cross posted from The Isaac Brock Society
Is there a duty to obey a law that was never intended to apply to you,
even if the literal reading of he law suggests that it may/does apply?
November 22, 2017 at 7:13 am
At the bottom of page 62 of the section by section summary:
” For the last taxable year beginning before the dividend exemption takes effect, a U.S. corporation that is a 10-percent shareholder of a foreign corporation must include in income its pro rata share of the undistributed, non-previously-taxed post-1986 foreign earnings of the corporation. The subpart F inclusion is taxed at rates of 10 percent for earnings attributable to liquid assets and 5 percent for other earnings. (emphasis added)”
Clearly, the Senate intends for the deferred foreign income to be taxable only to corporate shareholders. I’m not sure how the actual legislative text accomplishes this.
This is what the Senate summary says. This may even be what the Senate actually intends. I have spent considerable time trying to read through this crap to determine whether the “literal reading” of the proposed statute (regardless of legislative or Senate intent) can be interpreted to apply to the shareholders of Canadian Controlled Private Corporations. Although I do NOT believe that the intent is to apply this “transition tax” to Canadian Controlled Private Corporations, I believe that the literal reading of Sec. 14103 would include Canadian Controlled Private Corporations. So, the Senate Bill is no improvement (with respect to Americans abroad than the House bill).
What follows is my reading/parsing of the proposed legislation. I hope that those who are “wiser than I” can demonstrate why I am wrong.
1. What is the purpose of Sec. 14103?
The purpose is to confiscate a percentage of the retained earnings of certain corporations as a way of funding the move to territorial taxation for corporations.
2. Do the U.S. individual shareholders, including Americans abroad get the benefits of territorial taxation?
3. To what kind of corporations does Sec. 14103 apply?
The section applies to any “deferred income corporation”.
4. What is a “deferred income corporation”?
“The term ‘deferred foreign income corporation’ means, with respect to any United States shareholder, any specified foreign corporation of such United States shareholder which has accumulated post-1986 deferred foreign income (as of the close of the taxable year referred to in subsection (a)) greater than zero.”
Note that U.S. citizens are United States shareholders. So the question becomes …
5. What is a “specified foreign corporation”?
“For purposes of this section, the term ‘specified foreign corporation’ means— (A) any controlled foreign corporation,”
By “this section” they mean Sec. 14103 – noting that Sec. 14103 is the section that prescribes who is pay the “transition tax”. It does NOT mean Sec. 14101 which is the section that prescribes who gets the benefit of “territorial taxation”.
So, a “specified foreign corporation” appears to include any “controlled foreign corporation” which would include a very large number of Canadian Controlled Private Corporations!
Notice how similar the language in Sec. 14103 “specified foreign corporation” (who is subject to the tax/confiscation) is to the language in Sec. 14101 (who gets the benefit of territorial) “specified 10-percent owned foreign corporations”. The definition of “specified 10-percent owned foreign corporations” in Sec. 14101, is restricted to U.S. corporations that are the owners of a foreign corporation. See:
‘‘(1) IN GENERAL.—The term ‘specified 10-per-cent owned foreign corporation’ means any foreign corporation with respect to which any domestic corporation is a United States shareholder with respect to such corporation.”
The language in both the House and Senate bills seem to allow for the confiscation of the retirement plans of some Shareholders of some Canadian Controlled Private corporations. (In July of 2017, Mr. Morneau – of Trudeau Government Finance Minister fame) began a discussion of how the Government of Canada could attack this same pool of earnings. It appears that the U.S. Government may be interested in that same earnings pool.)
Actually, I remain convinced that this is not the intent. So, I will conclude with the question that I asked in my last comment on this issue:
Is there a duty to obey a law that was never intended to apply to you, even if the literal reading of he law suggests that it may/does apply?
Legislative Text of US Senate Tax Reform Bill
What follows is a very parsed down excerpt from Sec. 14103
1 SEC. 14103. TREATMENT OF DEFERRED FOREIGN INCOME
2 UPON TRANSITION TO PARTICIPATION EX-
3 EMPTION SYSTEM OF TAXATION.
4 (a) IN GENERAL.—Section 965 is amended to read
5 as follows:
6 ‘‘SEC. 965. TREATMENT OF DEFERRED FOREIGN INCOME
7 UPON TRANSITION TO PARTICIPATION EX-
8 EMPTION SYSTEM OF TAXATION.
9 ‘‘(a) TREATMENT OF DEFERRED FOREIGN INCOME
10 AS SUBPART F INCOME.—In the case of the last taxable
11 year of a deferred income corporation which begins before
12 January 1, 2018, the subpart F income of such foreign
13 corporation (as otherwise determined for such taxable year
14 under section 952) shall be increased by the greater of—
15 ‘‘(1) the accumulated post-1986 deferred for-
16 eign income of such corporation determined as of
17 November 9, 2017, or
18 ‘‘(2) the accumulated post-1986 deferred for-
19 eign income of such corporation determined as of
20 December 31, 2017.
1 ‘‘(d) DEFERRED FOREIGN INCOME CORPORATION;
2 ACCUMULATED POST-1986 DEFERRED FOREIGN IN-
3 COME.—For purposes of this section—
4 ‘‘(1) DEFERRED FOREIGN INCOME CORPORA-
5 TION.—The term ‘deferred foreign income corpora-
6 tion’ means, with respect to any United States
7 shareholder, any specified foreign corporation of
8 such United States shareholder which has accumu-
9 lated post-1986 deferred foreign income (as of the
10 close of the taxable year referred to in subsection
11 (a)) greater than zero.
12 ‘‘(2) ACCUMULATED POST-1986 DEFERRED FOR-
13 EIGN INCOME.—The term ‘accumulated post-1986
14 deferred foreign income’ means the post-1986 earn-
15 ings and profits except to the extent such earnings—
16 ‘‘(A) are attributable to income of the
17 specified foreign corporation which is effectively
18 connected with the conduct of a trade or busi-
19 ness within the United States and subject to
20 tax under this chapter, or
21 ‘‘(B) in the case of a controlled foreign
22 corporation, if distributed, would be excluded
23 from the gross income of a United States share-
24 holder under section 959.
1 ‘‘(e) SPECIFIED FOREIGN CORPORATION.—
1 ‘‘(1) IN GENERAL.—For purposes of this sec-
2 tion, the term ‘specified foreign corporation’
4 ‘‘(A) any controlled foreign corporation,
6 ‘‘(B) any section 902 corporation (as de-
7 fined in section 909(d)(5) as in effect before the
8 date of the enactment of the Tax Cuts and Jobs