Month: December 2018

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.

Continue reading “Tax Fairness for Americans Abroad Act”

TCJA and US Expats

As 2018 draws to a close, the community of nonresident US taxpayers has been inundated with articles about GILTI and the transition tax. These provisions have a disproportionate impact on nonresidents because people tend to earn their income close to home, so US taxpayers living outside the US are much more likely to be individual shareholders in a corporation that the US deems a CFC. However, there has been less attention paid to several other provisions in the 2017 tax reform package that will also have a disproportionate effect on those US taxpayers who are residents and taxpayers of other countries.

Continue reading “TCJA and US Expats”

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.

Continue reading “Fixing the Transition Tax for Individual Shareholders”

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. 

Continue reading “Explaining GILTI – Wrap-up”

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]

Continue reading “Explaining GILTI – Individual Impact”