Introduction
This week I am giving a (short) presentation on this topic. I created some slides that are designed to provide the categories for discussion. I thought I would share the slides in this blog post.
John Richardson – Follow me on Twitter @Expatrationlaw
Update April 13, 2022 …
Here is yet a seventh way – the treatment of gifts as capital gains – that the Biden Green book would impact Americans Abroad
Introduction
It’s The System Not The Parties!
As long as the United States employs @citizenshiptax and #FATCA, changes in US tax laws will continue to have dramatic (intended and unintended) effects on #Americansabroad – regardless of which political party is in power. https://t.co/t6N4zyLIBQ
— Care about #Americansabroad? Join @USVotersAbroad! (@USVotersAbroad) March 11, 2022
As long as the United States employs citizenship taxation any proposed changes to the US tax system will have an impact (some intended and some unintended) on Americans abroad.
The Biden Green Book for fiscal year 2023, released on March 28, 2022, contains a number of proposals to both increase tax rates and increase the tax base by increasing the number of activities that are taxable events. Generally the proposals include a number of provisions to create and enhance taxation on both income from capital and capital itself. These provisions continue to generate discussion in the mainstream media including: The New York Times, Washington Post and Wall Street Journal. This is certain to generate much discussion in the tax compliance community.
The 2023 Green Book is available here.
Much will be written about how the proposals would affect resident Americans. Far less will be written about how the proposals would affect Americans abroad. The US rules of citizenship taxation steal from Americans abroad (and the countries where they reside) in hundreds of ways. Some are intended and foreseeable. Others are the unintended consequences that result from tax changes that apply to people who are not considered in the political process.
Significantly the Green Book does not suggest a move away from US citizenship taxation toward resident taxation as embraced by the rest of the world. In their totality, the proposals (particularly those that create income realization events when a gift is made) suggest a worsening of the situation for Americans abroad. That said, one proposal “might” (depending on Treasury) allow for the relaxation for the 877A Exit Tax rules, for a narrow group of Americans abroad under certain circumstances.
The purpose of this post is to identify six ways (and I assure you that there are more) that the Green Book would impact Americans abroad. The “Group Of Six” includes:
1. Raising The Corporate Tax Rate To 28 percent – Creating Subpart F Income and Making More Americans Abroad GILTI – Page 2
Verdict: This will have the effect of increasing the number of Americans abroad subject to taxation on income earned by their small corporations but not received by them personally.
2. An increase in the Corporate rate would increase the GILTI rate (suggesting to 20 percent) – Page 2
Verdict: More Americans abroad will be GILTI and will possibly (depending on a combination of country specific factors and their specific circumstances) be subject to GILTI taxes at a higher rate).
3. Reducing Phantom Gains And Losses: Simplify Foreign Exchange Rate And Loss Rules For Individuals And Exchange Rate Rules For Individuals – Page 90
Verdict: This in interesting. While reinforcing that Americans abroad are tethered to the US dollar it does suggest a recognition of the unfairness of how the phantom gain rules harm the purchase and sale of residential real estate outside the USA). Imagine how this would interact with the proposed rules converting gifts to taxable capital gains?
4. Strengthening FATCA: Provide For Information Reporting by Certain Financial Institutions and Digital Asset Brokers For the Exchange Of information – Page 97
Verdict: This is an attempt to reinforce the core principles of FATCA which are about the identification of US citizens outside the United States.
5. Expatriation – The Stick: Extend The Statute Of Limitations For Auditing Expatriates To Three Years From The Date From Which 8854 Should Have Been Filed (Possibly Forever) – Page 87
Verdict: This is theoretically very bad. It means that those who renounce without filing Form 8854 would be subject to a lifetime of risk. Practically speaking these provisions are not understood on the retail level. Hence, I doubt this will influence many people.
6. Expatriation – The Carrot: Exempting Certain Dual Citizen Expatriates From The Exit Tax – Page 87
— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) March 29, 2022
Verdict: This is good news for the narrow group of people impacted by this – mainly “Accidental Americans”. It is bad news for the rest because the existing rules will continue to apply to those “who are left behind”.
