On May 15, the House of Representatives and Senate passed what AmCham refers to as ôthe inappropriately namedö Tax Increase Prevention and Reconciliation Act of 2005. President Bush signed the bill.
Section 911 of the act û a politically charged number to start with - significantly increases the United States taxation of most Americans who live in Hong Kong û and it is retroactively effective as of January 1, 2006. The US is the only developed country in the world that enforces taxation on non-resident citizens.
Under the act, Americans working abroad can exclude up to $82,400 from their foreign earned income, up from $80,000. However, the tax exclusion on foreign housing expenses is reduced while income taxes are now higher. Plus, the exclusion for housing will be $11,536 per year and a new ôstackingö rule means that Americans will pay taxes at the higher marginal rates since tax is computed by adding back the amounts excluded.
HereÆs an example of how accountants have determined it will impact Americans who are working abroad and earning about $300,000 per year (including all benefits). If your monthly rent and utilities are about HK$80,000, then your annual housing costs, in US dollars, would be about $125,000. In the past, the foreign earned income exclusion reduced the US tax liability by about $40,000.
Now, you will pay another $20,000 in taxes because of the limitation in the housing exclusion and you will pay another $10,000 because of the stacking rule. The legislation has therefore reduced the tax impact of the exclusion by 75% - or put another way, you can expect to pay an additional $30,000 in taxes this year.
This interpretation, and complaints from AmCham and other American organisations, have sparked a written response from the US Senate Committee on Finance. The document sent to AmCham states: ôIt (the act) subjects individuals who receive section 911 benefits to the same marginal tax rates applicable to those living and working in the United States who have the same amount of economic income. No one should be in a better position with respect to non-excluded income just because the individual lives and works outside the United States.ö
The document also states: ôMany employers offer their overseas employees ætax equalizationÆ packages under which the employer guarantees that the employees will not pay more taxes working overseas than they would pay if they were working in the US. This is where section 911 reduces the cost to employers. The amounts excluded under section 911 for compensation and housing would be fully taxable to the employee in the US. Thus, the section 911 exclusion relieves the employer from reimbursing the employee for US tax on those amounts. In this respect, section 911 is a tax subsidy for the cost of sending an employee overseas.
ôIt should also be noted that US employees working overseas may receive other taxable benefits. These could include private school education for their children, car allowances, and other amenities.ö
Jack Maisano, president of AmCham, points out, though, that many Americans living abroad have increased expenses û and the so-called benefits artificially increase AmericansÆ taxable income without offering them additional actual income.
For example, Maisano says: ôAmericans abroad can't just send their kids to the school down the block - or even get bussed to one across town. They need English schools, and those often cost money. Sometimes lots of money. That's a real cost of education that Americans at home don't have. Waving it away as a privilege and æprivate schoolingÆ doesn't address the issue.ö
The US Senate Committee on Finance also argues in its document that in the past ôThere was no upper limit on deductible or excludable housing costs; the only requirement was that they be æreasonableÆ, a term that was subject to aggressive interpretation by taxpayers and allowed highly compensated individuals to exclude large amounts of housing benefits.ö
Maisano counters: ôAmericans overseas are taxed in other ways that don't look like taxes. In Hong Kong, our high property costs, resulting in high rents, are a result of the government taking up to 40% of its revenue through land sales. That's in essence a tax that filters down through the property market. By not viewing it as a tax, Americans are in effect losing some of the benefit they would otherwise get from foreign tax credits.
ôThey also can't get 1,800 square feet of house with a yard for $230,000 (the average size and cost in America), or visit their parents or relatives at Christmas without flying half way around the world (which, by the way, costs more than flying domestically), or enjoy any number of other activities that local communities in America offer, often for free. And yes, the schooling, housing, and travel - if paid by the company - are all taxed. Even the taxes the company pays are taxed! How can that be fair?
ôThe real issue, though is the competitive one. In the real world, we compete. And America's tax laws - however the finance committee may want to justify them - do not allow Americans and American companies to compete fairly around the world.ö
Aggrieved Americans can thank Charles Grassley, Republican of Iowa and chairman of the Senate finance committee for this bill. American expatriates may remember him because in 2003 he tried to totally eliminate the then $80,000 exclusion on income earned by Americans abroad. Iowa, literally located in the heart of middle America, is not a state that many would predict produces a huge number of expatriates. Corporates, who often offer their expatriates overseas packages that include covering taxes, put on a lobbying offensive that killed that bill.
But this more recent act slipped through. Maisano says that in the last few years AmCham has been very active in opposing any suggestions of a tax increase on overseas American. Indeed, in March, several Hong Kong AmCham representatives met in Manila with representatives from the US Chamber of Commerce and were told that the taxing of expats issue had been settled, for this year at least.
And so when the House and Senate first saw the current bill, there were in fact no provisions affecting overseas Americans. In the tradition of Depression-era Louisiana Senator Huey Pierce Long, the conference committee inserted the provision late one evening in early May, and both houses of Congress passed it within hours. The result: there was no realistic opportunity to react.
According to IRS statistics, 306,393 tax returns claimed the section 911 foreign earned income exclusion in 2003. Of those returns, 41%, or 125,894 had a US tax liability after the exclusion.
The new measure is going to cost about $200 million a year in taxes for the 4.1 million Americans working abroad û thatÆs excluding military personnel and foreign service officers, according to an estimate by the Joint Committee on Taxation in the US Congress.
ôThe point is not just the unfairness of the high tax increase, applied retroactively,ö says Maisano. ôIt's that Americans abroad means US exports - which means US jobs and US domestic taxes. It also means the introduction of American values overseas - which is something one would think the Congress would want to promote.
ôFewer Americans abroad means lost US exports and lost international influence. In a global economy, we at AmCham think its better to have more exports and more influence - therefore we need more Americans abroad.ö
The near elimination of the housing allowance will cost the US at least $2.5 billion in exports, which equals 25,000 jobs in the US, according to a study by PriceWaterhouseCoopers. This study was commissioned by the American Chambers in Asia and the Chambers in the Gulf States last year. ThatÆs clearly worth more than the estimated $200 million in tax dollars the Congress expects to gain on this bill.
ôEvidently, we're not getting that message through to the people in Washington,ö says Maisano.
But AmCham isnÆt giving up. ôOur most powerful weapon is a mass response from outraged Americans,ö says Maisano. He urges Americans living abroad to fax their congressmen and complain û lobbying them to either undo this act in future legislation, or at the very least, not continue to more heavily tax Americans living abroad.
The best way to fire that weapon - is through your fax. (A few years ago expatriates backlogged the faxes on Capitol Hill by using this lobbying tactic). As Maisano says: E-mails can easily be deleted and regular mail can be thrown away. But fax machines ôget jammed by complaintsö.
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