(reposted with permission from author)
By Virginia La Torre Jeker, J.D.
Admitted NY Bar and US Tax Court, covers US international tax law and contributor to Forbes.
Link to the article on Forbes
A recently leaked internal House memorandum has revealed potential tax reform under discussion in the U.S. House of Representatives. These share some key elements with President Donald Trump’s tax reform proposals, reflecting a coordinated effort to implement significant change. The leaked information contains changes that could reshape the tax obligations of U.S. persons living abroad and those of multinational business owners.
Aside from elimination of the U.S. estate tax or “death tax,” two key points stand out: (1) reducing U.S. taxes for those working overseas on their foreign-earned income and (2) lowering the corporate income tax rate. These proposals could have far-reaching implications for individuals and businesses navigating the complexities of the U.S. tax system. For Americans owning businesses abroad, the proposals will impact them in relation to taxation of so-called Controlled Foreign Corporations and taxation under the Global Intangible Low-Taxed Income regime.
Tax Reform Eases Burden On U.S. Persons Abroad
Tax reform discussions may significantly ease tax matters for Americans living overseas. Under current law, U.S. citizens and residents are taxed on their worldwide income, with the Foreign Earned Income Exclusion allowing individuals working abroad to exclude up to $126,500 (in 2024) of foreign-earned income, provided they have a tax home abroad and meet either the bona fide residence or physical presence test. However, the FEIE does not apply to passive income or self-employment tax, and it does not fully eliminate double taxation in many cases.
The leaked memorandum suggests two potential reforms to alleviate this burden:
The leaked memorandum suggests two potential reforms to alleviate this burden:
- Increasing the FEIE threshold: A substantial increase in the exclusion amount could benefit many expatriates, particularly those in high-income or high-cost-of-living countries.
- Exempting all foreign-earned income from taxation: A more radical shift, this change would effectively remove the U.S. tax obligation on foreign-earned income, aligning with the territorial tax systems adopted by most other countries.
Tax Reform, Corporate Tax Rate Reduction And Its Impact On CFC And GILTI Rules
Another key proposal for tax reform under discussion is reducing the U.S. corporate tax rate from its current 21% to as low as 15%. This change would not only impact domestic corporations but could also have significant effects on the CFC and GILTI regimes. These regimes were designed to prevent U.S. taxpayers from indefinitely deferring U.S. tax on income earned by their foreign corporations. Under these rules, certain categories of income, such as passive income or low-taxed active income are subject to immediate U.S. taxation, even if not distributed to U.S. shareholders. This ensures that U.S. multinational businesses and individuals cannot use offshore entities to avoid or significantly delay U.S. tax liabilities.
Under current law, income of a CFC that is subject to foreign tax at a rate that is at least 90% of the U.S. corporate tax rate (i.e., 18.9% under the 21% rate) is generally excluded from immediate taxation under the CFC and GILTI rules. If the corporate tax rate is reduced to 15%, the high-tax exception threshold would drop to 13.5%, broadening the range of jurisdictions where U.S.-owned foreign corporations could benefit from exemption.
This change could have several effects:
- Greater relief under the high-tax exception: U.S. persons operating businesses in foreign jurisdictions with tax rates above 13.5% could find that their CFCs are no longer subject to the CFC Subpart F or GILTI inclusions, thereby reducing the need for complex tax structuring.
- Potential impact on foreign tax credit utilization: Lower U.S. corporate tax rates may reduce the ability of U.S. shareholders to claim foreign tax credits as the gap between foreign taxes paid and U.S. tax owed narrows.
- Reassessment of entity structures: Multinational businesses may need to reconsider whether it remains advantageous to operate as a CFC or whether alternative structures provide better tax efficiency under the revised rules.
Tax Reform: What Comes Next?
While these tax reform proposals remain speculative, they highlight a growing recognition of the unique challenges faced by U.S. persons abroad and the competitiveness concerns of U.S. business owners. They align with President Trump’s tax policy objectives, focusing on reducing taxes for individuals and corporations. Should these measures advance, they could significantly shift the landscape of international tax compliance and planning.
For expatriates and multinational business owners, staying informed and proactive in tax planning will be crucial. As legislative developments unfold, tax professionals will need to assess how these potential reforms interact with existing tax treaties, foreign tax credit rules, and entity structures to optimize outcomes for U.S. taxpayers abroad.
