TheAmerican | In Italia
Published April 30, 2018
After kind greetings Alice sat, placed her backpack by her feet and announced, “I may decide to show you something but first I need to know if you can get me around a new law.”
I said we’d have to see and asked her to explain. The matter, said Alice, concerned “this godforsaken new U.S. tax law.”
You mean Trump’s tax cut that isn’t? I replied.
“You’ve got it,” she replied, her eyes glinting. “You must know they’ve hit Americans owning foreign businesses bad. They’ve put a one-time retroactive new tax in 2017 on deferred company income, and that ain’t fair!” So unfair, in fact, that Alice stood up and leaned over the desk as if ready to pounce.
“I’ve lived long enough to know when I’m being robbed and goddammit I’m not going to pay ’em!” There was no doubt Alice meant it.
The 2017 Tax Cuts and Jobs Act is unexpectedly hitting U.S. shareholders whose holdings in certain foreign corporations reach minimum levels. That level is met if they own 10 percent or more of the combined voting power of all classes of stock or 10 percent of the value of the shares of all classes of stock of a “controlled foreign corporation (CFC).”
A CFC — read carefully — is any foreign corporation in which more than 50 percent of the total combined voting power of all classes of stock (among those entitled to vote) is owned directly, indirectly or constructively by U.S. shareholders in 2017 for at least 30 days during the taxable year. That may be a lot to swallow, but once you do you understand the consequences.
The new law imposes a one time “toll tax,” a deemed repatriation tax – even if assets aren’t repatriated.
It was originally conceived as a way to tax major U.S. corporations such as Apple, Goldman Sachs and Citigroup that had accumulated mega-sums through holdings in subsidiaries located in overseas jurisdictions with tax rates lower than the U.S.
The levy targets their accumulated earnings and profits. Those attributable to liquid assets taxed at 15.5 percent, illiquid assets at 8 percent.
Putting the likes of Apple aside for a moment, the law also applies to individual stockholders with minimum holdings. While Fortune 500 companies have the cash to pay whatever tax comes their way, that’s not always the case for stockholders.
“I’ve lived in Siena for 40 years,” said Alice, ” I haven’t been back to the U.S. in two decades but I’ve always filed my U.S. tax returns.” Eight years ago, Alice continued, her Italian accountant recommended she incorporate an Italian Srl (Societár responibiltá limitata, a limited liability company) to lower taxes on her motorcycle parts business. “I did just that and I own 99 percent of the shares of the Srl, the other one percent is owned by an Italian friend.”
She was not, she roared, a U.S. company with overseas funds that required repatriation. She had no subsidiary in a low tax jurisdiction. She paid her Italian taxes in full.
Under previous law, 10 percent shareholders in foreign corporations were taxed on distributed income in the form of dividends and their pro-rata share of what is termed “Subpart F” income. The calculation under the new law expands the definition of that income, which in 2017 must be recognized to include even funds set aside under local foreign law for items such as retirement liquidations and reserves, thereby increasing those shareholders’ 2017 tax liability.
Alice was having none of it. “What can you do counselor?” she asked with veiled menace.
I told her I wasn’t a magician and the choices were hers alone. She could join with others to vote out the Republicans in November. She could also hope members of Congress would not only go to bat for Americans living overseas but also lead a charge to overturn a tax bill that will bring in millions in offshore tax dollars into the U.S. Treasury – not a likely scenario.
Her only other path, if she wanted to protect her business from similar surprises in the future, would be to hand in her U.S. passport as so many Americans overseas have done in recent years. But that would still leave her with a repatriation tax for 2017 since she was a U.S. citizen in that year. She could also be subject to the U.S. “exit tax” upon expatriation.
Alice reached into her backpack and pulled out her U.S. passport followed by a small blowtorch, matches and a metal plate. She lit the torch and pointed it at her passport. Through the smoke of her flaming document, she was defiant: “There’s my answer!”