Call to Action!

We are all disappointed that the Tax Cuts and Jobs Act (HR 1) currently before Congress does not contain relief for non-resident citizens. But it could even make things worse!  The current legislative versions of the bill (both House and Senate) are poorly drafted and could be interpreted to harm individual shareholders of  “controlled foreign corporations,” including small businesses owned by non-US resident Americans (even though this is clearly not the intent of Congress).

It is time to contact our Australian elected representatives to make them aware of the potential extraterritorial reach of this harmful provision. The Steering Committee of Fix the Tax Treaty! has sent an open letter to Prime Minister Malcolm Turnbull, Treasurer Scott Morrison, and Foreign Minister Julie Bishop outlining why Australia should be interested in this issue and what Australia can do to mitigate the potential harm.

download letter

What is the Issue?

One of the central aims of the tax reform bill is to apply a territorial tax regime to multinational corporations. HR 1 does this by allowing corporate taxpayers to exclude from their income any dividends received from foreign subsidiaries to the extent that those dividends come from income earned outside the US. But Congress did not want to reward those multinationals that had avoided US tax by not “repatriating” foreign earnings from before this new tax change. Their answer was to impose a one-off “transition” tax on accumulated earnings from 2017 and earlier years. Unfortunately, they have drafted the law so that the transition tax applies to all controlled foreign corporations, not just those that would get the benefit of territorial taxation going forward. So, an unintentional drafting error could see confiscatory taxes imposed on Australian-resident US citizens who own Australian corporations doing business in Australia!

As discussed over on the Isaac Brock Society website (here, here, and here), it is clear that the intent of Congress is for the transition tax to apply only to corporate shareholders of controlled foreign corporation. If Congress does not fix this error in the final bill, we fear that the compliance industry, with its natural inclination for conservatism and to over-disclose, will convince US-taxable individual shareholders of Australian corporations to include the transition tax in their 2017 US tax returns. One way to help ensure this does not happen, is to ask for assistance from Australia in clarifying the application of this provision on Australian-residents claimed as tax-residents by the US.

What can you do?

Your active involvement is important if we are going to draw attention to our issues and affect positive change.

  1. Download our open letter and send it to your federal Member of Parliament and Senators. Include a brief cover letter with your own story and request that your MP or Senator to ask for a personal response to our letter from the Prime Minister, Treasurer and Foreign Minister.
  2. Let us know who you have sent the letter to by completing this survey (responses are anonymous).
  3. When you get a reply from your MP, please let us know by either posting a comment (here or in the FB group), or emailing letters@fixthetaxtreaty.org.

Other Benefits

Although this campaign seeks to address the topical “collateral damage” from the  draft tax reform legislation currently with Congress, it provides other benefits towards our cause:

  • raises general awareness with policy makers over the many Australian problems with US extra-terriorial taxation of individuals
  • recommends that policy makers to use existing treaty processes to mitigate taxation problems areas
  • encourages the Prime Minister to commence the process to update the Australia – US tax treaty

FAQ

How do I find out who my MP and Senators are and how to contact them? To find your MP, enter your post code in the form at the bottom of this page. You’ll get a list containing your MP plus all of the Senators for your state. If your MP or Senator does not list an email address you can either print the letter and mail it or provide a link to the letter on this website as part of the text you enter in their web form.

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8 thoughts on “Call to Action!”

  1. What a gem.

    As more leverage with those who may say “the law is the law” and thinking expressed by Treasurer Scott Morrison that the U.S. may tax their citizens how they wish, in future I encourage a section 4) on the justification of taxation.

    The U.S. extraterritorial double tax claim is not justified as the U.S. does not provide local services in exchange for its claim double taxation such as health care, Centrelink, infrastructure etc., nor does the U.S. provide for protection of local property or local protection of individual rights. Australia should not pretend the claim of double tax jurisdiction is justified. IMO, it is tax cheating by the U.S. against Australia and Australians.

    The U.S. extraterritorial law represents interference into the internal affairs of Australia, when these laws counteract Australian government savings and tax incentives for Australian residents such as superannuation.

