US Taxation of US retirement account distributions to NRAs

In my last blog post I discussed how Australia taxes distributions from US retirement accounts. But that’s only half of the picture because the US may also tax these distributions. For US citizens, the US tax treatment is clear and well known. But, what if you’re not a US citizen (or green card holder) when you withdraw your US retirement savings?

These issues were the subject of a series of three podcasts I recorded with John Richardson last week (links below). The purpose of this post is to summarise the key points covered in those podcasts.

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How does Australia tax your US retirement account?

For those who have moved between the US and Australia, access to and tax treatment of retirement accounts is a common issue. We’ve covered the US taxation of superannuation in several posts, but the tax treatment by both countries of 401k and IRA accounts held in the US is also important. Today’s post will cover the Australian side of this equation. My next post will discuss what happens to your US retirement accounts when you renounce US citizenship (or for Australian expats returning from the US).

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To renounce or retain US citizenship?

Several of us participated in a conversation today about the issues that must be considered when deciding how to deal with the extraterritorial impact of US citizenship based taxation. For those who are just realising that the US requires ALL citizens to comply with US tax obligations, we discussed the various considerations that come into play when deciding how (or whether) to comply. We also discussed the issues that must be considered when deciding whether it is time to renounce US citizenship. As with many momentous life decisions, there is no one-size-fits-all prescription – US citizenship and tax compliance are individual decisions that will depend on personal circumstances, country of residence, future plans, and personal temperament.

The conversation, hosted by John Richardson, included Keith Redmond, Laura Snyder, David Johnstone and Karen Alpert. It is available here:

Time to ask a good question

Thanks to a follower of this site who has urged their MP to submit Questions in Writing about the Australia/US Tax Treaty and the impact of FATCA on Australian residents claimed by the US as “US Persons.” As I’ve written elsewhere, allowing the US to tax the Australian-source income of Australian residents drains money from the Australian economy. Even if the US tax liability is offset by credits for Australian tax paid, the cost of compliance and the constraints placed on financial planning are real.

Today, Rebekha Sharkie, MP for the electorate of Mayo in South Australia submitted the following question:

312 MS SHARKIE: To ask the Treasurer—

(1) Why was superannuation excluded from the 2001 revision of the USA-Australia tax treaty.

(2) Is it a fact that the 2001 revision of the treaty was focused on businesses rather than on individuals.

(3) Has the Treasurer received any advice on revising the treaty to address issues with taxation of superannuation; if so, can the Treasurer provide any such advice (or if not possible, can a summary of each advice be provided to the House).

(4) Is the Treasurer aware of changes in the past decade in US practices in the enforcement of the Foreign Account Tax Compliance Act as it applies to ‘US persons’ that are also residents of Australia for tax purposes, or Australian citizens that reside in Australia and are subject to Australian taxation.

(5) Has the Government been advised of any such changes by the US Government; if so, could the Treasurer provide the advices (or if not possible, can a summary be provided of each of these advices to the House).

(6) Has any such change in US practice increased the costs to Australian citizens and tax residents that are required to comply with US tax rules; and what is the estimated total cost of treaty and extra-territorial US tax compliance for Australian citizens and Australian tax residents over the forward estimates broken down by financial year.

(7) Under the treaty and related instruments: (a) under what circumstances would Australian citizens and tax residents be paying both US and Australian taxes (however arising); (b) can the Treasurer detail each of these circumstances; and (c) has the Treasurer received any advice concerning any of these circumstances, or concerning the potential or reality of double taxation under current treaty arrangements more generally; if so, can these advices be provided (or if not possible, can a summary of these advices be provided to the House).

(8) What is the number of: (a) Australian citizens; and (b) Australian tax residents; that pay US taxes on Australian income (however arising, including salary, superannuation contributions and distributions, home ownership, business ownership, and any other investments).

(9) Broken down by financial year over the forward estimates, what is the: (a) total cost from the treaty to Government revenue; and (b) total capital removed from Australian superannuation accounts and the Australian economy due to extra-territorial taxation by the US Government (including Australian superannuation contributions and distributions).

(10) What review and monitoring mechanisms does the Government have in place to identify issues arising out of the operation of the treaty.

(11) To date: (a) what concrete steps have been agreed to in order to resolve the issues identified in the US-Australia tax treaty; and (b) what are the deadlines for completing each of these steps.

(12) In tabular form, can a list be provided of the notifications (and a brief description of each individual notification) provided by the US and received by Australia pursuant to Article 2, Paragraph 2 of the treaty.

(13) Will the Government commit to a renegotiation of the treaty; if not, why not; if so, in which year does the Government: (a) expect to commence those negotiations; and (b) intend to conclude negotiations.

Any MP can direct Question in Writing to the appropriate Minister. There is no requirement that the question be answered, but it remains on the list of unanswered questions until it has been answered, withdrawn, or Parliament is dissolved. If a question is left unanswered for 60 days, then the MP who asked the question can ask why there is a delay.

I will be quite interested to hear how the Treasurer answers this question.

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 – 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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Part 1: Our FOI Journey – Challenges & Pitfalls

Looking For a Needle in a Haystack… 

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?

Continue reading “Part 1: Our FOI Journey – Challenges & Pitfalls”

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.

Have you written your MP yet?

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.

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