US Treasury grants 2-month extension on new Transition Tax

clock • 4 min read

American expat groups are welcoming the news that the US Department of the Treasury has granted those affected by the new so-called Transition Tax a two-month extension for the payment of their first instalment of the one-off, 15.5% levy.

However, they said the tax continued to be flawed, and potentially damaging to expatriates who owned stakes in overseas businesses, and that they would continue to campaign for it to be eliminated.

As a result of the extension, which was announce yesterday, the first payment Transition Tax payment, for those American individuals who will be required to make it, will now be due on 15 June rather than 15 April.

As reported, the “s.965 Transition Tax” was introduced by the Tax Cuts & Jobs Act 2017, which took effect on 1 January. It requires American citizens who own as little as 10% of an overseas business to pay a one-off levy on un-repatriated foreign earnings, set at 15.5% on cash and 8% for other assets.  The tax was intended to target such large multi-national American companies as Google and Apple, which have recently been criticised for keeping the profits they’ve been making offshore out of the US government’s tax coffers.

Such organisations as the American Citizens Abroad, Democrats Abroad and Republicans Overseas have been campaigning hard for a delay in the imposition of the tax as it currently applies to individual Americans living overseas, but also for it to be abolished completely as a tax on individuals’ business ownership stakes.  And yesterday and today, spokespeople for these organisations reiterated this point.

“There is still a lot of work to do, as the 17.5% Transition Tax continues to threaten overseas American business owners with bankruptcy,” Republicans Overseas’ vice chairman and chief executive for the Solomon Yue said, using a 2% higher figure for the likely cost of the transition tax for those who have to pay it than the government’s 15.5%, which reflects an independent assessment by a Canadian specialist in American expatriate tax matters.

The American Citizens Abroad said it was “grateful” that the Treasury and IRS had realised the difficulty taxpayers would have had in meeting a 15 April deadline, but noted that it had “asked not only for more time, but also requested a de minimis ruling, which would remove small taxpayers from the scope of the tax” altogether.

“The de minimis ruling was not done, but ACA will continue to press for it,” the ACA added, in a statement.

“The transition tax imposes tax on certain accumulated earnings in a foreign control corporation owned by US shareholders. This tax affects, among others, American individuals residing abroad, who own a foreign corporation.

“This corporation might be labeled something else under local law, but for US tax purposes it might be treated as a corporation, and therefore its owner(s) might be confronted with this new tax,” the ACA statement continued, noting that under the law as it’s currently written, there need not even be an actual distribution to the individual in question, since it creates “a deemed or constructive distribution”.

The ACA’s legal counsel, Charles Bruce, pictured left, added: “It is frankly ridiculous for the transition tax to apply to small taxpayers owning small foreign corporations. They should not be put through the same wringer as the largest US multinational corporations, making the same calculations and completing and filing exactly the same form.”

Both the ACA and the Republicans Overseas reiterated their call for the US to resolve most of the tax problems currently affecting American expats by replacing its citizenship-based tax regime with one based on residency (or as the Republicans Overseas call it, “territorial taxation for individuals”, or TTFI).

The Democrats Abroad, meanwhile, called on its members to email the US Treasury, IRS and relevant congressional committees, at a link it provided them with, to “demand Americans abroad be exempt” from the Transition Tax — which they call the Repatriation Tax — as well as from the “Global Intangible Low-Tax Income (GILTI) Tax”, a new tax created by the Tax Cuts & Jobs Act that will see foreign businesses owned by Americans being subject to US corporate tax on profits, less about 10%, regardless of whether or not the profits are repatriated.

According to the Democrats Abroad, a key argument for enabling expat Americans to avoid these two new taxes is because such overseas Americans are not able to to take advantage of deductions and offsets that foreign businesses, which these taxes were intended to target, are able to take advantage of.

“Thes are both grievous errors [created in the drafting of the legislation] and must be addressed urgently,” the Democrats Abroad told its members, in a recent emailed “call for action”.

“This is an urgent issue that we can’t wait for Congress to fix,” it added.

To read and download the US Treasury’s latest notice, which contains the key paragraphs that postpone the deadline for the first instalment of the Transition Tax on page 39, click here.