Category: US taxation on non-residents

Part 25 – Reflections on the “S Corporation” exemption to the Sec. 965 @USTransitionTax – Hat Tip to @SCorpAssn Part C

cross-posted from citizenshipsolutions

Part A is here

Part B is here

continued from Part B:

5. Why most Americans abroad are like most small business owners in America (and presumably should have similar tax treatment from a U.S. perspective)

It’s simple. The vast majority of Americans abroad who carry on business through Canadian Controlled Private Corporations (and similarly situated Americans living in other countries) are small business people. They are people who are simply trying to make a living. As described in a recent article from American Citizens Abroad:

“Treasury is not truly in touch with the reality of Americans abroad. Foreign corporations owned by Americans abroad exist in abundance. They are an everyday fact of life,” added Serrato.

ACA believes that it is fundamentally wrong for the Treasury Department to write regulations without knowing who is affected, and to what extent, as this goes against the fundamental requirements of the RFA.

The point is that small business people are the same inside the United States and outside the United States. The single most important characteristic is that from an economic perspective the corporation is a structure that is generally created to achieve limited liability or some other local benefit.

6. How the S-Corp association lobbying in DC has likely resulted in favourable “transition tax” treatment for S-Corps

I tip my hat to the S Corporation America. I have NO DOUBT that their lobbying and organization secured a “transition tax exemption” for S Corporations.

It is interesting to note that:

1. The individual shareholders of S Corporations were fully aware of the benefits of tax deferral by using the S Corporation as the shareholder of a CFC:

2. In its 2013 submission to the House Ways and Means Committee the S Corp association argued clearly and forcefully that the individual shareholders of S corporations should be exempt from the transition/repatriation tax:

(The same two arguments for why individual shareholders of S Corporations should have have been exempted from the transition/repatriation tax apply to ALL individuals including individuals living outside the United States.)

The complete S Corp Association submission to the Ways and Means Committee is here:

S_Corporation_Association_WG_Comment_2

7. The argument that – with respect to the “transition tax” that Americans abroad with small businesses should be treated the same way as shareholders of U.S. S-Corps

In the interview with Monte Silver we both agreed with the argument that:

(i) S Corporations are legally corporations but really business entities which are used by individuals who are operating small businesses. (the IRS requirements to qualify as an S Corporation reinforce this.) The S Corporation for practical purposes IS the individual.

(ii) Sec. 965(I) creates a transition tax exemption for S Corporations – and therefore is creating a transition tax exemption for individuals who have decided to create an S Corporation (but remain taxed as individuals).

(iii) If the principle is that individuals should be subject to the transition tax then creating an S Corporation should NOT justify a transition tax exemption for individuals.

(iv) If the principle is that individuals should be exempt from the transition tax then ALL individuals (including Americans abroad) should be exempt from the transition tax even if they are individuals who use an S Corporation.

(v) Individuals in general should be treated the same whether they form an S Corporation or not.

(vi) In conclusion: Since individuals who form S Corporations are exempt from the Sec. 965 transition tax then individuals who live outside of American and have small business corporations should be exempt from the Sec. 965 transition tax.

8. Should Americans abroad who don’t renounce U.S. citizenship consider using U.S. Corps to own and operate their businesses abroad?

Think of it! In order to protect themselves from the U.S. Government Americans abroad might consider (1) creating an S Corporation and then (2) creating a foreign corporation (local to the shareholder) to run his business. Sounds totally crazy! But, it might be worth considering for a simple reason:

Congress does not care about Americans abroad and does not care that it doesn’t care!

Congress does listen to the S Corporation Association of America!

Legislation in America (as Conrad Black once said) is: A pay to play casino.

Practically speaking, what should those Americans Abroad with neither representation nor lobbying do?

John Richardson

What if Meghan Markle’s child is born a U.S. citizen? Would the child have any immediate tax and information reporting requirements to the IRS?

-posted from Quora

J-bnnJohn Richardson
Toronto lawyer: FATCA U.S. tax + renunciation of citizenship
CitizenshipSolutions

John Richardson, Lawyer (1982-present)
Answered Mon
 

 
What if Meghan Markle’s child is born a U.S. citizen? Would the child have any immediate tax and information reporting requirements to the IRS?

I note that the question (1) assumes that Ms. Markle’s child is a U.S. citizen and (2) the question focuses on BOTH tax and reporting requirements.

Would Meghan Markle’s children be U.S. citizens?

