Earlier this week, the U.S. Treasury granted significant relief to Americans abroad subject to the Repatriation tax. According to the Treasury release, Americans abroad with less than $1,000,000 in total Repatriation tax liability are de-facto granted a one year extension to make the first payment that was otherwise due by June 15, 2018.
A bit of background. The Repatriation tax forced large U.S. companies like Apple and Google to pay a sizable tax on profits they held outside the U.S. in their foreign subsidiaries (called CFC – controlled foreign corporations). Specifically, all profits of these CFCs that accumulated between 1986 through December 31, 2017 were treated as income to their U.S. parent company (Apple and Google, for example) and taxed at 15.5% for profits held in cash form, and 8% for profits held in non-cash form.
Although not the target of the tax, U.S. citizens or Green Card holders living abroad U.S. who owned interests in companies incorporated outside the USA (“Expats”) suddenly found themselves subject to the tax. Why? Under the law, individuals were treated the exact same way as large U.S. corporations. Therefore, if an Expat owned at least 10% of a foreign corporation, and over 50% of that foreign corporation was owned by Americans, that corporation was a CFC for purposes of the tax. Accordingly, Expats were required to pay the same tax as Apple on accumulated profits, with one catch – their rates were higher – 17.54% (for cash) and 9.05% (for non-cash).
This caused an uproar among Americans abroad. An example will help explain why.
Assume an Expat living in London who has been operating a CPA sole practice or family restaurant for 30 years through a UK corporation. After paying high UK corporate income taxes on all profits, the expat holds $500,000 in the company and is counting on this money for retirement. Under the tax, the Expat is now personally liable for 17.54% of that amount, or $87,700.
How is this tax to be paid? Under the law, the $17,540 can be paid in eight annual payments. The the first payment of 8% (or $7,016) was originally set for April 15, 2018. Should the payment be a single day late, the entire $87,700 liability is accelerated and is due immediately! This is in addition to any late, insufficient or non-payment penalties.
Monte Silver, an experienced U.S. tax lawyer, partner at the Israeli law firm Silver & Co., first uncovered the Expat exposure to the tax. Monte, who previously worked at the I.R.S. and the U.S. Tax Court, initiated a global grass-roots campaign to change the law.
“It was obvious that Expats were in no position to understand the complexities of the tax and comply by April 15, 2018, even if they wanted to,” Said Silver. “A legislative fix in so short a time was impossible, so I initiated a grass-roots email-petition focused on obtaining temporary relief from Treasury and the IRS. Within days of the campaign launch, senior Treasury/IRS officials were receiving hundreds of emails from angry Expats, and agreed to meet me to understand the problem. Within a week, Treasury extended the deadline for payment until June 15, 2018. And after two additional months of petitions, on June 4, the Treasury/IRS granted additional relief.
The relief is as follows: An Expat shall incur no acceleration of the 8-year payment plan, or other penalties, for failing to make the June 15, 2018 payment, if the total tax due from the Expat under the Repatriation tax (i.e. in all the eight years) is less than $1,000,000. In other words, if an Expat has less than a total of $1,000,000 in Repatriation tax liability, there is no real reason to make the June 15, 2018payment! To obtain this relief all that is required is to make the 965(h) election.
This is very meaningful relief. To reach $1,000,000 in total tax liability, an Expat must have at least $6.5M in accumulated profits held in cash form, or $12.5M in non-cash form. It is important to note, however, that the relief has no impact on filing and 965 election deadlines, which remain unchanged – June 15 or October 15, 2018. Thus Expats might consider filing for the Oct 15 extension by June 15, 2018to allow time to file the election.”