GILTI (Global Intangible Low Tax Income) is the gift that keeps on giving – claiming US tax jurisdiction over the income of corporations owned by US “persons” on an ongoing basis. While the transition tax was painful, it was a one-off. For calendar year taxpayers, GILTI will apply starting with the 2018 US tax return – so it’s actually been in place for almost 11 months now. But the IRS has only just issued some of the relevant regulations and there are many questions that remain unanswered. Comments on the first set of proposed regulations are due on 26 November, so I’m going to start by considering a comment submitted by Arnold&Porter on behalf of the Israeli Ministry of Finance. In subsequent posts I’ll go back and discuss the purpose of GILTI and whether the actual legislation does what it says.
Looking For a Needle in a Haystack…
Those of you who follow our blogs might recall we commenced a Freedom of Information (FOI) campaign with both the ATO and Treasury a full year ago to develop a deeper understanding around the issues we face with an intent to use this information to inform future policies and actions (see Behind the Curtain – FOI Requests, Nov 2017).
In practice, exercising our Freedom of Information rights became a much more involved, complex and time consuming process than initially envisioned. Along the way we learned a great deal about the FOI process and challenges in obtaining useful information. Although the information we obtained wasn’t the insightful contextual documents we had hoped for, we still gained some information and insights along the way.
I’ve split this blog into two parts to keep the length down
- Part 1 – Challenges and pitfalls – Our journey through the FOI process
- Part 2 – What did we learn and what steps might we consider next?
What: Since the passage of FATCA in 2010 and Australia’s acquiescence in the form of the FATCA IGA (signed in 2014), an increasing number of US citizens resident in Australia have become aware of their US tax obligations. For many the solution has been to renounce US citizenship. This will be an informal and interactive presentation covering questions such as:
- My bank asked for my US SSN? Does that mean I must file US tax returns?
- What does filing US tax returns mean for my super? My Australian investments? Will I be double taxed?
- Does filing both US and Australian taxes defeat the objectives of financial and retirement planning in Australia?
- What is the transition tax? GILTI? Is it still viable for a US expat to own a small business in Australia?
- Will the US ever fix these problems by joining the rest of the world in taxing based on residence rather than citizenship? What is this new “TTFI” that I have heard about?
- How do I renounce/relinquish US citizenship? Do I have to pay an exit tax on my Australian assets?
- How do I determine whether renunciation is right for me?
- If I renounce what happens to my Social Security? My IRA or 401(k)?
- How does renouncing US citizenship affect my ability to travel to the United States?
Who: This is a joint presentation by Karen Alpert and John Richardson.
Karen Alpert founded the website Let’s Fix the Australia/US Tax Treaty and its associated Facebook group. The purpose of the group is to lobby and educate the Australian government regarding the impact of extraterritorial US laws on Australian citizens and residents and the cost to Australia of surrendering its sovereignty in these matters. Karen has a Ph.D. (UQ, Finance) and lectures in Finance at the University of Queensland.
John Richardson is a Toronto citizenship lawyer, the co-chairman of The Alliance for the Defence of Canadian Sovereignty as well as the Alliance for the Defeat of Citizenship Taxation. He is a member of the ACA Taxation Advisory Panel. He holds the degrees of B.A., LL.B., and J.D. He is a member of the Massachusetts, New York and Ontario bars. His law practice focuses on “Solving the problems of U.S. citizenship” including relinquishing and the “Exit Tax”. He gives programs for expats (and Green Card holders) all across Canada and Europe. He writes extensively at citizenshipsolutions.ca.
Where/When: 7pm – 9:00 pm Thursday 25 October, 12 Payne St., Auchenflower QLD (Fibrecraft House)
Google Maps Link: https://goo.gl/maps/8vJKgfD1x5t
THIS SESSION IS OF A GENERAL NATURE. IT IS NOT INTENDED TO AND SHOULD NOT BE UNDERSTOOD TO OFFER LEGAL ADVICE OF ANY KIND.
Additional Sessions (John Richardson only)
- October 31 – Auckland, New Zealand
- November 1 – Sydney, Australia
For information see:
In my last post I summarised a report prepared for the Petitions Committee of the European Parliament about the application of FATCA in Europe including the effect of the new General Data Protection Regulation (GDPR). In this follow up post I discuss the context of this report and other recent developments and the implications of these European actions on those of us who live outside the EU.
By now most Americans Abroad will be familiar with the wide-reaching effects of FATCA. These effects vary widely. Those in countries with banks that were badly hit by the DOJ Swiss Bank prosecutions, are finding it very difficult to open more than the most basic non-interest bearing bank account. Long term expats who were unaware of their US filing obligations or the more esoteric “foreign” provisions in the US tax code are finding that they have structured their financial life in ways that are toxic when US tax rules are applied. And with the recent tax reform, it has only gotten worse. Perhaps the worst situation is that faced by “Accidental Americans” whose connection to the US is tenuous at best.
