updated 2:11 PM CET, Oct 31, 2023

ACA to Treasury: 'de minimis rule' needed for GILTI and Transition Tax (and btw, RBT is needed too)

The American Citizens Abroad has written to seven top U.S. Treasury officials, including Treasury Secretary Janet Yellen and IRS Commissioner Charles Rettig, to urge it to "revisit" the way President Trump's 2017 Tax Cuts and Jobs Act is affecting the small- to medium-sized businesses owned by Americans overseas – in addition to urging them to take other actions, including "the true corrective measure" of switching the U.S. to a residence-based tax (RBT) regime.

Inserting a de minimus rule into the TCJA's Transition Tax and GILTI regulations would at least represent a "necessary and desireable" start in the direction of helping to ease a burden that has already caused many overseas American business owners to "simply [throw] up their hands," in part merely because the cost of calcuating the tax they would be deemed to owe would be so great, ACA officials Marylouise Serrato, Charles Bruce and Jonathan Lachowitz say in their five-page letter.

But the best corrective measure for addressing the many problems Americans abroad are struggling with, they go on to add, remains "the adoption of residence-based taxation (RBT)." 

The ACA has lobbied U.S. officials for years to move the U.S. to an RBT system, which the rest of the world (apart from Eritrea) practices, from the U.S.'s current citizenship-based tax (CBT) regime, which the ACA and other organizations, officials and tax experts blame for most of the complex financial and tax problems American expats have been struggling with for more than a decade.

Earlier this year, the Washington, DC-based advocacy organization, via its sister organization, the ACA Global Foundation, announced plans to finance fresh research into the RBT vrs CBT issue, citing what it said at the time was its belief that Washington lawmakers would be revisiting the RBT issue later this year, and that this data could therefore be instrumental in helping to make the argument for the change.

Biden trip to Europe

The ACA's letter  to the Treasury officials was dated June 9 (yesterday) – the day that President Biden was due to arrive in Britain on his first trip abroad since taking office in January. During the course of his eight day trip,  which he has billed as aimed at rebuilding U.S. ties with Europe, and establishing terms of business with Russia, the president is expected to meet many American expats, most of whom will be U.S. government employees, such as U.S. embassy and consulate officials. 

Thus far, however, U.S. officials haven't mentioned any plans for the president to discuss the way American expats are taxed during his trip. And even during his campaign, Biden said little about expats and their tax issues, even as he and other Washington officials have spoken at length, especially in recent weeks, about the need to increase individual financial reporting requirements, as part of the Biden administration's flagship policy of looking to "close the tax gap" by cracking down on tax-avoiding and -evading corporations and wealthy individuals.

Although still in the earliest stages of planning, Biden's tax-gap closing plans are already creating concerns among Americans abroad, as most of their current financial issues have been caused by the side effects of the last major U.S. tax crackdown – the Foreign Account Tax Compliance Act of 2010 – initiated by Biden's Democratic predecessor, Barrack Obama.

'Regulatory flexibility analysis' issue

In their letter, the ACA's Serrato, Bruce and Lachowitz address an element of the Transition Tax and GILTI regulations that, as this and other media organizations have been reporting, has been the subject of a legal challenge brought last year by Tel Aviv-headquartered U.S. tax attorney Monte Silver: what Silver alleges is the government's failure to take into account these regulations' effects on small businesses (like his law firm), by carrying out a so-called "regulatory flexibility analysis" before signing them into law. 

As Silver has alleged – and continues to allege, as he continues his challenge, in spite of the court having ruled against his claim in an initial decision – in the way the Tax Cuts and Jobs Act has been drawn up, the government failed in its legal obligation to carry out such an analysis, as it's obliged to do by the Regulatory Flexibility Act, a law introduced in 1980 that was aimed at leveling the playing field for small businesses and other small entities in the U.S., when introducing regulations mainly aimed at larger entities.

"Treasury's determination that the Regulatory Flexibility Act does not apply [to the small overseas businesses owned by Americans] essentially because shareholders of foreign corporations are not small entities...is wrong," the ACA officials write.

"It ignores the reality that Americans abroad frquently own and operate businesses, often small businesses."

'Tax cost' to Treasury
would be 'little if anything'

In their letter, the ACA officials note that the Treasury had fundamentally erred in writing legislation that essentially treats American owners of such small businesses as "a yoga studio in Paris, a business consultancy in Buenos Aires or a coffee shop in Stockholm" the same as "large U.S. multinationals engaged in offshoring [their] profits."

For this reason, they add, the government would lose "little, if anything," if it were to exclude them from the TCJA's definition of "controlled foreign corporations," and thus subject to its taxes.

When drafting a de minimis rule that would take such "small taxpayers out from under the workings of the regulations," the ACA officals explain, the Treasury could look at data available to its own Office of Tax Analysis in order to gauge how many people would be removed from the Section 965 regime if this were done, and how much tax would be involved.

"ACA’s guess – and without access to tax return data which is available to Treasury and Joint Committee on Taxation, it can only be a guess – is that all, or almost all, small taxpayers abroad with controlled foreign corporations (CFCs) can be taken out of the 965 regime, and the tax cost [would] be little, if anything," the ACA officials say in their letter.

"End of the day, many of the small businesses in question are simply not terribly profitable.

If the Treasury Department believes it cannot write a simple, up-front de minimis rule because its hands are tied, then it can come at the problem from a different direction: Small taxpayers can be allowed to treat their foreign corporations as 'disregarded entities'.

"There not being a corporation in place, section 965 would not apply. Affected taxpayers [could then] be allowed to retroactively make the election.

"Applying the Transition Tax to small CFCs owned by Americans abroad is unwise. It is a misstep.

"Treasury Department should 'walk back' these regulations."

In their letter, the ACA executives note that among the areas that the government needs to work on is establishing better data as to the numbers of Americans abroad, and the numbers of these Americans who file taxes from abroad, a point that they and others have mentioned in the past.

Although official estimates currently place the number of Americans abroad at 8.5 million to 9 million (the 9 million being the latest State Department estimate), "after eliminating members of the armed services and government employees and contractors, and making a number of other other adjustments," this reduces to just 4 million overseas "residents" – of which approximately 1.7 million are estimated to be "overseas tax return filers," which reduces further, to just 1.2 million, after eliminating federal government employees, the ACA official say.  

They add: "Accurate and reliable data regarding the community over overseas taxpayers is essential of the committees intend to develop policy which directly affects [them]." 

The ACA is a non-partisan and non-profit advocacy organization that was founded in 1978 in Geneva, Switzerland, and moved its headquarters to the U.S. in 2012.

Although primarily known for its advocacy efforts, the ACA has begun to play an important role lately in helping Americans abroad to obtain and maintain bank accounts – something that has become increasingly difficult, as banks both in the U.S. and abroad shun the cost and complications of having American expats as clients – through its "ACA-Member/State Department Federal Credit Union (SDFCU) accounts," which it launched five years ago.