Generally, I don’t follow the politics of the day. Many lawyers’ mantra is “let’s just work with the laws we are given…” I find this hard to understand. At law school, I worked as a legal assistant for the Office of Chief Counsel International at L’Enfant Plaza in Washington, D.C. We had interactions daily with Congresspeople and Senators as they tried to understand legislative bills. We also tried to understand, subsequently, the intent of the Senate and Congress in passing the legislation. Now, the legislative bodies and the Executive Branch are passing bills like never before! Just a few years ago, I would get a monthly publication, compliments of the U.S. Treasury, detailing the changes in the tax law. This was usually less than 25 pages and easy to read over a weekend with strong coffee. Now, I get daily updates on the legislative changes; averaging 3 plus a day!!! I find my weekends filled with trying to swim through this tangled confusion of legislation.
Some of this legislation is huge and in the form of an Act. Have you ever tried to find a recent Act, like the new American Jobs Act? Finally, I found the Act at http://www.scribd.com/doc/64723281/American-Jobs-Act. It is an amazing piece of proposed legislation that is void of understanding, clarity or methods of implementation. If you have the time to look this up in the above website, look at the Act and specifically Title IV Section 441. If you don’t have time, I have reprinted this Section below. It is an amazing part of this Act. What is so amazing about it? Well, it basically will stunt America’s international growth and presence overseas and allow our competitor to race past us in the world job markets as well as expanding our markets and presence overseas.
CAN THE OBAMA ADMINISTRATION REALLY DO THIS?
If you have lived long enough, then you can recall only one instance where a U.S. President actually enacted laws that negated over 60 treaties with one stroke of his fountain pen. The general rule is that U.S. Federal law never supersedes International Treaties…never. But, in 1986 President Ronald Reagan passed the 1986 Tax Reform Act which contained provisions that overrode the then currently operating Double Tax Treaties with more than 60 countries that had been relied on by foreign governments as a solemn agreement with the United States that gave reliance between counties and their citizens that travel, live and work between the U.S. and foreign countries. This overriding act was simply unprecedented. Probably the most important treaty benefit is to not tax a person’s income by two counties; a true double tax on one stream of income. It equates to paying Federal taxes twice! So, if you are an American working in England; both the U.S. and England will tax you on your earnings. This means that with two countries taxing your wages, you may end up with no benefit from working an oversea’s assignment that directly helps promote U.S. international trade and friendship. We desperately need friends in these other countries and trade which helps the U.S. economy. We have become, in my opinion, a country largely of consumers of goods and services produced or rendered in other countries. We have taught these countries about business in our Universities, let highly educated foreign individuals work after University post graduate degrees with student visas and then followed by brain and economic drain as these U.S. educated individuals move back to their homes where the opportunities are greater and wages are higher with less taxes.
I think that we need to get street-smart and become a country of competitiveness and international presence. I recall when the people of China were starving. China could not feed all of their population; an awful condition to affect so many millions of people. We sent our University researchers to China to offer assistance in crops and to educate them on how to sustain themselves with modern methods of planting, fertilizing, harvesting and storing crops. We helped them modernize their methods of planting rice. We did such a good job and they were such excellent learners, that now they grow surpluses of rice and sell this surplus globally, even to the U.S. Can you believe it!
I recall when Senator Obama was running for the office of President of the United States and even immediately after he was elected into office; one of the cornerstones of his campaign was to only buy American products. Since we are a country of consumers, I wondered what on earth were we going to buy and consume that we still make in America? I also wondered what our trading partners thought of this idea. This Presidential idea quickly provoked outrage among our trading partners, with Europe at the front of the line. The European Union warned against this protectionism; creating hard feelings against America and filings with the World Trade Organization charging the U.S. with violating agreements limiting discrimination in government spending. President Obama quickly changed his statements to more conciliatory comments when he told ABC News that he did not support “Buy American” provisions after all because he did not want to “signal protectionism…I think that would be a mistake right now.” He went on to say that this “…is a potential source of trade wars that we can’t afford at a time when trade is sinking all across the globe.” Those statements were made in 2009.
Well, in my opinion, trade is still “sinking all across the globe”. However, this American Job Act has us falling over our own feet when we should be unshackled and allowed to be competitive in international trade. If you care to read this Act, you will quickly see for yourselves. First you need to understand why and/or how this legislation was drafted. Let’s look at early September 2011, when the House Democrats put forth as “unofficial” revenue raising provisions intended for the desks of the Joint Select Committee for individuals:
…No credits would be allowed against the tax, and the tax would not be taken into account when calculating a taxpayer’s alternative minimum tax liability.
Now there are tax credits, both federally and at the State level, to assist individuals such as the:
- Child credit: a credit up to $1,000 per qualifying child;
- Child and Dependent Care credit up to $6,000, phased out at incomes above $15,000;
- Earned Income Tax Credit; his refundable credit is granted for a percentage of income earned by a low income individual;
- Credit for the elderly and disabled: A nonrefundable credit up to $1,125
- Two mutually exclusive credits for college expenses;
- Credits for Research Expenses;
- Work Incentive Credit or credit for hiring people in certain enterprise zones or on welfare; and
- A variety of other credits for individual taxpayers.
