Tag: CFCs

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 1: Responding to The Section 965 “Transition Tax”: “Resistance is Futile” but “Compliance is Impossible”

 

Cross-posted from the citizenshipsolutions blog

by John Richardson

Introduction and background …

“This legislation is being interpreted by a number of tax professionals to mean that individual U.S. citizens living outside the United States are required to simply “fork over” a percentage of the value of their small business corporations to the IRS. Although technically “CFCs” these companies are certainly NOT foreign to the people who use them to run businesses that are local to their country of residence. Furthermore, the “culture” of Canadian Controlled Private Corporations is that they are actually used as “private pension plans”. So, an unintended consequence of the Tax Cuts Jobs Act would be that individuals living in Canada are somehow required to collapse their pension plans and turn the proceeds over to the U.S. government” -John Richardson

I have previously suggested that the Section 965 “transition tax” should not be interpreted to apply to Americans abroad. This argument was based largely on a “lack of legislative intention” coupled with the fact that individuals (whether in the USA or living abroad) do NOT get the benefits of the transition to “territorial taxation”.

These are difficult times for many Canadians who are the owners of Canadian Controlled Private Corporations. Canadian residents use Canadian Controlled Private Corporations (“CCPCs”) to operate small businesses and to create pension plans for their retirement. Importantly a Canadian corporation meets the definition of a “CCPC” only if it is controlled by residents of Canada. By definition all “CCPCs” are local to their owners. The use of “CCPCs” reflects the reality of Canadian tax laws going back to 1972. Governments the world over are taking steps to ensure that corporations cannot be used for the deferral or avoidance of taxation.

The election of the Trudeau Liberals resulted in the Government of Canada taking an interest in “Tax Reform” (or at least “tax reform” in relation to Canadian Controlled Private Corporations. On February 27, 2018 Finance Minister Morneau delivered the Liberals third budget. Although not widely publicized, the budget including major changes in how the passive income of CCPCs is to be taxed in Canada.

Of course those “CCPC” owners who have U.S. citizenship must also deal with the U.S. tax system. Interestingly, both the Government of Canada and the Government of the United States have the owners of “CCPCs” on their radar.

Canada – On the “Home front” (meaning in Canada) the Liberal Government of Justin Trudeau and Finance Minister Bill Morneau are targeting the “retained earnings” in their corporations. Specifically they believe that “retained earnings” that were subject to the lower small business tax rate provide an unfair tax deferral, resulting in more capital to invest, which allows for the creation of additional passive income. The February 27, 2018 Canadian budget is a direct response to this perception.

The United States – The “Homeland” has just passed the TCJA (“Tax Cuts Jobs Act”). One provision of the TCJA amended Internal Revenue Code Section 965 to impose a one time tax on the “United States shareholders” of “Deferred Foreign Income Corporations” (a “DFIC”). This tax is based on the “undistributed earnings” of corporations. The application of this tax to U.S. citizens living outside the United States is newsworthy, is debatable (and is being debated). The application of the Section 965 “transition tax (assuming the applicability of the tax to Canadian resident owners of “CCPcs”), would be a direct, retroactive tax on the “retained earnings” of Canadian Controlled Private Corporations. Notably these “retained earnings” were NEVER subject to U.S. taxation before (it’s retroactive). The mechanism that the U.S. Government is using to impose direct taxation on the retained earnings of “CCPCs” is to (1) attribute the corporate undistributed earnings to the individual shareholder and (2) impose taxation directly on the individual shareholder. For “Tax Geeks” (and those who want boring cocktail conversation), from a U.S. perspective this process of income attribution is called “Subpart F” income. (You can learn all about it by reading Internal Revenue Code Sections 951 – 965). I emphasize that a Subpart F inclusion (by definition) attributes corporate income to a “shareholder” without any realization event whatsoever.
Continue reading “Part 1: Responding to The Section 965 “Transition Tax”: “Resistance is Futile” but “Compliance is Impossible””

It’s Happening Again – Enough is Enough is Enough

 

NB: STAY TUNED – a 7-part video on the Transition Tax, with
John Richardson & Karen Alpert will be posted in the next couple of days.
 
