updated 2:28 PM CEST, May 24, 2023

Concern among American expat small-business owners over proposed GILTI law tweak by U.S. lawmakers

American expatriates who own small- and medium-sized small business corporations outside the U.S. are expressing growing concern over what they say is a move by two Washington lawmakers to legislatively reverse a 2019 interpretation by the U.S. Treasury of elements of President Trump’s Tax Cuts and Jobs Act, which had been meant to help such individual owner/operators of such small, non-U.S. businesses, who had originally been hard-hit by the Trump legislation.

The lawmakers, both Democrats, are Oregon’s Ron Wyden and Ohio’s Sherrod Brown, and their bill, entitled the Blocking New Corporate Tax Giveaways Act, would prevent the introduction of a planned “high-tax exemption” to the Tax Cuts and Jobs Act’s Global Intangible Low-Tax Income (GILTI) regime.

In the TCJA, which took effect on Jan. 1, 2018, the GILTI rules had been intended to discourage U.S. corporations from shifting their high-yield intangible assets, such as intellectual property rights, to low-tax jurisdictions outside the U.S.

However, as reported here in June – when the Treasury Department and IRS published proposed tweaks to these regulations – officials acknowledged that the GILTI measures were seen as coming down unfairly hard on American taxpayers living outside of the U.S., with owners of small overseas businesses particularly hard-hit.

The changes proposed by the Treasury and IRS, therefore, had been aimed at giving overseas taxpayers the option to exclude certain income that would otherwise be subject to the GILTI regime if that income was subject to foreign income tax at an effective rate greater than 90% of the full U.S. corporate tax rate – or 18.9%, based on the current 21% U.S. corporate tax.

The U.S. IRS defines GILTI income as that portion of a controlled foreign corporation’s income that is owned by U.S. shareholders that exceeds a notional 10% return.

After a 50% deduction, GILTI income is subject to an effective corporate tax rate of 10.5%.

The legislation now being proposed by senators Wyden and Brown, however, would amend the Internal Revenue Code to clarify that high-taxed amounts would be excluded from tested income for purposes of determining global intangible low-taxed income only if these amounts were either foreign-based company income or insurance income.

In a statement announcing the proposed bill, Wyden explained the thinking behind it: “When the big multi-national corporations said ‘jump,’ the Treasury Department asked ‘how high?’"

He added: “Treasury has overstepped its authority to unilaterally give companies billions in tax breaks on top of the hundreds of billions in tax breaks they’ve already received.

“Our bill would block the proposed giveaway that essentially allows corporations to choose the lowest available tax rate. Working families don’t get this perk and big corporations shouldn’t either.”

The Wyden/Brown legislation was criticized by some expat tax experts, however, for un-doing the good work that Treasury and IRS officials had managed to do last year, in fixing unintended consequences for American owners of small, non-U.S. businesses that had been created by the TCJA.

"I doubt they were even thinking of Americans abroad,” said Australia-based tax-fairness crusader Karen Alpert, an academic and tax expert who oversees a blog entitled FixtheTaxTreaty.org.

“This is another reason the U.S. should not have tax jurisdiction over nonresidents. “By claiming tax jurisdiction, they ought to owe a duty of care to ensure that all claimed taxpayers are treated fairly, and that the tax obligations are reasonable. “By totally ignoring Americans abroad, Congress has failed to exercise that duty of care."

John Richardson, a Toronto-based lawyer who is actively involved in expat tax and citizenship issues, said he thought that the Wyden/Brown bill, "although misguided", was "proof that the U.S. Treasury has the regulatory and interpretive tools to enable it to mitigate the problems of Americans abroad", as some experts have long argued.

"In this instance, Treasury adopted a reasonable and purposive approach to interpreting Section 951A [the so-called GILTI provisions of the Tax Cuts and Jobs Act]." Richardson added.

"Specifically, Treasury interpreted the GILTI rules in such a way as to not allow for individual shareholders of small business corporations to be taxed at rates of up to 75%.

Here, Treasury understood that the overall purpose of the Sub-part F rules was to prevent individuals from shifting their corporate profits to low-tax jurisdictions, and interpreted Section 951A in that spirit."

Richardson noted that since last year's intervention by the Treasury and IRS in the way the GILTI provisions affected American owners of small, non-U.S. businesses,  the Treasury had again moved to interpret the Internal Revenue Code  – specifically Section 6048" – in what he called "a purposive, rather than literal, way", when it announced earlier this month that it would "exempt from foreign trust information reporting requirements certain U.S. individuals' transactions with, and ownership of, certain tax-favored foreign trusts", in the form of what it called Revenue Procedure 20-17.

Richardson noted with interest the fact that Treasury was in a position to take action, and had now done so twice within a few months, to protect expatriates from laws passed by Congress that had made such action necessary.

To read more about senators Wyden and Brown's bill, on Richardson's CitizenshipSolutions.ca website, click here.