I assure you that the Green Book contains a large number of ways that Americans abroad will be impacted. I will leave it to others to add to this list.
The principle is:
Citizenship taxation can steal from Americans abroad at least a thousand ways. If you can understand even one hundred of them you are doing well!
Summary: Once again this shows how all proposed changes to US tax law impact Americans abroad in a world of citizenship taxation. There is nothing in this that suggests a move toward residence taxation. There are few crumbs which might make citizenship taxation easier to live with (example relaxing phantom gains). But, on balance these provisions are a “doubling down” on the problems of citizenship taxation. The provision to allow easier expatriation for “Accidental Americans” does nothing to make life easier for the rest.
If you have seen enough you can stop here. For those who want more of the details and explanation, continue on …
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When I hear people say that the IRC 911 FEIE and/or the IRC 901 FTC rules mean that #Americansabroad don't pay taxes to the US, I am reminded of John F. Kennedy's 1962 Commencement speech at Yale where he said: https://t.co/N6sOOPL4vO
— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) October 8, 2021
This is the fourth of a series of posts about international tax reform generally and how FATCA, CRS, citizenship-based taxation, GILTI, etc. work together.
The first three posts were:
US Tax Treaties Should Reflect The 21st Century And Not The World Of 100 Years Ago
The Pandora Papers, FATCA, CRS And How They Have Combined To Create Tax Haven USA
How The World Should Respond To The US FATCA Driven Attack On The Tax Base Of Other Countries
This fourth post continues where the third post – How The World Should Respond To The US FATCA Driven Attack On The Tax Base Of Other Countries – left off. That post described in a general way that FATCA facilitated the US taxation of residents of other countries. The purpose of this post is to give a small number of important examples. To repeat:
The imposition of FATCA on other countries means that …
The United States has effectively expanded its tax base into other countries by claiming residents of other countries as US tax residents. This is a direct attack on and the erosion of the tax base of those other countries.
Synopsis:
The power to regulate is the power to destroy! That's why the regulatory process should require careful consideration of how and to whom regs apply. It's time for Treasury to consider "A Simple Regulatory Fix for Citizenship Taxation" https://t.co/6dUqXjtUNo via @SEATNow_org
— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) June 27, 2021
Canadian corporations should NOT be deemed (under the Treasury entity classification regulations) to be “per se” corporations. The reality is that corporations play different roles in different tax and business cultures. Corporations in Canada have many uses and purposes, including operating as private pension plans for small business owners (including medical professionals).
Deeming Canadian corporations to be “per se” corporations means that they are always treated as “foreign corporations” for the purposes of US tax rules. This has resulted in their being treated as CFCs or as PFICs in circumstances which do not align with the purpose of the CFC and PFIC rules.
The 2017 965 Transition Tax confiscated the pensions of a large numbers of Canadian residents. The ongoing GILTI rules have made it very difficult for small business corporations to be used for their intended purposes in Canada.
Clearly Treasury deemed Canadian Controlled Private Corporations to be “per se” corporations without:
1. Understanding the use and role of these corporations in Canada; and
2. Assuming that ONLY US residents might be shareholders in Canadian corporations. As usual, the lives of US citizens living outside the United States were not considered.
These are the problems that inevitably arise under the US citizenship-based AKA extraterritorial tax regime, coupled with a lack of sensitivity to how these rules impact Americans abroad. The US citizenship-based AKA extraterritorial tax regime may be defined as:
The United States imposing worldwide taxation on the non-US source income of people who are tax residents of other countries and do not live in the United States!
It is imperative that the United States transition to a system of pure residence-based taxation!
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Introduction
The United States imposes a separate and more punitive tax system on US citizens living outside the United States than on US residents. There are numerous examples of this principle – a principle that is well understood (but not directly experienced) by tax preparers.
The US tax system operates through a combination of laws, Treasury Regulations, enforcement by the tax compliance community and IRS administration. There are many instances where the extraterritorial application of the US tax system results in absurdities, that are very damaging to those who try their best to comply with those laws.