 
NB: For anyone with time to spare/the interest/needing specifics to make the point regarding the “intention” of the law, here are some of the relevant House/Senate hearings and/or documents:

Oct 3, 2017 Full Committee Hearing -Senate Finance

Nov 6 – 9, 2017 H W & M Markup
Nov 13, 2017 Open Executive Session to Consider an Original Bill Entitled the Tax Cuts and Jobs Act Sessions also continued Nov 14, 15, 16 with videos at the page)
Supporting Document Markup – Senate Finance Committee

*******

Another day, another set of articles and comments where the #TransitionTax & #GILTI are being stuffed down the throats of expatriates who have their own small corporations. The proliferation of articles on this issue, all proclaiming the U.S. can now inflict a deeper cut into the retirement savings of non-residents, is infuriating. The first two articles at least expressed the idea that these provisions might affect non-resident U.S. taxpayers.

Max Reed , posted on November 3, 2017:

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.

Kevyn Nightengale, posted on November 10, 2017 (I have not included the updated comments because this is what we saw at that time):

This provision was not designed to catch individuals (I think), and certainly not Americans abroad – they are collateral damage. it’s incredibly unfair.

When I saw the House version, I expected that individuals would be exempted after a sober second (or third) thought. Or at least individuals living abroad would be exempted. But seeing a parallel provision in the Senate version makes me expect the worst.

Seems fairly obvious that the biggest clue that the #TransitionTax IS NOT meant to apply to small CFC’s is that they are not “transitioned” from a worldwide system to a territorial one. This is so basic it is hard to believe nobody just calls these people out on this. How many tax professionals watched all of the House/Senate hearings? Many of us did, all hoping to hear that the move to territorial would include individuals; or at least some mention of us. There simply was nothing to suggest that this tax applied to anyone except large multi-national corporations.This provides the context in which the law was conceived. It should be considered just as thoroughly as the plain reading that professionals claim catches expats in the net. Just exactly who is really making the law here?

Now, on to the two prominent articles of the week. The Financial Post has U.S. tax reform to bring double taxation to some Canadians by Julius Melnitzer. Mr. Melnitzer is well-known for making huge distortions of reality. Canadians are familiar with the fact that he perpetuated “the biggest personal loan fraud in Canadian banking history.”

The biggest personal loan fraud in Canadian banking history was the work of a wealthy, respectable London, Ontario lawyer, Julius Melnitzer. When he left the board of Vanguard Trust, a small firm with which his law firm had been dealing, he just happened to take a copy of the corporate seal that Vanguard had used, among other purposes, to attest to the validity of certain forms which it issued in lieu of custom-designed share certificates. Melnitzer’s first trick was to create fake shares by simply typing in the share amounts and stamping the certificates with the company seal. He created five certificates representing a total of almost 900,000 shares. Then he used these “shares” as collateral for personal lines of credit. He also forged financial statements of a company that his father had founded, in which Melnitzer owned 20% of the shares, along with a pledge from the company that it would guarantee Melnitzer’s debts. Using the Vanguard shares and the phoney loan guarantees Melnitzer received a total of $5.6 million in lines of credit from five major Canadian banks. The scam went on for years. Each time a bank would start to press him for repayment, he would threaten to take his business elsewhere. He would also request a letter of recommendation from one bank, then use it to obtain funds from its competitors. A few years later, the banks pressed him to either pay up or come up with better collateral. Emboldened by the fact that no one had questioned the veracity of the forged documents, he decided to do the second.

Melnitzer went to a small local printing company that his law firm had done business with for years. He told them he was representing a client charged with using forged stock certificates to get loans at banks. He wanted to prove in court that printing technology had improved so much, even a small shop like theirs could do a credible job. When the company agreed, he ordered single shares of five blue-chip companies in the name of his daughter to avoid suspicion. He then altered them to put in his own name and bumped up the amounts until they had a face value of about $30 million. Not only did the great majority of the financial institutions he dealt with accept these in the place of the initial collateral, but some even significantly increased his line of credit. Alas, when an officer at National became suspicious about how Melnitzer’s personal wealth had risen so quickly, the officer asked bank experts to inspect the stock certificates. Melnitzer was arrested three days later.

Further:

Julius Melnitzer, a London, Ont., lawyer, was brilliant in the courtroom and had a stable of powerful clients, including some of the province’s biggest landlords. Thanks to a tip from an observant middle manager at a bank, the police discovered Melnitzer had printed up more than $100 million worth of stock certificates bearing blue-chip names like Exxon Corp. and used them to secure around $67 million in loans from several banks. He also bilked several friends out of more than $14 million by getting them to invest in a bogus property deal in Singapore. In 1992, Melnitzer pleaded guilty to 43 counts of fraud. He was sentenced to nine years in jail but was out on day parole after a couple of years and full parole in 1995. Melnitzer is now a well-known and respected Canadian legal affairs writer.