    Additionally, Australia has made exception to its own policy, of residence based taxation, via acquiescing to the U.S. extraterritorial claim of tax jurisdiction, by making it o.k. in Australian law via a flawed tax treaty.

    The AU-US Tax Treaty, while mitigating double taxation for Australian residents, fails in its key aim of preventing double taxation. Here (HR1) is yet another example of where the treaty lacks robustness to prevent additional double taxation caused by changes in either of the Australian or U.S. tax codes.

    Another failing is a faulty review and remedy mechanism that may take decades for remediation. Superannuation is an example as the law has been in place for decades without explicit tax treaty exemption from U.S. taxation for Australian residents.

    IMO, Australian Government neglect of the tax treaty is nothing less than shirking its obligation of protection of its residents, an existential obligation as part of its compact with Australian residents encompassing Australian tax jurisdiction.

  2. The request is cleaver to prompt the Australian Government to use existing provisions of the tax treaty to seek clarification on the new U.S. tax legislation. Perhaps the Australian Government may be coaxed into acting on its treaty responsibilities and obligation to protect Australian residents.

    Or, perhaps the Australian Government does nothing, again, and will try to defer Australian sovereign matters to the U.S. to sort out. Or, does nothing outside of using my Australian tax dollars for government salaries and departments to continue the malpractice.

  3. Karen:

    Thank you for taking the initiative to draft this letter – well done.

    Your letter reflects the sentiments of a press release released by the Alliance For The Defence Of Canadian Sovereignty which was released on November 24, which is found (along with a number of interesting comments) here:

    http://isaacbrocksociety.ca/2017/11/23/here-is-the-november-24-2017-adcsadct-press-release-asking-u-s-congress-not-to-harm-canadians-even-more-with-its-new-tax-reform-legislation/

    What is going on is this (in simple terms):

    1. The U.S. has certain rules that “attribute” certain income of non-U.S. small business corporations to their “U.S. Person” shareholders. The income is “attributed to the shareholder” even though the income was NOT received by the shareholder. (That’s why they are called “attribution rules”. For the most part, the “attribution rules” have included the “attribution” of “passive income” (interest, dividends, capital gains) to the “U.S. Person” shareholder. Significantly, the rules have NOT forced the “attribution” of active business income. Therefore, “U.S. Person” owners of small business owners in Australia have not had the active income of the “business income” attributed to them. This income may have remained inside the corporation. To the extent that this income has remained in the corporation since 1986, it would (in a general sense) constitute “retained” earnings. The key point is that this pool of income was NEVER taxable under U.S. law. I repeat: this pool of earnings was NEVER taxable under U.S. law.

    2. This “passive” income that was attributed to the individual shareholder is referred to as “Subpart F” income (the rules for this are found starting in Sec. 951 of the Internal Revenue Code). Again, the “active income” was NOT Subpart F income and was never attributed to the shareholder during any of those years. In some cases it accumulated. In some cases it was used to fund the business, etc. …

    3. What the proposed U.S. law may be interpreted (it’s only the tax compliance industry that is doing this) to mean is that:

    – the active income earned inside the company that was NEVER subject to U.S. tax (because it was not attributed to the shareholder) is NOW being “retrospectively” redefined as “Subpart F income”; and

    – once defined as “Subpart F” income is NOW (when it wasn’t before) attributed to the shareholder!

    4. Furthermore, Subpart F income does NOT retain its original character and is generally treated as ordinary income, taxable at ordinary income rates. But, in this particular case, the proposal is to impose a special rate on this income which is somewhere between 7% and 14%.

    5. So, think of it this way. This tax is imposed on “accumulated earnings” since 1986. So, imagine that you have a company with 1,000,000 or retained earnings. This would mean that you would have to pay a $140,000 tax to the U.S. Government. This tax would be payable, for NO reason at all, with NO income realization event at all. The tax would be payable on income that was NOT (at the time it was earned) subject to U.S. taxation at all. The application of this assumes that the USA is going back in time and deeming income that was NOT taxable AT THE TIME IT WAS EARNED to be taxable NOW!

