Edvenson Consulting

English Services, American Legal & Tax Services 


Romney & the Foreign Tax Credit

Posted on September 30, 2012 at 3:55 AM



This article is about context. First, we always look at things from where we stand. In my case, that is as an American living and working overseas and doing U.S. tax forms for Americans overseas. As a consequence of that work, I am regularly completing the foreign tax credit forms for Americans overseas. Why? Because their income is overseas, they are taxed in their ‘tax home’ country which is overseas, and that credit demonstrates to the IRS that they do not also owe taxes to the United States on the same income. This is the first and best use of the foreign tax credit.


Then there are the abuses of the foreign tax credit, and since I find little ‘plain English’ on the issue, I thought I would make an effort to provide some. First, Romney claims he does not have to reveal his tax returns. For Americans in Norway, this is laughable: our taxable income is emblazoned online for all to see, compliments of the Norwegian tax authority, and one’s income is public knowledge for anyone interested in looking you up -for at least a while each year. While this would seem to be inconsistent with Europe’s move toward favoring the protection of personal privacy, it is apparently an ingrained element of the Jante Law in Norway – that is, the unwritten law which states that no one is allowed to be any better than anyone else, and if you think so, you better not think so. Ja vel, moving on.


Yahoo News reports an interesting discussion with tax attorney, Alvin Brown in late August: http://news.yahoo.com/irs-concerns-foreign-tax-credit-abuses-raise-questions-071009421.html . In this, the weaknesses of the foreign tax credit are noted, and the IRS’s efforts to re-consider it and reign in abuses are also discussed briefly. The foreign tax credit is available to write down taxability in the U.S., as we saw with the American overseas example above. It is also available for Americans living in the U.S., which would mean, basically, that they don’t have to pay some taxes to the U.S. because they have paid them, yes, to a foreign country. A rather uncomfortable fact, don’t you think? For someone who is walking the streets of America and who supposedly supports U.S. efforts to do the many things public funds need to help do – build roads, open schools, create clean drinking water, clean air, and manage all of the costs of maintaining a civil society.


Then, there is the added notice mentioned by Mr. Brown in the Yahoo news article: “IRS Notice 2004-20, IRB 2004-11, March 15, 2004, identifying certain foreign tax credit issues as" tax avoidance transactions" for purposes of the tax shelter disclosure, registration, and list maintenance regulations a purported stock acquisition that is intended to generate credits for foreign taxes paid on gain that is not subject to tax in the United States.” These can be administered in such a way as to raise questions for the IRS, but remain ‘legal’ avenues for not paying U.S. taxes to the U.S.


Now, let’s run an example using MR. MR lives in the U.S. and makes a LOT of money. He could put it into stocks in the U.S. and invest in the U.S.. He could, actually, decide, on purpose, that he would help the U.S. out of its debt and economic slowdown. He could help America, in other words, by using his money to help America and Americans. The problem is that he has options. To remind, whatever option MR takes, he has to sign the tax forms sent to the IRS. Irregardless of how much he may contest later that he has no idea what those forms say and do, he is, in fact, legally liable for anything he sends to the IRS. After all, as we all know, lack of knowledge of the law is not a defense to the breaking of it.


But no, MR sends his money to another country – and hey, he pays tax on it there. Foreign income tax. Why not? In the non-sleezy version of the story, MR pays tax on it in the foreign country, and then is able to use that tax as a credit against paying tax to the U.S. . This means he uses it as a credit so that he does not help America by paying taxes to America – he helps himself. The foreign tax credit also allows what is called “carry-over”. This means he could pay foreign tax and even carry it over from year to year, using it as a tax credit so as not to pay tax to the U.S. - from one year to another – continually reducing his taxes to the U.S. over more than one year at a time.


That’s only one aspect of it. He’s also able to get whatever he is actually getting on his money whereever that money is. And it’s not in the U.S. – that’s the point: it’s somewhere else. MR’s money is, presumably, somewhere where it is not used for U.S. purposes, does not help put people back to work, does not help people who are sick keep their homes, does not help people who must be hospitalized pay their health care bills. No, that money is somewhere, of course, where it is making more money for MR. This is Romney economics in a nutshell.


