TAX CUTS & JOBS ACT HAS A NASTY SURPRISE FOR BUSINESS OWNERS ABROAD
A great many flaws exist in the Tax Cuts & Jobs Act due to inadequate consultation and hasty drafting. One of those flaws causes enormous harm for Americans abroad who own businesses in their countries of residence.
If you are an overseas American with a business abroad, click here to reach out to Washington and demand a remedy!
The new tax law ushers in a system of Territorial Taxation for Corporations. The new system has 2 troubling components.
- Repatriation Tax: In transitioning to the new system, overseas subsidiaries of U.S. corporations who have profits that have not been repatriated to the U.S. parent company will be subjected to a Repatriation Tax on profits going back to 1986. The profits will be deemed to have been repatriated to the U.S. parent, even if there is no movement of cash or on paper, and then taxed at a discounted corporate rate, after certain offsets and credits for tax paid to the country of incorporation. If the offshore company is owned by a U.S. Person living abroad, rather than a U.S.- based corporation, the deemed profits are afforded no offsets nor credits for tax already paid. Clearly, this is an error in drafting.
- Global Intangible Low-Tax Income (GILTI) Tax: Disregard the name entirely because it is a misnomer. Going forward foreign businesses owned by U.S. based corporations and individuals and U.S. Persons living abroad will, again, be subjected to U.S. corporate tax on their profits, less about 10%, whether or not the profits are repatriated to the U.S.. As with the Repatriation Tax corporate owners of foreign businesses are afforded deductions (50%) and offsets (80% of foreign taxes paid) (in many instances the result will be no taxes owing) that U.S. Persons owning foreign businesses are not afforded. The U.S. Person owner of a foreign business will be paying tax twice on the same dollar of income. Clearly, this is another grievous error in drafting.
Last week a Democrats Abroad delegation spoke to members of the Senate Finance Committee and House Ways and Means Committee about, amongst other things, the need for an urgent remedy for this policy flaw. Congress is working on an Omnibus appropriations bill to approve spending for this year that must be passed no later than 23 March. This matter is on, we understand, a lengthy list of Tax Cuts and Jobs Act problems that need to be addressed. Sadly, we also understand that very few of them will be addressed in the appropriations bill.
Demanding a remedy
Democrats Abroad and a number of others are demanding an urgent remedy for this policy flaw. Our proposal:
Americans abroad with interests in foreign corporations should be exempt from the Repatriation Tax and from the GILTI regime for any given year so long as two conditions are met.
- We meet the conditions required for exemption under IRC Section 911 (bona fide non-resident for tax purposes), and
- We are individual U.S. shareholders.
In the absence of Congressional action, we will urge the Treasury and IRS to take the following actions:
- Issue an immediate notice stating that for Americans abroad, the first payment under IRC Section 965 (transition tax on untaxed foreign earnings) is due the earlier of October 15, 2018, or the issuance of further guidance.
- Issue a further notice in line with our proposal.
As in all matters requiring the attention of lawmakers and regulators, robust outreach from affected parties is essential. Repatriation Tax declarations are to be made in 2017 filings, so time is of the essence.
Time to take action!
The script for this letter has been prepared by third party taxation advocates, in collaboration with Democrats Abroad’s Taxation Task Force. Democrats Abroad supports the collaborative, non-partisan campaign behind this grassroots advocacy initiative and believes it is essential for addressing this problem urgently.
Letter Campaign Contacts
Department of Treasury
Mr David Kautter
Mr Chip Harter
Mr William Paul
Leni C Perkins
House Ways & Means Committee
Senate Finance Committee
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