In the past year, one of the more active fronts in the FATCA “wars” has been in France with the formation of L’Association des Américains Accidentels (AAA). This group has been generating media attention and actively lobbying the French government to come to their aid, culminating in the unanimous passage of a resolution by the French Senate inviting the government to take action to support French citizens caught up in the FATCA nightmare. This latest development hasn’t been picked up by the English-language media, but has been covered in French. (Anglophones, Google Translate is your friend!)
While all of this action has been building up in France, J.R., a French citizen and Accidental American, submitted his petition to the European Parliament, resulting in the report described in my last post, and a new oral question to the European Commission from the Petitions Committee.
Possible EU Action
The Petitions Committee will be voting at their June meeting on a resolution to be put to a Plenary session of European Parliament in July. The original draft of the resolution can be found here, with proposed amendments here. Many of the recommendations of Prof. Garbarino’s report have found their way into this resolution. The first action paragraph added by the amendments to the resolution says it all:
-1. Calls on Member States and the Commission to ensure that the fundamental rights of all Citizens, in particular the Accidental Americans, are ensured, especially the right to a private and family life, the right to privacy and the principle of non-discrimination, as laid down in the Charter of fundamental rights of the European Union and in the European Convention of Human Rights
Additional paragraphs ask the Commission and Member States to
- ensure that legal residents are not discriminated against when it comes to financial services;
- ensure that EU data protection laws are followed and amend IGAs if necessary to ensure compliance with GDPR;
- prepare a full impact statement on the impact of FATCA and CBT on EU residents and citizens;
- noting the lack of reciprocity in the FATCA IGAs, calls on Member states to suspend the IGAs (or at least reporting on all but US citizens residing in the US) until reciprocity is achieved.
IF this resolution passes (the vote in the Petitions Committee is scheduled for 19 June, with a vote in the Plenary session in July), that doesn’t mean immediate action. Expect some foot-dragging by the Commission and Member States. However, due to the new GDPR, something will need to be done before the next data transmission in September.
Effect on FATCA worldwide
It is my hope that these developments will cause the IRS and Congress to consider the impact of FATCA on Americans abroad relative to the (minimal) potential revenue stream from tax residents of other countries who can offset most, if not all of their potential US tax liability with a credit for taxes paid to their home country. These are not the tax evaders FATCA was aimed at, but they are the main victims of a global stop and frisk program to locate, tax and penalise non-resident US citizens. Of course, expats have been hoping along these lines since 2010.
However, with GDPR there is at least some hope that EU member states (or the EU collectively) will be able to re-negotiate the FATCA IGAs. Any concession that EU member states are able to win from the IRS will be welcome, and can be used by other countries to win similar concessions. While Article 7 of the Model 1A IGA calls for consistency, its applicability in this instance will depend on exactly how the EU member states negotiate and draft any concessions. Article 7 says that IGA partners will receive the benefit of any more favourable terms with regard to potential penalties on local financial institutions and due diligence requirements, but not with regard to the actual reporting requirements. But, if EU Member States gain the concession that they no longer have to report on their own legal residents, I would expect other G-20 nations to ask for the same. Then there’s the matter of Article 10, which calls for the parties to revisit the agreement by the end of 2016 with regard to reciprocity. I have yet to find evidence that any partner jurisdiction has requested such a review.
Of course, any change in FATCA reporting requirements will not override US law. In the absence of an adoption of residence based taxation by the US, those with US assets or who plan on returning to the US will be exposed to US tax on non-resident citizens. However, CBT was unenforceable with respect to US citizens without any US assets prior to FATCA (and is still largely unenforceable) because the IRS has very limited power to collect from assets held outside the US. FATCA is really a data privacy/protection issue because under FATCA the IRS has a better idea of who might have a filing obligation (not who owes tax), and some non-US banks are assisting the IRS by insisting on proof of US tax compliance. Here’s hoping that the current push for greater data protection, as exemplified by GDPR, will have global effects when it comes to sending sensitive financial data on a country’s own citizens and residents across international borders.
For those who haven’t seen the news, the IRS has effectively delayed the deadline for paying the first installment of the Transition Tax. For analysis and discussion, see yesterday’s posts on The Isaac Brock Society and Citizenship Solutions.
The short version is that, for individuals with Transition/Repatriation tax liabilities of less than US$1 million, underpayment of the first installment will not trigger acceleration of the entire liability provided that:
- The §965 (transition tax) liability is reported on a timely filed return for the “inclusion year” (this would be 2017 for most individual US Shareholders);
- The §965(h)(1) election to spread payments out over 8 years is included on that timely filed return; and
- The entire first and second installments have been paid by April 15, 2019 (June 17, 2019 for taxpayers residing outside the US).
Note that there will be interest charged on the late portion of the first installment.
So, what does this mean?
First off, it’s a big win for those who were scrambling to compute and pay this tax by June 15. Small business owners will now have until October 15 (assuming they’ve applied for an extension) to compute and report their transition tax liability (and until 17 June 2019 to pay the first installment) and remain compliant with US tax law. On October 15, however, those who are sitting on the fence regarding compliance will have a difficult decision.
