The Republicans Overseas, Democrats Abroad, American Citizens Abroad and other US expat groups have been pulling out the stops in Washington in recent weeks in an effort to rally support for a delay in the implementation, and ultimate abolition, of the recently-introduced 17.5% transition tax as it applies to overseas Americans who own stakes in small businesses.
As reported, this tax was introduced by the Tax Cuts & Jobs Act 2017, which took effect on 1 January, and it 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.
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, the organisation announced yesterday.
(A stack of these petitions may be viewed above, with Republicans Overseas vice chairman and chief executive Solomon Yue, left, along with the organisation’s worldwide vice president James Gosart; Republican Asian Coalition Territorial Tax for Individuals’ lobbyist James Brandell, and Americans for Tax Reform director Patrick Gleason.)
According to the Republicans Abroad, George Holding, a Republican member of the House of Representatives from North Carolina, is putting the finishing touches on legislation that would see the US move to a residence-based personal tax regime – the Republican version of which is called Territorial Taxation for Individuals – in addition to addressing the problem of Americans overseas who are in line to be hit by the unintended consequences of the transition tax.
Groups that have thus far gone on record in support of Holding’s draft TTFI bill, as the Republicans Overseas calls it, include the Association of Americans Resident Overseas, the American Citizens Abroad, Accidental Americans, Americans for Tax Reform, as well as the tax policy adviser to House Ways and Means chairman Kevin Brady, according to the RO, which published an update of its efforts and its delivery of the petitions yesterday.
At a recent gathering in Washington, representatives for these groups “agreed that the best approach to address the 17.5% transition tax is to request [the] Treasury to delay its implementation, and then pass the TTFI bill, to reconnect the method of taxing individuals with Territorial Taxation for Corporations”, which was among the key new measures introduced in the Tax Cuts & Jobs Act, the Republicans Overseas said.
The Americans for Tax Reform has agreed to host monthly meetings on the matter until Holding’s bill is passed, according to the Republicans’ group.
It noted that there is a precedent for delaying the implementation of the transition tax as it applies to expatriates and non-resident Americans in the numerous times that implementation of the Foreign Account Tax Compliance Act was postponed before it finally began to take effect in 2013.
‘Burden, cost and difficulty’
With respect to what it says is a particularly compelling argument for delaying the implementation of the transition tax, the Republicans Overseas points to the extreme “burden, cost and difficulty” for American expatriates who are now expected to comply with it, since it currently obliges them to pay the first of eight installments of the tax they owe by 15 April. This is in spite of the fact that in order to comply, these individuals will be expected to provide financial statements and retained earnings for their overseas businesses “according to US GAAP, back to 1986”.
US GAAP is the American accounting standard, which is different from that used in much of the rest of the world, which is called the International Financial Reporting Standard, or IFRS.
In a recent posting on his citizenshipsolutions.ca blog, Toronto-based lawyer John Richardson noted that although the transition tax is “not a bad thing” for homeland Americans, for non-resident Americans affected by it, “it is a terrible thing, which may destroy their retirements”.
“The reason is that ‘non-residents’ are subject to both US taxation and taxation in their countries of residence,” he writes.
“The transition tax is an extremely egregious example of the terrible effects of the US practice of imposing ‘worldwide taxation’ on the residents of other countries.
“I hope that the transition tax will be the ‘straw that breaks the camel’s back’ and ends the US practice of imposing taxation on people who don’t live in the United States.”
In an interview, he added: “There’s zero chance of anybody, really, outside of the US being able to comply with the [transition tax]. Zero. I don’t think individuals could comply even if they wanted to. The difference in accounting standards alone will make it impossible.”
For the Republicans Overseas’ Yue, meanwhile, the sheer awfulness of the transition tax could just be the thing that brings Washington lawmakers to the table, at last, to address the massive general tax problems the country’s expatriates face.
This is because the US, unlike every other country in the world except Eritrea, taxes individuals on the basis of their citizenship rather than where they live, causing major, lifelong complications for its expatriates, even if they were only in the US long enough to be born there.
“I see a perfect storm is forming for TTFI passage as a solution to the 17.5% transition tax nightmare,” Yue says.
“Delaying implementation of the transition tax will give Congress time to fix the 17.5% transition tax problem, by passing TTFI to connect with TTFC.”
IRS Q & A on Section 965
Separately, the Internal Revenue Service has posted what it says are “questions and answers about reporting related to Section 965 on 2017 tax returns” on its website. Section 965 is the IRS term for the transition tax, which it defines as “a tax on the un-taxed foreign earnings of certain specified foreign corporations as if those earnings had been repatriated to the United States”.
To view this Q&A, click here.