updated 2:28 PM CEST, May 24, 2023

Call for U.S. Treasury to fix 'Transition Tax' problems with 'de minimis rule'

The American Citizens Abroad, the main non-partisan Washington lobbying group representing American expats around the world, today urged the U.S. Treasury Department to introduce a so-called de minimis rule to its latest draft of new tax regulations, in order to address what it said were problems inherent in the legislation that, if not changed, would cause major problems for many U.S. citizens living abroad.  

Such a de minimis rule, the ACA said, would exclude from Section 965 of the legislation – sometimes referred to as “Transition Tax” or “Repatriation Tax” – those U.S. taxpayers living outside the U.S. who own small non-U.S. businesses, such as shops, bars, law firms and bed-and-breakfast enterprises, which the current legislation treats in the same way as it does the overseas entities of such large multi-national companies as Amazon and Apple. 

"For many [such expat taxpayers], the cost of calculating the tax implications and preparing the returns may exceed [their] actual tax liability," the ACA said, in a statement announcing the submission of its statement on the matter, which may be viewed on  its website.

The ACA's seven-page submission may also be read and downloaded, in pdf form, here. 

"In addition, many will not have the funds to pay the taxes due, and some will have to liquidate their businesses because the cost to calculate, and pay, the tax will bankrupt them."

The proposed regulations were issued by the U.S. Treasury on August 9, and appear as 62 pages in the Federal Register. They spell out in detail how the Treasury sees the new tax regime introduced at the end of December by President Trump in his tax reform package, formally known as the Tax Cuts and Jobs Act.

"De minimis" is a legal term taken from Latin, where it literally means "having to do with minimal things." In this instance, it means that the ACA is urging the U.S. Treasury to ensure that key elements of the  new legislation not affect entities that are "minimal" in size compared with those much larger entities that it was designed to target. 

As reported, the new Trump regulations have left American expats reeling, particularly as they came even as many were already struggling to deal with their U.S. tax obligations in the wake of the Foreign Account Tax Compliance Act of 2010. Because it requires banks and other foreign financial institutions to report to the IRS on any American clients they have, at the risk of facing significant financial penalties, FATCA enabled the U.S. tax authorities to come after thousands Americans who previously had been unaware of their U.S. tax filing obligations. One of its unintended consequences, which has also added to expats' woes, is that it has made simply obtaining a bank account or a mortgage almost impossible for many expats.

Other nationalities don't have these problems because their governments tax on the basis of residency rather than citizenship. The U.S. is well-known for being the only country apart from Eritrea that taxes on the basis of citizenship rather than residence. 

There had been talk that a Republican Congressman, George Holding, would introduce legislation by the end of September that would help to mitigate the problems American expats are facing as a result of the current U.S. tax regime, but thus far it has not materialized.

The ACA's submission came on the last day of a 60-day comment period, during which expats who had been adversely impacted by the 2017 Tax Cuts and Jobs Act were invited to tell Congress of their experiences.

'Inundated with complaints'

In its submission the ACA said it was being "inundated with complaints" from Americans abroad "about transition tax and related matters".

These complaints were coming, it said, "from small business owners who were never 'socking away' income offshore to avoid U.S. taxation", like those individuals and entities the legislation had been designed to target, and as a result, were being hit with "life-changing" effects on them and their businesses.

"Many of these individuals have been setting aside profits in their foreign company simply because, rather than paying out profits to themselves, they [were] in effect financing future operations and perhaps future expansion," the ACA went on.

"By nature, [their] business is 'foreign'; it is situated and operates outside the U.S.; all its employees live outside the U.S.

"There may be no connection with the U.S. other than the fact that some or all of the shareholders are U.S. citizens.

"These individuals reside in the foreign country and, in fact, might not travel to the U.S., or if they do, do so infrequently.

"Some feel they will have to liquidate their businesses because the cost to calculate, and pay, the tax will bankrupt them."

Applying a de minimis rule to exempt small taxpayers living outside the US from the rules, though, would be a "common-sense approach" to the problem, and provide an immediate "fix."

The ACA concluded its submission by requesting that a public hearing on the matter be held.

The submission was signed by ACA executive director Marylouise Serrato, and the organisation's legal counsel, Charles M. Bruce, of the Lausanne, Switzerland office of the Bonnard Lawson law firm.