Category Archives: GILTI

US Treasury interprets Section 962 Election to mean that individual shareholders are entitled to 50% exclusion of #GILTI income when calculating income attributed

On March 4, 2019 as described by Helen Burggraf at American Expat Finance:
My comment included:

Also welcoming the news of the changes in the tax treatment of Americans’ overseas small businesses was John Richardson, a Toronto-based lawyer at CtizenshipSolutions.ca, who specializes in assisting Americans abroad with their tax and citizenship issues. The Treasury, Richardson said, should be congratulated for taking a “purposive” approach “when interpreting how Sec. 951A interacts with Sec. 962” of the relevant regulations.
In layman’s terms, Richardson noted, the new regulation means that “American expats may now deduct 50% of the active business income defined as GILTI, thus reducing the amount of GILTI they would be expected to have to pay tax on.”
However, the new regulations don’t affect the so-called Section 965 “transition tax,” he noted.
“It appears that Treasury heard and understood the problems faced by individual shareholders of CFCs [Controlled Foreign Corporations].
“I suspect that organisations representing S Corps [a type of closely-held corporation, as defined by the U.S. Internal Revenue Service] also made submissions to Treasury and had an influence on this decision.
“All Americans abroad should be encouraged by this. Instead of interpreting the law in the most literal and punitive way, it appears that Treasury has recognized the problems that individuals, whether living inside or outside America, faced.
“The bottom line is that small business owners abroad will now, for the most part, be able to defer U.S. taxation on the active business income of their corporations by using the Sec. 962 election, provided that their corporations are paying sufficient local tax. They will of course have to pay U.S. tax when the income is distributed to them.
“But [even here], the distributions will be subject to local tax which can then be used, via the FTC rules, to offset U.S. tax owing – for active business income.
“In other words, this is excellent news for Americans abroad.”

Full discussion here …


An example of the 50% discount and the Section 962 election here …


John Richardson – Follow me on Twitter at @ExpatriationLaw

The United States imposes a separate and more punitive tax system on US dual citizens who live in their country of second citizenship

Prologue

Do you recognise yourself?

You are unable to properly plan for your retirement. Many of you with retirement assets are having them confiscated (at this very moment) courtesy of the Sec. 965 transition tax. You are subjected to reporting requirements that presume you are a criminal. Yet your only crime was having been born in America (something you didn’t even choose) and attempting to live as a U.S. tax compliant American outside the United States. Your comments to my recent article at Tax Connections reflect and register your conviction that you should not be subjected to the extra-territorial application of the Internal Revenue Code – when you don’t live in the United States.

The Internal Revenue Code: You can’t leave home without it!

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Punishing you for your past – Presuming you #GILTI for your future

Introduction – Punishing You For Your Past and Destroying Your Future
Punishing You For Your Past – Retroactive Taxation And The Sec. 965 Transition Tax
The 2017 U.S. Tax Reform AKA – The Tax Cuts and Jobs Act ushered in significant changes for Americans abroad who carry on business through small business corporations. Section 965 was an attempt to impose retroactive taxation on 31 years of corporate earnings that were NOT subject to U.S. taxation at the time that they were earned. In Canada Canadian Controlled Private Corporations are used as private pension plans. The effect of the Sec. 965 transition tax was/is to confiscate the pensions which were earned in Canada by Canadian residents. It’s simply wrong.
In early of 2018 Dr. Karen Alpert and I worked on a series of videos to explain the Sec. 965 Transition Tax. Those vides spawned a series of 27 posts about the Sec. 965 transition tax.
Destroying Your Future – Presumed GILTI – The Sec. 951A GILTI Tax
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Part 27 – While addressing some Sec. 965 @USTransitionTax concerns, there is NO EVIDENT CONCERN from @WaysandMeansGOP ‏for the injustice inflicted on Americans abroad

Introduction – “Indifference being the worst form of abuse”


A quick summary of this post:
On November 26, 2018 the House Ways and Means Committee under the leadership of Chairman Brady announced a bi-partisan bill which contains a number of “Technical Fixes” to the December 22, 2017 Tax Cuts and Jobs Act. While specifically addressing the Sec. 965 transition tax, the bill contains neither mention nor relief for Americans Abroad who are at risk of having their retirement pensions confiscated by the U.S. Government. (While the transition tax may actually be beneficial for Homeland Americans, it is simply devastating for Americans abroad.)
In other words: The proposed legislation is NOT neutral. By specifically addressing the Sec. 965 transition tax and NOT providing relief for Americans abroad, it has exacerbated a difficult situation. My understanding is that many Americans abroad have requested filing extensions to December 15, 2018. The failure of this proposed bill to provide relief means that many Americans abroad with small businesses are in an untenable situation where compliance may well be impossible.
My analysis and discussion follows …
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Part 25 – Reflections on the "S Corporation" exemption to the Sec. 965 @USTransitionTax – Hat Tip to @SCorpAssn