The majority view is “YES” her children would automatically be U.S. citizens. My minority view is “NO” – they would have the right to be U.S. citizens but not the obligation to be U.S. citizens. I have previously explained my reasoning on Quora here:

John Richardson’s answer to Could Meghan Markle’s children apply for US citizenship?

But, assuming that her child will be born a U.S. citizen, then …

To be perfectly clear:

With the exception of gifts/bequests received from a “covered expatriate” the recipient of a gift is NOT required to pay tax on the value of the gift.

The recipient of a gift or bequest may be subject to penalty laden reporting requirements. These reporting requirements apply even though the value of the gift is NOT subject to tax.

Furthermore, this answer is really a “thought experiment” which explores the absurdity of certain aspects of the Internal Revenue Code apply to the lives of Americans abroad.

Here we go …

Tax Requirements …

The obligation to file a tax return would depend on the amount of taxable income the child received and whether that income met the thresholds for filing. It is unlikely (but not impossible) that the child could meet the income thresholds. For information on thresholds (which also depend on filing category) see:

Do I Need to File a Tax Return?

Reporting Requirements (which may exist independently of the obligation to file a tax return)…

The reporting requirements can exist independently of whether a tax return is required to be filed. It depends on whether there are sufficient facts to trigger the basic reporting requirements.

The child is a recipient of support from Harry

The child is probably going to live life as a normal baby and will be both supported and cared for by his/her parents. It is reasonable to assume that the child will receive financial support from the Harry (the father) who is (from a U.S. perspective) an “alien” or at least a foreign person.

Should the food, housing, medical care, toys, etc. received from Harry be considered to be a “gift” from a “foreign person”? If the answer is YES and the value of the support exceeds $100,000.00 USD then the child has a reporting obligation to the IRS (whether the child files a tax return or not). This is made very clear by Section 6039F of the Bible Of American Life – The Internal Revenue Code. It reads:

26 U.S. Code § 6039F – Notice of large gifts received from foreign persons
Continue reading “What if Meghan Markle’s child is born a U.S. citizen? Would the child have any immediate tax and information reporting requirements to the IRS?”

Part 25 – Reflections on the “S Corporation” exemption to the Sec. 965 @USTransitionTax – Hat Tip to @SCorpAssn (Part B)

cross-posted from citizenshipsolutions

Part A is here .

1. What exactly is an S Corporation?

An “S corporation” is a corporation which elects a specific kind of tax treatment under the Internal Revenue Code. It is NOT a type of corporation. Rather it is the “tax treatment” used by a corporation. (A corporation can be incorporated in any state.)

The following tweet referencing an excellent article from Wolters Kluwer explain this point.

The first thing to remember is that an S corporation is simply a for-profit corporation that elected to be taxed under Subchapter S of the Internal Revenue Code, making it a “pass-through” entity for tax purposes. It is incorporated under and governed by the same state corporation laws as a corporation that was not eligible for S corporation tax status or whose shareholders chose not to elect that status. Therefore, an S corporation has the same non-tax advantages as a regular corporation. (A regular corporation is also referred to as a C corporation when discussing its tax status because it is taxed under Subchapter C of the Internal Revenue Code).

Because an S Corporation is a corporation with a specific kind of tax treatment (the profits are passed through to the shareholders), one can say that an S Corporation is really a creation of the Internal Revenue Code (On The Third Day Congress Created The S Corporation).

2. How the requirements of an S Corporation reflect that that S Corps are the “small business corps” of America

Since the S Corporation is a creation of the Internal Revenue Code, we look to the Internal Revenue Code to learn the requirements to be an S Corporation. The S Corporation is defined in Internal Revenue Code Sec 1361.

Section 1361 includes:

(a) S corporation defined
(1) In general
For purposes of this title, the term “S corporation” means, with respect to any taxable year, a small business corporation for which an election under section 1362(a) is in effect for such year.

(2) C corporation
For purposes of this title, the term “C corporation” means, with respect to any taxable year, a corporation which is not an S corporation for such year.

(b) Small business corporation

(1) In general For purposes of this subchapter, the term “small business corporation” means a domestic corporation which is not an ineligible corporation and which does not—

(A) have more than 100 shareholders,
(B) have as a shareholder a person (other than an estate, a trust described in subsection (c)(2), or an organization described in subsection (c)(6)) who is not an individual,
(C) have a nonresident alien as a shareholder, and
(D) have more than 1 class of stock.