    6. Note also that in order to pay this tax (for those who would pay it) they would have to generate the $140,000 which would surely require the sale of assets which would generate more taxable income, etc. Ask yourself this question: How much capital would have to be eroded in order to generate the $140,000 to pay this “tax”?

    That’s how this “transition tax” would work if it in fact applied – But does this tax apply? It depends who you ask …

    7. I don’t believe that this “tax” was intended to apply to the individual shareholders of small business corporations that are located outside the United States.. Leaving aside the literal working of the statute (which although relevant, is almost certainly an oversight), the following points are significant:

    – The purpose of the tax is to pay for the transition to “limited territorial taxation” for U.S. domestic CORPORATE shareholders of non-U.S. corporations. This is the only group that gets the benefits (if you see it this way) of “territorial taxation”

    – The history of the discussions of this and ALL background material suggest an intention that this is to applied ONLY to U.S. domestic corporations that are shareholders of foreign corporations (example Apple).

    In any case, this is the issue. You may find tax advisors who claim that the individual shareholders of Australian corporations (who were “Born In The USA”) are subject to this tax. This tax was NEVER intended to apply to them! For many, to pay this “tax” (which is actually a retrospective confiscation) is to turn your retirement pensions over to the IRS.

    But, understand this:

    1. Your battle will be with the tax compliance industry. I doubt that the IRS would even imagine that this would apply to you.

    2. It is absolutely double taxation!!

    3. It is time for the Government of Australia and other Governments to put a stop to this U.S. “extra-territorial overreach” (enforced by the tax compliance industry) once and for all!!

    1. Thanks, John. While I linked to the thread with the ADCT press release in my post, I probably should have referenced it more fully.

      You’re absolutely right – the battle will be with the compliance industry. One ray of hope is that there really won’t be much time for either the IRS or the compliance industry to tool up on this – the transition tax will apply to 2017 calendar year returns!

  4. Further comment …

    Upon reflection the Senate bill nows call for 14.9% as a “transition tax”. But the mechanics for the individual mean that individual U.S. citizen shares of controlled foreign corporations would now pay up to 18% of the “deferred income” as a transition tax. The 14.9% assumes a corporate taxpayer. Because the top individual rate is higher than the corporate rate (39.6% vs. 35%) the tax burden on the individual is actually (and perversley) higher than the transition tax for corporations. Yet, individuals to not get the benefits of territorial taxation!

    #YouCantMakeThisUp!

  5. Hi all. I have a question on this topic. Don’t you think that the IRS would want this to go after the low hanging fruit – meaning the little guy? Wouldn’t this bankrupt a lot of smaller businesses? Do the local governments give a poop about that?

    1. Thanks for your comment, Greg.
      There are several aspects to consider:
      * If passed, does this provision really apply to individual shareholders?
      * If tax is assessed by the IRS and not paid voluntarily, can the IRS actually collect?
      * Do our home governments care?

      As for whether this provision really applies to individuals, it does not look like this is what Congress intended. It might (depending on the Conference report and any amendments) be possible to argue that the literal reading is contrary to the intent of Congress. And who knows what position the IRS will take on this when they issue the relevant forms and instructions (which they have very little lead time for, given the tax must be computed on the 2017 tax return).

      For the small business owner with no US assets or ties, the IRS will have a very difficult time collecting. Sure, they can send notices, and possibly cancel passports, but their ability to actually collect US tax assessed on local-source income from local assets is severely limited. In this situation, the local tax authority has no obligation (or reason) to help the IRS with collection. See this post on the “Revenue Rule” for more on the difficulty of collecting in foreign courts.

      And, our home governments will only care if we frame the issue in ways they can understand. We need to be explaining how the US is draining capital from every other country in the world by intimidating US Persons into voluntarily paying US tax on their foreign source income. Here in Australia, we’re explaining that the US taxes our retirement savings and otherwise makes it difficult to save for retirement, but that the Australian government will end up footing the bill in the end due to Australia’s means-tested Age Pension.

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