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Washington, D.C.

November 2018


Residency-Based Taxation: It’s Happening Now


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

The Tax Cuts and Jobs Act (TCJA) or HR1 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.

A word about labels.

Taxing Americans abroad as US citizens, that is, taxing them on their worldwide income because they are US citizens, is citizenship-based taxation. Changing this to not tax them on their foreign income because, while US citizens, they reside outside the US, is residency-based taxation (RBT). 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 for them to have a taxable presence in one country or another. Under new legislation, skipping over many details, foreign income, whether earned by US corporation or by its non-US subsidiary, can now go untaxed or lightly taxed. The toggle switch here is geography or, some would call it, territoriality.

Residency-based taxation for individuals is tantamount to territoriality for individuals because the end result is that foreign income is not taxed.

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 made this public.  

One of the most serious problems is that small American businesses overseas are subject to the new Transition tax regime (Section 965). ACA recommends that a de minimis ruling be adopted to take out of the Transition Tax regime small business owners who may have never incorporated as a Controlled Foreign Corporation (CFC) and were not “stocking away” profits for future repatriation. ACA recently testified to the IRS and once again highlighted the disastrous effects the Transition tax regime is having on US citizens overseas and the need for a deminimis ruling. ACA continues to pursue solutions and from the negative effects of the new legislation but our ultimate goal is enactment of a residency-based taxation regime

Our advocacy

ACA has worked to promote and lay the groundwork for RBT legislation. It has held 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 completed preparation of a baseline of information about taxation of Americans abroad. This work lays out as completely as possible, using all available data, the critically important details. This information not only allows ACA to refine and re-refine our “vanilla” approach to transitioning from RBT to CBT but is essential for the Congress.

There is no way to effectively consider legislative proposals without having a grasp on the numbers.  ACA’s work on this has been shared with Members’ offices and with the Joint Committee on Taxation (JCT), most recently in January of this year. This information, filtered and modified as JCT thinks best, goes into JCT’s baseline for the subject.

With the baseline data that ACA has provided, decision-makers can intelligently sculpt proposals.

Turning to Legislation

There is lots of chatter about legislation for RBT, and Congressional offices and tax writing committees are known to be working on this. What does this legislation look like? No one knows for sure as currently there is no finalized RBT legislative language and no legislation has been introduced. There is Congressional support for tax reform for Americans overseas and ACA is continuing to cultivate support. ACA believes that Members, including Chairman Brady, Chairman Hatch, Representative Holding, and others, want to change the tax rules for Americans abroad. ACA members will recall that during the passage of HR1, Congressman Holding spoke on the House floor for Congress’ need to turn its attention to Residency-based taxation for individuals and received Congressman Brady’s acknowledgement of this, see:

ACA continues to: produce data and information, attend meetings with stakeholders and Congress, dialogue with other advocacy groups, share our knowledge on the subject and, educate the media, the public, the Congress, the Administration and the tax writing committees on the need to enact legislation. ACA is working 24/7 on tax reform and our presence in Washington, DC continues to be vital to this process.  

ACA is confident that RBT legislation will be introduced in this Congress.  ACA has called on the House Ways & Means Committee to include RBT in the Tax Cuts and Jobs Act (TCJA) 2.0. ACA is cooperating with other groups, including Republicans Overseas, Democrats Abroad, AARO, several American Chambers of Commerce, and a large number of individual actors in advocating for RBT. ACA is also working to lineup supporters and co-sponsors of legislation.

Whatever legislation is introduced will be a collective of the proposals brought to the table by the various groups that are advocating for change. The goal is to get sensible legislation drafted and passed in the Congress. 

Details on 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 streamlined approach to accidental Americans wishing to transition into the new system and other points will be determined once boilerplate legislation is drafted.