Treasury regulations have an enormous impact on how the Internal Revenue Code applies to Americans abroad. In a previous paper coauthored with Dr. Alpert and Dr. Snyder, we described how Treasury could provide “A Simple Regulatory Fix For Citizenship Taxation“. Treasury regulations can be extremely helpful to Americans abroad or extremely damaging. It is therefore crucial that Treasury consider how its regulations would/could impact the lives of those Americans abroad attempting compliance with the US extraterritorial tax regime. In some cases it may be appropriate to have different regulations for resident Americans than for Americans abroad.
Treasury has demonstrated that it can be very helpful
Although this post will focus on difficulties, it’s important to note that Treasury has demonstrated that it can be very helpful to Americans abroad. It has interpreted the Internal Revenue Code in ways that have mitigated what could have been extreme damage. Here are two recent examples from the GILTI context where Treasury:
– interpreted the 962 Election to allow individuals to receive the 50% deduction in GILTI income inclusion that was allowed to corporations; and
– interpreted the Subpart F rules to mean that ALL income earned by a CFC should be entitled to the high tax exclusion
Clearly some of the news coming from Treasury has been good!
The power to regulate is the power to destroy
This post provides examples of how certain Treasury regulations contribute to the application of the United States extraterritorial tax regime. The examples are found in the following two categories of regulations:
Category A: Foreign Trusts – The Form 3520A Penalty Fundraiser – Regulations That Are Unclear Resulting In Penalties
Category B: Business Entities Designated as “per se” Corporations – Creating CFCs In Unreasonable Circumstances (Canadian Controlled Private Corporations) – Regulations That Are Clear But Over-inclusive
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Introduction: As Goes Tax Reform For US Multinationals, So Escalates The Harm To Individual Americans Abroad
In the 18th century people were "guilty". In the 21st century people are #GILTI. pic.twitter.com/ItGBwKStFw
— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) April 14, 2021
The Problem: The proposed changes in International Tax (mostly in relation to corporations) will affect numerically more individuals than corporations. The effects on Americans abroad, who run small businesses outside the United States, will be absolutely devastating.
Two Solutions: Suggestions for how to protect individuals (including Americans abroad) would be to make changes to the Subpart F regime – GILTI, etc. There are at least two ways this change can be achieved:
1. To NOT apply Subpart F to INDIVIDUALS who are shareholders of CFCs.
2. If Subpart F is to apply to individual shareholders of CFCs, it should NOT apply to those individual Americans abroad who meet the residence requirements to use the S. 911 Foreign Earned Income Exclusion. (I.e. people who are almost certainly tax residents of other countries.)
March 25, 2021 – The Senate Finance Committee Held A Hearing Described As:
Introduction
The background: The US Senate Finance Committee has begun hearings for the purpose of discussing further reform of the rules of International Tax. These reforms would appear to include raising the GILTI tax and raising US corporate tax rates in general. Each of these would have a massive negative effect on Americans abroad. The reasons are detailed in the rest of this post.
Bottom line: Americans abroad need to send their views (presumably objections) to the Committee. The rest of this post provides the background, SEAT’s understanding of the issue and templates individuals can use to email Senate Finance.
Please forward this post to anybody who you believe would be affected by this (anybody who runs a small business through a corporation.)
Okay ….
A Washington state couple is suing the government arguing a tax on repatriated assets violates the U.S. Constitution. https://t.co/uOKo7AWAO2
— Bloomberg Tax (@tax) September 30, 2019
A lawsuit alleging that the Section 965 transition tax is unconstitutional affords the opportunity to write Part 33 in my series of posts about the U.S. Transition Tax.
Part 22 of this series included a discussion of a paper by Sean P. McElroy which argued that the Section 965 repatriation tax was unconstitutional for the following reasons explained in the abstract:
In general – Good News For American Entrepreneurs Abroad …
On Friday June 14, 2019 US Treasury proposed in Notice 2019-12436 that any foreign income earned by Controlled Foreign Corporations be (subject to election) excluded from the definition of GILTI income. This will be particularly welcome to Americans living outside the United States, who are attempting to carry on business in their country of residence, through non-U.S. corporations.
