Mere days before November 2, 2017, when House Speaker Paul Ryan unveiled highlights of House Republicans’ tax reform bill – a bill which, as of mid-December, is in the process of being merged with its Senate counterpart – former Trump campaign manager Paul Manafort was indicted, or criminally charged, with 12 counts of various “white collar” (financial) crimes. The charges, which were also filed against political consultant and deputy Trump campaign aide Rick Gates, involve alleged money laundering, conspiracy, and tax evasion in connection with willful failures to report secret offshore accounts in tax havens like Cyprus. With the GOP aiming to have a tax bill ready for the president’s desk by Christmas, time is running out – and with the clock ticking faster, it’s anyone’s guess how the indictment against Gates and Manafort could leave its mark on the tax package.
The overarching goal of the GOP tax plan is to streamline the U.S. Tax Code, which isn’t exactly known for its clarity or efficiency. To achieve this, legislators would either pare down or repeal various regulations as they currently exist, such as repealing the alternative minimum tax (as proposed by House Republicans), repealing the Affordable Care Act (ACA) or “ObamaCare” individual mandate (as proposed by Senate Republicans), and scaling back the mortgage interest and state tax deductions (as proposed by both chambers of Congress).
Another area where legislators hope to relax regulation is in government scrutiny of offshore income. As some taxpayers are surprised to learn, the United States is currently the only nation on earth – other than Eritrea, that is – which taxes citizens on foreign-earned income regardless of where they physically reside. Members of both the House and Senate have proposed changing this system to be territory-based, meaning only domestic profits – not foreign profits – would be subject to tax. (As the official GOP website points out, quoting Philip Dittmer writing for the Tax Foundation, “Now, 27 of the 34 OECD member countries employ some form of territoriality, which is up from 17 just a decade ago.”)
Writing for Quartz, Tim Fernholz noted, “This could have a big impact on shell company schemes like the one that Manafort used to move his money into the United States, to the point of making transactions like his legal, because you can’t evade taxes on untaxed money.” He added, “If this bill can be labeled by opponents as the ‘Paul Manafort Offshore Tax Act,’ that won’t help it pass, so Republicans will face even more scrutiny as to how they deal with offshore finance.”
There are two distinct elements to offshore tax regulation: how everyday taxpayers with foreign assets or bank accounts could be impacted by reforms, and how multinational corporations could be impacted by reforms.
On one hand, the GOP has argued that individual taxpayers are adversely impacted by existing requirements to disclose foreign income, stating as part of the 2016 Republican Party Platform, “The Foreign Account Tax Compliance Act (FATCA) and the Foreign Bank and Asset Reporting Requirements,” or FBAR requirements, “result in government’s warrantless seizure of personal financial information without reasonable suspicion or probable cause. Americans overseas should enjoy the same rights as Americans residing in the United States, whose private financial information is not subject to disclosure to the government except as to interest earned. The requirement for all banks around the world to provide detailed information to the IRS about American account holders outside the United States has resulted in banks refusing service to them. Thus, FATCA not only allows ‘unreasonable search and seizures’ but also threatens the ability of overseas Americans to lead normal lives. We call for its repeal and for a change to residency-based taxation for U.S. citizens overseas.”
Conversely, where businesses are concerned, the GOP has argued that existing tax structures are too permissive and hurt Americans economically by allowing business entities to move profits abroad. To quote the GOP website, “At least forty-seven companies have relocated their headquarters overseas in order to take advantage of lower tax rates from 2004-2013 compared to only twenty-nine from 1983-2003. President Trump’s tax relief package would eliminate the incentive for corporations to keep foreign earned income abroad, resulting in capitol [sic] returning to the U.S. so it can fuel job growth in America.”
For now, it remains impossible to definitively state which provisions will (and won’t) make the final cut when the dust settles and policy deliberations between House and Senate Republicans draw to a close. However, two facts are all but certain: (1) as with any effort at major legislative reform, the plan will likely be polarizing, and (2) taxpayers will require detail-oriented, precision financial guidance from an experienced tax attorney or CPA, not only to ensure compliance, but also sound financial tax planning.
Whether a taxpayer requires assistance with tax preparation, audit representation, business tax planning, unfiled tax returns, unreported foreign income, or criminal tax defense, the knowledgeable team of accounting and tax professionals at the Tax Law Office of David W. Klasing is prepared to provide zealous advocacy. To arrange a reduced-rate consultation with our California tax lawyers, international tax attorneys, or business tax attorneys, contact us online today, or call the Tax Law Office of David W. Klasing at (800) 681-1295.
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