Spokespeople for a number of organizations representing American expats have expressed concern that legislation unveiled earlier this week by House Ways and Means Committee chairman Kevin Brady fails to address certain aspects of President Trump's Tax Cuts and Jobs Act (TCJA) of last December that have been particularly harsh for many U.S. expats.
In particular, they say that the Brady legislation, which is a door-stopping 297 pages long and which may be viewed and downloaded here, fails to address the problem many expatriates who have partial or complete ownership of small offshore businesses now face, of having to pay a one-time "repatriation levy" of as much as 17.5% on earnings from these businesses that date back years.
That said, sources say the bill does deal with some concerns that had been expressed in the wake of last December's publication of the TCJA, which, most Washington insiders agree, had been rushed into law, in order to ensure that it could take effect on the first day of 2018.
However, many of those American expat advocates who have trawled through the document say that there is nothing that begins to address the burden that they say the repatriation tax, and a new Global Intangible Low-Tax Income (GILTI) tax, will place on some expatriates.
In particular, the bill fails to introduce a so-called de minimis rule, which the American Citizens Abroad, which represents American expats around the world, has been campaigning for for months.
As recently as at an IRS/Treasury Department hearing last month, the ACA has argued that such a de minimis rule was needed to exclude from Section 965 of the Tax Cuts and Jobs Act legislation those U.S. taxpayers living outside the U.S. who own small non-U.S. businesses, such as shops, bars, law firms and bed-and-breakfast enterprises. Otherwise, the ACA argued, these individuals will find themselves being taxed in the same way as the overseas entities of such large multi-national companies as Amazon and Apple.
Lame duck session nearing end
In the end, it may not matter legislatively, as the legislation must be approved by both houses of Congress if it is to be enacted, which some say could be unlikely before Washington's lawmakers adjourn for the year, ending the current 'lame duck session'. (An earlier House effort to make the tax cuts in the TCJA permanent, known as Tax Reform 2.0 was approved by the House but failed to get through the Senate before the Midterm elections on November 6.)
Nevertheless, there had been hopes in the expatriate community that some legislative relief to the issues created by the TCJA would be forthcoming before the end of 2018.
Some also say the fact that the concerns of organizations like the ACA weren't taken on board is in itself a potentially worrisome concern.
One observer noted that Brady, a Republican from Texas, and his House Ways and Means colleagues appeared to have taken on board certain concerns expressed by the National Taxpayer Advocate, an in-house IRS watchdog, but not those of expat groups that have been lobbying Congress for months, including the well-regarded ACA.
"While specifically addressing the Section 965 transition tax, the bill contains neither mention nor relief for Americans abroad who are at risk of having their retirement pensions confiscated by the U.S. government," one vocal campaigner, Toronto-based tax lawyer John Richardson, wrote in his citizenshipsolutions.ca blog. He was one of the first to comment on the legislation.
"While the transition tax may actually be beneficial for Homeland Americans, it is simply devastating for Americans abroad.
"By specifically addressing the Section 965 transition tax and not providing relief for Americans abroad, it has made the situation much worse. My understanding is that many Americans abroad have requested filing extensions to December 15, 2018.
"The failure of this proposed bill to provide relief means that many Americans abroad with small businesses are in an impossible situation, where compliance may well be impossible.
"The failure to address the transition tax and the GILTI tax issues has made it impossible for Americans abroad with small businesses to survive as U.S. citizens operating businesses outside the United States. I suspect that there will be a range of responses to this reality.
"Of course, this issue impacts only a subset of Americans abroad. But those who are not directly affected by the transition tax and GILTI problems should take careful note of what has happened – and should be very concerned, as it is clear from this that the U.S. government doesn't care about Americans abroad, nor do they care that they don't care."
'Need to be more realistic'
Solomon Yue, an unelected Republican from Oregon who is vice chairman and chief executive of the Republicans Overseas who has been acting as a conduit between the offshore American community and Congress since Trump took office, told the American Expat Financial News Journal today that expats might need to be more realistic about their expectations than they have been recently, when it comes from what they expect to get from Congress.