For those who are concerned with understanding the hows and whys, I suggest you read Treasury’s Notice which includes a good history and description of the Subpart F rules, some Legislative History leading to the GILTI rules, and Treasury’s attempt to piece it all together. You will find it all here.
Look here – Canadians may be required to fiance Homelander Health Care! "Distributions from Canadian RRSPs are subject to #Obamacare surtax while distributions from US plans exempt" https://t.co/EK32yVbRO3 via @ExpatriationLaw
— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) June 9, 2019
This is Part 32 of my series of blog posts about the Sec. 965 transition tax. I recently received a message from a person who says that he was assessed a Section 1411 Net Investment Income Tax assessment on the amount of the Section 965 transition tax. Although not intended as legal advice, I would like to share my thoughts on this. I don’t see how the transition tax could be subject to the NIIT.
Let’s look at it this way:
Why Section 965 Transition Tax Inclusions Are NOT Subject To The Sec. 1411 Net Investment Income Tax
A – The Language Of The Internal Revenue Code – NIIT Is Not Payable On Transition Tax Inclusions
I see no way that the language of the Internal Revenue Code leads to the conclusion that the transition tax can be subject to the NIIT.
My reasoning is based on the following two simple points:
1. The NIIT is based on Net Investment Income which is generally defined as dividends, interest and capital gains as per this tweet:
Definition of "Net Investment Income" for purposes of 3.8% NIIT does not include Subpart F and excludes income from an active business. Therefore, @USTransitionTax income should NOT be subject to IRC Sec. 1411 NIIT (Net Investment Income Tax) – See also https://t.co/p5LeHAEfwE pic.twitter.com/xZ7Fh55lZC
— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) June 9, 2019
2. Subpart F income by legal definition (controlling case law) is NOT interest, dividends or capital gains as per this tweet
Subpart F income is taxed to the shareholder as ordinary income and not as interest, dividends or capital gains – per 5th Circuit in Rodriguez. Therefore an income inclusion bc of @USTransitionTax should not be subject to 3.8% Net Investment Income Tax. https://t.co/v63A3HydZH pic.twitter.com/qR4plVVYr9
— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) June 8, 2019
B – The Purpose Of The Section 965 Transition Tax
3. The whole point of the transition tax is to go after active income that was not subject to U.S. tax when it was earned. There is nothing about the transition tax that converts active income into investment income by making it a subpart F inclusion as per this tweet:
One reason why the 3.8% NIIT should NOT be payable at the time the @USTransitionTax is assessed – Second reason: The fictitious Subpart F inclusion doesn't change business income to investment income See:
"Section 965 and Net Investment Income Tax" https://t.co/JoCEiNyXWy— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) June 7, 2019
Therefore, (and this is speculation on my part) the NIIT charge must be based on something specific to your tax filing – likely treating the transition tax inclusion as meeting the definition of Net Investment Income – specifically Dividends, Interest or Capital Gains.
Under no circumstances should you or anybody else impacted by this simply pay a NIIT surcharge on the transition tax, without a careful and meticulous investigation of the reasons for it. Have a good look at your tax return.
The mandatory disclaimer: Obviously this is not intended to be legal advice or any other kind of advice. It is simply intended to give you the framework to discuss this issue with your tax preparer if you were one of the unfortunate victims who received an NIIT tax assessment on your acknowledged transition tax liability.
John Richardson – Follow me on Twitter @Expatriationlaw
https://twitter.com/worldnewsreader/status/1132961693598986241
Even in “retirement” Jackie Bugnion writes the best arguments against citizenship taxation ever https://t.co/unONPqdv0S via @ExpatriationLaw
— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) May 27, 2019
This is Part 31 of my series of blog posts about the Sec. 965 transition tax. It is a “guest post” by Jackie Bugnion who is the former tax direction of ACA. The article explores the impacts of the Section 965 transition tax and GILTI on the lives of Americans abroad. Ms. Bugnion places the transition tax and GILTI in the context of the U.S. system of citizenship-based taxation.
This article is reproduced with thanks to the author Jackie Bugnion and the publisher Tax Analysts.
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John Richardson – Follow me on Twitter @Expatriationlaw