In addition, a Federal foreign tax credit is allowed for foreign income taxes paid to another country. This credit is limited to the portion of Federal income tax arising from, generally, foreign source income such as wages earned by a U.S. citizen working overseas. The credit is available to all taxpayers who qualify to help reduce the burden of having your wages taxed by two countries with no offset from one country’s tax systems against the other country’s tax system. Basically, being taxed by two countries on one stream of income. It will not be long and the U.S. citizen will quickly stop working overseas and come home to…unemployment and seek unemployment payouts.
In this same piece of “unofficial” revenue raising provision” a proposal to take away a U.S citizen’s passport which has the effect of keeping our international businesspeople at home where there are fewer opportunities and adding to the swelling numbers of the highly educated and unemployed Americans. The language is as follows:
A new proposal would authorize the government to deny the application for a new passport or renewal of an existing passport if an individual has $100,000 or more (indexed for inflation) of unpaid federal taxes which IRS is collecting through enforcement action. The government also could revoke a passport upon reentry into the U.S. for such individuals.
In my law practice, I have several clients who after audit examinations; residential home short sales or residential foreclosures experience a phantom increase in their taxable income that yields huge tax debts. Now, they are either making installment payments from their wages or trying to make offers of lump sums, borrowing generally from relatives, to compromise the tax debt with the IRS. But, if they can not get their U.S. Passport renewed or apply for a passport for keeping or getting a job overseas; then how can they pay the IRS the tax liability? This defies logic for me.
THIS IS WHERE REALITY SETS IN:
Now take the information above and apply it to the actual American Jobs Act which has a familiar form to the above revenue raising foundation proffered for the Joint Select Committee, specifically Title IV, Section 441, which is inconveniently found way in the back of the Act and referenced “Dual Capacity Taxpayers. Sec. 441. Modifications of Foreign Tax Credit Rules Applicable to Dual Capacity Taxpayers”.
SUBTITLE E – DUAL CAPACITY TAXPAYERS SEC. 441. MODIFICATIONS OF FOREIGN TAX CREDIT RULES APPLICABLE TODUAL CAPACITY TAXPAYERS.(a) IN GENERAL.—Section 901 of the Internal Revenue Code of 1986 (relating to credit for taxes of foreign countries and of possessions of the United States) is amended by redesignating subsection (n) as subsection (o) and by inserting after subsection (m) the following new subsection:‘‘(n)
SPECIAL RULES RELATING TO DUAL CAPACITY TAXPAYERS.—‘‘(1) GENERAL RULE.—Notwithstanding any other provision of this chapter, any amount paid or accrued by a dual capacity taxpayer or any member of the worldwide affiliated group of which such dual capacity taxpayer is also a member to any foreign country or to any possession of the United States for any period shall not be considered a tax to the extent such amount exceeds the amount(determined in accordance with regulations) which would have been required to be paid if the taxpayer were not a dual capacity taxpayer.‘‘(2)
DUAL CAPACITY TAXPAYER.—For purposes of this subsection, the term ‘dual capacity taxpayer’ means, with respect to any foreign country or possession of the United States, a person who— ‘‘(A) is subject to a levy of such country or possession, and‘‘(B) receives (or will receive) directly or indirectly a specific economic benefit (as determined in accordance with regulations) from such country or possession.“(3) REGULATIONS. – The Secretary may issue such regulations or other guidance as is necessary or appropriate to carry out the purposes of this subsection.’’(b)
CONTRARY TREATY OBLIGATIONS UPHELD.—The amendments made by this section shall not apply to the extent contrary to any treaty obligation of the United States.(c) EFFECTIVE DATE.— The amendments made by this section shall apply to amounts that, if such amounts were an amount of tax paid or accrued, would be considered paid or accrued in taxable years beginning after December 31, 2012.
Yes, the language of this Act is vague and ambiguous, but worse yet is that the language is chilling when read with the initial revenue raising foundation proffered to the Joint Select Committee. Therefore, this language will completely eliminate the double tax relief in more than 65 international treaties. I can definitely see that other countries will quickly pass American’s interests for international trade, economy and job growth. Who will hire the American employees for international assignments when the taxes are basically double for an American employees who has no right to a passport or renewing a passport to keep an overseas job with an American or non-American employer? I believe that we are entering an era similar to the Clinton era when he vowed to tax only the rich and then worried that even semi-wealthy American would give up their U.S. citizenship to shed such an overwhelming economic/tax burden. Clinton even went so far as to have new legislation passed to make the act of relinquishing U.S. citizenship more financially costly in hope to dissuade expatriatism, which is a brain and economic drain on America. A second passport may be the norm for Americans wanting to live and/or work overseas. If you can qualify in some countries with a proven history of ancestry to that country, then great. If you can not qualify or can wait the many years it will take for such passport, then you will need to get an economic passport which I will talk about in Part II.
Asset Protection World is ready to discuss your options for your Asset Protection Planning. Call us for a FREE consultation.