On April 22, 2021, the board of Stop Extraterritorial American Taxation submitted the organization's comments to the Senate Finance Committee, in response to the committee's Overhauling International Taxation document, posted on the committee's website.
Below, the board of SEAT – a recently-launched advocacy organization that seeks to convince U.S. lawmakers and government officials to put an end to the country's citizenship-based tax regime – responds to the Senate Finance Committee's proposed overhaul of the U.S.'s international taxation system.
SEAT (Stop Extraterritorial American Taxation) would like to provide comments on the document Overhauling International Taxation, posted on the committee’s website. Unfortunately, this document, and the international tax policies put forward by Congress and the current administration, are a continuation of Congress’ callous neglect of American citizens living outside of the United States.
The best solution to this problem is for the U.S. to come into alignment with every other developed nation on the planet and move to a residence-based taxation system for individuals.
It is imperative that Congress work to minimize the unintended consequences of changes to the international tax system by carefully targeting these provisions at U.S.-headquartered multinational corporations, so that individuals and entrepreneurs living outside the U.S. are not treated as “mini-multinationals” and burdened with excessive compliance and double taxation.
A brief history
In 2015, the Senate Finance Committee Bipartisan Tax Working Group on International Tax concluded its report with the following paragraphs:
"According to working group submissions, there are currently 7.6 million American citizens living outside of the United States. Of the 347 submissions made to the international working group, nearly three-quarters dealt with the international taxation of individuals, mainly focusing on citizenship-based taxation, the Foreign Account Tax Compliance Act (FATCA), and the Report of Foreign Bank and Financial Accounts (FBAR).
"While the co-chairs were not able to produce a comprehensive plan to overhaul the taxation of individual Americans living overseas within the time-constraints placed on the working group, the co-chairs urge the Chairman and Ranking Member to carefully consider the concerns articulated in the submissions moving forward."
Six years have passed, and there is still no movement on overhauling the taxation of individual Americans living overseas, in spite of the clear directive from the International Tax Working Group.
In fact, the situation for Americans abroad has gotten far worse. Most of the damage has been as a direct result of the enhancements to the Subpart F regime in President Trump's 2017 tax system overhaul, the Tax Cuts and Jobs Act.
Without consideration of individuals generally, and Americans abroad in particular, the Internal Revenue Code was amended to impose both the Section 965 Transition Tax and the Section 151A tax on Global Intangible Low-Taxed Income (GILTI) in a way that, in its plain language, includes Americans abroad running small businesses where they live,
work, and pay tax.
There is no evidence whatsoever that the application of these provisions to Americans abroad was given any consideration.
This is true even though the number of individual Americans abroad impacted by the legislation is far greater than the number of U.S. multinationals impacted by this legislation.
Although the changes enacted as part of TCJA were generally beneficial to U.S. multinationals, they were devastating to U.S. persons abroad, especially those whose retirement savings were the equity in their small businesses.
Is History repeating Itself?
Now, in 2021, the Senate Finance Committee and other branches of the U.S. government are intending to make further changes to the GILTI rules. In none of the hearings or reports has there been a single mention of the impact of these changes on individuals, including Americans abroad.
In other words, the Senate Finance Committee is proposing legislation that will be interpreted to impact individuals who are simply given no consideration whatsoever.
The rationale for the proposed changes is to prevent large U.S. corporations from transferring profits that should be sourced in the United States outside of the United States, to be taxed at lower rates.
This rationale does not – and cannot – have any application at all to U.S. citizens running yoga studios, dentist offices, or convenience stores inside their country of residence.
These individuals are not, by trying to make an income in their country of residence, diverting profits that should have been made inside the U.S. to a tax haven jurisdiction.
A proposed solution
The time has come for the Senate Finance Committee to start considering the individuals affected by its proposed legislation, and give them the concern and respect that they are entitled to, as individual U.S. citizens.
The obvious solution would be for the United States to join the rest of the developed world and tax based on residence rather than citizenship.
Taxing non-resident citizens is “Mission Impossible,” as it is impossible to fairly administer an extraterritorial tax system and afford non-resident U.S. citizens the rights guaranteed by the Taxpayer Bill of Rights (IRC §7803(a)(3)).
Given that there is not currently a Residence Based Taxation proposal before Congress, it is imperative that international tax rules be closely targeted, to avoid unintended consequences.
In addition to the suggestion in the Senate Finance Committee's Overhauling International Taxation document – that all high-tax jurisdictions be ignored in computing GILTI – we suggest two ways that taxation of multinational corporations could be better targeted.
- The Subpart F regime in general (including GILTI) should not apply to a controlled foreign corporation that, when aggregated with related businesses, meets the size standards for small businesses set out by the Small Business Administration.
This should have minimal revenue impact, as the Treasury believes that “the ownership of sufficient stock in a Controlled Foreign Corporation (CFC), in order to be a U.S. shareholder, generally entails significant resources and investment."
- Alternatively, the Subpart F rules should not apply to any individual who meets the Section 911 residence requirements and is a US shareholder of a foreign corporation organised in their country of residence.
For these individuals, the “foreign” corporation that they control is not foreign to them – it is in the same country where they live, work and pay taxes.
Thank you for your attention to these matters.
Respectfully submitted by the board members of Stop Extraterritorial American Taxation (SEAT):
Dr Laura Snyder, President
Dr Karen Alpert
To see this submission on the SEAT website, click here.
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