Washington, D.C.
March 22, 2018

 

Residency-Based Taxation: It’s Happening Now

What’s happened recently?  What’s happening now?  What’s next?

Let’s start with enactment of tax reform, officially called “Tax Cuts and Jobs Act” (TCJA). This was signed into law just before last Christmas.

Because of the rush to get this done, no consideration was given to Americans abroad. Not just to the subject of moving away from citizenship-based taxation to residency-based taxation; not anything having to do with Americans abroad.

In fact, in the provisions that were enacted, major harm was done. The benefit of territorial tax for corporations was run to US corporations but not to any other shareholders of controlled foreign corporations, including Americans abroad. Yet the harm, in the form of a transition tax on accumulated earnings and profits of foreign corporations, definitely hits Americans abroad.  The benefit of a 20% deduction on some types of income of so-called “pass-through entities”, such as partnerships, does not help Americans abroad, who are partners or otherwise participate in these entities since it doesn’t apply to foreign income, and typically the income of a foreign partnership belonging to Americans abroad, logically, is foreign. 

In the closing hours of consideration of TCJA, important Members of Congress, including Representative Holding (R-North Carolina) and Chairman Brady, of the House Ways and Means Committee, stated quite deliberately that they wanted to turn to the subject of changing the taxation of Americans abroad to move things in the direction of residency-based taxation.

A word about labels.

Taxing Americans abroad as US citizens, that is, taxing them on their worldwide income because they are US citizens regardless of anything else, is citizenship-based taxation. Changing this to not taxing them on their foreign income because, while US citizens, they reside outside the US, is residency-based taxation. The toggle switch determining whether an individual is taxable on worldwide income or taxable only on US income – and not on foreign income – is residency. 

Corporations can be resident in more than one country. It is also relatively straightforward to them to have a taxable presence in one country or another. If the corporation has foreign income it – or more properly its income – might nonetheless be subject to current US taxation. If this foreign income can be placed, for example, in a foreign subsidiary, under old rules, and if certain horribly complex rules are met, US tax on this foreign income can be deferred. Under new rules, skipping over many details, foreign income, whether earned by US corporation or by its non-US subsidiary, can go untaxed or lightly taxed. The toggle switch year is geography or, some would call it, territoriality.

It is correct to say that residency-based taxation for individuals is tantamount to territoriality for individuals because the end result is foreign income is not taxed. For some it can be a little confusing because territoriality normally is talked about in the context of corporations, not individuals. Enough of all this.

Really bad stuff resulting from TCJA.

Immediately after passage of TCJA, ACA jumped on the subject of the bad fallout from this Act. We identified for all concerned what the problems are and what, in our view, needed to be done. An article, posted on our website, attracted immediately a great deal of attention, and the information popped up in many other articles and other writings. ACA continues to pursue, very, very vigorously, solutions or at least some type of relief. However, our legitimate goal is enactment of a residency-based taxation regime.

Our advocacy.

Before turning to legislative activity, it must be emphasized that ACA has worked to promote and lay the groundwork for RBT legislation. It has had dozens of meetings with Members and Members’ staff on Capitol Hill and with the tax-writing committees staffs. ACA has identified and has been working with champions on this issue like Congressman Holding.

Very importantly, working with District Economics Group on revenue estimates, ACA has completed preparation of a baseline of information about taxation of Americans abroad. This lays out as completely as possible, using all available data and, in some cases, backtracking from that data into new data sets, the critically important details. This information allows us to refine and re-refine our so-called “vanilla” approach to transitioning from RBT to CBT. There is no way to do this effectively without having a grasp on the numbers.

ACA and DEG met with and shared this baseline data with several Members’ offices. Then, in mid-January, ACA, with DEG, met with the staff of the Joint Committee on Taxation (JCT) to present all the information developed by ACA/DEG. No one expects JCT to simply embrace this information. Without a doubt, however, JCT will benefit from the “spade work” done by DEG. This information, filtered and modified as JCT thinks best, goes into JCT’s baseline for the subject.

With baseline data, decision-makers can intelligently sculpt proposals. These proposals, almost element by element, can be estimated; that is, revenue estimates can be run. 

Turning to Legislation.

ACA expects legislation to be introduced in the very near future.  

ACA is cooperating with all the other groups including Republicans Overseas, Democrats Abroad, AARO, several American Chambers of Commerce, and a large number of individual actors.

Quite naturally, a number of groups would like to position themselves at the front of the parade. This is quite understandable. ACA has made it clear to everyone that its only goal is to get enacted into law provisions that will exempt from US taxation individuals resident overseas on their foreign source income, in other words, residency-based taxation. This change can be “branded” in any way that sponsors and leading proponents want. It can be called residency-based taxation. It can be called territorial tax for individuals. It can be called TTFI/RBT. But ACA is maximizing its efforts to get it done.

There will be important little, or not so little, points to be decided as things move ahead. Taxation of US-source capital gains? Estate and gift taxation? An aging rule – that is, how long does an individual need to “age in status” as a foreign resident? A lightened approach to accidental Americans wishing to transition into the new system. Maybe ½ dozen other things. 

ACA is as close or closer to this exercise than anyone.

ACA is continuing to produce information, attending meetings with stakeholders and Congress, dialoguing the other advocacy groups and continuing to promote enactment, almost every day. ACA is also working to lineup supporters and co-sponsors of legislation.

  


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