Posted by Aca Admin on June 02, 2024
Washington, DC
June 2, 2024
American Citizens Abroad (ACA) commends the Ways and Means Committee Majority for seeking to expand its understanding of the needs and concerns of U.S. citizens and businesses as it examines TCJA provisions ahead of the law’s 2025 sunsets. We believe that the Tax Teams announced on April 24th reference critical components of the U.S economy and the Listening Tour will provide valuable input in these areas. Explicit issues for the Americans abroad community arise in these areas as well. Those issues merit investigation by tax-writers because the TCJA renegotiation will directly impact an estimated 4 to 6 million U.S. citizens living abroad and affect U.S. productivity in the global economy.
WORKING FAMILIES and AMERICAN WORKFORCE
Congress often enacts tax policy without giving adequate prior consideration to the unintended adverse impacts it might have on ordinary working-class Americans living abroad. They do not live abroad to avoid paying taxes; they pay taxes in the countries they live in, the vast majority of which have higher individual tax rates than the U.S. individual tax rates. Americans abroad are eager for Congress to understand that they are ordinary working families and not tax evaders, and that the U.S. tax system is fraught with policies that discriminate against them.
Discriminatory tax policy –
▪ U.S. Taxation of non-U.S. non-qualified pension plans.
▪ U.S. Taxation of artificial Capital Gains/Losses due to currency fluctuations.
▪ Barriers to investing in U.S. securities without a U.S. residential address.
▪ Barriers to investing outside the U.S. in securities not registered with the SEC (PFIC Rules).
▪ Net Investment Income Tax, established as an Affordable Care Act pay-for, although
Affordable Care Act benefits are inaccessible to Americans abroad, and no foreign tax credits can offset it.
▪ Child Tax Credit U.S. residency requirements.
▪ No marital deduction for bequests to foreign surviving spouses.
▪ U.S. taxation of tax-free foreign long-term savings plan income
▪ U.S. taxation of foreign welfare payments which are tax-free domestically.
▪ U.S. tax on transfers of foreign retirement plan assets; transfers of U.S. retirement plan assets are tax-free.
▪ Double taxation of small business profits.
Tax compliance inequities -
▪ Outdated double taxation treaties.
▪ Complexity of compliance, especially as compliance requires individuals to:
o comprehend double tax treaties and
o navigate the convergence of the U.S. tax system and the tax system of the
individual's country of residence.
▪ Cost of expat tax services, 2-3 times what it costs to engage tax return preparers
domestically.
IRS support deficiencies -
▪ Insufficient telephone (and in-person) support
▪ No expat tax return preparer oversight or minimum competency standards
▪ IRS online account access for non-resident taxpayers and expat tax professionals remain inadequate (impeding efficient case resolution and forcing millions of
taxpayers abroad to call or send correspondence to the IRS or go without IRS support entirely.)
▪ Insufficient FreeFile e:filing options for preparing expat tax returns.
Additionally, many Americans living overseas are working for NGOs, large and small U.S. and multinational companies however, many are independent entrepreneurs with small family businesses, boutiques, restaurants, consultancies, etc. When TCJA was passed many of these small businesses owned and operated by one or two Americans were caught up in the Transition Tax and GILTI regimes meant for large U.S. multinationals that were offshoring profits. For many family businesses this was devastating, and some simply had to close up shop because the tax filing requirements were too onerous and expensive. These are not businesses that are offshoring profits to avoid paying U.S. taxes, they are simply businesses where owners were retaining profits for future investment in their businesses or for retirement. This was clearly an oversight by the tax writing committees and could have been addressed before the law was passed had Congress “listened” to the specific issues of US citizens overseas. ACA provided testimony calling for a deminimis ruling to alleviate the problem for small businesses.
U.S. INNOVATION, GLOBAL COMPETITIVENESS and AMERICAN WORKFORCE
Tax policy developed to bring jobs back to the U.S. from abroad cannot and should not eliminate all U.S. business investment outside the U.S. To be innovative in product development and service delivery, U.S. businesses should be exploring gaps and building intelligence for opening new markets, especially markets outside the U.S. U.S. businesses cannot exploit foreign markets without operations present in them. U.S. businesses will therefore always employ Americans in their operations abroad. As noted herein, the tax consequences of offshore residency are punitive. Many U.S. businesses are therefore forced to put costly tax equalization provisions and tax return preparation reimbursements into the employment contracts of their offshore employees.
Many U.S. subsidiaries overseas are now being run by foreign nationals, as are American Chambers of Commerce (AMCHAMs). Although ACA welcomes partnering with foreign in-country talent, these employees will often resource contractors, services and partnerships via their own networks, excluding the possibility of partnerships with U.S. citizens and U.S. companies both overseas and domestically. These individuals will go back to their employment, educational and social networks when looking for partnerships instead of considering U.S. businesses and individuals. This also limits the ability of US citizens to gain international work experience as there are fewer and fewer opportunities for Americans to work overseas. Even in the Commercial offices of many U.S. Embassies and Consulates, the staff may be foreign employees looking to advance their countries interests and not the interests of the United States when finding partnership opportunities.
Tax policy that discriminates against Americans abroad, therefore:
• makes U.S. citizen employees more expensive than non-U.S. citizen employees, which hurts the American workforce;
• thwarts the ability of U.S. businesses to employ the workforce of their choice, which impacts U.S. global competitiveness; and
• threatens U.S. innovation by putting up barriers to the exploitation of new markets, technology, products and services.
THE NEW ECONOMY and U.S. INNOVATION
The New Economy and advancements in Artificial Intelligence, cybersecurity and technology are key growth areas for the U.S. economy. Not all innovation comes from the U.S.; it also comes from countries and markets in Asia, Europe, the Middle East and elsewhere. Many of these opportunities to learn and partner with other companies working in these fields, therefore, requires U.S. companies to have “boots on the ground”. In 2023, Switzerland and Sweden led the United States in innovation in areas of pharmaceuticals, technology, renewable energy, and R&D. Following close behind the United States is Singapore, Finland, the Netherlands, and Korea (Source: WIPO Global Innovation Index 2023). U.S. citizens need to be present in these markets and engaging with foreign actors, companies large and small, laboratories, start-ups, Centres of Excellence, etc. This benefits the U.S. economy not only because of the relationships and knowledge base it provides to U.S. companies, allowing them to understand what innovation is taking place elsewhere in the world, but more importantly how the U.S. can capitalize on them to the benefit of the U.S. economy. Not enough U.S. citizens are deployed overseas to satisfy demand. This is generally due to the
high cost of hiring U.S. citizens arising from the myriad tax and compliance issues associated with U.S. taxation.
CONCLUSION
It is imperative that the issues of U.S. citizens living overseas are put on record with the Committees and Congress before the expiring and other provisions of the TCJA are settled. The Congressional Listening Tour must include the concerns of U.S. citizens overseas and the organizations representing them. Otherwise, Congress risks perpetuating or worsening the harm discriminatory U.S. tax policy does to U.S. individuals and U.S. businesses abroad, which impacts global competitiveness, innovation and the U.S. economy generally. ACA welcomes assisting the Committee with its Listening Tour to help them better understand the issues. However, to be fair, the issues of Americans abroad that impact citizens, U.S. innovation and global competitiveness should be put on official Congressional government record through hearings. In this way the Committees can identify legislative solutions that will help families, workers and small businesses as well as the U.S. economy. ACA can assist with the organization of witnesses to provide data, testimony and case studies. Please contact our offices in Washington, DC at any time to discuss.
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