(Interestingly this sounds very much like the requirements to be a Canadian Controlled Private Corporation in Canada. Note also that most Canadian Controlled Private Corporations are “per se” corporations under the entity classification rules and cannot be treated as disregarded entities under U.S. tax law.)

It is clear that this does not and could not describe a large publicly traded corporation like Google or Apple. Notice also that S Corporation shareholders cannot include nonresident aliens.

An S Corporation is designed to provide the corporate benefits of limited liability coupled with the simplicity and tax benefits of being taxed as an individual.

3. How the S Corporation is taxed and why that taxation is consistent with the S Corporation as an entity for small business

To put it simply:

An S Corporation is a “pass through” entity. The profits (passive income excepted) of the corporation are taxed directly to the individual. This has the effects of:

– avoiding double corporate taxation (the profits are taxed only once instead of first at the corporate level and second at the individual level);

– making the S Corporation a bad vehicle for the accumulation of income for expansion, etc. (but the devil is always in the details)

From the IRS perspective:

This is very reasonable and reflects that an S Corporation is really more like an individual than an Apple or a Google. It is reflected by the following history of the S Corporation

4. An interesting history of the S Corporation

At S-Corp.org, the S Corporation Association of provides an interesting history of the origins and evolution of the S Corporation which includes:

The History and Challenges of America’s Dominant Business Structure

Before Congress created S corporations, entrepreneurs had two choices when starting a business. They could form a regular C corporation, enjoy liability protection, but face two layers of federal tax at the corporate and individual level. Or they could choose a partnership or sole proprietorship, enjoy a single layer of taxation at the individual level, but sacrifice the umbrella of liability protection.

Neither choice was optimal for small and family owned businesses. In 1946, the Department of Treasury suggested a third option – merging a single layer of federal tax with comprehensive liability protection.

A few years later, Republican President Dwight Eisenhower found himself under fire from the Democratic Congress for practicing “trickle-down economics” and favoring big corporate interests over the little guy.

At the same time, Republicans and Democrats were increasingly alarmed that too much economic power was being consolidated into the hands of a few wealthy, multinational corporations. This economic centralization was characterized by economists like John Kenneth Galbraith, who saw America’s economic future as a grand balance of power between Big Labor, Big Business, and Big Government. Private enterprise was viewed as a thing of the past.

In response to these concerns, Eisenhower embraced the Treasury proposal and recommended the creation of the small business corporation to Congress. In 1958, led by Democratic Finance Chairman Harry Byrd, Congress acted on Eisenhower’s recommendation, creating subchapter S of the tax code as part of a larger package of miscellaneous tax items. In exchange for enjoying a single layer of tax, entrepreneurs electing S corporation status agreed to the following limitations:

They were required to be a domestic enterprise; They were required to have a limited number of shareholders; They were limited by who those shareholders could be; and They could have just one class of stock.

You can continue and read more history here …

John Richardson

John Richardson and Monte Silver: The Sec. 965 Transition Tax & Sec. 951A GILTI Taxes – Next steps

The US wants to “raise funds” by imposing taxation on the undistributed earnings of Canadian Controlled Private Corporations. Lawyer Monte Silver needs to “raise funds” to stop them. You can help!

this section cross posted from Brock

A message from one Canadian resident …

When life is stranger than fiction …

It’s true! As far as the U.S. Congress is concerned:

1. A U.S. resident (the type the actually lives in the United States) is free to run a business incorporated in the United States and NOT be subject to the U.S. Transition Tax and GILTI rules; but

2. Certain Canadian residents (the type that actually lives in Canada that the USA claims to be a U.S. citizen) is NOT free to run a business incorporated in Canada without being subject to the U.S. Transition Tax and GILTI rules.

In other words, the United States of America (that great Citadel of Freedom of Justice) is in effect imposing a separate and more punitive tax system on Canadian residents than on U.S. residents.

In Canada, Canadian Controlled Private Corporations play the social role of being private pension plans.

Bottom line is this: The United States is (via the Transition Tax) attempting to confiscate the pensions of Canadian residents as explained in this recent article at Tax Connections:

Elizabeth Thompson of CBC has written a series of articles about this outrage:

U.S. Extra-territorial taxation is a direct attack on Canada’s Sovereignty …

This may not affect you personally but it is an attack on Canada. I suggest that this is an important cause and I suggest that consider donating to it! Thanks to Monte Silver for taking this initiative!

Support Canadian Sovereignty! Donate to Monte Silver’s “Transition Tax Fundraiser!”

