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.
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.
- 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.
- Let us know who you have sent the letter to by completing this survey (responses are anonymous).
- 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 firstname.lastname@example.org.
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
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.