For Mr. Melnitzer’s point of view see here.

So why am I making such a big deal out of Mr. Melnitzer’s background? Irony. Hypocrisy. Disgraceful. Despicable. Along with government and the tax compliance community, the media is guilty of presenting only one side of the picture, consistently. We are labelled as “tax cheats” “scofflaws” and so on for not filing pieces of paper we knew nothing about. This man, who cheated banks out of $67 million, his friends out of $14 million, is promoting a questionable point of view that seriously affects the lives of millions of expats. Sorry, I cannot consider him a “well-known and respected Canadian legal affairs writer.”

The article quotes Roy Berg on the Transition Tax issues and Paul Seraganian on estate tax issues. An example of the Transition Tax issue:
 
A doctor who is a dual citizen practising in Canada,
with $2M of accumulated earnings in a private Canadian corporation,
would have a one-time U.S. tax liability of $300,000 this year
Roy Berg, director, U.S. tax law, Moodys Gartner
 

“A one-time tax liability of $300,000.” Incredible. Just a “fact.” Doesn’t matter at all how immoral this tax is in the first place. Doesn’t matter that this likely represents the doctor’s retirement savings. He/she likely worked very hard to earn that.This is a real-life person, not a hugely wealthy individual such as a corporate CEO who makes far more than $2 million a year in bonuses alone. It’s not small potatoes to confiscate that from a non-resident “U.S.” person. A Canadian citizen and resident. It is unbelievable that anyone, in any country would simply accept that U.S law applies outside it’s borders. It seems to me that “tax professionals” need to think carefully about what they are doing, who they are hurting and their role in what is truly an amoral regime at best and an immoral regime at worst. And people affected by this should think long and hard about parting with such amounts. I sincerely hope renunciations will be off the charts next year. One can at least be certain that “unofficial” renunciations, people “just walking with their feet” (as in non-compliance) will continue. There is a limit to the value of anything and U.S. citizenship is quickly becoming something non-residents simply cannot afford to keep.

An excellent comment by Karen Alpert on this article:

It is patently clear that Congress was not thinking about the impact of tax reform on non-resident US citizens. None of the discussion in the lead-up to tax reform, or in the committee hearings, indicated that Congress intended to punish the citizens and residents of other countries who happen to be claimed by the US as citizens. Nothing written by the IRS so far has indicated that they believe this applies to non-resident individuals – every example in the IRS notices has specifically looked at corporate shareholders. The only indication that this might apply to non-resident individual shareholders is from the tax compliance industry that stands to earn a large amount of fees on attempts to comply with this extra-territorial over-reach by the US.

If applied to non-resident individuals, the “transition” tax would be a pre-emptive grab at the tax base of Canada and every other country where US emigrants and Accidental Americans are living. The “deferred foreign income” that would be confiscated is money that was never subject to US tax, and is only claimed by the US because of a fictional “deemed repatriation”. Think about what that really means – the US is pretending that US emigrants are “repatriating” funds back to a country where they don’t live, and that they may no longer really identify with. The only good that could possibly come from this is the long overdue realisation that US taxation of the citizens and residents of other countries is contrary to the national interests of those countries and contrary to normal international practice.

The comments section is still open; please go over and make your views known.

**********

The other major article this week is at the Financial Times.

You can see the article on the

citizenshiptaxation facebook group

 
Financial Times
Americans abroad hit by Trump’s new repatriation tax rules
by Andrew Edgecliffe-Johnson in New York – FEBRUARY 4, 2018

John Richardson comments:

(A previous comment of John’s is here . )

@Mitchell @WBY @Brian Lillis @Monte

@Mitchell gives us an excellent description of the reality of this situation.

We are dealing with a situation where the “tax compliance community” says: “Resistance is futile” and the reality is “compliance is impossible”.

What will be people do? Those who have long term relationships with “tax compliance people” are probably in the worst situation. They will be under enormous pressure to transfer their pensions (in reality this is how these corps are often used) to the IRS. These people will be confused, frightened and “easy prey”for the amoral individuals who populate the industry. I saw one explanation of the “transition tax” from a highly regarded tax firm that noted that they must search their client base for “victims”.