***************

Update from Monte Nov 14, 2018

Below is a summary of the advocacy effort since June 2018, and a description of the road ahead. For the first time since we began this advocacy, donations are required to enable us to proceed. I am also making myself available until December 15 to assist on Transition tax matters, in exchange for donation to the cause.

This email impacts Americans who have interests in non-U.S. corporations. Unless our tax advocacy is successful,

1. Many American small businesses have until December 15 to file their 2017 U.S. tax return with the Transition tax attachments.
2. Many American small businesses have paid some Transition tax and will pay more in the coming 8 years.
3. A huge number of American small businesses must comply with GILTI every year from 2018 onward.
The first part of this email discusses developments since June till today. The second part focuses on next steps.

Part 1 – from June 4 till the present

On June 4, due to our efforts, the Treasury granted small businesses with less than $1M in transition tax liability a one year extension to make the first payment of the tax. Since that time my focus has been to secure small businesses – both U.S. and foreign based – permanent relief from the two taxes. As set forth below, the attempt to resolve the exposure of American small businesses (abroad and in the US) to the Transition tax and GILTI by friendly dialogue appears to have fallen on deaf ears.

Congress-facing activity: In June 2018 I met with senior staff of 37 members of the Senate Finance Committee and House Ways and Means, and engaged in extensive follow up. One Senator’s office was kind enough to produce a draft bill to exempt small businesses from the Transition tax. However, that office made clear that there was no support for the relief among any members of the Senate Finance Committee he talked to. In my opinion, Congress will not grant small businesses any relief from these taxes, even in the lame duck session.

Treasury-facing activity: In August 2018, Treasury issued proposed regulations for the Transition tax. In October 2018, Treasury issued proposed regulations for the GILTI tax. After investing hundreds of hours reviewing these proposed regulations, researching various procedural laws and talking to relevant US legal experts, I conclude as follows: in issuing these proposed regulations, Treasury seriously violated at least 3 federal procedural laws – (i) the Regulatory Flexibility Act (RFA), which expressly gives Treasury the authority to exempt small businesses from the Transition & GILTI taxes; (ii) the American Procedure Act (APA) and the Paperwork Reduction Act (PRA). These violations give small businesses the specific authority to sue Treasury in a relatively expedited proceeding, and the courts have the specific power under these laws to provide small businesses effective relief.

Since August, I have repeatedly sent Treasury Secretary Mnuchin and senior officials at Treasury/IRS and other agencies well-thought-out analysis citing clear-cut Congressional reports, legislative history and case law all supporting my claims. I asked that a compromise be reached in order to put this matter to rest. But Treasury simply ignored my analysis, or at best simply concluded without any explanation that these laws did not apply to the proposed regulations, At this point, and based on written and oral feedback from senior government officials, I have concluded that Treasury will not grant small businesses any exemption in the proposed regs.

Part 2 – Next steps

There are five options, which can all take place in parallel. The first four involve me helping individual small businesses lawfully avoid Transition/GILTI taxes. The fifth option, which will seriously enhance options 2-4, involves suing the Treasury for violating three federal laws and getting the court to give us relief.

1. Very small businesses with little Transition tax liability that have yet to file 2017 returns: Until now, on a pro-bono basis I have helped many people who needed to file their Transition tax returns but did not know how to do so. I will continue to do so until December 15, in exchange for an agreeable donation to the cause.
2. Larger businesses with above average Transition tax liability that have yet to file 2017 returns: Based on my analysis of the law and facts, as confirmed by experts, I can issue a legal opinion that reasonably supports the position that the taxpayer has no obligation to file any Transition tax filing on or before December 15, 2018, or make any Transition tax payments in the future.*
3. Larger businesses that have already filed 2017 returns and made Transition tax payments. Here, I can issue a legal opinion that reasonably supports the position that (i) the taxpayer has no obligation to pay any more Transition tax payments, (ii) the taxpayer can amend its 2017 return without the Transition tax filings, or (ii) allows the taxpayer to file for a refund of Transition taxes paid. *
4. All businesses with GILTI filing obligations and tax liability from 2018 moving forward. Same as options 1-3 with regard to GILTI filing obligations and tax liability *
5. Litigation. A lawsuit against Treasury/IRS to get the court to provide small businesses relief from these two taxes. I have every intention to immediately file this lawsuit and aggressively fight this in court. Independent legal experts and I strongly believe we will win, otherwise I wouldn’t even consider this option. And the laws provide for a relatively expedited legal proceedings. I have identified a highly experienced DC-based boutique law firm which has done battle with Treasury and won. The firm likes the case. ITS ALL ABOUT THE DONATIONS. Costs of litigation can be kept low by me doing part of the work at reduced rates (yet no longer completely pro-bono given the time involved).

