President Trump's Tax Cuts and Jobs Act 2017, which took effect on Jan. 1, 2018, has been a huge issue for many Americans who own as little as 10% of a small overseas business. Caught up in a clumsy legislative effort aimed at such large multi-national American companies as Google and Apple, these small business owners are, as has been frequently reported by this media organization and others, being forced to pay a 17.5% transition tax on income from their small business entities that dates back as far as the 1980s.
That's why Monte Silver, a U.S. tax attorney resident in Israel who is partner and founder of the Tel Aviv-headquartered, U.S. tax law firm Silver & Co., earlier this year made good on his vow to file a lawsuit against the U.S. Internal Revenue Service and Treasury Department over the way the TCJA is being applied to so-called "controlled foreign corporations."
Here, Silver explains how certain proposed revisions to the "GILTI" component of the TCJA are good news for American owners of overseas small businesses – but that the TCJA remains a problem, and that his lawsuit is continuing.
To many American small-business owners, the GILTI (Global Intangible Low-taxed Income) tax, introduced in the 2017 Tax Cuts and Jobs Act, is a real nightmare.
First of all, the tax is annual, starting in the 2018 tax year.
Second, individual U.S. shareholders of a Controlled Foreign Corporation (CFC) cannot claim any foreign tax credits for any taxes their companies may have paid in the country they reside in – unlike such companies as Google and Apple, the large multi-nationals that GILTI was intended to go after in the first place.
Third, owners of these small businesses typically do not enjoy the 50% GILTI deduction that these multi-nationals receive. In other words, they are being subject to double taxation. (Ouch!)
Such American owners of non-U.S. small businesses have two possible options. Neither is recommended:
- structure their operation as something other than a company (such as a sole proprietorship)
- Transferring the shares of their CFC to a U.S. holding company
As we see it, the only real solution such individuals have is to make a so-called "Section 962 election" every year. The Section 962 election is an element of the U.S. Tax Code that is designed to ensure that individual taxpayers are not subject to a higher tax rate on the earnings of a directly-owned foreign corporate entity than if they had owned it through a U.S. corporation.
But such Section 962 elections have their drawbacks.
So in short, it's a mess.
And although the Treasury has been very active recently in issuing various proposed and final regulations related to the TCJA – including some highly complex and lengthy (248 and 318 pages long respectively) documents which relate to the Transition tax and GILTI provisions – neither of these opuses offer any relief whatsoever to American owners of small non-U.S. businesses.
In fact, these regulations do nothing to address the three violations of Federal laws, which continue therefore to serve the basis of our Transition Tax lawsuit.
Two nuggets of potential good GILTI news
However, buried deep in the pages of all these recently issued, mostly unsympathetic-to-American-owners-of-small-non-U.S.-businesses legislative documents there are a few nuggets of hope, in the form of two proposed regulations that specifically have to do with the GILTI tax, and which have direct and positive implications for us:
- Proposed Regulation relating to 962 election. (Reg 1).
- Proposed Regulation relating to High-tax countries. (Reg 2).
Proposed Reg 1 – (177 pages long): entitles any taxpayer who makes a 962 election to claim the 50% GILTI deduction under "IRC 250". (Internal Revenue Code 250 allows a parent corporation, such as Google Inc., to reduce its GILTI income by 50% automatically)
In other words, under this proposal, American owners of small non-U.S. businesses would get treated no worse than Google or Apple are. Very generous.
So now, if an American owner or part-owner of a small non-U.S. business resides in a country in which the corporate tax rate is at least 13.125%, by making the 962 election, under this proposed regulation, they should not longer be double-taxed.
(Of course, the headache and cost of annual compliance with the GILTI tax would remain.)
Proposed Reg 2 – (74 pages): has a much greater positive impact for our American owners of non-U.S. businesses.
In essence, Reg 2 states that if income of an individual American's company in their (non-U.S.) country of residence is taxed at a corporate rate equal to at least 90% of the U.S. corporate tax rate – or 18.9% (21% x 90%) – then such income is not even considered GILTI income.
In other words, IF, IN ANY GIVEN YEAR, THE INCOME OF AN INDIVIDUAL' AMERICAN'S CORPORATION IS TAXED AT A RATE GREATER THAN 18.9%, THAT INDIVIDUAL WILL BE DEEMED TO HAVE HAD NO GILTI INCOME IN THAT YEAR.
The result, therefore, is that such an individual will not have to comply with the GILTI provisions that year.
Let's look at an example: me.
I live in Israel, where the corporate tax is 23%. Generally, all of my company’s income is taxed at that rate. Thus, under Proposed Reg. 2, I would not have to comply with GILTI at all.
Okay so far, but...?
To be sure, there are still a few problems.
1. Those American taxpayers who own part of all of a non-U.S. corporate entity, and who live in countries where the corporate tax rate is less than 18.9% – such as Canada, the U.K. or Singapore – cannot take advantage of Reg. 2. For them, therefore, it's back to Reg 1, and annual 962 elections.
2. . Both Reg 1 and Reg 2 are currently set to take effect once they have been passed into law. And they have not been yet.
So that leaves the question as to what taxpayers who find themselves caught up in the new GILTI tax nightmare are supposed to do in 2018...
(Or was supposed to have done, actually, as the deadline for filing such returns, assuming one didn't get an extension was June 15.)
Monte Silver, pictured above, is a U.S. tax attorney who is partner and founder of the Tel Aviv-headquartered, U.S. tax law firm Silver & Co. As reported, he is in the process of bringing a legal case against the U.S. Internal Revenue Service and Treasury Department over the way the TCJA is being applied to so-called "controlled foreign corporations," a type of entity which includes many small, family businesses run by American expats around the world.
This article is intended for general information only, and is not intended as specific advice.
- U.S. responds to Monte Silver's Transition Tax challenge
- Dems Abroad seeks expat American biz owners for GILTI push
- Opinion: Some questions expat small-biz owners might ask their elected reps, while replying to GILTI survey
- Expat small-biz owners reminded: Deadline for major Dems Abroad GILTI survey is Friday
- ACA to Treasury: 'de minimis rule' needed for GILTI and Transition Tax (and btw, RBT is needed too)