Transition Tax/GILTI Advocacy
Transition Tax Legislation
The TCJA moves the US from a worldwide tax system to a participation exemption system by giving US (that is, domestic) corporations a 100% dividend received deduction for dividends distributed by a controlled foreign corporation (CFC). To transition to that new system, the measure imposes a one-time deemed repatriation tax, payable over 8 years, on unremitted earnings and profits at a rate of 8 percent for illiquid assets and 15.5 percent for cash and cash equivalents. The dividends received deduction is available only to US corporations that are shareholders in a CFC. The deduction is not available to individuals, nor to foreign corporations, which, for example, are owned by US individuals, including individuals living abroad. On the other hand, the repatriation tax applies to everyone, not merely US corporations.
Accordingly a US citizen residing abroad, who is a shareholder in a CFC, might be subject to the repatriation tax. These businesses may be a yoga studio in France, a restaurant in Norway or a consultancy in Thailand. They can be big or small and have probably not been incorporated taking into consideration US tax law. Some of the individual who are subject to the repatriation tax might not have in hand the actual monies needed to pay this tax.
ACA advocates for the application of a de minimis ruling (threshold for reporting) which would remove from the reporting regimes small businesses owned and operated by US citizens overseas. The intent of the new law was to address the tax compliancy of large US corporations, small consulatancies, restaurants, excercise studies owned by US citizens overseas should not be subject to these tax regimes.
August 6, 2020: ACA Update: The Torturous Road Leading to TCJA and Its Progeny, the Transition Tax and GILTI.
Changes in the Internal Revenue Code and Treasury Department tax regulations elaborating on these changes go from bad to worse. All this is so miserable for American small business owners abroad that a little “crimp” looks like something major which should be celebrated. We should be thankful for anything, but we need to keep our eyes on the ball. We need a big change in the way Americans abroad are taxed. Click here for full article.
July 10, 2020: ACA writes to Treasury and IRS and Reiterates the need for a De Minimis Ruling for Transition Tax and GILTI.
June 19, 2019: ACA Advisor, Peter Palsen, writes about Treasury providing relief to U.S. for Americans abroad owning businesses through entities that are taxed as foreign corporation - in particular, controlled foreign corporations. These entities can be subject to complex and punishing new rules enacted in 2017 as part of the large “tax reform” law. "This is not an easy subject, but getting it right can save a lot of tax and angst," Peter Palsen explains in his piece, “IRS Proposes Additional GILTI High-Tax Relief.” Click here for full article.
March 26, 2019: Eli S. Noff, Esq. CPA writes about Treasury providing relief to U.S. individual owners of foreign corporations facing the new GILTI regime. The relief is likely to increase the use of Section 962 elections by owners of foreign companies that are paying meaningful amounts of foreign tax. Eli notes in the article that the use of the election under the right circumstances can revert an individual owner of a foreign corporation to the pre-GILTI regime of paying tax on earnings only when they are distributed. Click here for full article.
March 4, 2019: ACA update on Transition Tax and GILTI advocacy.
The US Treasury Department GILTI latest announcement on tax regulations (issued March 4th) gives some relief to individual taxpayers, including Americans abroad, heretofore slammed by the GILTI provisions enacted as part of TCJA in December 2017.
Taking notice of the strong arguments made in 34 sets of comments submitted in response to the proposed regulations, the Treasury Department has modified the regulations.
The interesting spin to ACA members, according to Peter Palsen, advisor to ACA, is the interaction with RBT. “Many owners of foreign companies were considering moving the foreign companies under U.S. holding companies so they could be sure to access the 50% deduction. However, now the 50% deduction is available without actually moving the foreign shares into a U.S. company. Why is this relevant to RBT? Because dividends from a U.S. company are U.S. source income – and thus conceptually ineligible for RBT exemption. Therefore, for years prior to RBT, if the 50% deduction was not extended to Section 962 elections, individuals would have felt pressure to put foreign companies in U.S. companies – but that would be a problem when RBT is enacted. Now thanks to this development, the pressure is reduced.”
“Unfortunately, this does not relieve anyone of reporting requirements, which for most ACA members is the bigger deal. In fact, they will need to continue to track the historic earnings of their foreign corporations,” said Charles Bruce ACA Legal Counsel.
“Nonetheless, this is a significant ‘win’, ” according to Peter Palsen. “For individuals with businesses that are paying at least modest amounts of foreign taxes (and otherwise are not subject to ‘normal’ Subpart F rules), the use of a Section 962 election will allow the individuals to go back to the old days of only paying tax on income in foreign companies when it is distributed. Many of the software providers accommodate the Section 962 election, which makes life a tiny bit simpler.”
October 8, 2018: ACA submitted extensive commentary to the Treasury on its issuance of regulations (August 8th). In its commentary, ACA advocates for a de minimis ruling for small taxpayers residing abroad exempting these small taxpayers from the transition tax and its information- collection provisions. ACA requested that it testify at public hearings on the subject and these were held on October 22nd. ACA’s testimony calls for the adoption of a de minimis ruling and questions Treasury determination that the transition tax regulations do not impose significant economic impact on taxpayers.
In March of 2018, ACA wrote to Treasury officials requesting relief from certain the reporting requirements of the Transition tax, including an extension in the filing deadline. In April of 2018, Treasury provided some relief giving an extension for the filing deadlines. On June 5th, the Treasury, after pressure by ACA and other advocates, extended the filing deadline further from June, 2018 to June 2019.