeland American. He is a “tax resident” of ONLY the United States. For Homeland Americans who are subject to ONLY the U.S. tax system the “transition tax” is NOT a bad thing. For “non-residents” it is a terrible thing, which may destroy their retirements. The reason is that “nonresidents” are subject to both U.S. taxation and taxation in their countries of residence. The “transition tax” is an extremely egregious example of the terrible effects of the U.S. practice of imposing “worldwide taxation” on the residents of other countries. I hope that “the transition tax” will be the “straw that breaks the Camel’s back” and ends the U.S. practice of imposing taxation on people who don’t live in the United States.

After the discussion, I summarized our conversation in the following letter to him. Here is the letter.

Continue reading Part IV-Sec 965 Transition Tax – Comparing Treatment of Homeland Americans to the Treatment of Non-Residents

Part 3-Responding to the Sec 965 Transition Tax- They Hate you for Your Pensions!

cross posted from citizenshipsolutions

by John Richardson

Introduction

This is the third 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 first two posts 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”

Immediately prior to the passing of President Obama’s “Affordable Care Act” (which was subsequently ruled to be constitutional BECAUSE it was a “tax”), legislators were faced with a comprehensive, complex and incomprehensible piece of legislation. Very few members of Congress understood the details and impact of what they were voting for.

Nancy Pelosi secured her in place of history by suggesting that:

“We really need to pass the law so that you can see what’s in it!”

Ms. Pelosi meant (I think) that it’s one thing to know what a law says. It’s quite another to know how it actually impacts people.

Notwithstanding the April 15, 2018 deadline for the first “transition tax” payment, very few “tax professionals” understand what the Internal Revenue Code Sec. 965 “transition tax” says, (let alone what it actually might mean – assuming it applies).

What the application of the “transition tax” might actually mean in the life of an individual owner of a Canadian Controlled Private Corporation Continue reading Part 3-Responding to the Sec 965 Transition Tax- They Hate you for Your Pensions!

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

 

cross-posted from citizenshipsolutions blog

by John Richardson

Beginning with the conclusion (for those who don’t want to read the post) …

For the reasons given in this post, I believe that there are grounds to argue that the imposition of the Sec. 965 “transition tax” on Canadian resident/citizens DOES violate the Canada U.S. tax treaty. It is my hope that this post will generate some badly needed discussion on this issue.

If you are an individual who believes you may be impacted by the “transition tax”, you should consider raising this issue with the Competent Authority. I would be happy to explore this with you.

Need some background on the Sec. 965 “U.S. transition tax”?

The following tweet references a 7 part video series about the Internal Revenue Code Sec. 965 “Transition Tax” created by John Richardson and Dr. Karen Alpert.

(Video 6 gives examples of what various approaches to “Transition Tax Compliance” might look like.)

A reminder of what the possible imposition of the “transition tax” would mean to certain Canadian residents

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!

Some of theses thoughts are explored in an earlier post: “U.S. Tax Reform and the “nonresident corporation owner”: Does the Section 965 “transition tax apply”?

And now, on to our “regularly scheduled programming”: The possible use of the U.S. Canada Tax Treaty to as a defense to the U.S. “transition tax”

In Part 1 of this series, I wrote: “Responding to the Section 965 “transition tax”: “Resistance is futile and compliance is impossible“. I ended that post with a reminder that the imposition of Section 965 “transition tax” on Canadian residents has (at least) four characteristics:

1.The U.S. Transition Tax is a U.S. tax on the “undistributed earnings” of a Canadian corporation; and

2. Absent deliberate and expensive mitigation provisions, the U.S. transition tax contemplates the “double taxation” of Canadian residents who hold U.S. citizenship.

3. The “transition tax” is a preemptive “tax strike” against a corporation in Canada. Historically Canada would have the first right of taxation over Canadian companies.

4. The U.S. Transition Tax creates a “fictitious” taxable event. It is not triggered by any action on the part of the shareholder.

The purpose of this post is to argue that the Canada U.S. tax treaty may be a defense to the application of the Section 965 “Transition Tax”

Part A – Exploring what a “Subpart F” inclusion really is

Part B – The Canada U.S. Tax Treaty: Relevant provisions

Part C – Impact of the “Savings Clause”

Part D – The Interpretation of the tax treaty: WHO interprets the treaty and HOW is the treaty to be interpreted

_________________________________________________________________________

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