Beginnings …
A recent comment at the Isaac Brock Society includes:

It’s too bad I didn’t put my Canadian corporation in an S Corp before I knew I was a US taxpayer. I must have misplaced my crystal ball at the time. As I had when I sold my house in Canada.
What a clusterfu@k!

On November 15, 2018 I did a second interview (first interview October 16, 2018 here) with Monte Silver and his Sec. 965 advocacy. The video was featured on a post at CitizenshipTaxation.ca.


If you have not watched the November 15 interview, I suggest that you begin by watching the video (click on the above tweet). The most significant part of the interview is where Sec. 965(I) is discussed. Interestingly Sec. 965(I) provides a transition tax exemption to individuals who are the shareholders of an “S Corp”. To understand the mechanism for the exemption, click on the link in the following tweet:


This interesting exemption is available only to individuals who are shareholders of S corporations and not to other individuals. The interview also included some discussion of the fact that “S Corp” shareholders have the benefit of lobbying from a powerful lobbying association – S-Corp. The interview ended with Monte Silver describing the probability that the Sec. 965 transition tax issue is headed to the courts.
But, in the “Pay To Play Casino” that America has become:


Why are individuals who are the shareholders of an S corporation, which owns the shares of a CFC, more equal than those individual shareholders who own the shares of a CFC directly?
Let’s see …
Purpose of this post …
The purpose of this post is to explore the following issues/questions:
1. What exactly is an S Corporation?
2. How the requirements of an S Corporation reflect that that S Corps are the “small business corps” of America
3. How the S Corporation is taxed and why that taxation is consistent with the S Corporation as an entity for small business
4. An interesting history of the S Corporation
5. Why most Americans abroad are like most small business owners in America (and presumably should have similar tax treatment)
6. How the S-Corp association lobbying in DC has likely resulted in favourable “transition tax” treatment for S-Corps
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
8. Should Americans abroad who don’t renounce U.S. citizenship consider using U.S. Corps to own and operate their businesses abroad?
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Part 22 – The 16th amendment authorises an Income Tax – but the @USTransitionTax is a wealth tax!

Part 1: The constitutional authorisation for the US income tax

As explained in a recent post at Tax Connections:

Written by TaxConnections Admin | Posted in TaxConnections

IRS- First Tax Return Form In 1913

Origin Of Internal Revenue Service

The roots of IRS go back to the Civil War when President Lincoln and Congress, in 1862, created the position of commissioner of Internal Revenue and enacted an income tax to pay war expenses. The income tax was repealed 10 years later. Congress revived the income tax in 1894, but the Supreme Court ruled it unconstitutional the following year.

16th Amendment

In 1913, Wyoming ratified the 16th Amendment, providing the three-quarter majority of states necessary to amend the Constitution. The 16th Amendment gave Congress the authority to enact an income tax. That same year, the first Form 1040 appeared after Congress levied a 1 percent tax on net personal incomes above $3,000 with a 6 percent surtax on incomes of more than $500,000.

In 1918, during World War I, the top rate of the income tax rose to 77 percent to help finance the war effort. It dropped sharply in the post-war years, down to 24 percent in 1929, and rose again during the Depression. During World War II, Congress introduced payroll withholding and quarterly tax payments.

1913 Form 1040

(PDF 126KB, 4 pages, including instructions)

A New Name

In the 50s, the agency was reorganized to replace a patronage system with career, professional employees. The Bureau of Internal Revenue name was changed to the Internal Revenue Service. Only the IRS commissioner and chief counsel are selected by the president and confirmed by the Senate.

Today’s IRS Organization

The IRS Restructuring and Reform Act of 1998 prompted the most comprehensive reorganization and modernization of IRS in nearly half a century. The IRS reorganized itself to closely resemble the private sector model of organizing around customers with similar needs.

(Note that even in 1913, the most prominent part of the 1040 was the Penalty Provision.)

1913

Part 2: Taxation must be constitutional. Is the transition tax an income tax?

