Category Archives: GILTI

Extradition Is One Way That Changes In Another Country’s Tax Laws May Change Your Tax Relationship With The US

Prologue

As long as the US continues to employ citizenship taxation any changes in US tax law will continue to have unintended consequences on Americans abroad. In March of 2022 I outlined how some of the tax changes proposed in the 2023 Biden Green book would impact US citizens who live outside the United States. As important as US tax changes are, Americans abroad must be aware of how changes in the laws of their country of residence may also impact their “tax relationship” with the United States.

The purpose of this post is provide five simple examples. Some of the examples are based on Canada’s tax laws and others are of a more general nature.

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Biden 2023 Green Book: Six Ways The Proposals Would Affect Americans Abroad

Update April 13, 2022 …

Here is yet a seventh waythe treatment of gifts as capital gains – that the Biden Green book would impact Americans Abroad

Introduction

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

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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Treasury 26 CFR § 301.7701-2 – Business entity definitions discriminate against Canadian Controlled Private Corporations

Synopsis:

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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Toward An Explanation For Why Some Americans Abroad Are Complacent About Citizenship Taxation

Prologue

This is the third of a series of posts focussing on the need to end US citizenship-based taxation (practised only by the USA) and move to a form of pure residence-based taxation (practised by the rest of the world). The first post was titled “Toward A Definition Of Residence-based Taxation For Americans Abroad“. The second post was titled “Toward A Movement For Residence-based Taxation For Americans Abroad“. This third post is “Toward An Explanation For Why Some Americans Abroad Are Complacent About Citizenship Taxation“.

Why are some Americans Abroad not concerned about citizenship-based taxation? Why will many Americans Abroad continue to vote for the same political party that continues to damage them? What does this imply for unifying Americans Abroad in support of a movement toward residency-based taxation? This post will explore these issues.

In The Life Of Many Americans Abroad: Citizenship-based taxation is not a problem until it is!!

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To punish 100 #GILTI Corporations is to punish millions more individuals

Introduction: As Goes Tax Reform For US Multinationals, So Escalates The Harm To Individual Americans Abroad

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:

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US Senate Finance Hearing Affects Americans Abroad AKA Mini-Multinationals – Action Needed!

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 ….

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Proposal by @JoeBiden to increase the GILTI tax has particularly vicious implications for #Americansabroad

Introduction

Taxation is what America is about and America is about taxation.

Perhaps it’s better to say that:

Politics is about taxation and taxation is about politics.

Once Upon A Time In America

The primary legislative achievement of President Trump’s first term was the 2017 TCJA. It’s important to note that the TCJA had it’s genesis in the work of Michigan Congressman Dave Camp and was the result of a long term project of reworking the US tax system. It is absolutely incorrect to suggest that the TCJA was developed by the Trump Administration. It should not be referred to as “Trump Tax Reform”. That said, because of the “politics” involved in enacting the TCJA, the Trump Administration and Republican Controlled Ways and Means Committee, did impact the legislation at the margins. (Rate of repatriation tax, etc.)

Like all tax legislation the TJCA had clear winners and clear losers.

The TCJA Winner(s)

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Seriously now, who’s GILTI? Senators Wyden and Brown attempt to reinforce the punishment of GILTI Americans abroad

Introduction and July 2021 update …

There is wide agreement that the United States needs to improve its infrastructure. This will require massive spending. All spending necessitates a discussion of taxation. Since March 25, 2021 the Senate Finance Committee, Ways and Means Committee and the Biden administration have been exploring ways to increase taxation to pay for this. A series of SEAT submissions to the Senate Finance Committee is available here.

The community of Americans abroad has also recognized that any major tax reform creates an opportunity for a consideration of the United States transitioning to residence-based taxation. Although everybody claims to want residence-based taxation, the devil is in the details. As I have previously explained the words “residence-based taxation” mean different things to different people. The shared objective (of residence based taxation) is that the United States would cease imposing taxation on the non-US source income received by Americans abroad. That said, there are two broad ways that goal can be achieved. One way completely severs Americans abroad from US tax jurisdiction. The other leaves Americans abroad subject to US tax jurisdiction (forcing them to live in fear of every legislative change).

1. Pure residence-based taxation: Ending US tax jurisdiction over individuals who do NOT live in the United States. This would mean that Americans abroad would simply NOT be part of the US tax base. This is what residence-based taxation means in every other country of the world. In other words: you are not subject to US worldwide taxation because you don’t live in the United States. This is what I call “pure residence based taxation”. It is the only form of residence-based taxation that will solve the problems of Americans abroad. (This is what is advocated by SEAT.)

2. Citizenship-based taxation with a carve out: Continuing US tax jurisdiction over individuals who do NOT live in the United States, but relaxing the requirements that would apply to them. This proposal is what I call citizenship-based taxation with a carve out for certain people. Under this proposal, ALL Americans abroad would continue to be subject to US tax jurisdiction, but their non-US source income would (presumably) not be taxed by the United States. (This citizenship-based taxation with a carve out was the basis of the 2018 Holding bill and appears to what is being proposed by various groups. Further discussion of the Holding bill is here. It is essential that whenever a group announces that it is working toward residence based taxation that you ask them to clarify what they mean. Under the proposal, will Americans abroad remain subject to US tax jurisdiction? Will they still be defined as tax residents of the United States?)

