Tax Fairness for Americans Abroad Act

HR 7358, introduced on 20 December 2018, represents a watershed moment for American citizens residing OUTSIDE of the US. You can read a bit about the bill over at Citizenship Solutions – where a draft has also been posted. The official bill should be posted on congress.gov in a day or two.

This is a HUGE step forward! While the naysayers are already active on Facebook and Twitter complaining that this bill will never pass because there’s not enough time left in the current Congress, they fail to realise that any step forward is a victory. Enormous effort has gone into getting sufficient support in Congress to get this far. We need to acknowledge the significant time and effort that has been expended by people like Solomon Yue, Suzanne Herman, John Richardson, and Keith Redmond; and by organisations such as American Citizens Abroad, Republicans Overseas and Democrats Abroad. They have been working consistently over a period of years to get this far. Someone in Congress now recognises the problem – this is the first step in ultimately achieving a solution.

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Fixing the Transition Tax for Individual Shareholders

Individual shareholders of US Controlled Foreign Corporations face a difficult deadline on 15 December. That’s the last date to file a timely 2017 tax return (assuming all possible extensions have been granted). For those who feel they must comply with the §965 transition tax, this is the last date to make an election to spread the tax over eight years. We have been covering this tax provision at Fix The Tax Treaty since before the Tax Reform legislation was passed (list of posts). Comprehensive coverage of the transition tax is available in a series of posts by John Richardson over at www.citizenshipsolutions.ca. For affected shareholders, the transition tax can destroy the nest egg they have built up over a long career. The purpose of this post is to consider how this injustice can be fixed.

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Explaining GILTI – Wrap-up

My last four posts were an attempt at a broad overview of the Global Intangible Low-Taxed Income (GILTI) provisions that were part of the US Tax Reform enacted in December 2017. I started with a discussion of a comment made on behalf of the Israeli Ministry of Finance. This comment is quite unusual because most countries refrain from commenting on domestic regulations in another country. Following on from that post, I explained the underlying rationale behind GILTI, the mechanics of GILTI for corporate US shareholders and how the rules differ for individual US shareholders. This post provides a high level summary to tie the series together. 

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Explaining GILTI – Individual Impact

In this series of blog posts I try to explain GILTI (Global Intangible Low Taxed Income) in simple terms. In the first post I discussed a public comment made on behalf of the Israeli Ministry of Finance on the recent proposed GILTI regulations. My second post explained the rationale behind GILTI. The third post talked about how GILTI was measured focusing on US domestic corporations, the target of these provisions in the first place. This post will look at how these rules, that were written for Apple and Google, play out for individuals owning small businesses in the “foreign” country where they live. For those who want to get into the detail, there’s a technical appendix on our wiki.

[This post has been updated on 16 March 2019]

So, what have we learnt so far? GILTI applies to US Shareholders of Controlled Foreign Corporations (CFCs). The aim was to tax globally mobile intangible income that multinationals can easily move to tax havens to minimise their worldwide tax bill. However, what is being measured is much broader, picking up much of the active business income of CFCs regardless of whether that income is being sheltered from US tax in a tax haven.

One takeaway is that GILTI doesn’t apply unless a business is organised as an entity that is treated as a corporation for US tax purposes. Under the “entity classification rules”, certain types of non-US businesses are required to be classified as a corporation for US tax purposes, while others can elect to be treated as either a corporation or a disregarded entity (essentially a sole proprietorship or partnership). In a post-GILTI world, classification as anything BUT a corporation may be optimal.

As we’ll find below, the rules that apply to individual US Shareholders of CFCs mean that they will be paying higher tax rates than corporate shareholders because:

  • The 50% deduction applies only to corporate shareholders, and
  • Without a special election (§962), individual shareholders cannot offset GILTI with foreign tax credits.

The result is that US tax will be owed on GILTI unless the foreign tax rate exceeds 26.25%, double the rate that applies to corporate shareholders.

Basic rules for individual shareholders

The rules we discussed in the prior post apply to US domestic corporations that own CFCs. While the calculation of GILTI is essentially the same  for individual shareholders (GILTI = CFC income not already taxed by the US less deemed tangible income), the tax computation is completely different.

Corporate shareholders are allowed a deduction of 50% of their gross GILTI, but this deduction is not available to individual shareholders. Furthermore, individual shareholders will be taxed using the individual tax rate schedule, with marginal tax rates rising as high as 37%, instead of the new corporate tax rate of 21%. [Update March 2019 – in the §250 proposed regulations issued on 4 March 2019, the IRS relented and amended the §962 regulations to allow the 50% deduction to individuals electing to be taxed as a corporation under §962]

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Explaining GILTI – Measurement

In this series of blog posts I try to explain GILTI (Global Intangible Low Taxed Income) in simple terms. In the first post I discussed a public comment made on behalf of the Israeli Ministry of Finance on the recent proposed GILTI regulations. My second post explained the rationale behind GILTI. In this post I’ll discuss how GILTI is measured in non-technical terms. For those of you who want to get into the detail, there’s a technical appendix on our wiki. This post will focus on the general rules applicable to Apple and Google and other US domestic corporations that are US Shareholders in Controlled Foreign Corporations (CFCs). In my next post I’ll discuss the differences that apply when the US Shareholder is not a domestic corporation. Continue reading “Explaining GILTI – Measurement”

Explaining GILTI – Rationale

In my last post I discussed a public comment made on behalf of the Israeli Ministry of Finance on the recent proposed GILTI regulations. GILTI is quite complex, and that post may have thrown some readers into the deep end. In this post I go back to the beginning and try to explain why the US Congress felt that the GILTI provision was an essential part of the 2017 Tax Cuts and Jobs Act (TCJA). Subsequent posts will cover more detail about what GILTI actually measures and how the GILTI computations are supposed to work.

When Congress passed TCJA, it was hailed as major international tax reform that would make US multinationals more competitive with their international counterparts. The US corporate tax rate was reduced from 35% to 21% and with much fanfare, the US moved from taxing the worldwide income of corporations to a (not quite) territorial taxation system. Now that the bill has been signed and taxpayers, the IRS, and the tax compliance industry have had some time to study it, the reality doesn’t quite live up to the hype. For non-resident individual US taxpayers, the problem could be even worse! The transition/repatriation tax (§965) and GILTI (Global Intangible Low Taxed Income – §951A) have been drafted to apply to all US shareholders of Controlled Foreign Corporations (CFCs), not just the US domestic corporations that benefit from the modified territorial tax system. Once again, Congress has failed to consider the implications of their actions on non-resident US taxpayers. Continue reading “Explaining GILTI – Rationale”

Explaining GILTI

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.

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The Challenges of Investing and Financial Planning for Americans Abroad

John Richardson interviewed me for his video series on Retaining or Renouncing US citizenship:

Much of this information is also covered in the Investment Constraints series of blog posts and my paper “Investing with one hand tied behind your back”, available at SSRN.

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.

 

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”