1 of this two-part blog, we reviewed our lengthy and largely
unsuccessful journey in exercising our Freedom of Information (FOI) rights to
better understand the context behind the current 2001 tax treaty and to use
this information to better frame our initiatives to improve this important
Although our FOI requests were
largely unsuccessful, we did gain some knowledge and insights along the
way. The purpose of Part 2 is to discuss
these learnings and suggest further activities we might consider.
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.
Those of you who follow our blogs might recall we commenced a Freedom of Information (FOI) campaign with both the ATO and Treasury a full year ago to develop a deeper understanding around the issues we face with an intent to use this information to inform future policies and actions (see Behind the Curtain – FOI Requests, Nov 2017).
In practice, exercising our Freedom of Information rights became a much more involved, complex and time consuming process than initially envisioned. Along the way we learned a great deal about the FOI process and challenges in obtaining useful information. Although the information we obtained wasn’t the insightful contextual documents we had hoped for, we still gained some information and insights along the way.
I’ve split this blog into two parts to keep the length down
Part 1 – Challenges and pitfalls – Our journey through the FOI process
Part 2 – What did we learn and what steps might we consider next?
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.
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. 
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).
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.
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.
One of the terrific things about living in a parliamentary democracy like Australia is that there are safeguards in place to facilitate transparency of the Australian Government and public services. One powerful tool is the Freedom of Information Act, or FOI, which provides individuals or organisations with the right of access to documents held by many government agencies. By law, most public authorities have to respond to an FOI request within 30 days. Their response will either contain the information requested, or give a valid legal reason why it must be kept confidential. Note that the government agencies may levy charges for locating and making the information available, based on prescribed rates.
Here at Fix the Tax Treaty!, we’ve often wondered whether the Australian Government adequately considered the impacts on Individuals (vs businesses) when negotiating and entering into the Australia – US tax treaty agreements and the FATCA Intergovernmental Agreement (IGA).