By Hans Esser, for Expatbriefing.com 29 March, 2018
Two organizations representing the interests of US citizens living abroad have warned the US Treasury Department that the transition tax included in the Tax Cuts and Jobs Act could place unfair tax and administrative burdens on expats with small businesses.
According to a letter to the Treasury by American Citizens Abroad (ACA) and its sister organization American Citizens Abroad Global Foundation (ACAGF), an American abroad who owns a business through a controlled foreign company (CFC) may need to report and pay tax on foreign income accumulated by the CFC prior to November 2, 2017, under amendments to Section 965 of the US tax code.
The TCJA, passed in December 2017, requires various taxpayers that have untaxed foreign earnings and profits to pay a tax as if those earnings and profits had been repatriated to the US. Foreign earnings held in the form of cash and cash equivalents are taxed at a 15.5 percent rate, and the remaining earnings are taxed at an eight percent rate. Certain taxpayers may elect to pay the transition tax over eight years.
“Along with a number of other things, this Act affects American individuals residing abroad who have a reportable interest in a controlled foreign corporation. The so-called transition tax rules in amended Section 965, as well as the rules creating a constructive distribution of accumulated,” the letter states.
The letter went on to explain that an American abroad who owns a 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 new Section 965. The last calculation must be in conformance with new, very detailed rules.”
The letter warns that these new provisions could create “a compliance nightmare” for thousands of US expats.
The two organizations estimate that Americans abroad may have an interest in more than 10,000 CFCs.
The ACA and the ACGAF are calling for the addition of de minimis rules to the amended Section 965 that would exempt many US expats from needing to comply with the new requirements. They are also calling for an extension to the transition tax filing deadline and a waiver of late-filing and payment penalties. Furthermore, they want the reporting requirements delayed until the Treasury Department finalizes and publishes regulations on the matter.
Speaking on behalf of ACA, ACA Legal Counsel Charles Bruce noted that: “There is no de minimis rule, which might save the day for many taxpayers having small businesses operating through what for US tax purposes is a corporation. There should be. The new rules call for reporting which, frankly, for many American individuals living abroad is nigh-on impossible.”