The American Citizens Abroad, a Washington, DC-based advocacy organisation which looks after the interests of American expatriates, has formally called on the US Treasury to take steps to address the “compliance nightmare” it says has been created for many US expats by new requirements contained in the Tax Cuts & Jobs Act.
In particular, the ACA explains, in its letter to assistant secretary of the Treasury for Tax Policy David Kautter and deputy assistant secretary for International Tax Affairs Chip Harter, the new, so-called “transition” tax contained in the tax bill that took effect on 1 January “call for reporting which, frankly, for many American individuals living abroad is nigh-on impossible” for them to meet, particularly within the time deadlines that have been set.
This is because this new transition tax tax affects potentially thousands of expatriates who have a reportable interest in a controlled foreign corporation, is due with these individuals’ 2017 tax filing.
“Many may not have the funds to pay it,” the ACA letter says.
“For example, an American abroad who owns a business through a controlled foreign corporation (CFC) will need to figure out whether that CFC has accumulated earnings and profits as of November 2, 2017; if so, what the size and character of these earnings are; likely bring current the calculation of accumulated earnings and profits; and make the calculation of earnings subject to tax under the new Section 965,” the ACA continues in its letter.
“The last calculation must be in conformance with new, very detailed rules.
“For thousands of Americans abroad these new provisions create a compliance nightmare. We submit that as to an overwhelming majority of them, they will not be able to comply within the time deadlines. The caculation of the figures is relevant for the April 15, 2018 reporting.”
Not only will American expats struggle to comply with the new reporting and tax requirements, the ACA adds, but “the Internal Revenue Service will be hard-pressed – we think overwhelmed” – to handle the situation on the receiving end.
The ACA urges the Treasury to start out by modifying the reporting requirements under Section 965; extend the filing deadline for those expats who are required to file; and waive all “late-filing, late payment and Form 5471-related penalties” with respect to such individuals.
Furthermore it argues that the reporting requirement for expats “should not come into effect until the Treasury Department publishes and finalises regulations on this subject”.
Finally, “whenever the reporting requirements kick in, a de minimis rule should apply, to exempt small taxpayers resident outside the US. This is a common-sense aproach. The same type of approach was applied in the case of the filing Forms 8938 (Statement of Specified Foreign Financial Assets).”
The ACA goes on to note that such other groups representing Americans abroad, including the Republicans Overseas, Democrats Abroad, Association of Americans Resident Overseas and the Federation of American Women’s Clubs Overseas, are known to also “support the granting of relief” to US expatriate taxpayers in the matter of the new reporting and tax requirements.
It concludes by noting that certain members of Congress are currently working on legislation that aims to move the US away from its current citizenship-based tax regime to one that is residency-based – “sometimes referred to as territorial taxation for individuals” – and that this legislation “would obviate, for Americans resident abroad, calculations and filings relating to the transition tax rules”.
Therefore, it suggests that it would make “good sense to delay reporting of the Section 965 tax for Americans abroad” until Congress had had a “chance to solve this problem”.
The ACA letter is signed by ACA executive director Marylouise Serrato; ACA chairman Jonathan Lachowitz, who is also a founder of White Lighthouse Investment Management, with offices in Massachusetts and Switzerland; and ACA’s legal counselor Charles Bruce, a lawyer with Bonnard Lawson. In addition to Kautter and Harter, copies of the letter have been sent to Senate Finance Committee chairman Orrin Hatch and House Ways and Means Committee chairman Kevin Brady.
To read the ACA’s letter on the organisation’s website, click here.
As reported, the “transition tax”, introduced by the Tax Cuts & Jobs Act 2017, took effect on 1 January, and requires American citizens who own as little as 10% of an overseas business to pay a tax that was intended to target such large multi-national American companies as Google and Apple. The new tax is a one-time-only “deemed repatriation tax” of 15.5% on the profits the businesses in question have accumulated overseas, whether or not the individual shareholder chooses to repatriate them.
Earlier this month, the Republicans Overseas delivered 2,750 petitions to members of the White House and Congress which seek the delay in the implementation of the transition tax, as well as a change in the way American expats are taxed, to a “territorial” system rather than one based on citizenship.