US expats’ fingers still crossed as first draft of tax reform bill doesn’t address overseas individuals

“The good news is that the game is [still] on,” the American Citizens Abroad said yesterday, after the House of Representatives unveiled the first draft of the long-awaited Republican tax reform bill –which said nothing one way or other about the taxation of individual Americans who don’t reside in the US.

As reported, the ACA and other organisations representing expatriate Americans have been campaigning hard over the last few months in an effort to draw US lawmakers’ attention to what they say is the dysfunctional way Americans are taxed on the basis of their citizenship, rather than on the basis of where they live, as is the case in all but one other country in the world, the other being Eritrea.

In its statement, the American Citizens Abroad noted that the tax reform bill published yesterday – formally known as HR 1, or the Tax Cuts and Jobs Act – includes “the biggest push in decades to enact ‘territorial’ tax rules for corporations”. This basically means that US corporations would not be taxed on foreign source income. And previously untaxed earnings of foreign subsidiaries, amounting to some US$2.6trn,  would be allowed to be repatriated, subject to a one-time 12% tax on cash assets, 5% on non-cash assets.

Although the taxation of American citizens who live overseas wasn’t mentioned in the bill, the ACA said that it was good news for now that nothing ruling out a change in the current citizenship-based taxation (CBT) regime has been published, and “it’s also good that nothing being done with regard to [the taxation of US] corporations muddies the water for international tax reform for individuals”.

“When Congress looks up from its work on corporations, it will see that territorial treatment for individuals, in other words – residency-based taxation which does not tax individuals on foreign income – sits on the table right alongside the corporate provisions and can,  and should, be added,” said Charles Bruce, legal counsel for the ACA and a member of its board.

Marylouise Serrato, executive director of the ACA, said Americans abroad “definitely have a seat at the table”, based on what the ACA has observed in recent weeks in Washington, during its campaign to highlight the problems CBT is causing Americans who live overseas.

“Congress knows that is wrong and nonsensical to continue with citizenship-based taxation,” she added.

The ACA argues that contrary to what is often perceived, a residence-based tax regime for American expatriates would be revenue neutral and would not make it easier for such individuals to evade tax, as they would be taxed in the jurisdictions they are living in now – which, in fact, they already are, in addition to being required to file US tax returns each year and in some cases, to pay US taxes as well. This, it says, is the message it is attempting to deliver to Congress.

US citizenship renunciations still on rise

The debate over whether the US should, and possibly will, move from a citizenship-based tax regime to one that is based on residency comes as expatriate Americans continue to renounce their citizenships in record numbers. On Wednesday, Bloomberg reported that based on the most recent data from the Treasury Department, renunciations in 2017 are on track to top 2016’s record number of 5,411, which was itself a 26% jump from 2015.

At the current rate of people handing back their passports, the total for 2017  “would be 6,813”, Bloomberg noted, “a 26% rise from 2016”.

 As reported here  in February,  although the problems associated with US citizenship began before the implementation of the Foreign Account Tax Compliance Act, signed into law by president Obama in 2010, FATCA is widely credited with sending many expats rushing for the exits, by making the business of being an expatriate American increasingly difficult and expensive.

Almost at once, non-US banks no longer wanted Americans as customers; US tax returns became so complex that expats began requiring specialist tax preparers to help them to file (expat Americans are said to pay an average of US$2,000 to have their tax returns done for them, compared with a US average of just US$200); and even expats who have never lived in the US since they were babies nor received any benefits from their having been born in the States have been finding themselves expected to pay significant sums of tax to the US, even though they were fully tax-compliant in their current countries of residence.

To read and download the Tax Cuts and Jobs Act, which is 429 pages long,  click here. 

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