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This letter to Congress opposes repeal of the foreign earned income exclusion, as proposed in Section 350 of S. 1054, the Jobs and Growth Tax Relief Reconciliation Act of 2003. It discusses how the proposal would be a reversal of long standing tax policy, may result in double taxation and the loss of U.S. jobs and exports, as well as an increase in complexity.
May 14, 2003
The Honorable Charles E. Grassley
Chairman
Senate Finance Committee
219 Senate Dirksen Office Building
Washington, D.C. 20515
Fax: (202) 228-0554
The Honorable Max Baucus
Ranking Minority Member
Senate Finance Committee
219 Senate Dirksen Office Building
Washington, D.C. 20515
Fax: (202) 228-0554
Re: Repeal of the Earned Income Exclusion of Citizens or Residents Living Abroad
Dear Senators Grassley and Baucus:
The American Institute of Certified Public Accountants (AICPA) strongly opposes the proposal to repeal the long-standing exclusion of the first $80,000 of foreign earned income of Americans living abroad and eliminate the ability of these individuals to deduct or exclude foreign housing expenses. Beginning in 2004, Section 350 of S. 1054, the Jobs and Growth Tax Relief Reconciliation Act of 2003, would repeal the foreign earned income and housing expense exclusions (collectively, the "911 exclusion"). We believe repeal of this provision will result in double taxation, lost American jobs, and increased tax complexity.
The AICPA is the national, professional organization of certified public accountants comprised of more than 350,000 members. Our members advise clients on federal, state, and international tax matters, and prepare income and other tax returns for millions of Americans. They provide services to individuals, not-for-profit organizations, small and medium-sized businesses, as well as America's largest businesses.
We strongly oppose the proposed repeal of section 911 for the following reasons:
Reversing Long-Standing Tax Policy
The exclusion for foreign earned income and foreign housing expenses has been a part of the Internal Revenue Code for 77 years. The United States is the only developed country in the world that imposes taxes based upon citizenship. All other developed countries impose individual income tax based upon residence. In 1926, Congress created an exclusion to equalize the tax treatment between Americans working abroad and their foreign counterparts working in the same country and to recognize the hardships involved in employment abroad.
To our knowledge, the rationale for repealing this mitigating provision has not been studied or debated in Congress, and there have been no hearings and no testimony in support of the repeal.
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Double Taxation Result
In most foreign countries, U.S. citizens must pay income tax to the host country even though they also remain subject to U.S. taxation. Although the IRC includes a foreign tax credit for income taxes paid to foreign countries that can reduce an individual's U.S. tax liability, many limitations reduce the one-to-one offset of the tax credit, including: (i) the foreign tax credit cap based on the effective U.S. tax rate on foreign source income; (ii) the reduction of foreign source income by the complex allocation and apportionment of U.S. deductions; and (iii) the 90 percent ceiling on the foreign tax credit for Alternative Minimum Tax purposes.
Due to the above-mentioned limitations, if the 911 exclusion is repealed, U.S. citizens and permanent residents ("green card" holders) who work abroad may be subject to double taxation on some portion or all of their earnings because there will be U.S. tax liability above and beyond the host country income tax liability. This double taxation would be especially punitive to U.S. citizens working in host countries with high income tax rates.
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U.S. Job and Export Losses
Repeal of the 911 exclusion will result in U.S. job losses—as foreign workers are hired in place of American workers that would otherwise be employed and sent abroad. If the 911 exclusion is repealed, U.S. employers that structure compensation agreements of American employees working abroad such that they are "equalized" to U.S. home country taxes will find that the costs of hiring Americans for foreign assignments will be prohibitively high. Additionally, "un-equalized" American workers will be more reluctant to accept overseas positions. If U.S. multinationals substitute foreign nationals for U.S. workers at their foreign operations, the result could be both decreased U.S. employment as well as lost U.S. export sales. This is because foreign nationals are less likely to purchase U.S. goods and services because they are more familiar with their local suppliers.
On May 6, 2003, the U.S. Chamber of Commerce stated in a letter to Congress regarding the potential repeal of the 911 exclusion: "At a time when we are searching for ways to encourage and increase employment of U.S. workers, this measure appears to undercut that important objective. In a similar vein, raising income taxes on these workers would be at odds with the income tax cuts that the President wishes to grant them." We agree. This seems to be in direct conflict with an intention to stimulate the economy.
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Increase in Tax Complexity
Many Americans who work abroad are rank and file employees and middle managers of small and medium-sized businesses, making modest salaries while coping with the increased expenses and difficulties of living abroad. Eliminating the 911 exclusion would further complicate the income tax returns of these individuals, who must already cope with filing income tax returns in the countries in which they work. For such individuals, the 911 exclusion frequently eliminates the need to compute the foreign tax credit, which is a highly complex calculation that involves multiple layers of ratios and algebraic equations. Large multinationals already frequently find it necessary to hire outside tax advisors to prepare the complex tax returns of their American employees working abroad. Accordingly, we acknowledge the increased complexity concern may be less relevant to these large employers.
We urge Congress to carefully consider the impact of repealing the 911 exclusion.
We welcome the opportunity to discuss this further with you or your staff. Please contact me at (202) 414-1705; Andrew Mattson, Chair of the International Tax Technical Resource Panel, at (408) 369-2566; or Eileen Sherr, AICPA Technical Manager at (202) 434-9256.
Sincerely,
Robert A. Zarzar
Chair, Tax Executive Committee
cc: Members of the U.S. Senate
The Honorable William M. Thomas, Chairman, House Ways &Means Committee
The Honorable Charles B. Rangel, Ranking Minority Member, House Ways & Means Committee
Mr. Bob Winters, Chief Tax Counsel, Special Counsel, House Ways & Means Committee
Ms. Allison Giles, Chief of Staff, House Ways & Means Committee
Mr. John Kelliher, Chief Counsel, House Ways & Means Committee
Mr. Greg Nickerson, Tax Counsel, House Ways & Means Committee
Mr. Jon Sheiner, Tax Legislative Assistant to Rep. Rangel
Ms. Janice Mays, Democratic Chief Counsel, Ways & Means Committee
Mr. John Buckley, Democratic Chief Tax Counsel, Ways & Means Committee
Mr. Kolan Davis, Staff Director and Chief Counsel, Senate Finance Committee
Mr. Mark Prater, Chief Tax Counsel, Senate Finance Committee
Mr. John Angell, Democratic Staff Director, Senate Finance Committee
Mr. Russell Sullivan, Democratic Chief Tax Counsel, Senate Finance Committee
Ms. Anita Horn Rizek, Democratic Tax Counsel, Senate Finance Committee
Mr. George Yin, Chief of Staff, Joint Committee on Taxation
Mr. E. Ray Beeman, Legislation Counsel, Joint Committee on Taxation
Mr. David G. Noren, Legislation Counsel, Joint Committee on Taxation
Mr. Thomas A. Barthold, Senior Economist, Joint Committee on Taxation
Mr. William Hoagland, Tax Legislative Assistant to Senate Majority Leader Bill Frist
Ms. Pamela F. Olson, Assistant Secretary for Tax Policy, Treasury Department
Ms. Helen Hubbard, Tax Legislative Counsel, Treasury Department
Ms. Barbara M. Angus, International Tax Counsel, Treasury Department
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