A new law has created taxes for corporations that shift their profits offshore, but it also affects smaller business owners too
Living abroad not idyllic for US expats facing new taxes
The four-employee business of Travis Baldwin, who has not lived in the US for nearly a decade, is about to get hammered by a pair of tax provisions that were aimed at corporates such as Microsoft
A Republican law signed by President Donald Trump in December created new taxes for corporations that have shifted their profits offshore for years. But unlike other provisions in the bill, these international changes do not set a floor on annual gross receipts for when they kick in - meaning Mr Baldwin, who owns an industrial design company in Bristol, in the UK, is on the hook even though he says his business has never made more than $100,000 annually.
The two taxes US expatriates who own businesses abroad are most concerned about: a one-time repatriation levy of as much as 17.5 per cent on old foreign profits and an annual levy called Gilti - or global intangible low-tax income - on foreign profits going forward.
“It’s terrifying,” says Mr Baldwin, who added that he has had trouble finding a local tax attorney who even understands the new law. “It’s just gotten so complicated. I feel like I have this burden that no one else has.”
The tax changes are likely to convince some that it’s no longer worth keeping their US citizenship, according to Nora Newton Muller, who helps run the tax committee for the Association of Americans Resident Overseas. Other US citizens, who have not been paying US taxes but are thinking of becoming compliant, might decide just to stay off the radar, she says.
It is hard to know exactly how many people will be affected, since the Internal Revenue Service does not release numbers of how many expats own businesses abroad. The AARO, a Paris-based association, estimates there are nearly 9 million expats, a portion of whom own a business.
The Republican law slashed the corporate tax rate to 21 per cent from 35 per cent, and shifted the US to a system of taxing its companies on their domestic profits only. Those changes required guardrails - like the repatriation tax for profits stashed offshore since 1986, and the Gilti tax, to ensure multinationals pay at least something on their future overseas profits.
Expat business owners, like business-owners in the US, often pay themselves a salary that’s only a fraction of their profits, keeping the rest in their companies for retirement or a rainy day. The new law as it stands would require expats to pay the one-time repatriation tax on their profits, even though in reality the money is never returning to the US. To pay the taxes, many expats will have to give themselves a dividend from their business, triggering more local taxes.
Mr Baldwin says he found out about the changes from a Facebook group for expats. He hired a firm in Florida that specialises in expat tax issues, but the firm has not yet told him how much he will owe for definite. So far, the firm has estimated his tax bill and preparation costs for next year could total an additional $20,000.
Expat business owners say they have had trouble getting lawmakers to pay attention to the issue, since few, if any, have a critical mass of expats who vote in their district. Supporters of changing the law have been trying to find a champion in the Senate.
Monte Silver, a tax attorney from Santa Monica, California, who has an office overseas, travelled to Washington earlier this year to try to convince lawmakers to take up the cause.
“They said, ‘Monte, the problem here is we have these little districts. We don’t know on a district level how many of these people live in my district. Go to the Senate,’” says Mr Silver.
Mr Silver says he has a Republican senator on the Finance Committee, which handles tax bills, to promise to take up the issue, but declined to name the lawmaker. The attorney says he has also met with Treasury Department officials, but they have said there is not much they can do since a fix would have to come from lawmakers.
Struggling expat business owners received one win last month though. The IRS said it would let businesses that owe less than $1 million in repatriation taxes wait until next year to pay the first installment. The payment had originally been due in April 2018.
But the delay does not affect the Gilti tax, which business owners should have already started paying estimated payments on. Individuals will face higher rates for the Gilti tax than corporations, and find the levy applies to a broader swath of their profits since they cannot take advantage of foreign credits.
Senate Finance Committee Chairman Orrin Hatch, a Utah Republican, is working with the administration to implement the new policies and will “continue to meet with members, taxpayers and other stakeholders to address any concerns with the new law and examine potential changes,” Julia Lawless, a spokeswoman for the panel, said in an email. An IRS spokeswoman declined to comment.
Alicia Vincent, who helps run a furniture business in Montfort l’Amaury, France, says she has written letters to lawmakers in her native Texas and recruited family and friends living in the state to join her. She says her accountant, who is charging her about $350 an hour to calculate the new tax, estimates her company’s effective tax rate will be almost 70 per cent between France’s taxes and that of the new US regime.
“How can you pay 70 per cent in taxes? You just don’t make profits? Eventually we’d close up our business. It’s just not worth it,” Ms Vincent says.
For those unwilling to close up shop, Mr Silver says they just will not pay if the Gilti tax is not modified.
“It’s clear what’s going to happen,” Mr Silver adds. “We’re going to become tax violators.”