With the release of a report to the European Parliament and unanimous passage of a resolution in the French Senate, it appears that some governments are finally starting to stand up to US bullying of their own citizens through FATCA and CBT.
This post will summarise the academic report, written by Professor Garbarino of Bocconi University. A follow up post will discuss the context of the report and other recent developments and the implications for those of us who live outside of the EU. Continue reading “FATCA Developments in Europe”
So, is FATCA responsible for stopping tax evasion? On twitter yesterday someone (not worth naming, he has no followers) claimed that FATCA was the root cause for the enforcement action announced by Kelly O’Dwyer, Minister for Financial Services last week . This was also reported by Bloomberg . The headline number in the press release was A$900 million of transactions – these transactions are not necessarily unreported income, and even the part that is unreported income will be taxed at a rate less than 100%. In fact, of 578 taxpayers listed in the original investigation, the vast majority were found to be compliant and only 106 are the subject of the ongoing enforcement action.
The claim in yesterday’s tweet was that FATCA broke Swiss banking secrecy and was therefore responsible for this potential tax revenue. However, Swiss banking secrecy was broken by the US Department of Justice which sued UBS (and subsequently other banks) for violating their Qualified Intermediary agreements. The results of these lawsuits were the justification for FATCA (and FATCA, in turn, was the justification for CRS).
I will not defend tax evaders. These 106 Australian taxpayers deserve the full force of whatever enforcement action the ATO can bring to bear. However, the resulting tax revenue will be the result of old-fashioned investigation based on information provided by an informant. None of the very costly Automatic Exchange of Information (AEoI) schemes has had any impact in this case.
Many government officials around the world believe that AEoI has generated BILLIONS of dollars in tax revenue from assets hidden in “offshore” accounts. Last week an official of the Chilean revenue office told me that she thought AEoI had generated $85 Billion of tax revenue world-wide. When you try to get to the bottom of these numbers, however, you find news stories like this one. Revenue that has been generated by data leaks and informants, not income that has been reported by FATCA (or CRS, which had its first data exchange last September). While I believe there are some who have (or will) “come clean” in fear of FATCA/CRS before they are identified by their local revenue authority, it is quite possible that the net revenue impact will be less than the considerable global compliance costs that AEoI has imposed on the financial services industry. For details on the costs and estimated revenue from FATCA, see section 1.02 of Prof. William Byrnes’ paper on Background and Current Status of FATCA and CRS.
I have been looking to see whether compliance among US expats has increased post-FATCA. While the anecdotal evidence appears to be that many “minnows” have been scared into compliance by the fear-mongering of tax professionals, the effect is not yet apparent in the data. The IRS publishes data on returns filed with an overseas address – these include returns filed by active duty military stationed overseas as well as residents of Puerto Rico, US government employees stationed overseas, and expats. The number of returns in this category has declined sharply since 2009.
The number of returns appears to be highly correlated with the number of US military personnel stationed overseas, which is currently at the lowest level in decades.
Once you remove military personnel, the compliance rate for other expats in 2015 appears to be between 15-20%, which is the same rate that has been quoted since before FATCA.
The effectiveness of FATCA, and AEoI generally, in increasing compliance rates is still unclear. The cost of compliance in Australia alone was estimated at over A$200 million. It’s time someone did a comprehensive, rigorous cost-benefit analysis of these schemes.
The IRS has extended the deadline to pay the transition tax for individual taxpayers whose tax residence is outside the US (see section 3.06(e) starting on page 35 of this notice). For those who own Australian corporations and have been filing form 5471, this is good news. It gives you two additional months to decide whether to comply with this law.
The extension is the direct result of the petition campaign spearheaded by Monte Silver from Israel. It indicates that the Treasury and Congress will listen if sufficient force is applied (at the height of the campaign, 50 petitions per day were being sent to Congress and the Treasury).
An extension of time to pay is only the first step. There will be continued lobbying for a legislative solution to exempt non-resident individuals from this tax. This is in addition to recent moves towards legislation to exempt non-resident citizens from tax on non-US income.
The transition tax confiscates the undistributed earnings of non-US corporations just because the owner is a US citizen or permanent resident. Where the owner is a resident of Australia, this means that the US is taxing capital that is part of Australia’s tax base – and getting there before the ATO. When the earnings are finally distributed (as a dividend), tax will also be paid in Australia, possibly resulting in double taxation. Meanwhile, the money spent to pay the IRS (and to pay the compliance professionals needed to compute the tax liability) will no longer be circulating in the Australian economy.
For the past few weeks there has been increasing speculation about the contents of a rumoured Residence Based Taxation proposal from Congressman George Holding’s office. Democrats Abroad reported that they had seen the proposal. Then Republicans Overseas were also on board. And, over on the American Expatriates Facebook Group, Keith Redmond reported on a meeting held at the offices of Americans for Tax Reform to discuss the proposal. It has been great to see such broad-based support for this much-needed reform. Continue reading “Residence Based Taxation Proposal”