Paul L. Caron

Wednesday, October 5, 2011

Rethinking the U.S. Estate Tax on Nonresident Aliens

Tax Analysts Omer Harel (International Tax LL.M., Michigan), Rethinking the U.S. Estate Tax on Nonresident Aliens, 64 Tax Notes Int'l 77 (Oct. 3, 2011):

The U.S. estate tax imposed on NRAs today is an inefficient tax without serious policy justifications and it distorts behavior in ways that the estate tax imposed on residents does not. Also, this tax decreases the attractiveness of investments in the U.S. from the NRAs’ perspective as it forces NRAs to invest in U.S.-situated assets using a foreign corporation. This insulates them from estate tax exposure and subjects them to additional costs and higher taxes that the U.S. Treasury does not necessarily benefit from. The fairness arguments that were presented to support the retention of the NRA estate tax are not persuasive as NRAs owe much lower ‘‘debt’’ to the U.S. government than residents and, unlike residents, are sometimes unable to fully benefit from the step-up in basis. Further, after the Obama tax reform — which basically repealed the estate tax for almost all residents in 2011-2012 — the current regime has become extremely discriminatory and might in some instances violate U.S. income tax treaties.

Now that the U.S. (in particular the real estate industry) needs foreign investments more than ever, it is the right time to rethink this tax and repeal it or drastically modify it so that it will not deter foreign investors.

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This article has been introduced in the STEP news digest as "NRA estate tax may be in breach of treaties" which is obviously a misnomer. The bottom line is that tax has gone from rule of law to raw politics and on an international level, sheer assertion of sovereign powers, policy and theory have genuinely no place in the discussion on the legislative level, particularly when looking at parties without domestic political power. That said it is a well reasoned piece.

Posted by: Asiahand | Oct 7, 2011 12:15:20 AM