Notably, this is also taking place against a backdrop where VERY FEW “tax professionals” even understand how this (so called) tax works and how to work with it (or against it).

It is laughable that the only way any individual could even know that this exists is because of the combined efforts of the media and the “tax compliance industry” (frankly the last group of people I would trust).

I would also like to stress that members of the tax compliance community do NOT know more about this than the individuals impacted. Sure, they may be able to calculate the tax better (assuming that it applies to Americans abroad at all.) But their insight into this is limited by the thought (if you want to call it a thought):

The law is the law – the intent of the law was irrelevant – the unintended consequences are irrelevant.

The unfortunate truth is this:

People are going to have to choose between following the advice from their tax professional that “the law is the law” and retaining their life savings.

It will be interesting to see what happens.

 
 

ACA: TAX REFORM BILL AND AMERICANS ABROAD: WHAT HAPPENED? WHAT’S NEXT?

 

NB: While ADCT respects ACA’s positions and appreciates their lobbying efforts, this post in no way serves as an endorsement of their submission regarding RBT.

It bears repeating that no group approached Congress during the tax reform process and specifically requested RBT. Many chose to support RO’s effort (TTFI) assuming it more likely to succeed given Congress was clearly intent upon changing corporations to a territorial model.

ACA’s approach to RBT has been described by some as CBT with a carve-out (for those who are already compliant). It does not address the issues of Accidental Americans; becoming compliant for the express purpose of renunciation, etc.
 
 

TAX REFORM BILL AND AMERICANS ABROAD: WHAT HAPPENED? WHAT’S NEXT?
 

by Charles M Bruce
ACA’s Legal Counsel and Of Counsel to Bonnard Lawson-Lausanne

with contributions from Jonathan Lachowitz, Chairman, ACA, Marylouise Serrato,
Executive Director, ACA, and Jacqueline Bugnion, Former Director, ACA.

On the day President Trump signed the The Tax Cuts and Jobs Act (TCJA) , Mr. Bruce issued this letter (found on the ACA website).

EXCERPTS:

What happened?
 
Changes in the basic rules for Americans abroad were not made.
There are strong indications that Congress will soon return to the subject of tax law changes to make corrections in what was done and to address issues that were postponed. A couple of days ago Chairman Brady said, “I’m going to recommend that we do have some form of tax reconciliation in future budgets because there are still areas of the tax code I think . . . can be improved, including retirement savings, education, and streamlining,” Brady said. “And we had a number of good ideas from our members we weren’t able to accommodate. Plus, I think we’ll have to continue to modify the international code over time.”

What has not changed?
 

  • The basic foreign earned income and housing cost amount exclusion (FEIE) has not changed
  • The 3.8% net investment income tax to fund Medicare and The Affordable Care Act, remains in place and continues to apply in a way that, for Americans abroad, exposes them to double taxation because they are not allowed to credit foreign taxes against it.

 
There are some serious problems.
 
(a) The new participation exemption system adversely affects Americans abroad by not providing the dividends received deduction and yet taxing an individual on the deemed distribution.

(b) Special reduced rates for so-called “passthroughs” do not benefit Americans abroad that earn from a passthrough foreign income.

(c) Foreign real property taxes can no longer be deducted under the Act.
 
What are the good points?
 
Overall, the visibility of the subject of taxation of Americans abroad has greatly increased. The House Republican Blueprint for tax changes, developed early on, said that legislators would consider “appropriate treatment of individuals living and working abroad in today’s globally integrated economy.” Ways and Means Chairman Brady said that Congress is thinking about changes in the way American individuals abroad are taxed. Lawmakers, he added, take seriously the call for a shift from a citizen-based income tax system to a residence-based system that would only tax people on the income they earn in the U.S. Finance Committee
Chairman Hatch’s corporate integration proposal called for reconsideration of the taxation of nonresident citizens. Individual Members, such as, Representative Holding (Republican-North Carolina), have said that changing the way Americans overseas are taxed is high on their list of priorities. Late in the process, there was a very good floor colloquy between Representative Holding and Chairman Brady on the need to take up this subject afresh in the near future.

