Residency-Based Taxation: It's Happening Now

Washington, D.C.

March 22, 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. ACA continues to pursue, very, very vigorously, solutions or at least some type of relief 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

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.

Whatever legislation is introduced will be a collective of the proposals brought to the table by the various groups that are advocating for change. It can be called residency-based taxation. It can be called territorial tax for individuals. 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. 

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.


District Economics Group summary of analysis of a basic Residence Based Taxation (RBT) proposal:

ACA calls on Congress to hold hearings on taxation of Americans Abroad: