Americans Helping Americans Abroad

Repatriation and GILTI Taxes for Professionals and Small Business Owners

Presentation: Monte Silver, U.S. Tax lawyer in Israel and partner at Silver & Co.

With: Emmanuel Dinh, law professor at Université de Paris, Dauphine and practicing at STCPartners, and Melissa Pun, also practicing at STC Partners.

This meeting was prepared on short notice after exchanges between Nora Muller, AARO Board Member, and Monte Silver. Thanks to all who were able to prepare their interventions and to those attending on such short notice.

How did this all start?

First, it starts with the citizenship-based taxation system, unique to the United States.

Then come the bilateral tax treaties to avoid double taxation, which sound good until you find the "savings clause", which Emmanuel Dinh found in the treaty between France and the U.S., article 29-2 "Notwithstanding any provision of the Convention except the provisions of paragraph 3, the United States may tax its residents, as determined under Article 4 (Resident), and its citizens as if the Convention had not come into effect…." and Monte presented as article 6 §3 of the treaty between Israel and the US. Please check the treaty between your home country and the United States.

Foreign companies, more specifically, foreign subsidiaries of U.S. corporations were seen as means to deter U.S. tax, as early as 1962, thus creating the CFC (controlled foreign corporation), foreign corporations which are controlled 50%, or more, by U.S. persons. There is a part of their income that the U.S. could tax shareholders (of 10% or more) called Subpart F (bad) income. This is mostly passive income involving sales income or services income derived from the foreign subsidiary selling to or performing services for the U.S. corporation. In order to be taxable, it had to be substantial. This Subpart F income did not usually affect the small business owner, a U.S. citizen operating a business in his home (foreign) country.

The problem for the U.S. was that large U.S. corporations were holding back $4B in non-Subpart F profits from their foreign subsidiaries in low tax countries. The money was not coming back to the United States.

The Repatriation Tax (965)

The Repatriation Tax is a one-time solution to entice companies to bring the money into the United States. Also referred to as the Transition Tax, it is a transition from the old scheme to a new participation-exemption regime, allowing for tax free dividend repatriation from foreign subsidiaries.

It taxes all the accumulated profits between 1986 and 2017 (30 years!) as Subpart F income. There is no distinction between a corporate and an individual U.S. shareholder, but Monte had slides of tables showing how an individual business owner would be taxed, in effect, at a higher rate than a corporation.

He showed extracts from the Basic (incomprehensible) IRS Guidance for 965, which were given as handouts to the attendees, and are copied in annex to this report. In summary, though:

  • the first installment is due by JUNE 15, 2018. None payment or untimely payment causes immediate acceleration to full payment without the possibility of electing to spread it out over 8 years.
  • the election to pay all upfront or in installments is due with the ordinary return.

There were slides to show the payment terms, how to calculate the total 965 tax and the first installment.

Monte also pointed out that using the foreign tax credit rather than the deductions might lead to lower tax. And if the company can be taken out of the CFC category, that would eliminate or lessen the tax. It was pointed out in discussion, though, that since most compliant CFC-shareholding taxpayers have been filing form 5471, and the cutoff date was December 31, 2017, this could be difficult.

The first "fix" was to have the payment extension to June 15, 2018! Monte hopes the second "fix", which he could not discuss, would be coming very soon. As things stand now, however, some payment is still due by June 15 of this year.

GILTI

The Global Intangible Low Tax Income tax is prospective effort of the US to make sure that US corporations do not continue to accumulate earnings abroad through their foreign subsidiaries. The Repatriation tax takes care of past profits and GILTI takes care of the future, everything from January 1, 2018 and is an annual tax. As an individual taxpayer who is a shareholder of a foreign company shareholder is subject to the 37% tax rate, while a U.S. corporation (like Google) is subject to a rate of 21%, or 0% if the foreign subsidiary is in a country with a higher than 13% tax rate. The calculations are so complex, compliance, itself, will be more expensive.

After defining the different terms used in GILTI, just what do they mean by this, Monte concluded with "Bottom line is this: GILTI income is gross receipts, less COGS less "reasonable expenses" less 10% depreciation on tangible assets."

He followed with a table comparing the inequity between a small business owner, especially a service provider who does not have much in COGS or tangible assets, and a company like Google. The small business owner could end up with a total tax rate of nearly 50% (in a country where the tax rate is 20%, in the example) while, in the same country, the large U.S. corporation would have a total tax rate of 20% because GILTI would be 0%.

What is a small business owner to do?

  • "Nothing", which does not solve the problem.
  • Elect 962 to be treated as a U.S. corporation. This solves some of the problems (a 21% tax rate, the foreign tax credit), but not the 50% deduction.
  • Check the box and treat the company as transparent.
  • Close the company and do business as a sole proprietor or through another entity.
  • Explore ways to prevent the company from being classified as a CFC, subject to GILTI

The French Point of View

Emmanuel Dinh immediately opened the subject by defining these US taxes as extraterritorial.

French tax basics

Melissa Pun described the different notions of household between the U.S. and France; a household in France files a joint declaration, whereas the U.S. allows different filing statuses.

With the tax reform in France, the new flat tax of 30% on dividends, which are high in comparison to the U.S. tax, are, for the French, much lower than the previous rate of 45%.

The question is how a French resident U.S. shareholder in a CFC would raise the cash to pay the transition tax. Via dividends? There is also the problem that the flat 30% is a combination of the social contributions (CSG and CRDS) and income tax, so not all of the 30% might be accepted for a foreign tax credit.

The France - U.S. tax treaty

France does not care where a corporation was created or where the headquarters are. If they do business in France, that income is taxed in France. That is strict territoriality and France is one of the rare countries to stick to that.

France does not tax dividends from a foreign subsidiary. The U.S. tax reform of 2017 brings the U.S. in line with that.

France has also adopted the savings clause in other bilateral tax treaties, such as the one with Andorra signed in 2013, which has led to fear that the country could adopt a form of citizenship-based-taxation in the future, on the US model.

France also has a CFC definition.

The combination of the Repatriation or Transition tax and the future participation-exemption regime are a trade-off. Pay now for past profits and be able to repatriate (to the U.S.) tax-free dividends in the future. However, there is no way to offset these taxes on French taxes, so it comes down to double taxation, which is, in theory, prevented by the treaty.

What to do?

  • "Bona fide" Avoidance: take the stance that this does not concern you. It cannot have been legislators’ intent. Indeed, the reduced rate of the repatriation tax to be paid upon past non-repatriated earnings is somehow the price to pay before US corporate shareholders may enjoy tax-free dividend distributions. But US individuals residing abroad shall never enjoy such tax-free dividend distribution. As a result, there is no ground for them to be covered by the transition tax, notwithstanding the letter of the law. In discussion, this was deemed a risky attitude if the CFC had been previously declared.
  • Dispute it: take it to court basing the case on non-conformity with the US Constitution since it treats individual and corporate shareholders differently; defining it as confiscation since there is no taxable event and there is no cash for payment; retroactivity (going back to 1986!) being contrary to legitimate expectations; being in violation of the treaty, article 10 §8, which stipulates that the U.S. cannot tax undistributed assets. But then, the individual comes up against the savings clause, article 29 §2. Bypassing the savings clause by invoking Article 7, concerning taxes on French corporations could be an efficient route.
  • Adaptation: Align reality with fiction, and proceed to an actual distribution of dividends, which will generate French income tax, that will be creditable against US repatriation tax through a carry-forward of the French tax credit.

However, as Monte pointed out, all this takes time and the due date is June 15, 2018!

Conclusion

It is generally accepted in Washington, both on the Hill and at Treasury that these taxes are unjust and these are unintended consequences. There are many (ACA, Republicans Overseas, Democrats Abroad, AARO, as well as individuals) working on finding solutions and fixes.

Call to Action

Monte started his presentation and ended it with an appeal to sign the petition and send the email: americansabroadfortaxfairness.org

PETITION TO EXEMPT AMERICANS ABROAD FROM THE REPATRIATION & GILTI TAXES

We are law abiding American citizens and green-card holders living abroad. We are professionals or have interests in businesses in the countries we live in. In the vast majority of cases, our businesses are small and support ourselves and our families. We pay high taxes in the countries we live in, often higher than is paid in the U.S. Suddenly, due to the 2017 tax reform, we find ourselves subject to the draconian 15.5% Repatriation and GILTI taxes, taxes that were intended for companies like Google and Apple who have been hoarding hundreds of billions of dollars overseas. And to make matters worse, while Google and Apple get tax credits and deductions to avoid or minimize these taxes, we, simple Americans living abroad do not!! (To better understand the issues see www.silvercolaw.com/articles from items 31-38)

For years we have suffered in silence as we have been inflicted by one U.S. tax and/or disclosure regime after another. These regimes have sought to target U.S.- resident companies and rich individuals who were abusing the system. We, simple people living our lives, have been collateral damage to these tax wars.

NO MORE!! WE HAVE ONE SIMPLE GOAL: EXEMPT AMERICANS ABROAD FROM THE 15.5% AND GILTI TAXES.

We can do it and it won't cost a dime!!!

After spending hours talking to the IRS, the Treasury, the relevant people at the Ways & Means committee, DC-based senior tax lobbyists, expats and expat organizations from around the world, we see a simple solution.

For those who missed this presentation, Monte will be presenting in the UK or Germany, Monte will be presenting: https://www.linkedin.com/in/americantaxsolutions

Annex: pdfBasic IRS Guidance

AARO Member Login

AARO members, please log in for access to dues payments,
newsletters, videos and other benefits!

Not an AARO member yet? Here's how to join!