One of the most positive things that happened was that ACA successfully developed the best, most comprehensive baseline set of data for detailing the taxation of Americans abroad. This baseline information did not previously exist. It required five months of work by ACA and its independent revenue estimator, District Economics Group (DEG). Utilizing this information, ACA has been able to greatly refine its description of a possible approach to changes in the law and
to run revenue estimates. All of this shows that enactment of RBT can be made revenue neutral. This is an extremely important outcome. ACA has always said that for RBT to be adopted, it must be revenue neutral, tough against abuse, and fair for everyone, meaning among other things that no one would be worse off. ACA’s numbers-crunching shows that RBT can be adopted and the, at the same time, section 911 can be left in place.
 
What’s next?
 
Congress did not consider RBT and reject it. It’s noteworthy that no Member or committee arrived at the point where an RBT/territoriality-for-individuals proposal was put by a Member on the table, drafted in legislative language and “scored” for its revenue effects.Republican interest groups, as well as other groups such as Democrats Abroad, AARO, and FAWCO, all talked with many Members and “knocked on many doors”. They deserve great credit for their efforts……. However, the big, high-visibility subjects, including changes in the international tax rules for corporations, commanded most of the attention of decision-makers.Also, the approaches to these subjects, including the various versions of proposed changes in the corporate tax rules, resulted in a constantly changing landscape and made it difficult to insert residency-based taxation alongside them.
The effect of work on the other subjects can be seen from the fact that many effects on Americans abroad were simply overlooked or not fully appreciated until very late in the game, if it (sic) all.

ACA believes that Members, including Chairman Brady, Chairman Hatch, Representative Holding, and others, are sincere in saying that they want to change the tax rules for Americans abroad. We don’t think they would’ve made the statements they did if this was not the case.

In light of what was not addressed in TCJA and some of the overlooked outcomes, ACA strongly believes NOW IS THE TIME FOR CONGRESS TO HOLD HEARINGS ON THE TAX TREATMENT OF AMERICANS ABROAD. These can lay out the existing rules, including the rules added by TCJA. The Joint Committee on Taxation, the lead committee on matters having to do with tax, can construct its own baseline for dealing with the subject. ACA is making the results of the ACA/DEG study available. Hearings can also identify the key topics, including, for example, treatment of tax havens, various anti-abuse topics, etc. All the interested parties can present their views. It’s an opportunity for everyone generally to “get on the same page” or say why they choose not to be on that page. Of course, there will be differences in opinion as to what changes should be made. ACA suggests that the hearings be held by the Ways and Means Subcommittee on Tax Policy. It looks to Members, both Republicans and Democrats, who have historically taken an interest in the subject to support hearings.
 
*******
 
On the Transition Tax:

The Merry-go-Round of Unintended Consequences
No Evidence of Intent to Apply the Transition Tax to Small Business Corporations of #Americansabroad
ADSC-ADCT Letter to US Congress
Seven Simple Points to be made re Transition Tax and CFCs
It’s the Subpart F Rules Stupid

ACA Papers:

submission to the Senate Finance Committee April 2015

Side-By-Side Analysis: Current Law; Residency-Based Taxation

Representative Holding’s comments:

It’s the Subpart F Rules, Stupid

 

 

There is a very good discussion going on over at Brock regarding the “Transition Tax” and the unintended consequences that may be passed on to expats. Fortunately, this cross-posted comment by USCitizenAbroad demonstrates how we have moved from the complicated verbiage of statutes/IRS Code to something understandable. (!!!!!)

@Plaxy

First, there has never been ANY background discussion that suggests that a transition tax would apply to individual shareholders (whether in the US or abroad) of non-U.S. corporations.

Second, ALL of the discussion has been in the context of finding a way to impose taxation on the offshore trillions supposedly owed by the corporate shareholders of foreign corporations,

Third, notice that some of the discussion (for example in the two Morse articles) raises the question of how the tax should be designed (inside the income tax system, outside the tax system, subpart F, etc.).

What I think has happened is that, by making a subpart F inclusion the mechanism for taxing the “offshore trillions”, it has theoretically drawn individuals (and by extension Americans abroad) into harm’s way.

Because the subpart F rules do apply to the individual shareholders of Canadian Controlled Private Corporations (even though originally intended for corporations), and the mechanism to capture the “offshore trillions” is subpart F, individuals have been drawn in.

Had the mechanism for inclusion been something other than subpart F, I suspect that we would not even be having this discussion. But, what discussion? What is generating the discussion?

Interestingly, the ONLY discussion of the impact of this on individual Americans abroad comes from the tax compliance industry in Canada (because they are the only group considering individual Americans abroad) and probably tax people in other countries.