(A more complete discussion about the difference between pure residence taxation and citizenship taxation with a carve out is here. A proposal for changes in the Internal Revenue Code that would result in pure residence-based taxation is here.)

Why completely ending US tax jurisdiction over Americans abroad (moving to pure residency-based taxation) is essential!!

The US tax code is incredibly complicated. The existence of citizenship-based taxation means that many changes in the tax code can impact Americans abroad even when the legislators are not considering the impact on Americans abroad. Since March of 2021 the Senate Finance Committee has been conducing hearings discussing tax reform for US corporations. The truth is that these proposals will affect many more individuals than corporations. Yet, Senate Finance never discusses the impact on individuals generally and individual Americans abroad in particular.

It is impossible for Americans abroad to survive when any change in the tax code could impact them without the legislators remembering that they even exist.

Let’s be clear! When it comes to Americans abroad:

It’s not that Congress doesn’t care about them. It’s that they don’t care that they don’t care!

This is why it is essential that ALL Americans abroad support and only support a movement toward “pure residence based taxation” which will ensure that nonresidents are NOT part of the US tax base.

If Americans abroad are left subject to the US tax based (citizenship-based taxation with a carve out) they will always be subject to being affected by any and all changes in US tax law.

A particularly egregious example of this in the following post. What follows is long, comprehensive and technical. Most will NOT want to read it.

But, the following post (written in 2020) is proof that ONLY pure residence-based taxation will solve the problems of Americans Abroad!

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Prologue

Americans abroad who are individual shareholders of small business corporations in their country of residence have been very negatively impacted by the Section 951A GILTI and Section 965 TCJA amendments. In June of 2019, by regulation, Treasury interpreted the 951A GILTI rules to NOT apply to active business income when the effective foreign corporate tax rate was at a rate of 18.9% or higher. Treasury’s interpretation was reasonable, consistent with the history of Subpart F and consistent with the purpose of the GILTI rules.

Now, Senators Wyden and Brown are attempting to reverse Treasury’s regulation through legislation. This is a direct attack on Americans abroad. Senators Wyden and Brown are living proof of the principle that:

When it comes to Americans abroad:

It’s not that Congress doesn’t care. It’s that they don’t care that they don’t care!

Introduction

As many readers will know the 2017 US Tax Reform, referred to as the Tax Cuts and Jobs Act (TCJA), contained provisions which have made it difficult for Americans abroad to run small businesses outside the United States. In the common law world a corporation is treated as a separate legal entity for tax purposes. In other words the corporation and the shareholders are separate for tax purposes, file separate tax returns and pay tax on different streams of income. The 2017 TCJA contained two provisions that basically ended the separation of the company and the individual for U.S. tax purposes. In other words: there is now a presumption (at least how the Internal Revenue Code applies to small business owners) that active business income earned by the corporation will be deemed to have been earned by the individual “U.S. Shareholders”. To put it another way: individual shareholders are now presumptively taxed on income earned by the corporation, whether the income is paid out to the shareholders or not! The effect of this on individual Americans abroad has been discussed by Dr. Karen Alpert in her article: “Callous Neglect: The impact of United States tax reform on nonresident citizens“.

The expansion of the Subpart F Regime

The Subpart F rules were established in 1962. The principle behind them was that individual Americans should be prevented from, using foreign corporations to earn passive income, in jurisdictions with low tax regimes (or tax regimes that have lower taxes than those imposed by the United States). The Subpart F rules have (since 1986) included a provision to the effect that investment income (earned inside a foreign corporation) which was subject to foreign taxation at a rate of 90% or more of the U.S. corporate rate, would NOT be subject to taxation in the hands of the individual shareholder.

To put it another way (with respect to investment income):

1. It was mostly investment/passive income that was subject to inclusion in the incomes of individual shareholders as Subpart F income; and

2. Passive income that was subject to foreign taxation at a rate of 90% or more of the U.S. corporate tax rate (now 21%) would NOT be considered to be Subpart F income (and therefore not subject to inclusion in the hands of individual shareholders).

To coordinate my background discussion with the Arnold Porter submission described below, I will refer to exclusion of investment income subject to a 90% tax rate as “HTKO” (High Tax Kick Out).

The basic principle was (and continues to be):

If passive income earned in a foreign corporation is taxed at a rate of 90% or more of the U.S. corporate tax rate, that there was no attribution of that corporate income to the individual U.S. shareholder.

In its most simple terms, the Subpart F rules are found in Sections 951 – 965 of the Internal Revenue Code. They are designed to attribute income earned by the corporation directly to the U.S. shareholder, without regard to whether the corporate profits were paid to the shareholders as a dividend. Note that many developed countries have similar rules. Many developing (from a tax perspective) countries (for example Russia) are adopting Subpart F type rules. The U.S. rules are more complicated, more robust and (because of citizenship taxation) apply to the locally owned companies of individuals, who do not live in the United States.

Punishing them for their past and destroying their futures – The expansion of the Subpart F Regime to active business income

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US Treasury proposes that foreign income subject to high foreign tax be excluded from definition of #GILTI

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.

Treasury Notice 2019-12436
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