The Transition Tax could be the final straw for business owners among the American diaspora.
It’s easy. Just cut and paste from one of these two letter writing campaigns:
- The original letter, initiated in Israel by Monte Silver (http://www.americansabroadfortaxfairness.org/) which has been endorsed by Republicans Overseas
- Or the version promoted by Democrats Abroad.
The letter asks the IRS to exempt nonresident individuals from the application of the transition tax and GILTI. It’s great to see bipartisan support for this effort!
What’s this all about?
As we mentioned in our Call to Action last December, the recent US tax reform has the potential to cause big problems for US taxpayers who own non-US corporations. In a nutshell, a literal interpretation of the new section 965 would require nonresident US taxpayers to pay up to 17.54% tax on the retained earnings of their “foreign” corporation, even though these corporations are local to the shareholder and there is no actual distribution of cash from the corporation. Congress never considered how the new law might apply to nonresident US taxpayers who are citizens and tax residents of other countries. While the tax profession’s calls for compliance started in Canada, they have now spread worldwide. None of these compliance professionals are considering whether the tax is contrary to existing tax treaties or whether Congressional intent should be considered in determining the applicability of this tax on individuals who are citizens and residents of other countries. Clearly, the resident country should have first taxing right on these undistributed corporate earnings, but with this new tax, the US is front-running and taxing a pretend distribution. The resulting timing mismatch between local and US tax could result in the same income being taxed twice with no foreign tax credits. The potential impact on Australian residents was highlighted in an article in the Australian Financial Review entitled “Trump tax plan a ‘killer’ for expats in Australia.” (my response).
With the transition/repatriation tax the utter disregard of Congress for American citizens residing abroad has again been demonstrated. If you own a small business that the US considers a Controlled Foreign Corporation, please join the letter writing campaign above.
Update: See John Richardson’s latest blog post for an explanation of how this impacts nonresident US Shareholders of CFCs much more punitively than US residents who have interests in CFCs.