Government Affairs and Relocation

Worldwide ERC® recently published a Government Affairs Update, which outlines the potential impact on relocation and global mobility programs. Information in this update includes:tax reform, Social Security, IRS changes, the new French withholding system, the travel suspension, the FinCEN advisory, and airline carbon emissions.

Tax Reform
There were a number of developments on tax reform during the last couple of weeks. On October 19, the Senate approved a fiscal 2018 budget resolution that would permit up to $1.5 trillion in deficit increases from tax legislation.  The vote was 51-49, with all Democrats voting against.  Passage of the budget will permit tax reform legislation to move through the Senate under so-called “reconciliation” procedures that would require only 51 votes for passage, rather than the 60 that are commonly required for all other Senate legislation.  In addition, reconciliation instructions to the Senate Finance Committee would allow it to cut taxes by more than $1.5 trillion if it also cuts entitlement programs under its jurisdiction such as Medicare and Medicaid.

The House has yet to pass a budget.  It is not clear whether the House will simply adopt the Senate budget, or will pass its own more conservative version and resolve differences in conference.  A substantial number of House Republicans are reportedly not in favor of increasing the deficit through tax reform, and House Speaker Ryan has repeatedly promised that tax reform would be revenue neutral. 

The Senate budget resolution gives the House Ways and Means and Senate Finance Committee until November 13 to produce tax legislation.  Meanwhile, on October 16 the President suggested that tax reform might slip into 2018, as did Senate Majority Leader McConnell.  After November 13, the House and Senate are in session together for only 15 days during the remainder of the year, and have many other issues to deal with.

Seeking to boost support for tax reform, the White House Council of Economic Advisors issued a report October 17 asserting that a cut in the corporate tax rate to 20% would increase average household income by from $4,000 to $9,000 per year.  The increase would come from corporations devoting their tax savings to economic growth, which would benefit all workers.  However, outside economists expressed disagreement, with one saying that the “conclusions of the CEA report are implausible and unrealistic.”  Nevertheless, the President touted these findings in several speeches urging support for the Republican tax reform plan.

The President also argued that tax cuts are strongly linked to economic growth, a position that would validate the $1.5 trillion deficit increase proposed.  Again, however, there was strong pushback from independent observers.  For example, the Committee for Responsible Federal Budget issued an October 4 report entitled “Tax Cuts Don’t Pay for Themselves.”

The deduction for state and local taxes continue to be a focal point of interest.  The new Senate Budget included an amendment that would allow for limitation of the deduction in future tax reform legislation, although no details as to what limits are contemplated were provided.  The deduction is in the crosshairs because it is the single most prevalent deduction claimed by itemizers, according to IRS data.  Its repeal would raise as much as $1.4 trillion over a decade.  Some observers expect that the deduction will be limited in tax reform, but not eliminated.  For example, it could be capped, or taxpayers could be given a choice between the state and local tax deduction and the mortgage interest deduction. 

Worldwide ERC's summary of how this will impact mobility: Tax reform, if enacted, will potentially affect most Worldwide ERC® members, and most transferees.  Worldwide ERC® remains committed to providing up-to-date information to its members.

Social Security Provides 2018 Wage Base
Along with a 2% increase in benefits for 2018, the Social Security Administration announced a new Social Security Wage Base for 2018.  

The wage base, which is the maximum amount of employee wages from which FICA taxes are withheld, is adjusted annually based on the average increase in annual wages.  For 2018, the wage base will increase from $127,200 to $128,700.  According to SSA, of the estimated 175 million workers who will pay Social Security taxes in 2018, about 12 million will pay more due to the wage base increase. 

SSA provided a fact sheet concerning the changes, which is available here.  https://www.ssa.gov/news/press/factsheets/colafacts2018.pdf. 

Worldwide ERC's summary of how this will impact mobility:  Worldwide ERC® members will need to adjust withholding, and gross-ups will also be affected.

IRS Announces Inflation Changes for 2018
On October 19, the IRS released detailed guidance on the more than 50 tax provisions that are adjusted for inflation each year.  The adjustments for 2018 will generally be used on tax returns due in 2019.  The changes are discussed in Rev. Proc. 2017-58, https://www.irs.gov/pub/irs-drop/rp-17-58.pdf, and News Release 2017-178, https://www.irs.gov/newsroom/in-2018-some-tax-benefits-increase-slightly-due-to-inflation-adjustments-others-unchanged. 

