Potential tax changes for Americans in Panama

1,621Views 6Comments Posted 10/09/2017

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. www.americansabroad.org.

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

Comments 6

Val Panama

Thank you - this has been an issue well overdue with the IRS - I know we are fine, TurboTax can't handle what you describe which caused me to be overwhelmed - nor have I found anyone who understands the expat/ bona fide resident OUS and the establishment of a business. Please - is there any qualified individual who can help with the unique circumstances Bob describes? Need help for previous years although know all is fine, fearful of putting us as the tax preparer! Thx PS - I will post this message but saw who you recommend for assistance after I wrote this. Will contact Glen but others?

4 years ago
Clinton Donnelly

Trump wants to make numerous improvements to the US tax code this fall. It remains to be seen if the Republicans have the political chutzpah to accomplish it. But consider the implications of such a change. To stop taxation of American individuals and business abroad would require a tax INCREASE on domestic taxpayers. Few politicians want to vote for that. Further, consider how the worldwide taxation of citizens enables the U.S. government to wield a powerful control over ALL the banks in the world. They use this to pursue international criminals, drug lords, and terrorist wherever they are. Rarely in history does a government give up power to control people. As worthy as residency-based taxation is, I don't see it happening. The US stands alone in the world doing citizen-based worldwide taxation. But the US has the power and leverage to pull it off because of the power and ubiquity of the US dollar. New Zealand tried to switch to worldwide taxation ten years ago, but business started fleeing, so they reversed it.

4 years ago

I do not understand the combining of tax laws that consider people and expat US citizens the same as corporations. Today a US expat cannot open a local bank account without filling out a blizzard of papers. Having a local bank account would make living (for example, in Panama) much easier. For the income earned by expats in Panama (if it is possible to work here) it is not worth the effort to secure an account here. Now the same restrictions apply in Europe. Individual taxpayers are not the same as corporate taxpayers. BTW, Newsroom is not improving its selection. It is expanding the topics offered for consumption. Whether or not it satisfies everyone is not an issue. There will always be a few who just disagree because disagreeing is what many do as a matter of habit.

4 years ago
Richard Charron

Is this April 1st?

4 years ago

Good article. Thank you Newsroom! You're improving!

4 years ago

Hey Dems .... MAGA

4 years ago
The comments are the responsibility of each author who freely expresses his opinion and not that of Newsroom Panama.
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