A new paper by Sean P. McElroy titled: “The Mandatory Repatriation Tax Is Unconstitutional” suggests that:

Abstract
In late 2017, Congress passed the first major tax reform in over three decades. This Essay considers the constitutional concerns raised by Section 965 (the “Mandatory Repatriation Tax”), a central provision of the new tax law that imposes a one-time tax on U.S.-based multinationals’ accumulated foreign earnings.

First, this Essay argues that Congress lacks the power to directly tax wealth without apportionment among the states. Congress’s power to tax is expressly granted, and constrained, by the Constitution. While the passage of the Sixteenth Amendment mooted many constitutional questions by expressly allowing Congress to tax income from whatever source derived, this Essay argues the Mandatory Repatriation Tax is a wealth tax, rather than an income tax, and is therefore unconstitutional.

Second, even if the Mandatory Repatriation Tax is found to be an income tax (or, alternatively, an excise tax), the tax is nevertheless unconstitutionally retroactive. While the Supreme Court has generally upheld retroactive taxes at both the state and federal level over the past few decades, the unprecedented retroactivity of the Mandatory Repatriation Tax — and its potential for taxing earnings nearly three decades after the fact — raises unprecedented Fifth Amendment due process concerns.

Here is a copy of the paper …

SSRN-id3247926

The point is that the transition tax is not a tax on income. It is a tax on “fake income”. It is “fake income” on two levels:

First, by definition it is not based on income. It is based on a pool of capital that was not subject to taxation when it was earned.

Second, Sec. 965 deems it to be income precisely because it not actual income which is based on any realisation event.

Is this the simplest argument for why the Section 965 transition tax may be unconstitutional?

John Richardson Follow me on Twitter @Expatriationlaw

Part 21 – @ACAVoice makes presentation at October 22/18 IRS @USTransitionTax hearing – argues both that Regulatory Flexibility Act should apply and/or that de minimis rule be created

Introduction


This is Part 21 of my series of posts about the Section 965 transition tax.
The Section 965 “Transition Tax” saga continues. Americans abroad may have political differences. They may have philosophical differences. They may live in different countries with different tax treaties. But, opposition to the Section 965 Transition Tax and GILTI appear to have unified all Americans abroad.


To put it simply: The application of the Section 965 transition tax to the small businesses operated by Americans Abroad is the most unjust, most punitive, most egregious and most unjustified piece of legislation over to come from the Homeland (assuming – which I doubt – that it was every intended to apply to Americans abroad in the first place). Significantly, the transition tax is a benefit to Homeland Americans but can confiscate the retirement plans of Americans abroad. In other words, the transition tax is one more punishment that America is meting out to its citizens who dare to leave the United States.
Boldly Go, where no fictitious tax event has gone before …
The transition tax is also a direct attack on the tax base of the countries where Americans abroad live. To put it simply: the transition tax is a fictional tax event, that allows the United States to take a preemptive tax strike against the tax base of other countries. By so doing, the transition tax allows the United States to siphon tax revenue from other countries, that it could never siphon before. (Well, the S. 877A Exit Tax rules also create a fictitious tax event that allows the United States to siphon capital from other countries.) The impact of the transition tax on Canadian residents (who are also U.S. citizens) has been explored in CBC reporter Elizabeth Thompson’s series of posts about the transition tax.
The Transition Tax when applied to Americans abroad is:

The retroactive taxation of undistributed earnings of a non-US corporation, based on NO event that generates taxable income, which almost certainly subjects Americans abroad to double taxation.

The parts I have bolded provide arguments for why the “transition tax” violates numerous tax treaties.
In Part 20 I explored the arguments for why/how the Treasury Regulations are not compatible with the Regulatory Flexibility Act. Part 20 included a discussion of the arguments made by ACA for why the Regulatory Flexibility Act should apply to the regulations.
In Part 21 (this post), I am highlighting the submission of American Citizens Abroad (ACA), who argues IN ADDITION (this is a no brainer) that there should be a threshold level of undistributed earnings before the Section 965 confiscation can apply – period.
Thanks to ACA (“American Citizens Abroad”) for taking the time to organize these arguments and present them at the October 22, 2018 IRS hearing on the “transition tax”.
What follows is the email I received from ACA – I strongly suggest that you follow the links. ACA has done a superb job of demonstrating how the Treasury can exempt Americans abroad from this particularly draconian and confiscatory piece of legislation.
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Part 20 – The failure of Treasury to comply with the requirements of the "Regulatory Flexibility Act" make the Sec. 965 @USTranstitionTax subject to judicial review

If you don’t want to reach this post, then just watch the above video.

