Unlike the majority of jurisdictions, the US taxes individuals on a worldwide basis - a system that can cause multiple problems and must be changed, a lobby group of US expats says.

The lobby group for expat US citizens has fired another broadside at Capitol Hill, calling for an end to the worldwide system of tax and easement of new rules that it says unduly hit Americans abroad.

American Citizens Abroad, a bi-partisan group, has weighed in again on the recently enacted Tax Cuts and Jobs Act, the package of measures that slashed corporate tax to 21 per cent from 35 per cent, doubled estate tax exemptions, and capped deductions on state and local taxes, among other changes. Notably, however, the law that taxes Americans on a worldwide basis, rather than on where they live, which is the approach of most countries, hasn’t been changed.

Groups such as ACA and the American Chamber of Commerce In Hong Kong argue that the US worldwide system discourages US citizens from living abroad because they are seen as a compliance burden by foreign banks and other institutions. Since the passage of the Foreign Account Taxation Compliance Act, or FATCA, this situation has gotten worse. HSBC and Deutsche Bank, for example, have ceased offering expats banks accounts. An increasing number of expats have renounced citizenship in recent years. The situation even caused commentators, if not entirely seriously, to wonder whether American actress Meghan Markle, due to marry the UK’s Prince Harry in May, will have a US tax problem.

ACA said yesterday has submitted a statement to the Senate Finance Committee in connection with hearings it is holding on the new tax laws. It said the legislation represented a “missed opportunity”. 
“With the passage of territorial taxation for corporations, it should have been a natural for Congress to adopt a residency-based approach for Americans living and working overseas, essentially territorial taxation for individuals,” Marylouise Serrato, ACA executive director, said.

The organization said that not only was residency-based taxation not adopted in the new laws, but there are “serious problem areas” due to the new participation exemption system, which adversely affects Americans overseas. (ACA said the 100 per cent corporate dividend received deduction is not available to individuals, nor is it available to foreign corporations which are owned by US individuals, including individuals living abroad. A US citizen residing abroad, who is a shareholder in a controlled foreign corporation, while not able to benefit from the new dividends received deduction, might be subject to the new repatriation tax.) 

“There are some hyper-technical changes to already complex existing provisions, for example, the 'downward attribution’ rule, which will be a nightmare for small American business owners overseas to comply with.  In some cases, the cost to comply will far outweigh the tax liability,” Charles Bruce, ACA legal counsel, added. 

Other problem areas highlighted in the statement are the inability of Americans overseas to use the new “pass-through” rate for partnerships and LLCs, the inability to deduct foreign real property taxes ($10,000 cap) and the continued inability to apply foreign tax credits against the 3.8 per cent net investment income tax to fund Medicare and the Affordable Care Act.

ACA argued that residency-based taxation is territorial tax for individuals and adopts the same approach as how foreign income of US companies are taxed.