Taxation and The RBT Tax Fairness for Americans Abroad Act (TFAA).
ACA advocates for the adoption of Residency-based Taxation (RBT) and supports advancing Congressman Holding's legislation, Tax Fairness for Americans Abroad Act of 2018 (TFAA), which was introduced in December of 2018. The Tax Fairness for Americans Abroad Act of 2018 proposes taxing US citizens resident abroad solely on their US sourced income and not on their foreign earned income. The legislation is a residency-based approach to taxation, sometimes referred to as territorial. A summary outline of the bill can be found here, along with a fuller outline and description provided by ACA here.
ACA was the first organization to create a baseline or "vanilla" approach to how taxing US Citizens overseas based on residency might be structured. In order to promote a constructive consideration of the subject, ACA provided a Written Description and a Side-by-Side Comparison indicating the current tax code, often referred to as Citizenship-based taxation or CBT, compared with details of ACA's RBT approach.
This baseline approach to RBT was intended to lay out a version that captures the essential elements of residency-based tax treatment and examine and modify these to arrive at an optimal RBT approach, one that meets the needs of the community while addressing the concerns over abuse and potential loopholes.
Revenue estimation work to provide an estimate on the cost of switching from CBT to RBT, began with District Economics Group (DEG) in May of 2017 and was completed on November 6th, 2017. The DEG study estimates that a revenue neutral budget score for RBT can be arrived at within the 10-year congressional budget window of 2018 through 2027. Click here to see DEG's letter.
ACA’s work on the subject of Residency-based taxation (RBT) was extensively presented to Congressional offices and the tax writing committees and provided these offices with key data on the community of Americans living and working overseas. ACA's knowledge was important to offices working on tax reform for Americans living and working overseas.
Citizenship-based (CBT) versus Residence-based (RBT) Taxation.
The United States taxes on the basis of citizenship. This means it taxes American citizens on their worldwide income regardless where they live. An American citizen living in London, or Toronto, or Tokyo, or Johannesburg, generally must file U.S. tax returns and pay U.S. tax, even if he or she does not live in or travel to the U.S. Taxation is not based on any physical presence test. The source of the income makes no difference either: income exclusively earned and additionally taxed abroad is also subject to U.S. reporting. Moreover, Americans abroad are commonly taxed twice, for example on some types of investment income and certain retirement-savings vehicles. In some cases, where an individual was born in the U.S. to foreign parents on a student or temporary work visa who then returned to their home country, those subject to the tax law and its penalties may not have not been aware of their status as an American birthright citizen.
This situation is incompatible with the global economy of the 21st century where the tax policy of most industrialized nations is based on residency and not nationality. CBT works against US economic interests in terms of job creation and increasing exports. Throughout its history, ACA has highlighted some of the worst problems that CBT imposes on US citizens overseas with regard to Social Security, Net Investment Income Tax, Functional Currency and Foriegn Pensions.
This is not the worldwide norm. The United States and, arguably, the small African country of Eritrea are the outliers in taxation based on citizenship regardless of residency.
FALLOUT FROM THE TAX CUTS and JOBS ACT AND INTRODUCTION OF THE "Tax Fairness for Americans Abroad Act of 2018," AN RESIDENCY-BASED APPROACH TO TAXING AMERICANS ABROAD.
On 22 December 2017, Pres. Trump signed into law the new Tax Cuts and Jobs Act. This law makes dramatic changes in the Internal Revenue Code, and there are a large number of very important, and some quite surprising, provisions affecting US citizens abroad. ACA made a number of points on the effects immediately upon passage of the bill. These are contained in the commentary – TAX REFORM BILL AND AMERICANS ABROAD: WHAT HAPPENED? WHAT'S NEXT? — by Charles M Bruce, ACA’s Legal Counsel and Of Counsel to Bonnard Lawson-Lausanne.
On December 29, 2017, ACA called upon Congress to hold hearings on tax reform for Americans abroad. Congress needs to review every aspect of tax reform for US citizens abroad, the background, the workings of existing law, the numbers, the real-life stories, all need to be aired, and now’s the time to do it. In this manner Congress will have all the elements it needs to write and pass legislation.
Since passage of the Tax Cuts and Jobs Act in December of 2017, ACA has been consistently advocating to Treasury on the negative fall-out from the Transition Tax on US citizens abroad. ACA advocates for relief for taxpayers residing abroad and asks that the reporting requirements under Section 965 should be modified and that a de minimis rule be applied to exempt small taxpayers resident outside the US. This is the same type of approach that was applied in the case of the filing of Forms 8938 (Statement of Specified Foreign Financial Assets) for FATCA.
The Treasury Department and IRS have provided a measure of relief from the new transition tax by extending the filing deadline for US citizens abroad. ACA continues to request a de minimis ruling in order that small taxpayers, i.e., those with foreign corporations which have little in the way of accumulated earnings, would be exempt from having to report and pay the new transition tax.
Congressman Holding Introduces “Tax Fairness For Americans Abroad Act of 2018 (H.R. 7358)” – A Residency-Based Taxation Bill
On December 20, 2018, Congressman Holding (Republican-North Carolina), a member of the influential House Ways & Means Committee, introduced legislation transitioning from the current citizenship-based taxation system to a system that provides residence-based taxation for individuals – sometimes referred to as territorial tax for individuals. By taking this first step toward ending the onerous burdens of citizenship-based taxation, Americans will become more competitive in the international job market and free to pursue opportunities around the world. Compliancy costs and the burden of exposure to double taxation will be significantly reduced, and tax fairness will be restored for US citizens living and working overseas.
Under the Tax Fairness for Americans Abroad Act (H.R. 7358) nonresident US citizens, who make an election to be taxed as a qualified nonresident citizen, will exclude from income, and therefore be exempt from taxation on, their foreign source income. All nonresident US citizens, however, will remain subject to tax on any US source income.
The basic principle of the bill mirrors the thinking behind ACA’s residency-based taxation (RBT) approach, that is, separating foreign-source and US-source income and excluding from US taxation specified foreign-source income earned when a US citizen is a qualified resident abroad. As can be seen in the bill language, the toggle switch determining whether an individual is taxable on US income – and not on foreign income – is residency. A summary outline of the bill can be found here, along with a fuller outline and description provided by ACA here.
For more on ACA current advocacy for tax reform, click here.
- New law on Foreign Earned Income Exclusion (FEIE)
- Support from Congress and the Taxpayer Advocate
- Submissions Made by ACA to Congress and Key Legislative Offices
- Filing Your Taxes: Some Guidelines
- Proposal for Treatment of Foreign Pensions
- Potential effects of US withdrawal from Universal Postal Union for US Citizens overseas