USA Tax Bill Due to Close Businesses in Other Countries

US citizens living abroad are asking for help to persuade Congress not to force Americans overseas to close their business interests. (Disclaimer: I am one of the Americans directly affected by this issue.)

The USA’s 2017 “Tax Cuts & Jobs Act” pretends to usher in territorial taxation for corporations. Large corporations not owned by ordinary American citizens get breaks from it. But American citizens who live outside the USA get so badly punished by it that many will have to close their businesses. Consequences for the countries they live in include loss of jobs (these businesses often employ locals too) and loss of the contribution those businesses have been making to local and national economies.

Expats often set up their own businesses because cultural barriers, regulations, language barriers or other issues make it hard for us to land regular jobs in the countries they live in. A 2014 study found that 19.6% of American expats have businesses, whereas only 13.3% of Americans in the USA have businesses. About 1.2 million Americans abroad are badly affected by the new tax law.

Here is what Congress did to its constituents abroad:

• Repatriation Tax. All our profits abroad since 1986 (for clarification: I believe this is on accumulated profits, so those who have retained earnings are more affected than those who haven’t) are deemed to have been repatriated (sent to the USA) even if those profits never move from where we live, and we must pay extra 15.5% tax on that money. Big companies get to apply offsets and credits for the tax they have paid to the countries where they made the profits. Small companies like mine are not allowed to do that. We already paid taxes to the country where we made the profit, but now we are taxed again by the USA with no offsets or credits allowed. How would you do if you now had to pay 15.5% of all your earnings since 1986 to Uncle Sam, on top of the taxes you already paid? Would you think that is right?

• Global Intangible Low-Tax Income (GILTI) Tax. Businesses outside the USA owned by Americans and USA-based companies will have to pay standard USA corporation tax, less about 10%, on profits. As with the Repatriation Tax, it doesn’t matter whether the money ever leaves the country where the profits are made, and big companies are allowed lots of deductions and offsets but ordinary Americans with foreign businesses aren’t. Would you like paying 25%, 30% or more to one country and then paying the same percentage again on the same profits to another country that had no involvement whatsoever in your business?

Affected Americans are asking the House and Senate to fix this as follows:

Exempt Americans abroad with interests in foreign corporations from the Repatriation Tax and from the GILTI Tax regime for any given year so long as two conditions are met.

1) They meet the conditions required for exemption under IRC Section 911 (bona fide nonresident for tax purposes), and

2) They are individual USA shareholders

This would allow the USA to capture a slice of the foreign profits of big multinationals, which is what Congress said it wanted, without destroying individual Americans who live and do business abroad. If any of those profits are repatriated to the USA, the IRA would get to double-tax them the same way it does now. But if it’s a small business with the owner simply using them to live on, this would allow that instead of forcing the businesses to close.

Without a fix for this, other countries will have to absorb the consequences of the closure of many American-owned businesses… mostly small ones, but this will affect more than the Americans who own them.

Some references if you want to know more:

Tax Journal: US Persons abroad hit by Trump’s repatriation tax 2018-02-08

Financial Times: Americans abroad hit by Trump’s new repatriation tax rules 2018-02-04 (requires a subscription)