An American small business owner in Kenya seeks relief from GILTI and double taxation

“I live and own a small business in Kenya and have no U.S. income. In 2024, largely because of TC&JA, my U.S. tax return was 201 pages. This is insane!”

— James in Kenya

Dear Congress,

American small business owners abroad need your help. Laws that you have passed with the best of intentions have unintentionally done serious harm to Americans abroad.

I am from Florida and now live in Kenya, where I own a small business.

I’m writing after having recently read Kevin Hassett’s excellent book The Drift (Stopping America’s Slide to Socialism). In the book, he draws on his experience as Director of the White House National Economic Council during President Trump’s first term. During his tenure as Director, he was instrumental in drafting the Tax Cuts & Jobs Act (TC&JA) that was enacted in 2017. While the TC&JA reduced the U.S. corporate income tax rate and may well have onshored jobs, it has had awful consequences for many US citizens living abroad.

Awful consequences

The purpose of the TC&JA was to have U.S. multilateral corporations pay a one-time transition tax on “untaxed post 1986 retained foreign earnings” that would allow companies like Coca-Cola and Procter & Gamble to repatriate their foreign retained earnings to the U.S. with no additional taxes due. The problem is, this transition tax included all foreign companies owned 50% or more by U.S. citizens, even small businesses, like mine. The act designated these foreign companies owned by Americans as Controlled Foreign Corporations or CFCs. In my case, my CFC has no U.S. home office, so my small company had no U.S. home office to which we could repatriate profits. Nevertheless, we were expected to pay this one transitional tax which was several hundred thousand dollars.

The first contravention of common sense is that the TC&JA “deems” foreign corporate retained earnings as personal income. Everyone knows corporate profits retained on the company’s balance sheet as retained earnings is not personal income. Nevertheless, the TC&JA simply “deemed” foreign retained earnings in a company as personal income of the US citizen. Taxation is supposed to tax income, not capital, but in Moore v. United States, the U.S. Supreme Court ruled otherwise. The Court held that retained earnings were simply undistributed income. Why this does not apply to U.S.-based companies is unfair and a blatant double standard that discriminates against Americans who own small businesses abroad.

In any event, we simply could not pay the “transition tax”. So, after months of trying to understand all this, our tax accountants advised us that we could make a “962 election”.

Not GILTI

Taking the annual 962 election means that each year we must file a GILTI (“Global Intangible Low Taxed Income”) return to the IRS which presents a continuing tax nightmare. All our annual audited financials must be converted from International Financial Reporting Standards to GAAP, then a tax is calculated on the company’s active and passive annual income with differing tax rates (Form 5471 with Schedules A-Q comprising 57 pages on my 2024 return), then a calculation allowing a foreign tax credit for 80% of the corporate income tax paid to the foreign tax authority (Form 1116). If the foreign tax credit is less than the 21% U.S. corporate tax rate, additional U.S. taxes are levied on the U.S. personal income tax returns of shareholders in the company.

Even after completing this annual “962 election” exercise, because we did not pay the outrageous transition tax in 2017, if we were to pay a dividend from the CFC, the dividends would be taxed at higher rates than ordinary dividends. In 2024, largely because of TC&JA, my U.S. tax return was 201 pages. This is insane!

By the way, many of us caught up in this tax conundrum are not “accidental Americans”. I grew up in the United States and remain a proud American.

The U.S. government should encourage U.S. citizens to use their skills to create businesses abroad. This should be a good thing. The fact is that profits from these businesses usually find their way back to the United States as we send our children – 4 children in my case – to U.S. universities and keep up our U.S. residence and periodically return to the country.

Please support Rep. Darin LaHood’s Residence-Based Taxation for Americans Abroad Act and eliminate double taxation and related financial discrimination for Americans abroad—including the GILTI regime. We would be extremely grateful and the United States would be better off as a result.

Sincerely,

James in Kenya