Reporting of SSNs under FATCA

On 15 October 2019, the IRS amended its FATCA FAQs (aimed at Foreign Financial Institutions – FFIs) by adding Q3 to the questions on Reporting. The new Q3 outlines the procedures that FFIs subject to a Model 1 IGA will be subject to in the event that they report accounts with missing or invalid identification numbers (SSNs). This new question is clearly aimed at easing the anxiety of Accidental Americans at the expiry of Notice 2017-46, which allowed FFIs to report date of birth instead of SSN on existing accounts if the FFI was unable to obtain an SSN.

This is significant because there have been many news outlets reporting that a large number of bank accounts (especially in Europe) would be closed at the end of 2019. The problem arises because there are many US citizens who have always lived outside of the US and may not have a Social Security number. Many of these individuals don’t even identify as Americans and don’t understand why they must go through the bureaucratic hassle of obtaining an SSN (not easy if you’re an adult and living outside the US). In September, the IRS made it possible for these individuals to renounce their US citizenship and follow US tax law without obtaining an SSN. However, the cost of renouncing (USD2,350 per person) is prohibitive for many, and the cost of having US tax returns prepared professionally can also be excessive.

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UK legal challenge against FATCA

FATCA forces banks all over the world to report their US Person account holders to the IRS either directly or indirectly through their local tax agency. As reported on this website, Australia is sending information on over 800,000 accounts to the IRS. This data transfer has been shown in a report to the European Parliament to violate GDPR in the EU. In the UK Jenny has decided to fight back. But, I’ll let Jenny tell you about it in her own words. Here’s the email she just sent out announcing the crowd-funding of her legal challenge:

Dear Karen,


I have some exciting news. For the past several months I have been working with the London law firm Mishcon de Reya to organise a challenge to HMRC’s indiscriminate, disproportionate reporting of British citizens’ private data to a foreign government under FATCA. The details are at https://www.crowdjustice.com/case/fatcahmrcprivacybreach/.  


FATCA is a domestic US law that was adopted into UK law in 2012 with no assessment by the UK government of its effects on individual rights, particularly those of ‘accidental Americans’, and it has since had a detrimental impact on me and thousands of other British citizens, as well as costing the UK economy millions (https://www.telegraph.co.uk/finance/personalfinance/tax/11050777/British-families-billed-500-to-prevent-Americans-dodging-tax.html). HMRC refuses to report to the public or Parliament what FATCA is achieving (https://ico.org.uk/media/action-weve-taken/decision-notices/2019/2614446/fs50751683.pdf). A policy that makes the people transparent to the government whilst keeping the government hidden from the people is unacceptable in the UK. Indiscriminate, disproportionate transfers of personal data also contravene the General Data Protection Regulation (GDPR), which came into effect last year and require transfers to be limited to the stated purpose. British citizens resident in Britain, working and banking locally and earning an average UK wage, do not owe US tax. Therefore there is no reason to transfer their data outside Britain. However, HMRC continues to do so, and refuses to offer individuals any details on this, or right of reply, or opportunity to check or correct their own data.  


In the UK, justice in a complex case like this is often closed to average-wage people like me, because of the requirement to pay court costs. However, Crowd Justice are working with me and my firm to facilitate crowd funding for this challenge. I would be grateful if you might consider a donation to this cause, which is crucial to protect individuals from indiscriminate transfers of sensitive information through unsafe chains highly vulnerable to data hacking and identity theft. Any donation, large or small, will be vastly appreciated, as will your efforts in spreading the word about this cause. 


As you will see on the Crowd Justice site, none of this money goes to me. It all goes directly into supporting the legal work for this cause. 


If you have any questions about the cause or about me, please do not hesitate to get in touch by email reply.


Thank you so much for your commitment to justice for ordinary citizens like me.


Kind regards
Jenny 

New IRS Relief Procedures

On Friday 6 September, the IRS announced new “Relief Procedures for Certain Former Citizens.” These procedures mirror the current Streamlined Offshore Filing Procedures with some differences that might be attractive to some who have renounced or wish to renounce their US citizenship. Taken in conjunction with other recent IRS announcements, this new procedure is a “carrot” to encourage compliance before the IRS applies the “stick” of recently announced compliance campaigns. However, this begs the question of why the IRS would want to encourage compliance among non-citizens whose US tax liability would be dwarfed by the combination of the cost to the IRS of processing their returns and the cost to the individual of having the returns prepared.

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Remembering Jack Bogle

I was sad to hear of the death of Jack Bogle last week. Jack was the “father” of modern index funds. He founded Vanguard Investments in the 1970s. His no-load, low-fee index fund was a major innovation in a world where investing had been only available to those who were willing to pick their own stocks or pay professional fund managers large fees to get results that weren’t statistically any better than a broad market index.

An index fund invests in all of the shares in the market (or the index that measures the market) – there are no investment decisions to make, and very little trading is necessary. This innovation has delivered market returns to small investors all over the globe at very low cost .

So, why am I talking about Jack Bogle and index funds on a website devoted to Australia/US cross-border tax issues? Because nonresident US citizens are punished for owning local versions of this basic investment!

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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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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.

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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”