The standard deduction for married couples rises from $12,700 to $13,000, and for singles from $6,350 to $6,500.  The personal exemption goes up by $100.  The foreign earned income exclusion rises from $102,100 to $114,000. 

Other adjustments affect the thresholds for the various income tax rates, and the amount of income that will trigger the 39.6% rate. 

Worldwide ERC's summary of how this will impact mobility: Worldwide ERC® members will need to adjust withholding, and gross-ups will also be affected.

New French Withholding System Delayed Until 2019
In a decree issued September 23, 2017, (2017-1390), the French government officially postponed implementation of a tax withholding requirement for French taxpayers until 2019.  The system had been scheduled to go into effect for taxable payments in 2018.  The government said it was exploring alternatives to the new regime.

Under current law, there is no withholding on wages paid to French workers; instead, they file an annual tax return in the year following the year of the wages, and pay taxes due at that time.  This system leads to a delay in receipt of taxes, and considerable tax avoidance. 

The new system was scheduled to begin next year, with monthly withholding at rates designed to mimic the taxpayer’s historical tax rate.  However, there was also a need for a fix for that year because taxes due for both 2017 and 2018 would otherwise be paid in the same year.  This was never resolved satisfactorily, with the government proposing a tax credit of some sort to eliminate the double payment in one year.

When implemented, withholding will apply not only to wages, but to self-employment income, pensions, sick pay, annuities, rental income, and other categories.  The new system has been unpopular, and it is not unlikely that the government will offer alternatives at some point during 2018.

Worldwide ERC's summary of how this will impact mobility:  If implemented, the new system will require Worldwide ERC® members with French employees, or French citizens to whom taxable payments are made, to adapt their systems to impose the required withholding.  However, with the delay, those changes can also be postponed.

Judges Halt Implementation of Latest Travel Suspension
On October 17, a U.S. District Court judge in Hawaii issued a temporary restraining order halting the implementation of the latest travel suspension preventing nationals from eight countries from entering the U.S.  On October 20, the judge converted his temporary restraining order to a preliminary injunction.  On October 18, a U.S. District Court judge in Maryland blocked implementation of the suspension as it relates to nationals with “bona fide” connections to entities or individuals in the U.S.  The Department of Justice is appealing the rulings.

The ruling by the federal judge in Hawaii does not apply to the executive action as it relates to nationals from North Korea and government officials from Venezuela.  The Department of Homeland Security therefore put the suspension into place with regard to travelers from those two countries as scheduled on October 18.   President Trump issued the third executive action on September 24, as the second Executive Order on a travel suspension was scheduled to expire.

The new presidential action differs from the last Executive Order in a few significant areas.  First, in addition to Iran, Libya, Somalia, Syria and Yemen, the Proclamation applies the travel restrictions to nationals of Chad, North Korea and certain members of the Venezuela government and their relatives.  At the same time, Sudan was dropped from the list.  Second, the Proclamation does not apply the same restrictions universally to nationals from all countries.  In the case of nationals from Chad, Libya and Yemen, individuals cannot obtain visas even for business travel.  This restriction does not apply to nationals from the other countries.  Individuals affected by the suspension do have the ability to seek a waiver on a case-by-case basis.  Finally, the previous executive actions were for periods of 90 days. The Proclamation does not have an expiration date.

The Proclamation is the result of lawsuits brought against the second Executive Order.  On June 26, the U.S. Supreme Court issued an unsigned order to allow the implementation of parts of the second Executive Order (No. 13780), signed by President Trump to temporarily suspend foreign nationals from Iran, Libya, Somalia, Sudan, Syria and Yemen from entering the U.S.  Based on the facts of the case, the Court formed a distinction between nationals who have “a bona fide relationship with a person or entity in the United States” and all other foreign nationals.  The Court upheld the suspension of the ban for foreign nationals who have such a relationship, including individuals employed by a company in the U.S.

Shortly after the U.S. Supreme Court ruling, the Administration put the suspension into place with guidance by the Department of State with the specifics.   The Court had not defined the definition of “a bona fide relationship” as it applies to extended family members.  The guidance issued by the Administration was clear that the definition did not apply to extended family members.  The State of Hawaii filed suit, and the Court of Appeals concurred that grandparents and grandchildren were not subject to the suspension.  On September 7, the 9^th Circuit Court of Appeals in San Francisco ruled that extended family members were not subject to the executive order suspending entry into the U.S. of nationals from six countries.  The ruling supersedes a guidance issued by the Department of State that cites extended family members are subject to the travel suspension.