* As to options 2-4 – please contact me for details. Such an opinion must be discussed in detail before any decision is made, and will be impacted by the final regs which will be out shortly. In any case, portion of the fees generated from these three options will help fund litigation is sufficient donations are generated.

As to option 5, litigation, this will not happen unless you generously donate to the cause. Donations can be made via
(i) www.gofundme.com/small-businesses-for-tax-fairness
(ii) Paypal at montetal2@yahoo.com, or
(iii) via a wire to a bank account.
All donations will be kept confidential. Furthermore, if you wish to be named as a party to this litigation, let me know.

Together we have achieved two wins from Treasury and brought broad awareness to our cause. I have every intention of continuing the battle and winning. Together (and only together) we can do it.
Monte

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!”

Comment on “Think You Can Leave U.S. – Think Again”

 


 

Recently an excellent article Think you can leave the US? Think again!
appeared on the Thom Hartmann site.

Written by an expat laurainparis , it is one of the best summaries/sources of information available. This post is based on a comment to the article.
 

by John Richardson

*******
 
Laura, this is one of the very best articles I have seen about the reality of this situation.

At the outset, I would like to explain that what most people call U.S. “citizenship-based taxation” (sounds kind of patriotic) is the U.S. policy of “imposing worldwide taxtion on the “tax residents” of other countries who do NOT live in the United States” (which is what it really is). In other words, let’s call it like it really is. It is NOT restricted to “so called Americans abroad”. The vast majority of people impacted by this are the citizen/residents of other countries.

You explain what it means when the United States claims the right to impose “worldwide taxation” on the residents of other countries. This of course means (as you know first hand) that a resident of France must pay U.S. tax on his/her French income. In addition (as you point out) the penalty regime imposed on assets that are local to the resident of France but “foreign” to the USA are draconian and completely idiotic.

I would also like to point out that although this discussion is frequently framed in terms of “taxation”, what this is really about is the United States exporting the Internal Revenue Code to other countries. This exports certain U.S. cultural values, reporting requirements and penalties on those who “commit personal finance outside the United States”. In other words, this is about much more than taxation.

There was an attempt to effect change, but it failed

The previous comment above by “PetLover” outlined and reinforced many of your points. PetLover also commented on the efforts made by various groups to effect legislative change. These efforts failed.

I would like to comment on why (I believe) these efforts failed and suggest what should be done on a “going forward” basis.

Why the efforts on the part of Americans abroad failed

On an organizational level the efforts were led by “Republicans Overseas” and “Americans Citizens Abroad – ACA”.

On an “individual level”, hundreds of individuals affected by this wrote to the House Ways and Means Committee in 2013 and the Senate Finance Committee in 2015. I mean 100s!! In fact the largest number (by far) of submissions on International Tax Reform came from Americans abroad. These submissions were acknowledged but basically ignored.

Tax “reform” (if you want to call it that) came to fruition on December 22, 2017. It included benefits for corporations, a few temporary benefits for U.S. resident individuals, no effort to improve the situation for Americans abroad and a possible worsening of the situation for Americans abroad who are self-employed.

There is a suggestion that the new “transition tax” applies to the small businesses owned by indivdual Americans abroad. If this is true, the U.S government would (if you believe the compliance community) confiscate approximately 20% of the retained earnings of small businesses owned by certain Americans abroad. If this is true (and I do NOT agree with the prevailing sentiment in the tax compliance community), it would mean that NOT only did Congress NOT assist Americans abroad but they made it even worse for them! In my view, the possible applicability of the “transition tax” is the final straw and those who can afford to renounce U.S. citizenship need to renounce “quick time”. But, back to the question, why did the efforts fail?

1. It’ s about the message – After all this time, most people do NOT make the distinction between FATCA and “citizenship-based taxation” (which is the U.S. tax policiy of taxing residents of other countries). Some were urging the repeal of FATCA. Some were urging a change in U.S tax policies. FATCA and tax policies are not the same thing. In fact, if the U.S were to change its policy of imposing taxation on the “tax residents” of other countries, FATCA would be far less of a problem. This is becaue those who resided in other countries would cease to be U.S. “tax residents”.

