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Transition Tax Reprieve (sort of)

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.

 

FATCA Developments in Europe

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”

Does FATCA stop tax evasion?

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.
U.S. military overseas presence is at a 60-year-low
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.

Temporary Transition Tax Reprieve

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.

Residence Based Taxation Proposal

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”

Fighting the Transition Tax

The Transition Tax could be the final straw for business owners among the American diaspora.

Act now!

It’s easy. Just cut and paste from one of these two letter writing campaigns:

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! Continue reading “Fighting the Transition Tax”

More on the Transition Tax…

In January, John Richardson and I recorded a conversation about the “Transition” tax that was part of US tax reform. John’s post introducing the videos is here: U.S. Tax Reform and the “nonresident” corporation owner: Does the Sec. 965 transition tax apply?

The transition tax is the provision in the tax reform bill that concerned us so much when it was introduced that we posted a Call to Action! In short, when applied to an Australian-resident US taxpayer, the transition tax asserts the right of the US to reach inside an Australian corporation and tax previously earned active business income just because a majority of the company is owned by “US Shareholders”. This is a major departure from prior law, and calendar-year taxpayers were given not much more than a week from the date the law was signed to the end of the tax year in which this new tax would be applied – certainly not enough time to understand the new law, let alone plan to avoid the inherent double taxation. Furthermore, in all of the hearings on the bill, not one Representative or Senator mentioned anything about the applicability of this provision to corporations owned by tax-residents of other countries, for whom the idea of “repatriating” profits to the U.S. is not only absurd, but also a drain on the economy of the country they call home.

What did we learn from our ATO FOI request?

While the 2014 FATCA information transfer to the IRS was widely reported, since then we have had no idea how much data has been flowing from the ATO to the IRS. To get a better idea of the scope of the data exchange, Carl sent an FOI request to the ATO for a summary of the data sent to the IRS under FATCA for all three reporting years that have now been completed (2014, 2015, and 2016). The ATO complied with this request in a timely manner, sending us a pdf file of a printout of an excel worksheet that spans several pages both vertically and horizontally. [1]

FATCA requires Australian financial institutions (very broadly defined) to report account holder details as well as account balance, dividends, interest and other income paid, and gross proceeds from sale or redemption to the ATO for transmittal to the IRS. It is evident from the graphs below that the amount of data going to the IRS has exploded since the initial data transfer of 2014 data (transferred 30 Sept 2015).

Continue reading “What did we learn from our ATO FOI request?”

From Little Things, Big Things Grow – Annual Report

“…but this is the story of something much more
How power and privilege can not move a people
Who know where they stand and stand in the law

From little things big things grow
From little things big things grow”

From Little Things, Big Things Grow,  Paul Kelly and Kev Carmody, 1991

Let’s Fix the Tax Treaty! seeks to be an open, transparent and effective advocacy group.  As part of this commitment, not only do we, the Steering Committee, believe it is good practice to set annual objectives as part of our action planning, it is also useful to look back and reflect on what was achieved with the resources available to us.

2017 was our first full year of existence and much of the year was spent building the foundations upon which we intend to build activity, momentum and scale over the coming years.   Key milestones along the way included publishing our Strategy Roadmap, creating and implementing a Wiki framework for knowledge capture and ongoing membership development and support.

Many of you will recall that we prepared a 2017 Scorecard which we issued as part of the Strategy Roadmap document.  How did we do?  See the table below this post.  Although not everything was achieved, we believe we made solid steps towards our goals.  Currently, we are finalising our 2018 objectives which will inform our efforts over the coming year.

As always, we value your feedback and comments.  Most of all, we value your involvement.  Are we moving too slow?  Do you want us to go in new or different directions?  Get involved!

Karen, Carl & Caroline

Continue reading “From Little Things, Big Things Grow – Annual Report”

Have you written your MP yet?

Following Karen’s recent Call to Action! post, we are starting to receive  positive feedback on our Open Letter – Extra-territorial Reach of US Tax Reform Legislation from our elected representatives here in Australia.  This campaign is well aligned with the core purpose of our group being  advocating for the Australian Government to renegotiate the under-pinning legacy tax treaties and intergovernmental agreements to provide a fair go for all Australians.

The Open Letter seeks to draw the Australian Government’s attention to an emerging harmful consequence of US extra-territorial taxation as part of US tax reform but it also serves as an opportunity for you to open a dialogue with your elected representatives about the pressing need for Australia to address the many deficiencies in the current Tax Treaty that disadvantage Australians with US ties.

We’ll share some of the positive feedback we received, but first, we want to again remind all of our members to please write your MP / Senators about this issue.   Presently, our follow-up survey suggests that only seven MPs have been contacted to-date, suggesting that only a small fraction of our membership have taken action.  Most Senators from NSW, QLD, SA and VIC have received at least one letter, making a total of 44 Senators who have been contacted. We have yet to hear from anyone in ACT, NT, TAS or WA who has contacted their representatives.  Without your active involvement, affecting positive change will be difficult.

Continue reading “Have you written your MP yet?”