What do International Investors in the US Really Want to Know About the US Tax System?
Having got back from my travels from Europe I headed straight to D.C. (National Harbour, MD to be precise) for the Select USA investment summit this past weekend.
I was delighted to be asked to be part of a panel alongside new friends Willie Hornberger and Carol Salaiz discussing the US taxation of individuals investing in and moving to the US. As part of the session we discussed the general considerations around the US tax system and in particular the reporting requirements associated with those individuals that move to the US.
At first I thought I would go over a brief outline of our session that we put together; but as we made the session as interactive as possible it was good to hear what some of the delegates were thinking. So instead I’m going to go over some of the questions that were asked, on the assumption that many more of you would have similar questions and thoughts.
Why is the US system so onerous on taxpayers and their reporting obligations? Why can’t we just say what we earn and pay the tax simplistically?
This came up at the session and is a common question I’ve been asked for many years. My stock answer is usually “I don’t make the rules, I just ensure my clients comply with them,” but that just don’t cut it with international taxpayers that are used to a more simplistic system in their home country. However, it’s unfortunately the truth of the matter and tax advisers and accountants are relatively toothless when it comes to tax reform.
In any event there are two comments I would like potential investors to understand:
- Although the US tax system and computational aspects can be complicated and burdensome, a significant proportion of the cost of compliance for international taxpayers lies with the foreign informational reporting obligations that may apply to them should they become a US taxpayer by virtue of their residency or immigration status. If they remain non-resident for US tax purposes many of the informational reporting aspects will not apply.
- It is clear that the current administration, and many before it, agree with most international taxpayers; the tax system is just too complicated as it currently stands and reform needs to happen. Despite the honorable intentions, the reality of full US tax reform is a monumental task that is likely beyond the current administration. Therefore there may be a stop gap, populist themed ‘reform’ around tax rates, but it will not change the current tax reporting obligations or computational aspect enough to appease those that wish for a simplistic approach.
What are the chances of the Trump proposals being approved and if they are, when do you expect them to be effective from?
The interest from the international community with regards to the proposals of lowering tax rates in the US for businesses is palpable. However, the uncertainty of knowing if or when they come in is delaying certain investors from making decisions on their investment. Many people are advising such investors to hold tight once we have greater certainty on matters.
I do believe there will be a change in tax rates as it was a cornerstone of Trump’s candidacy. However, to what extent they resemble the current plans I am not so sure. I do believe there will be a reduction in individual, corporate and business tax rates and that they may become effective as of January 1 2018 at the earliest.
My view for business and investors is that if the investment makes commercial sense now, waiting for what may occur with regards to tax reform should not change such a decision and when it should be made unless such a decision hinges on a specific part of the tax code such as research and development credits as opposed to the headline tax rates. Furthermore if there is a change in tax rates, it appears that this will only be a better outcome for the investor at present so why wait!
Having said all of the above, I did provide one note of caution at the session. Another of Trump’s policies and his rhetoric as a whole is his America First initiative. Therefore the devil may well be in the detail with regards to inbound investment to the US as the repatriation of US source profits outside the US may be looked at to encourage profits made in the US to remain in the US in some way shape or form.
Will the US partake in CRS (common reporting standards) with the majority of the rest of the business world?
This question and situation I have had first-hand experience of and during our session, as with specific situations I have encountered, it came from private investment bankers who are seeing an influx of questions and potential transfer of money/assets from outside the US in to the US.
Firstly, what on earth is CRS?! CRS is an information standard for the automatic exchange of information (AEoI), developed by the Organisation for Economic Co-operation and Development (OECD). Essentially this calls on jurisdictions to obtain information from their financial institutions and automatically exchange that information with other jurisdictions on an annual basis. Given the above freedom to exchange information, it’s clear that tax avoidance is top of many countries priorities.
However, the reason this question has been posed by some individuals and families has no correlation to the want to avoid tax in their home country. Wealthy individuals and their families have significant cause for concern that this information may make its way in to the wrong people’s hands, showing their personal and families wealth; and in doing so, they have reason to believe that their families well-being will be jeopardized. This cause for concern is a very real and significant issue in some countries that still face severe corruption, and their concern has increased due to CRS. Therefore many individuals know that the US have not signed up CRS and as such, the transfer of information with the individuals home country and the potential for such information to make its way in to the wrong people’s hands is mitigated.
This particular issue is very complex and sensitive and is very difficult for a mere CPA to advise on. We can help with how holding US based assets will be taxed and accounted for here in the US tax system and how best to do so to mitigate any US tax considerations. However, the tax and non-tax considerations of such transfers need to be considered and professional advice sought outside the US to ensure any potential US tax planning surrounding such a US based investment works.
As you can tell, many of the questions asked were wide ranging and the answers are never easy to convey or digest! But the interest to invest here in the US is again growing and for anyone that wishes to understand how doing so affects them as an individual, family or business, please get in touch and we’d be happy to talk through any of your questions and how we can help.