FATCA is a law that essentially “hunts” for people who are U.S. “tax residents”. It is U.S. tax law that imposes “worldwide taxation” on the tax residents of other countries. The former is an extreme irritation. It’s the latter that makes life untenable for “tax residents” of other countries.

The focus should have been on changing the U.S. tax policies and less on the repeal of FATCA. But, this requires that people NOT treat “FATCA” and U.S. tax laws as being the same.

So, the message needed to be: Stop imposing U.S. “worldwide taxation” on the “tax residents” of other countriese who do NOT live in the United States!

2. Partisanship – The inability of Americans abroad to behave in a non-partisan way. FATCA may be a partisan issue. But, the U.S. policy of imposing “worldwide taxation” on the “tax residents” of other countries is NOT partisan at all. It’s been around since the 1800s (as the article points out).

3. If you don’t ask for what you want, you won’t get what you want: Neither of the primary organizations (Republicans Overseas nor ACA) made the simple and understandable request that:

“The United States stop imposing “worldwide taxation” on the “tax residents” of other countries who do NOT live in the United States.”

How the organizations framed the issue:

Republicans Overseas: Did not focus on the issue of “tax residency”. It did NOT ask that the United States stop imposing taxation on the residents of other countries. Rather, it asked that the United States stop imposing taxation on certain kinds of income earned regardless of residence (asking for territorial taxation for individuals). Republicans Overseas asked that income earned outside the United States be exempt from U.S. taxation. The focus was NOT on “who” was subject to U.S. taxation, but rather on “what” income was subject to U.S. taxation.

American Citizens Abroad- ACA: Did not ask that the United States stop imposing taxation on the “tax residents” of other countries. Rather it asked that certain individuals, under certain circumstances should be exempted from “worldwide taxation” imposed on “nonresidents”. (Keep “citizenship-based taxation” with a carve out for certain people.)

Don’t get me wrong. I DO applaud the efforts of both organizations. It’s just that neither organization asked specifically for the only acceptable solution. What is that solution?

“The United States MUST stop imposing “worldwide taxation” on the “tax residents” of other countries” who do NOT live in the United States!”

Going forward …

I believe that the world (organizations, individuals, foreign governments, etc.) MUST unite behind this SIMPLE principle. No “carve outs”. No exceptions. No confusing the issues. No suggestions that change is complicated. This is the only solution that makes sense. Furthermore, by framing the issue in this way, the real issue is being discussed. It’s direct. It’s clear. It’s honest. It demonstrates how outrageous the situation is. It’s non-partisan. There is NOT a single individual, organization or foreign government that would disagree with this. Because the issue becomes non-partisan, the partisan fighting should stop. There will be no “divide and conquer”. The message will be clear.
 
Individuals must commit to the overall principle even if they are not individually impacted by all of the aspects of the Internal Revenue Code

For example:

– individuals who do NOT have mutual funds should not say: I don’t have mutual funds. This does not specifically affect me, therefore it is not a problem;

– individuals who have not had to pay capital gains taxes on the sale of their homes should not say: This does not specifically affect me, therefore this is not a problem.

– individuals who do not have small business corporations, should not say: This does not specifically affect me, therefore this is not a problem.
– those individuals who identify strongly as U.S. citizens living abroad, should recognize the impact that U.S. tax policies have on their country of residence. They should not say, this doesn’t affect me, therefore this is not a problem.

– those individuals who are not impacted by the S. 877A “Exit Tax” should not say: If I renounce citizenship, I will not have to pay an “Exit Tax”. They should not say, I don’t have to pay the “Exit Tax” and because it doesn’t affect me, it is not a problem.

Until individuals impacted by outrageous and unjust U.S. policies, unite and support the principle, regardless of how these policies affect them individually, there will be no united voice (only isolated pockets of discontent).

Finally, U.S. citizens living outside the United States are going to have to do some “soul searching” and ask themselves a simple question:

Are they “free” individuals that are entitled to a level of dignity and human rights that individuals in other first world democracies are entitled to? Or are they satisfied to be Americans – essentially the property of the United States government. In other words, are they satisfied to have the lower level of human rights and dignity that are allowed to Americans. Sorry, in the 21st century, the United States is NOT a leader in human rights. Other countries have long since passed the USA in that regard.

The author of this superb article asks:

Q. Why should U.S. residents care? The answer is simple.

A. Because all U.S. residents need to understand their future is to see how the U.S. Government treats its fellow citizens abroad. Their only crime is to have pursued a life (often attempting to sell U.S. products) outside the United States!