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U.S. citizens abroad who own an interest in a Controlled Foreign Corporation (“CFC”) have been unfairly targeted by two provisions of the U.S. tax reform that was legislated at the end of 2017. The taxes imposed under the Repatriation/Transition Tax and the Global Intangible Low Taxed Income (“GILTI”) regimen can be significant, are not creditable against Canadian tax and apply to all CFC owners regardless of the size of the CFC.
The Repatriation/Transition Tax has imposed a tax on undistributed earnings of a CFC as of the end of 2017. As of today, the GILTI tax will apply to the earnings of CFC’s. For ideas on ways to mitigate the GILTI tax, review the previously published Zeifmans newsletter, GILTI or Not GILTI: A guide for U.S. expatriates living in Canada.
Anecdotal information has been reported from Washington, D.C. indicating that members of the Republican Congress did not intend for the above mentioned provisions to apply to U.S. citizens abroad. A prominent U.S. news service has indicated that the IRS has provided internal instructions to its employees to be “extremely reserved” when providing guidance on the new law.
Correction of some of these errors in the legislation as well as numerous errors elsewhere in the legislation cannot be done through any unilateral IRS action. It requires the passage of “Technical Correction” legislation by Congress for the President to sign.
In a recent development, the U.S. press is reporting that U.S. based multinational corporations are beginning to shift more, rather than less, profit offshore. The reason being that the maximum GILTI tax rate for foreign subsidiaries is 10.5% – half the U.S. federal corporate tax rate. Coupled with the new ability to repatriate earnings from foreign subsidiaries on a tax free basis, U.S. based companies have a powerful incentive to shift profits offshore to a low tax jurisdiction.
News of corporations being incentivized to shift profits and potentially jobs offshore because of an unintended consequence that the law gives Republications, is an even more powerful incentive to fix the broken law.
Action is uncertain as Congress is not convening any meaningful way to fix the broken law until January 2019, after the mid-term elections end. If the Democrats win either house of Congress in the election, they are unlikely to in cooperate any technical corrections to the 2017 tax reform, unless the higher pre-2018 individual tax rates are restored as part of legislation. Even if, Congress agrees to restore the higher rates, it is unlikely to be signed into law by the President.
To summarize, in order for the Repatriation/Transition Tax and GILTI to be repealed, the following would likely have to occur:
- The Republications will have to retain control of both houses of Congress in the mid-term elections.
- Congress would have to prioritize Technical Correction legislation in 2019.
- The Technical Correction legislation would have to exempt Americans abroad from the Repatriation/Transition Tax and GILTI – an issue not likely at the top of the congressional agenda.
Finally, if Congress passes retroactive changes to the tax laws, which are then signed into law by the President, there should be plenty of time under the statute of limitations to apply for refunds. In the meantime, Zeifmans and our clients need to apply the law as it stands and continue to employ strategies to mitigate the impact of the tax.
For more information, please contact your Zeifmans advisor today or Stanley Abraham, U.S. Tax Partner at 647.256.7551 or sa@zeifmans.ca.
