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ACA’s advocates for the adoption of Residency-based Taxation (RBT).  Now’s The Time – Start Taxing Americans Abroad Like Other Countries Tax Their Citizens

In late 2016, ACA created a baseline or "vanilla" approach to how taxing Americans overseas might be structured.   In order to promote a constructive consideration of the subject, ACA has provided a Written Description and a Side-by-Side Comparison (updated November 1, 2017) indicating the current tax code (CBT) compared with details of ACA's RBT along side other territorial tax proposals.  ACA has regularly been updating its work in order to examine and review thinking on this subject.  ACA's Written Description explains the elements of its RBT approach as well as provides responses to questions raised by members and supporters.  This baseline approach to RBT is 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.   See our Frequently Asked Questions more information.

The baseline provided ACA with a starting point for developing revenue estimates on the cost of switching from citizenship-based to residency-based taxation. Revenue estimation work began with District Economics Group (DEG) in May of 2017 and was completed on November 6th.  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 new baseline approach was developed from our original draft proposal presented in 2014 (one page summary and full report) which recommends taxing Americans overseas on their US earned dividends, interest, royalties and on income earned in the United States.  Our work on the issue of RBT, both our original proposal and our new baseline approach, have been presented and well received by all the tax writing committees (see: https://www.americansabroad.org/advancements-acas-residency-based-taxation-rbt-approach/)

 

EXECUTIVE SUMMARY

The current Citizenship-based Taxation (CBT) puts Americans and the US economy at a competitive disadvantage. The US tax law discourages US companies from sending Americans abroad to promote US business, creates a major handicap for American entrepreneurs overseas and penalizes Americans working and living abroad.

CBT is very complex and costly to administer for both the taxpayers and the IRS. Tax filing from abroad is significantly more costly than domestic tax filing, even when no tax is due. CBT is grossly unfair as Americans abroad can pay taxes twice on the same income due not only to inherent incompatibilities between US and foreign tax rules but also to US legislation that imposes double taxation.

With CBT Americans abroad can also be subject to tax on phantom capital gains due to the long-term decline in the value of the US dollar. Americans abroad are fiscally penalized when investing in foreign tax-free pension funds which are considered taxable under US tax policy. Americans working abroad are highly restricted in local investment opportunities because of US tax rules.

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.

RBT will empower Americans abroad, boosting US export performance and US presence in world markets, particularly by encouraging small and medium-sized companies to initiate international activities. It will create better employment opportunities for Americans, both domestically and internationally.

 

TAX REFORM:  WHEN AND HOW?

With the recent intorduction of a major tax reform bill by House Republicans (H.R. 1 – “Tax Cuts and Jobs Act”), the most serious phase of the reform process is now underway. The House bill includes as a major part the biggest push in decades to enact “territorial” tax rules for corporations– meaning corporations would not be taxed on foreign source income. And previously untaxed earnings of foreign subsidiaries, amounting to some $2.6 trillion, would be allowed to be repatriated, subject to a one-time 12% tax on cash assets, 5% on non-cash assets.

Not surprisingly at this stage, nothing is said about the international taxation of individuals.  In the next weeks Congress will continue to discsuss and negiotiate the House bill and the good news is that the game is on.  There will be tax reform, and “territorial” treatment for corporations is in the mix and moving ahead. When Congress looks up from its work on corporations, it will see that territorial treatment for individuals, in other words, residency-based taxation which does not tax individuals on foreign income, sits on the table right alongside the corporate provisions and can—and should—be included. It’s also good that nothing being done with regard to corporations muddies the water for international tax reform for individuals. 

The ACA approach outlines a relatively straightforward means of moving from existing provisions to RBT.  The essential elements meet the needs of the community of Americans abroad, while at the same time avoiding a loss of revenue and the creation of loopholes. Novel concepts and provisions intended to act as revenue raisers—aimed at persons that are not in the population of Americans residing abroad—are avoided so as to not “muddy the water."

In the coming weeks ACA will be presenting, with DEG, their findings to the Joint Committee on Taxation staff and other interested parties on Capitol Hill and at Treasury Department. A number of important decision-makers in Congress and the Administration have expressed a desire to address the long-standing problems of the taxation of Americans abroad.  As Congress changes the corporate international tax rules towards territoriality they will also have in front of them a proposal for RBT that has been intelligently drafted and easily implementable.

If you would like to contribute to this work please consider making a donation to ACAGF to help fund this work: http://acaglobalfoundation.org/donate.

In the interim, there are four major areas that can be addressed within the current CBT tax regime that would go a long way to alleviating the problems most Americans abroad face. ACA continues to advocate for these positions while also advancing its advocacy work on RBT.  

 

US Tax Code for the 21st Century - Social Security Taxes

US Tax Code for the 21st Century - NIIT 3.8%

US Tax Code for the 21st Century - Functional Currency

US Tax Code for the 21st Century - Foreign Pensions