Expatriate Americans with businesses in Australia are in for a nasty surprise as a result of the Trump tax plan, experts say.
While much attention has been paid to the one-off "deemed repatriation tax" of 15.5 per cent for giants like Apple and Google, in fact any dual US citizen with retained earnings in a private business located outside America will be hit.
"If you own a private corporation, there's a one-time tax that you're going to be subject to and it's a killer," said Roy Berg, an American lawyer who works for Moodys Gartner Tax Law in Canada and is personally affected.
"It's at 15.5 per cent on cash assets and 8 per cent on non-cash assets.
"For example, a doctor with his own practice in Australia who has US dual citizenship or a green card and $2 million of accumulated wealth sitting in his corporation would have $300,000 of his hard-earned Australian dollars confiscated by the US government this year."
Salary and wage earners are not affected.
Any individual US citizen or green card holder owning more than 10 per cent of a "controlled foreign corporation" will be required to pay the tax within eight years, according to American Citizens Abroad.
A CFC is an overseas business in which US shareholders control more than 50 per cent of voting rights.
Under the old law, non-US corporations could retain any earnings above $102,100 on a tax-deferred basis.
Companies of all sizes made use of this provision but it was the multinational giants stashing billions offshore that caused most consternation.
White House chief economic advisor Gary Cohn has said an estimated $3 trillion in offshore wealth will be brought back to the US, although Wall Street estimates put the figure closer to $2.5 trillion.
The US tax system is almost unique in that all citizens, regardless of other nationalities they may hold and where they live, are taxed on their global income and required to file annual tax returns in the US.
Expat groups had hoped the Tax Cuts and Jobs Act would include switch to residence-based tax.
Those who need to tap dividends to pay the repatriation tax will be hit with a double whammy, Mr Berg said.
"Let's say I've got $1 million in retained earnings. I've got to come up with $150,000 in tax money to pay this one-time tax. In order to get that $150,000 I may have to declare a $300,000 dividend, and pay the tax on it, in order to get the $150,000 I've got to pay Uncle Sam. I've got to pay tax to pay tax."
Mr Berg, who will visit Australia this month to hold seminars for US expats, said the situation was likely to lead to a wave of citizenship renouncement. The provision applies from November 22, 2017 and there was little avenue for mitigation, he said.
"There was no forewarning, there was nothing we could do to plan around it because as soon as it was announced it became effective," Mr Berg said. Nor would there be any political backlash for Mr Trump.
"When US citizens living outside the US vote, our vote only counts for the popular vote, it doesn't actually elect the president," Mr Berg said.
The US state department says there are nine million US citizens living abroad but there are not figure on how many taxpayers will be caught.
This article was published and provided by the Australian Financial Review.