By Glen Frost

 FOR MANY  years, the persistent call for change in the taxation of American corporations and individuals abroad has gone unanswered. However, the current administration’s actions, suggest the very real possibility of new tax rules, sooner rather than later.

Indeed, assuming no major legislative disturbance or some catastrophe, such as a Russian-related scandal or open conflict with North Korea, some are predicting new tax rules before the end of this year or early next year.

For American citizens living in Panama, this would mean relief from onerous compliance requirements and potential penalties that can lead to financial ruin.

Expected changes include a long-awaited transition from our anomalous “worldwide” tax regime imposed upon American corporations to a “territorial” tax system. Currently, American corporations are subject to tax on their worldwide income, whether that income is earned in the U.S. or abroad. Under a territorial system, only a corporation’s U.S.-source income would be subject to U.S. tax, leaving foreign-source income generally exempt from U.S. tax.

Significantly, the administration’s advancement on the corporate “territorial” front simultaneously indicates the possibility of a corresponding change in the tax treatment of American individuals living abroad. The House Republicans’ “blueprint” for tax reform, adopting a “territorial” approach for corporations, expressly raises the possibility of changes for individuals. On the Senate side, Finance Committee Chairman Hatch’s proposal calls for reconsidering the taxation of nonresident citizens. Additionally, at a Congressional hearing held on July 18, eliminating citizenship-based taxation was said to be on some Members’ wish list.

Currently, the U.S. taxes its citizens and green card holders on their worldwide income, whether earned in the U.S. or abroad (“citizen-based taxation” or “CBT”). Under this burdensome system, Americans living abroad face a daunting array of tax rules and forms. Penalties for incorrect reporting, usually due simply to not understanding the rules, can be disastrous. For American individuals, residency-based taxation (“RBT”) treatment would provide a solution to these problems in the form of “territorial” treatment. This would mean that Americans abroad would only be taxed on U.S.-source income. Led by groups like American Citizens Abroad, which proposed RBT to Congress in 2016, efforts to make this change have steadily progressed. Since the 2016 elections, these efforts have “gone public,” with grassroots lobbying and “crowd-funding” of the costs of revenue estimates.

The U.S. CBT system stands out among the rest of the industrialized countries of the world—and not in a good way. The vast majority of countries treat their citizens fairly under a RBT system. Americans living in Panama are acutely aware of the burdens imposed upon them by the CBT system. And recent legislation like the Foreign Account Tax Compliance Act (FATCA) has only increased these burdens, making it difficult for many Americans to even get bank accounts abroad, because some foreign financial institutions refuse to do business with Americans to avoid the hassle of FATCA’s special due diligence and reporting requirements.

Fortunately, the RBT system fits comfortably alongside all of the international tax reform proposals being developed. Furthermore, it attracts bipartisan support.  While differing on details, Democrats Abroad, Republicans Overseas, Americans for Tax Reform, the Heritage Foundation, American Citizens Abroad, a number of American Chambers of Commerce overseas, and other business groups, all support the approach.

The RBT system is finally within reach, and now is the best time to aggressively advocate for it. Work on the legislation is in progress. Revenue estimates, which hopefully will show little or no revenue loss, are in the making. This is a change that can be made easily, possibly achieved without a loss of tax revenue, and with careful drafting, loopholes can be prevented. For more information, go to the American Citizens Abroad website.

Glen E. Frost, CPA, CFP® is  Associate Tax Counsel, of  American Citizens Abroad

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All of this is pie in the sky until something actually happens  To a great degree, what happens to to tax laws, rates and rules is strongly dependent on the budget process and the out of control spending that seems to be impossible to restrain 

Very few members of Congress want to reduce spending.  So when they work on "tax reform" they want to "pay for" every tax break or reduction in a way that will be "revenue neutral."  Unless and until Congress really becomes serious and really cuts spending, we are not likely to see many really good deals with taxation.

Meanwhile, the very real "other" tax, inflation, continues unabated.  It is built into the Federal Reserve System  Since creation of the Federal Reserve in 1913, the US dollar has lost 96% of its buying power,  What you could buy for one dollar in 1913 now costs around $24.75.  Whenever the Federal Reserve or banks lend money, they lend the principal by creating "money" out of thin air.  But the borrower has to pay back principal plus interest.  Where does the interest come from?  More "money" must be created, which, in turn creates more debt to be paid.

After Andrew Jackson vetoed renewal of the charter of the Second Bank of the United States (forerunner of the Federal Reserve), he paid off 100% of the national debt  The US prospered very nicely until 1913 with no central bank and no income tax.  In 1913 the banking crooks put into place both the income tax and the Federal Reserve, which work hand-in-glove.  Partly because of these laws and partly because of the Roosevelt administration's shift to Keynesian deficit spending, the nation has grown its debt to about $20 trillion, almost half of it added in the last eight years.  Mathematically, it can never be paid now, so the Andrew Jackson option is no longer available, not to mention the Social Security and Medicare promises (involving around $200 trillion) that cannot be kept.

Unfortunately for Trump (and maybe his successor) tax reform measures and other desirable changes for the people are a form of rearranging the deck chairs on the Titanic.. 

Replied on Discus - hope I hear from someone

Thx Bob

Can't have it both ways plain and simple. In life, you always pay a price.

Well said Bob and so true.........I like that analogy.....rearranging the deck chairs on the Titantic, hahahahaha........You dont mind if I borrow that phrase do you?

One thing I have never understood about this - if we stop paying U.S. taxes on income earned in Panama, will we then have to pay Panama income taxes on it?  If so, I don't see the benefit of stopping the current system.  I'm sure TurboTax is much easier to use than anything I would need to file a Panama tax form.

Judy - glad to see you here. Need to return some items to Hospice tomorrow if possible - will contact you directly.

Turbo Tax caused a nightmare for me due to income earned here. Still working on it but do believe in their customer support.

Maybe we will finally meet tomorrow??

I left you a private message.


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