MR has this money and it’s not in the U.S. Why? This is MR’s crime. As a result, he gets to walk American streets, breath clean American air, drive its albeit crumbling highways and roads, drink its cleaned water, use its nice toilets, eat at its restaurants, and all this time, he is not paying for the air, the water, the roads, the infrastructure. Of course, none of those things come for free – it’s all paid for with tax dollars. But MR is not paying those tax dollars – to the U.S. that is. No, he is paying it to some foreign country that promises to make more money out of his money than the U.S. economy can make.


Charity is charity – good to give a big chunk just before running for president. But charity is something you can give to whomever you like – it doesn’t have to cover health care for the poor, food for the starving, housing assistance programs, infrastructure improvements. It sounds so self-less, but it’s a completely managed giving-track. It’s MR’s own giving track, whatever it was. You could truly say that MR’s charity gifts reveal a contempt for the American tax system’s most burdensome and needy recipients – society at large.


This is MR’s apparent priority number one: make money out of my money so MR will have more of it – so what if it is not in the United States? MR at least is in control of it if he can use that foreign tax credit, and in doing so, he’s undermining the very foundations on which the U.S. was built: shared responsibility for certain expenses for the health and welfare of the population at large.


According to Alvin Brown, tax attorney, Romney’s revealed 2010 and 2011 foreign tax credits “are obviously large and complex as a consequence of their substantial disclosed foreign source income.”


In a later Yahoo news release, late September, it’s confirmed that “The majority of Mr Romney's income comes in the form of dividends and capital gains, which are taxed at a lower rate than ordinary income.” Additionally, PWC, his accounting firm, has come forward with a letter confirming that he never paid less than 13% tax annually. Still, the question I have is this: If you are going to have to pay tax, and the tax on dividends and capital gains is going to be your type of tax – because you don’t, for example, work, but have lots of investments, then why would you not invest in U.S. companies and U.S. businesses? The only reason I can think of is that he was more interested in seeing the amount of money he could make anywhere else that might be more economically profitable at this point in time – to himself. He would prefer to make money than save America. He would prefer to line his pockets than line the pockets of the unemployed.


We all make choices, and the most basic are for our self-preservation. Still, the whole idea that Romney is sitting in America, driving its streets, flying its skies, breathing its clean air, and drinking its clean water, then it only makes ethical sense that he should not be able to take the foreign tax credit, and that if he does, he should have to tell us what he thought was so important to invest in in a foreign country. For example, if he had invested in Hyundai in Korea, I would say, well, maybe that is alright. After all, Hyundai is building plants in the U.S. and uses American employees, parts and factories to build their cars. My husband has a Hyundai in Norway. It was built in the U.S.A. Nice going, Hyundai.


But News 4 reported on Sept. 25th that Romney’s 2011 tax return revealed he had invested in ’a Chinese oil company with links to Iran.’ Chinese oil companies are drilling oil in various places, among them Africa, where they are helping to build roads and infrastructure, but American? Iran?  Unfortunately, we're hardly even on speaking terms. And no, it’s not a U.S.-enhancing investment - unless you think we should give China all our money instead of just most of it.


In the same article, an Obama campaign strategist claims Romney is invested in “ a fund that hedges against American Treasuries.” Well, who can believe a campaign strategist.  But hedge funds? To put it simply, this is one of the ‘funny money’ types of investing that is not producing real jobs for real people, but does take money out of the economy for what could arguable be described as gambling or betting on what markets will do - for self-enrichment goals. http://www.channel4.com/news/romneys-tax-return-reveals-china-investment


Frankly, I don’t think I want to hear more from Romney on what he decided to invest in. If the above are any indication, ethics has not been one of his considerations in the matter. I think I already know his approach: everyone take care of themselves, since I’m going to take care of me - and also close the public purse. That, in my opinion, is counter to the model for creating a civil society and embracing rule of law, for sharing the burdens of modern development, while sharing the risks of investing in future progress together at home. Let Romney take his millions and go retire where? Somewhere foreign, perhaps. Then let the IRS audit his accounts and foreign tax credit usage and close the ability of Americans living in the U.S. to use this as a tax credit against their obligations to pay taxes at home to the U.S.


Sign me an American attorney, living and working overseas, paying foreign taxes and reporting annually to the IRS

Categories: None