On November 8, 2020, I participated in a podcast with attorney John Richardson. We discussed some of the reasons why the incoming administration was likely to increase the pressure on Americans abroad. The podcast is here.
On March 25, 2021 the Senate Finance Committee held a hearing on International Taxation. The hearing discussed changes to the Global Intangible Low-Taxed Income or so-called “GILTI” provisions enacted in 2017 by the Tax Cuts and Jobs Act (“TCJA”). GILTI turned the world of international taxation on its head for “controlled foreign corporations” (CFC). GILTI income was introduced as a brand new category of income for shareholders of a CFC to contend with.
In addition to making the GILTI rules much harsher, the recent hearing included a discussion of a general increase in the US corporate tax rate. Any such increase will also affect the harsh impact of GILTI. I explain below in greater detail how these proposed changes will decimate the American small business owner abroad.
Bye-Bye Small Business Abroad
The entire hearing discussed this issue ONLY from the perspective of corporations – the idea in mind being large multinational corporations. The reality is, that these changes, will mean serious negative changes for Americans abroad who operate small businesses. I am sorry to report that my podcast last year is proving to be prophetic. At no time in the hearing, did a single witness or a single question consider, how these changes would affect individuals generally or Americans abroad in particular.
It is critical that the Senate Finance Committee understand how these proposed changes to US corporations will affect the lives of Americans abroad generally and small business owners particularly!
You Can Help
You may be interested in the following initiative, by a new organization “SEAT” (an acronym for “Stop American Extraterritorial Taxation”). If you are interested in current developments and the opportunity to make your voice heard here’s where to go.
SEAT has provided templates for you to use to make your own submission quickly and easily to the Senate Finance Committee. NOTE – Deadline is April 7 — act today!
The writing is on the wall. Gird yourself, but don’t go down without a fight. Make your voice heard via SEAT and submit your letter to the Senate Finance Committee before it’s too late.
- For Americans abroad with their business established in a foreign corporation, let’s look at the impact of GILTI and how much worse it will become if the proposals come to fruition. GILTI is income that is deemed repatriated in the year it is earned. In other words, the tax law “pretends” that the GILTI income is paid out to the CFC’s US shareholder, even though no actual distribution has been made. Of course, the result is US taxation on this “pretend” income distribution. President Biden plans to double the tax rate on GILTI from the current 10.5% to a whopping 21%. In addition his plan spoke of eliminating the GILTI exemption for so-called qualified business asset investment.
- The plan would also increase the corporate income tax rate from 21% to 28%. This will directly impact US shareholders of CFCs wishing to use a very favorable exemption initiated by the Treasury called the “high tax kickout”. Very broadly if a taxpayer can show that the foreign corporation pays tax at a 90% or greater rate than the highest US corporate tax rate, then the exemption is available. Currently, the exemption applies if there is an 18.9 percent foreign country tax rate based on the current US corporate rate of 21 percent. If the Biden Administration increases the current corporate tax rate to 28%, then a taxpayer must show that the foreign country tax rate is 25.2% or greater. It should be noted that the Democrats have previously proposed doing away with this high-tax kickout exemption via the “Blocking New Corporate Tax Giveaways Act’’. (Full details at my blog post here.)
Posted April 3 2021
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