In its order of June 26, the U.S. Supreme Court did not rule on the legality of the executive order.  The Court was scheduled on October 10 to hear arguments on the case, but postponed the session in light of the new Proclamation.

Worldwide ERC's summary of how this will impact mobility:  The ability to move an employee around the globe is the foundation of our industry.  Actions that suspend or prevent that movement have the ability to undermine a key tool for employers to ensure they have the appropriate employees in positions vital to their operations.  Other nations to could take similar actions in response to U.S. immigration policies and make it more difficult for U.S. citizens to enter their countries.

FinCEN Issues Advisory on Money Laundering and Real Estate
The Financial Crimes Enforcement Network (FinCEN) has issued a notice on the risks of money laundering with certain real estate transactions.  The notice, entitled “Advisory to Financial Institutions and Real Estate Firms and Professionals” was issued on August 22.  The advisory highlights the potential for criminals misusing shell companies to launder money in real estate transactions involving luxury properties.

While there are mechanisms in place for a financial institution to identify and report suspicious activity involved with a real estate financial transaction, no such requirements for real estate brokers and service providers exist.  FinCEN therefore encourages real estate and other professionals involved in a real estate transaction to proactively and voluntarily report any suspicious activity.  The same liability protections under the Bank Secrecy Act, which apply to financial institutions regarding the reporting of suspicious activity, applies to real estate, escrow agents and title insurers.

The transactions in question will likely involve a shell company which FinCEN defines as “typically non-publicly traded corporations, limited liability companies (LLCs), or trusts that have no physical presence beyond a mailing address and generate little to no independent economic value.”  The transactions will also be all-cash purchases of real estate, which according to the National Association of Realtors, accounts for almost one in four real estate residential transactions each year in the U.S.

For a copy of the advisory as well as how to report suspicious activity, please go to: https://www.fincen.gov/resources/advisories/fincen-advisory-fin-2017-a003.

Worldwide ERC's summary of how this will impact mobility:  The transfer of an employee often involves the sale of a home. It is important that Worldwide ERC® members involved with a real estate transaction are aware of the risk of the possible involvement of individuals laundering money and to report suspicious activity.

Regulators Continue to Address Airline Carbon Emissions
The European Union (EU) reached an agreement on October 18 to extend an exemption on international flights from a plan to curb airline carbon emissions.  The extension will be through 2023 for airlines to abide by the EU directive on its Emissions Trading System (ETS) for aviation.  The extension allows the International Civil Aviation Organization (ICAO) agreement reached on October 6, 2016 (to cut carbon emissions on international commercial air travel) to come into effect.  The ICAO is the aviation regulatory body of the United Nations.

The ICAO aviation emissions agreement will be voluntary from 2021 to 2026, and then mandatory thereafter for those countries which have a significant commercial aviation industry.  A system will be developed for airlines which don’t meet the new emissions standards to purchase credits from certified environmental projects to offset the emissions emitted above the threshold.  This is different from the tax program the EU had developed, and the ICAO deal would replace that proposal.

The European Union adopted its carbon tax on air transport in 2008 as part of the aviation directive to its ETS.  The ETS utilizes the “cap and trade” principle as the framework for EU policies to combat climate change and reduce greenhouse gases.  The intent of the tax was to force airlines and other air carriers to purchase more efficient aircraft that use less fuel and thus emit less carbon dioxide. Because of strong international as well as internal pressure, the EU had temporarily suspended its plan to tax air carrier carbon emissions as long as the ICAO was making progress toward a global agreement.

Russia and India have stated they will not participate in the voluntary phase of the ICAO agreement, but China has indicated that it will participate.  The Air Transport Association, the airline trade industry group, which had strongly opposed the EU air emissions tax, supports the ICAO agreement.  There are reports the Environmental Protections Agency (EPA), with the support of the ATA, is looking into the development on regulations on limiting aircraft carbon emissions for U.S. flights.

Worldwide ERC's summary of how this will impact mobility: Worldwide ERC® has long monitored the efforts of the EU on limiting aircraft carbon emissions as it is anticipated to lead to higher costs for travel and the shipment of household goods by aircraft.  The larger agreement by the ICAO and a potential regulation by the EPA on carbon emissions of US flights could also lead to higher costs associated with the transfer of an employee.