The once-cushy expat lifestyle for Americans is again under attack. The US House of Representatives last week passed a bill that could have major financial repercussions for US expats. The measure is designed to crack down on people who do not report offshore income, but would likely snare many law-abiding taxpayers as well.
"It could have extremely far-reaching implications" says Dean Rolfe, Middle East tax leader in the Dubai office of PriceWaterhouseCoopers. The provision was tucked inside a much-debated, $15 billion job-creation bill at the last minute as a concession to legislators who thought the earlier version was too expensive. In theory, squeezing overseas tax evaders provides much-needed revenue to cover the incentives offered to employers.
The bill would require the government to withhold 30 per cent of the proceeds from the sale of US securities and other assets if they were purchased using offshore accounts. In effect, the government taxes the proceeds up front instead of waiting for the taxpayer to report the income. The taxpayer could recover the 30 per cent after filing his taxes and showing he is entitled to a refund. In addition, the bill would tighten reporting requirements on non-US banks to identify where overseas expats are stashing their money. In the past, offshore banks and financial firms could effectively thwart the Internal Revenue Service by obscuring ownership. "What they are trying to do is short-circuit that process," says Mr Rolfe.
However, tax professionals and financial advisers in the region said it was far from clear how the Internal Revenue Service would interpret and apply the new rules. It's also not a sure thing the bill will become law. The Senate will consider it next before it goes to Barack Obama, the US president, for his signature, although several reports indicated it would likely make it into law within months. It could also be revised extensively along the way.
The Internal Revenue Service already requires all US citizens to report any foreign accounts that exceed $10,000 at some point in the year. The form is called a Foreign Bank and Financial Accounts (FBAR) but "I would say 99 per cent of Americans abroad don't know that they need to file that," said Vince Truong, a Dubai-based financial adviser certified in the US. He said the new rules could expose expats to civil and even criminal penalties for failing to expose their overseas accounts, since the IRS will be collecting that information from the banks.
Here in the Gulf, many financial firms aggressively market offshore products to expats without realising that the rules for Americans are much more stringent than they are for Europeans. The IRS considers most investment income generated offshore to be subject to as much as much as 75 per cent tax. "Americans need to understand that these things are going to cause them a lot of trouble," Mr Truong said.
Another potential ramification could be reduced choice for Americans overseas when it comes to selecting a financial services provider. Josh Matthews, managing partner for Manseco Financial, which specialises in American expatriate issues, says some global financial firms are choosing to turn away American clients because of the increased hassle. The bill threatens to have the biggest financial impact on expatriate Americans since 2006, when the IRS established a ceiling on how much they could claim for a housing deduction. Previously, it was possible for expats to shield much of their income from taxes by classifying a big percentage of it as a housing allowance.
For the 2009 tax year, individual Americans living in the UAE do not owe taxes on the first $91,400 in taxable income. That would not change under the proposed legislation. What is changing is that the US government is getting much more strict about making sure it knows about all the income its expats are earning. email@example.com