Oh, what a tangled web we weave (Subpart F edition)
Oh what a tangled web we weave, When first we practise to deceive!
Sir Walter Scott, Marmion, Canto vi. Stanza 17
I have been doing cite-checking and editing for a friend’s international tax treatise and as a result I have been living in Subpart F recently.
Two interesting points here.
Subpart F + Subpart G = Subpart F
The first is of interest to tax lawyers only. When we say “Subpart F” we are wrong. The subject matter is actually contained in Subpart F and Subpart G. I never realized this until last night, while perusing a footnote.
Start with a lie . . .
The second point is one brought up by my friend yesterday in conversation. Subpart F achieves its desired result (anti-deferral) through a fiction. The fiction is that we will treat a corporation as a passthrough even though it is not.
As my friend says, the base assumption of Subpart F is a lie. What happens when you start from a lie?
Why are we so amazed that Subpart F has developed over 50 years into a byzantine collection of rococo logical dead-ends, cul-de-sacs, and frankly utter bullshit so convoluted it would be impossible for the Pope to keep up with the theology, let alone mere mortals running businesses and trying to go home to their families before midnight?
My friend’s thought is that the international tax system would be better served by adopting the California model. We’d blow away Subpart F. Section 367? Probably. Lots of other stuff in the Code would be blown away as well.
Expatriation, too
I can’t help but think about Section 877A here. We start from the fiction of a “make-pretend” sale on the date a person terminates U.S. citizenship or a green card.
This tiny (and seemingly sensible) lie will sprout into a monster. My guess is that in 15 years there will be a metric ton of regulatory debris and administrativia published by the Service, all of which is written with the best of intentions by well-meaning people.
But we’re starting from a lie. The expatriation rules will only get worse. (And for that blinding flash of the obvious I have Steve Toscher to thank. One day a few years ago at a tax conference I was standing between sessions, whining at a Federal official about how badly things were broken. He was standing there. He pulled me aside and said “Trust me. The LAST thing you want is for the government to write a set of rules to fix a messy situation. It only makes it worse.” The topic at hand was the FBAR debacle and the voluntary disclosure program. He was right, of course.)
Good to know because I’m applying for work in the US. Anyone need a junior electrical engineer with microwave skills and a masters degree?
@Nick H “…a neat taxation trick which doesn’t seem to bother too many people in Canada.”
Well, yes. But. The US “exit tax” rules work differently from Canadian ones. For example, the US exit tax doesn’t exempt retirement accounts, but instead demands an instant 30% tax on your entire IRA balance on the day you leave, as if immediately distributed. Potentially retirement-destroying.
If you haven’t been to a Tim Horton’s, you aren’t missing much. The donuts are good, but not great. The coffee is predictably pedestrian and perfectly consistent across all locations. The lasagna is on par with the canned variety from a supermarket. I had no idea this “Canadian” company was incorporated in Delaware. But it’s basically and bizarrely a cultural institution, no doot aboot it, eh.
Also, “make-pretend sales,” or as the CRA calls them, “deemed dispositions,” really aren’t too bad. In Canada, when you die, you are deemed to dispose of your assets and are liable for capital gains tax. No estate tax. When you immigrate, you are deemed to dispose of and re-aquire your assets at their current value to establish a starting point for Canadian taxation. Likewise on emigration to produce a liability for an “exit tax” by another name.
Deemed disposition is a neat taxation trick which doesn’t seem to bother too many people in Canada. I don’t think the problems with Subpart F are unique to that part. I think the real problem is that no one is trying to figure out who is actually being taxed on what, and who should be taxed on what transactions.
Perhaps this is the “canary in the coal mine” for the US – Tim Horton’s can now raise capital on the Toronto Stock Exchange without FATCA and the IRS (as long as they don’t take money from “US persons”) – well done.
I’ve never been to a Tim Horton’s but the menu looks better than Starbucks or Dunkin Donuts (particularly if you want chilli or lasagna bowls).
I hope other companies will follow the road to Toronto to show Levin and Grassley they’ve f**ked up.
Good luck Tim Hortons.
Do you think it might be possible to harmonize the expatriation tax rule for individuals with those of corporations. My understanding is that several companies such as Tim Hortons(a Canadian donut/coffee shop) that were technically incorporated in Delaware but whose earnings were predominatly non US were able to sucessfully “expatriate” back to their “home” jurisdictions. I posted a link below to the press conference the Prime Minister of Canada had at Tim Horton’s headquarters in Canada the day they re-incorporated from Delaware to Ontario.
http://www.youtube.com/watch?v=LgjPVKIQplA