This is particularly the case, he said, with respect to the "TCJA technical fixes, including TCJA Transition Tax fix and TCJA GILTI Tax fix," which "would require revenue offsets and are not [merely] 'technical fixes'."
But, he added, the long-awaited legislation said to be in the works from North Carolina representative George Holding, is still expected before the end of the year. As reported, this would give expatriate Americans the option of replacing the U.S.’s current citizenship-based tax (CBT) regime, as it applies to them, with a “territorial taxation for individuals” (TTFI) system. Those who would prefer to continue to be taxed under the existing CBT regime could, under this legislation, be allowed to do so.
The U.S. is the only country in the world, apart from Eritrea, which taxes on the basis of citizenship rather than residency.
Particularly for those with American passports who have spent most or even all of their lives outside the U.S., the obligation to file a tax return and Foreign Bank Account Report every year, and potentially be subject to U.S. tax even though they are being taxed fully as residents of the countries in which they live, is a source of frustration for many.
The issue took off after the introduction of legislation in 2010 which required foreign financial institutions to report to the IRS on their American clients. This in turn forced compliance with earlier but long-overlooked legislation that required Americans to report annually to the IRS on their offshore bank and financial accounts if they total US$10,000 at any point during the year.
Holding's legislation that supposedly would replace the CBT regime with "territorial taxation" has never been given even a working title, and failed to appear before the end of September and then October, when it had been expected to be unveiled.
However, the congressman, who had been involved in drafting President Trump's tax reform legislation, last December's Tax Cuts & Jobs Act – which has been strongly criticized mostly outside of the U.S. for its impact on non-U.S. resident expatriate owners of small businesses – has publicly expressed his concern about the problems expatriate Americans face as a result of the way the CBT regime affects them.
Yue said his understanding of the Holding legislation is that it would introduce its own transition tax, which would "exempt most middle class Americans abroad [who met] two conditions: they paid less than US$165,000 in annual tax each year for three years, and their personal assets on which any 'deemed capital gains tax' had to be paid totaled less than US$10m.
"Our US$90bn a year in savings from foreign housing exclusion deduction and foreign earned income tax credit can't be used to pay for all three: TTFI, transition tax fix, and GILTI tax fix."
A Democrats Abroad spokesperson said that the organisation was "as surprised as leaders in Washington DC by the ‘swan song’ tax bill launched by Ways and Means chairman Brady late on Monday night." (Brady is remaining in Congress, but will cease to be chairman of the the Ways and Means committee in the next session, as the Democrats now outnumber the Republicans in the House following the recent Midterm elections.)
"It’s more disappointing tax writing behind closed doors, [with] more goodies for the Donor Class; no provision to make the individual tax cuts permanent, and nothing at all for Americans abroad," Democrats Abroad Taxation Task Force chairwoman Carmelan Polce added.
She said her organization was continuing to work on House of Representatives legislation "rumored to be coming to the floor before the end of this year" that would introduce Residence-Based Taxation (RBT), as the Democrats refer to the tax regime they would like to see replace CBT. Like TTFI, it would see the U.S. tax people on the basis of where they lived rather than their citizenship, in line with what most other countries do.
The offshore arm of the Democratic party is also working on a letter to key Democratic Party leaders that will ask them to arrange hearings on the subject of "the tax filing and financial account reporting experiences of Americans abroad," which, Polce noted, Homeland Americans and their elected representatives in Congress continue to remain ignorant of.
Keith Redmond, a Paris-based campaigner for the cause of Americans living abroad – who says he understands their frustrations because he deals with them every week, and also because he is one himself – said such Americans should not give up hope.
“TTFI will be a separate bill, and not part of a ‘tax package’ [such as Monday's bill], as the objective is to maximise the support on both sides of the aisle,” Redmond added.
"We’ve come the farthest we’ve ever come due to the diligence and hard work of dedicated individuals, who have been giving the necessary voice to the [estimated] 9 million Americans resident overseas.”