The Journal The Authority on Global Business in Japan

In 2017, US President Donald Trump signed the most comprehensive reform to the US tax code since 1986, when Ronald Reagan signed an act approved by Congress that attempted to create a fairer, simpler tax system.

Like the 1986 Tax Reform Act, the Tax Cuts and Jobs Act of 2017 has been bene­ficial for both corporate and indi­vidual taxpayers. However, certain aspects have proven burdensome to US citizens who own businesses overseas—something of great concern to the American Chamber of Commerce in Japan (ACCJ).

The Global Intangible Low-Taxed Income (GILTI) provision, in particular, has had a disproportionately adverse impact on individual shareholders. GILTI is a tax on undistributed earn­­ings of overseas subsidiaries of US share­holders, but, in its current form, has a broader impact than expected. A more detailed explanation of the issues can be found in a piece we wrote for the March 2018 issue of The ACCJ Journal entitled “GILTI Change.”

Over the course of 2018, the ACCJ Taxation Committee and the SME CEO Council have engaged in an intensive advo­­cacy campaign, discussing the matter with various members of the Department of the Treasury, the US Senate, and Congress as a whole, as well as other relevant bodies within the US government.

These efforts have included a visit last September to Washington, DC, by Alternative Investment Committee Chair Frank Packard and SME CEO Council Harry Hill. Packard’s video summary of the visit can be found on the ACCJ website.

The ACCJ also sent a detailed follow-up letter to the US government in December, and coordination continues with other interested stakeholders, such as the Asia-Pacific Council of American Chambers of Commerce, American Citizens Abroad, and others.

MAKING PROGRESS
The Taxation Committee is happy to announce that, as a result of these efforts and those by other organizations, the matter of GILTI and its adverse impact on US citizens who own businesses in Japan has been partially addressed in recent regulations issued by the Department of the Treasury.

However, why not just eliminate the GILTI for individuals? Because the US government intended that individuals would be subject to GILTI. They were worried about weal­thy individuals with profits located in corporations in low-tax jurisdictions overseas.

SECTION 962
The proposed regulations issued by the Department of the Treasury clarify that, for individuals who make a section 962 election to be treated as a corporation for tax purposes, those individuals will be able to receive the 50-percent reduction in GILTI (under section 250). Although section 962 was enacted in 1962, few individuals have chosen this route because there has been little benefit in doing so.

However, in the current environment, it may be sensible to make a section 962 election because, while such election will not provide an exemption from GILTI, it will ensure that individuals receive the same deductions and other abrogations of the GILTI law that corporations receive.

It should also be noted that a section 962 election does not reduce the administrative burden associated with calculating GILTI and, in fact, will increase that burden due to the requirement to make the election annually.

COMPLEX BORDERS 
In an unrelated area, the ACCJ Taxation Committee is also preparing a position on taxation of the digital economy, which has new com­­­ple­xities when it comes to taxes and juris­dictions—complexities that the G20 and the Organisation for Economic Co-operation and Development (OECD) are attempting to address. And while the ACCJ understands the G20 and OECD objectives to reconsider the means by which the digital economy is taxed, it is imperative that there is agreement on the mechanism for doing so between taxing jurisdictions globally. Jurisdictions must also refrain from engaging in unilateral actions that are not aligned with such global agreement. Without certainty and clarity, it is impossible for businesses to engage in planning and expansion.

In this area, the ACCJ will request:

  • Consistency in adoption of a single method for taxation of the digital economy
  • Consistency in application of the selected method
  • Association of clear mechanisms for dispute resolution with the selected method to minimize double taxation
  • Consideration of the administrative costs necessary to comply with the selected method
  • The possibility of exempting small businesses through a de minimis threshold
  • The ACCJ supports the fair taxation of business profits globally. However, business development and growth are hampered if there is uncertainty as to how business profits will be taxed in various jurisdictions. In the worst case, the same business profits may be taxed in more than one location globally, resulting in double taxation. The above requirements are necessary to ensure such result does not eventuate.

NEXT STEPS 
The Taxation Committee will continue to provide updates as developments from Washington, DC—in relation to GILTI—are announced. In the meantime, if any member has comments on taxation of the digital eco­nomy that they would like the Taxation Committee to consider during preparation of the ACCJ’s position on this topic, please contact the Taxation Committee chairs through the Taxation Committee coordinator, Shotaro Imazu, at simazu@accj.or.jp


 

VIDEO
Frank Packard of the ACCJ’s SME CEO Advisory Council speaks about the Council’s September 2018 Doorknock in Washington, DC. In nearly 20 meetings with Congress and the US Treasury, Frank and council Chair Harry Hill brought attention to the GILTI and Transition Tax and their potentially significant impact on American-owned small businesses in Japan.

www.youtube.com/user/AmChamJapan

Why not just eliminate the GILTI for individuals? Because the US government . . . worried about weal­thy individuals with profits located in corporations in low-tax jurisdictions overseas.