There is no final legislation and the rules are complex. So, what happens is that one tax person says: “These rules apply to Americans abroad” and the rest follow. They have few (if any) independent thoughts on this. It is very difficult to read and understand this proposed legislation. They read legislation literally. They don’t read contextually. They in effect “make up the law”. We have seen this happen time after time.

Now, what are individuals to do? It’s obvious that this tax was NEVER intended to apply to them. But, (I expect) the tax compliance industry will work hard to force people to pay up. What is clear is the tax compliance community will NOT (if they adopt the “party line”) tell people that the tax does not apply to them. They won’t be willing (and understandably so) take the risk. But, they don’t know any more about this than you or I.

So, what should be done? What should the response be?

At the present time there are still many unknowns. But, I really don’t see how people can pay a tax that

  1. was never intended for them
  2. will confiscate their retirement plans
  3. is in effect a retrospective tax – they are (possibly) going back in time and deeming income that was not taxable at the time to be taxable now.
  4. is not based on any “event” whatsoever – this is why it is pure confiscation. Even if it were 1 cent it would be pure confiscation because there is no event triggering a tax.
  5. (5) reaches directly into the tax base of Canada.

Since July the Government of Canada has been discussing this same pool of Canadian capital. This whole discussion is confusing theory, reality and practicality. This cannot and should not be paid.

My suggestion I guess is:

Get your tax preparer to reveal his/her position on this before work on the returns commences. If the preparer will not sign the returns without paying this tax – then find another preparer or do them yourself or don’t file at all. Obviously the pressure to renounce has become even more intense.

What you cannot due is let the tax compliance community turn your retirement savings over to the IRS based on a law that was never intended to apply to you.

Furthermore, I think that tax preparers have a moral obligation to make their position on this known in advance.

 

Seven Simple Points to be Made Re: Transition Tax and CFCs

 


 
This comment from the Isaac Brock Society makes basic points to be made with regard to the proposed “Transition Tax” in both the House and Senate Tax Reform Bills.
 
Every expat who knows there are private individuals who are incorporated in their country should be contacting relevant government representatives giving them the information that U.S. Tax Reform may impose a “transition tax.” As it is widely surmised that this is an unintended consequence, now is the time to bring it to the forefront and create awareness/resistance to this. We have appealed to the U.S. government to change the relevant sections (or give some clarification); if this does not occur, we cannot allow the compliance community to decide what the law is. In the past this HAS occurred with regard to the treatment of PFICs, applying the Exit Tax retroactively to people who renounced prior to 2008 and putting “minnows” into OVDP/OVDI. Time to stand up and say “NO!”
 
The following points would work for any country; just change the numbers in point 1 and “Canadian” to your country (generally) and the ministers’ names to yours.
 
1. There are approximately one million Canadian citizens who are resident in Canada and are also U.S. citizens (mostly Canada/U.S. dual citizens – with the U.S. citizenship conferred on them because of a U.S.
birthplace).

2. It’s safe to say that a significant number of these “dual citizens” are “small business owners”, who carry on business through Canadian Controlled Private Corporations.

3. It is possible and likely that many of these “small business” owners have (since 1986 or the date of incorporation) accumulated earnings.
These accumulated earnings operate as their “retirement pensions” ( a fact that has been widely discussed with Finance Minister Morneau and Prime Minister Trudeau as part of their discussions on Canadian tax reform).

4. The United States imposes taxation on individuals based ONLY on U.S.citizenship (even if the person lives in Canada). The United States is the only advanced country in the world to impose “citizenship-based taxation”. The United States is the ONLY country in the world that BOTH:
1. Confers citizenship based on birth in the country AND 2. imposes “worldwide taxation” based on citizenship.

5. Many of the Canadian Controlled Private Corporations owned by Canadians with dual citizenship are deemed under the Internal Revenue Code of the United States, to be “U.S. shareholders”, of what are called “controlled foreign corporations”. To repeat, from a U.S. perspective the Canadian shareholders of Canadian Controlled Private Corporations, may be considered to be the “U.S. shareholders” of “Controlled Foreign Corporations”.

6. The United States is in the middle of a process of amending the Internal Revenue Code. It appears that both the House and Senate versions of the bill, include a provision that would require the “U.S. shareholder” of a “controlled foreign corporation” to include directly in his/her personal income, a percentage of the total amount of the “retained earnings” of the “controlled foreign corporation” (which could well be a Canadian Controlled Private Corporation”). This percentage would be based on the amount of the retained earnings which have accumulated since 1986. See for example Sec. 14103 of
The Tax Cuts and Jobs Act

(See the section starting on page 375 with Sec. 14103 beginning on page391.)