If you do want to read the post …
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Part 19 – Comments from those with @TaxResidency in other countries about the effects of @USTransitionTax & #GILTI

Designed for Google and Amazon and applied to individual Americans abroad …


ADCS Press Release on the Transition Tax and GILTI: The Alliance For The Defence Of Canadian Sovereignty issued a press release on the impact of the “transition tax and GILTI” on people with tax residency in other countries. Although issued in November of 2017, it attracted a number of comments. These comments provide insight into how U.S. citizenship-based taxation damages people in other countries.
Comments made in November 2017 (before the world heard about the transition tax)
The comments (from November of 2017 which is well before the Section 965 transition tax was understood) are here.
Comments in September/October 2018
As described in this post, U.S. Treasury has been seeking comments about the Sec. 965 transition tax. The deadline for comments is October 9, 2018. You can read the comments here.
Comments that are particularly noteworthy are:
From American Citizens Abroad – on behalf of all Americans abroad


From James Gosart an individual

To: United States Department of the Treasury
Subject: Re: Proposed Regulations under Section 965 [REG 104226-18]
The transition tax is a killer for small American owned overseas businesses.
I am a small business owner of a consulting company in Hong Kong. Around the world, I’m sure there are thousands of small American business owners like me.
I formed the company in 2011 after spending more than 25 years based in China and Asia as an expat employee of a major US corporation. During the 7 years the company has been in operation, I have helped US companies and investors with their China and Asia strategies, ultimately growing their businesses in Asia and contributing to US based employment. My company paid corporate taxes annually in Hong Kong. I have now relocated to the US and I’m in the process of shutting the business down.
The new transition tax is so burdensome and complex that there is no way I would start such a business today. Nor would I recommend it to anyone else. For the US to decide to retroactively tax retained earnings of small US owned overseas businesses is so draconian and unprecedented that it will seriously impact the survival of countless numbers of such businesses. Even if a US owned overseas business is capable of making this payment, and many will not be able to, how can any business survive when faced with a 17.5% tax that their non-US owned competitors do not have? In addition, many thousands of Americans who use lawful local corporate entities as retirement savings vehicles will see their lifelong retirement savings decimated.
The Commerce Department has long estimated that for every $1 billion of business done by American business abroad 5,000 domestic US jobs are supported. Based on my own anecdotal experience I agree with that. No doubt the transition tax will cause thousands of American owned small businesses to close, or fail to start in the first place, will cause the loss of many thousands of US based American jobs, and will damage the lives of countless numbers of Americans living abroad.
I do not believe the transition tax for small business can be made fair or workable. It must simply be dropped altogether.

________________________________________________________________________
And on the Home front …


The FATCA Canada lawsuit continues: The Alliance For The Defence Of Canadian Sovereignty announces the filing of its Memorandum of Fact and Law. The trial is expected to be heard in January of 2019.
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More on the U.S. “Transition Tax”
This is Part 19 of my series of posts discussing the Section 965 U.S. Transition Tax. This has been reposted with permission from Americansabroadfortaxfairness.org.

Part 18 – CAMPAIGN TO TREASURY/IRS: EXEMPT AMERICAN SMALL BUSINESSES IN THE U.S. & WORLDWIDE FROM THE @USTransitionTax & GILTI TAXES

This is Part 18 of my series of posts discussing the Section 965 U.S. Transition Tax. This has been reposted with permission from Americansabroadfortaxfairness.org.
Time out from our regular programming with this special message – A Call To Action – from Attorney Monte Silver:
Hi Fellow Americans:
On August 1, 2018, the Treasury/IRS issued proposed regulations that interpret the Repatriation tax law – a 250 page very complicated document. I discovered that in issuing the document, Treasury, the IRS and other Federal agencies seriously violated numerous Federal laws and procedures. This gives us tremendous leverage in negotiating for an exemption from the Repatriation & GILTI laws.
It is not unreasonable to expect that this battle may be won by December 15, 2018. What you can do to help win the battle? Easy! Treasury needs to hear your voice in a few short paragraphs (as outlined below) – by October 7, 2018.
We are within reach! Lets do it.
Monte
p.s. – as you may have an October 15, 2018 filing deadline, there is a way for you to extend the filing date until December 15, 2017. See IRS Publication 54, page 4 (can be seen at silvercolaw.com/blog). I suggest that you discuss this with your U.S. tax person.
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