US to squeeze expats on taxes

American expats are worried about the potential repeal of Section 911 and the effect it will have on their income.

Controversy over President Bush's tax cut proposal is not just confined to the US, Asia has also caught wind of it.

To help fund Bush's ambitious tax cut plan, the US Senate is currently reviewing the possibility of repealing Section 911 of its internal revenue code, a bill first enacted in 1926 to exempt the first $80,000 income tax for Americans who work overseas. Currently, US expatriates are subjected to the income tax laws of both the foreign country as well as the US. To mitigate the double-taxation, Section 911 allows these expatriates to gain tax exemption for income gained in foreign country up to $80,000.

So the repeal of the bill will be a blow for all Americans working abroad. To illustrate how deep it will cut into Americans' skin, an employee who earns $100,000, for instance, will have to forfeit more than $20,000 as a result of the extra tax. There is also the potential for state taxes and social security payments to further increase the bill.

The problem with repealing section 911 is manifold. First, multinational companies who follow the tax equalization policy - that is paying any taxes that exceed the expatriate's tax liability had they remained in the US - will bear a significant brunt of the increase in taxes if the bill was repealed. The long-term consequence of such is that less American expatriates are likely to work abroad since many of these companies will find it too costly and burdensome to send American workers on foreign assignments and may choose to hire locals instead.

Meanwhile, for those American expatriates who work for companies that do not tax equalize, or who are self-employed, they will have to shoulder the entire tax burden. Many Americans have chosen to work abroad, particularly in Asia due to the low income tax rate, to take advantage of the tax exemption. The gutting of Section 911 will be a huge disincentive for these Americans.

As a result, many Americans may have to rethink the advantages of working abroad and companies will find it increasingly difficult to attract and maintain American expats. Small businesses and entrepreneurs will be hit hard since they have fewer resources. American teachers, missionaries, and employees of non-profit organization will also suffer enormously as a result of the loss of tax exemption.

Moreover, section 911 is not just about allowing Americans to get rich while they work in polluted Asian cities. The principle of Section 911 is to promote and sustain the export of US goods and service to a global market.

According to Frank Martin, president of the American Chamber of Commerce in Hong Kong, "there is evidence that suggests Americans tend to prefer American products and services when they work abroad, which is good for the US economy. They also tend to adhere to their value systems and are important for spreading American values and interest abroad."

Similarly, PriceWaterhouse LLP published a study in 1995, which points out that a repeal of the foreign income exclusion would result in at least a 2% reduction in US exports. That figure will no doubt be much higher today.

What this means ultimately is that should the bill be repealed, there will be higher unemployment, reduction of American exports, and increased difficulty for US-based companies to compete in the global economy.

How likely will the US Senate pass the bill? Martin says it is still difficult to say as of now. Currently many business coalitions are beating down doors on Capitol Hill to try to get around it.

The American Chamber of Commerce in Hong Kong is lobbying with Washington but has only received vague responses. Many bankers in Hong Kong remain optimistic the tax will not get through the Senate.

Says Morgan Stanley's head of investment banking, Mike Berchtold: "The contemplated tax changes would be a bad thing for many different constituent groups and could lead to fewer Americans living and working overseas. I believe, though, that the probability is low that the discussed changes will come into effect. The reaction from major US corporates with operations abroad and US taxpayers/voters has been quite negative."

Concurs JPMorgan's head of human resources in Asia, Penny Van Niel: "We are evaluating the potential impact on our expatriate program and we remain sceptical that the repeal will survive the House-Senate conference debates. However, we are working with our partners to voice our opposition to the bill. American business and a number of legislators are strongly lobbying against the repeal as it translates to significantly higher tax equalizations costs for employers with tax equalized US citizens and green card holders working in low-tax jurisdictions such as Hong Kong, Singapore and much of Latin America. The repeal would also negatively impact any non- tax equalized assignees in these countries by increasing their global effective income tax rate. We are optimistic that this won't pass but we are continuing to monitor the situation closely."

Whether or not it goes through, the very idea of repealing section 911 is a further reflection of the current US government's worldview. "I think it is typical of the current administration," said a US banker at a European bank, adopting a sarcastic tone."Why should they give any tax relief to someone living outside the country, I mean who would want to live outside of the USA anyway? It is kind of unpatriotic, isn't it? You know; if too many people do this, they may start to sympathize with interests of 'other' countries."

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