7. Although it is not completely clear that this provision would apply to the Canadian shareholders of Canadian Controlled Private Corporations, the “literal reading of Sec. 14103 suggests that it may.

Certainly there have been (and this is where the danger lies) some tax professionals who are adamant that this would apply.

Conclusion:

It is extremely important that this danger be understood by all “stake holders” in Canada. This would include Finance Minister Morneau and members of the small business community in general.

Some discussion of this problem may be found here.

.

ADCS-ADSC & ADCT Letter to U.S. Congress

 

— In this press release we ask United States Congress to fix a problem in the present House/Senate tax bills that targets certain Canadian citizen/residents who own an incorporated business — and more broadly — to “stop imposing worldwide taxation on any Canadian resident”.

The press release is being sent in part to members of U.S. Congress and also to Canadian politicians who should be in the business of defending Canadian citizens from harm caused by a foreign state.

The focus of the press release is intentionally on “Canadians”. The word “American” is not mentioned. Our use in the text of the now-offensive term “U.S. person” (defined by the U.S. Internal Revenue Service) does not imply that U.S. person law applies to any Canadian resident or that any of these so-designated (by the U.S.) Canadians have ever consented to be U.S. persons.

*******
 

 
 
November 24, 2017
For Immediate Release

U.S. CONGRESS: DO NOT CONFISCATE OUR SMALL CANADIAN BUSINESSES AS PART OF YOUR TAX REFORM

Dear Congressperson,

On November 16, 2017 Rep George Holding, of the House Ways and Means Committee, in an exchange with Chairman Brady, urged that as part of tax reform that: The United States join the rest of the world by adopting “residence-based taxation”. This would END the U.S. current practice of imposing worldwide taxation on certain residents of other countries.
 
As U.S. law currently stands, many Canadian citizen/residents (who are deemed by the U.S. to be “U.S. Persons”) find themselves subject to U.S. taxation (ON THEIR CANADIAN INCOMES and CANADIAN ASSETS), even though they live in Canada and pay taxes to Canada.
The application of U.S. tax law into Canada – a principle enforced by FATCA – has profoundly negative consequences, some of which are intended and some of which are unintended.
 
This is a request that the wording of the United States “Tax Cuts and Job” bill be revised so as not to harm, even more, small Canadian businesses possibly included, we believe inadvertently, by your proposed tax reform legislation.
 
As your tax Senate and House tax reform bills are presently worded, Sec. 14103, for example in the Senate bill, might be interpreted to confiscate a significant percentage of the retained earnings of certain small “Canadian Controlled Private Corporations”. This is evidently part of broader legislation to implement “territorial taxation”, in order to enhance the competitiveness of publicly traded U.S. multinational corporations.
 
We believe that this section is intended to apply ONLY to the foreign subsidiaries of U.S. domestic corporations. However, a strict reading of the language of the bill suggests that this “transition tax” MIGHT also be paid by those who are deemed by your country to be “U.S. persons” living overseas who happen (as is common in Canada) to own an incorporated small business. The “minnows” swept up by your bill will then include small businesses such as a one-person incorporated medical doctor’s clinic, should the owner be designated by U.S. law to be a “U.S. person”.
 
We do not believe that this was your intention and ask that you fix the language of the bills accordingly. Surely you would agree that “territorial taxation” for U.S. multinational corporations does NOT mean that the United States should extend its taxable “territory” to Canadians who happen to own small Canadian Controlled Private Corporations!
 
As part of U.S. tax reform, we conclude by asking that the United States stop imposing worldwide taxation on any Canadian resident AND clarify that the “Tax Cuts and Jobs” Bill does NOT apply to Canadian residents who are shareholders of Canadian Controlled Private Corporations.
 
John Richardson
Carol Tapanila
Patricia Moon
Stephen Kish
 
On behalf of the
Alliance for the Defence of Canadian Sovereignty (www.adcs-adsc.ca ) Information@adcs-adsc.ca;
and
Alliance for the Defeat of Citizenship Taxation (citizenshiptaxation.ca)
 
Contact Mr. John Richardson at johnrichardson@citizenshipsolutions.ca