Unfortunately, the spectre of an “exit tax” on expatriating US citizens and long-term residents has once again reared its ugly head. The House Ways and Means Committee has recently approved a bill which, although focused on tax collection techniques, includes a number of provisions targeting certain expatriating persons.

The proposal, in its current form, would affect any person who relinquishes their US citizenship or any long-term resident who ceases to be a US person on or after the enactment date (collectively, a “covered expatriate”). In general, the term “long-term resident” means any person who has been a lawful permanent resident (i.e. green-card holder) during at least eight of the fifteen tax years ending in the year of expatriation.

The fundamental principle of the proposed exit tax is that all of the assets of a covered expatriate would be deemed to have been sold at their fair market value on the day prior to expatriation. To the extent that the resulting gain exceeds $600,000 it would then be subject to US taxation. There is a provision in the bill allowing for the deferral of the payment of such a tax charge, which would alleviate the potential for significant cash-flow issues, but to do so would mean the imposition of an interest charge.

Around this principle, there are a number of provisions contained within the bill dealing with specific items. Firstly, certain deferred compensation arrangements are specifically exempt from the exit charge. In these cases, the payer of any taxable payment to a covered expatriate would have to withhold tax at a rate of 30% from the payment. If a deferred compensation arrangement does not meet the requirements for the exemption from the exit tax, the expatriate would be deemed to have received a distribution of their entire interest under the plan on the day before their expatriation. It should be noted that the definition of what constitutes a deferred compensation arrangement is drawn very widely, and includes, for example, interests in non-US pension schemes.

Similar provisions are also included in the bill to deal with interests in trusts. For non-grantor trusts, there is an exemption from the exit tax, but the 30% withholding on taxable payments would apply in the same way as for deferred compensation. In addition, if the market value of the property distributed exceeds its basis, the trust would recognise a gain equal to the amount of the excess.

The bill goes further to make the tax affairs of expatriating citizens and long-term residents more onerous by also imposing a new gift tax regime to apply to gifts and bequests made by covered expatriates. The proposed legislation imposes a tax on the receipt of such gifts by a US person calculated at the highest gift tax rate in operation at the time of the gift to the extent that the gift exceeds $10,000. It should be noted that there is no wording in the bill to suggest that the lifetime exemption or marital deduction would apply to this tax.

Similar rules apply to gifts made to US trusts. For gifts made to foreign trusts, the tax would apply to any distribution from the trust to a US person which can be attributed to those gifts.

These proposals are clearly very draconian in nature, both in terms of the tax burden that they would impose, and also because of the administrative and reporting obligations that they would create.

Unlike previous attempts at introducing legislation in this area, these latest proposals have originated in the Ways and Means Committee, suggesting that there is a greater chance that they will be enacted, either in whole or in part. However, Congress has risen, so no further developments are expected before October of this year. Anyone who is thinking of expatriating from the US in the near future should give careful consideration to the potential impact of doing so, or consider going through the expatriation process as soon as possible in order to try to finalise everything before any such law is passed.