Americans abroad have long suffered from a US tax regime that is unique in the way it torments its own expats, and last year's tax "reform" made things worse, says an American tax lawyer. But there is hope.
The joy of being an American expat.
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More than 100,000 American expats live in Germany. Like the millions of Americans living in other foreign countries, they are being treated badly by the tax authorities of their home country. I should know, because I am an American expat myself, and a tax lawyer for people like me. But as bad as it has long been for us, last year’s hasty and sloppy tax reform has made it even worse. That’s the bad news. The good news is that we’re doing something about this, and I’m playing my part. So can you.
Start with the shock: Say you are an American expat living in Germany, and you operate a family restaurant. You’ve been in Germany for 30 years, and during that time you ran your little business via a German company, because you wanted to limit your liability, among other reasons. You are now approaching retirement and have saved up €100,000 ($119,000) in your company. You’ve already paid German corporate income taxes on all of that. Thanks to last year’s tax “reform,” however, Uncle Sam is suddenly saying that you owe the US another €17,540.
That’s because the new Repatriation tax, which was aimed at huge US companies like Apple and Google, treats you exactly the same — in effect, as a little Apple or Google. This is absurd, of course. The companies the law aimed at collectively shifted trillions of dollars to off-shore subsidiaries (called CFCs – controlled foreign corporations) to avoid the high 35 percent US corporate tax rate.
This is not the first time that Americans abroad have fallen victim to tax battles between the US government and rich American companies or tycoons. In past years, the IRS and its parent, the US Treasury, wanted to declare war on rich US-based Americans who were hiding money and income overseas. So they imposed onerous forms (the most infamous is nicknamed the “FBAR”) and ominous new laws (“FATCA”), forcing both the Americans and their foreign banks to make all sorts of declarations about their overseas assets or face Draconian fines.
The problem is that the US is, along with Eritrea, the only country in the world that practices citizen-based taxation. Eritrea! How about that for company. So whereas every other country only taxes its residents, the US taxes its citizens wherever they live. That doesn’t usually mean that US citizens abroad owe Uncle Sam money. In Germany, for instance, they pay a higher tax rate to their host country, and can credit that on their US returns for a liablity of zero. But it does mean that expats incur huge costs, stress, hassle and worry from filing all those complicated forms. And only because they lead normal lives abroad, paying a foreign rent out of a foreign bank account, or collecting a foreign pension.
So while expats were not the target of these tax regimes, our lives have been made miserable by them. Opening up bank or brokerage accounts in countries we live in has almost become an impossible feat, because those banks are so afraid of the repercussions of having us as customers. Running the simplest of businesses abroad via a company requires us to retain US accounting and tax services to deal with complexities that US-based owners of the same business would not even dream out.
The 2017 tax reform added insult to injury with two new taxes. One is called the “repatriation tax”. It targets profits accumulated off-shore between 1986 and 2017. Multinationals have to pay a one-time 15.5 percent tax on profits held in their subsidiaries (8 percent if held in non-cash form). That sounds fine, you might say.
But the law treats you, the US expat with a restaurant in Germany, as if you were Google US (the parent company), and your German restaurant as if it were Google’s German subsidiary. If a German-based expat owns at least 10 percent in a German corporation, and over 50 percent of that corporation is owned by Americans, the individual must pay the repatriation tax. With one catch. The expat’s rates are higher than Google’s: 17.54 percent on cash and 9.05 percent on non-cash profits!
How is this tax paid? In our example, you could pay your €17,540 liability in eight annual instalments, with the first due June 15, 2018. Any payment that is even one day late results in the entire 17,540 being due immediately!
The second new tax of the Trump reform to hit expats is called “GILTI” (don’t ask). It was aimed at preventing US multinationals from shifting post-2017 profits abroad, but it also snared you with your restaurant in Germany. GILTI basically taxes your restaurant’s net income at 37 percent. By contrast, Google, the law’s target, pays something between 21 percent and zero. That’s because Google pays at the highest corporate tax rate, whereas you pay at the highest individual rate. Google gets other deductions and credits besides.
Nobody in Washington ever intended to apply these taxes to expats. But the reform was rushed and is riddled with mistakes. So now what? One option is to find a good tax lawyer. Another is to join me and many or our fellow-expats and advocate. Several organizations around the world are fighting to exempt us from laws that were intended for Google and Apple. See www.americansabroadfortaxfairness.org, for example.
is a US tax attorney residing outside the US. He previously worked at the Estate & Gift Tax division of the IRS and at the US Tax Court. He specializes in providing tax solutions to American expats. In addition to having published extensively on the impact of the Repatriation and GILTI taxes on Americans abroad, Mr. Silver has initiated a global tax advocacy effort to exempt expats from these taxes.
My experience in recent weeks and months offers a glimmer of hope. Contrary to what you might have heard, Washington still has some reasonable people who are ready to listen. So let’s use the occasion of fixing the tax law to help American expats in general. There is no reason why America should treat its own citizens the way only Eritrea does. We expats may not have representation in Washington. But we have a voice. Let’s have it be heard.
To reach the author: firstname.lastname@example.org.
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