HIRE, FATCA, QFFI - Beware of Rampant Laws in Response to Rampant Spending
"Frank. When I think of America I always keep a pocket of optimism alive somewhere in my soul. To be honest, I think this bill [the Healthcare bill] is the straw that breaks the camel´s back. We are already technically insolvent, and yet keep inventing ways to spend money (and raise taxes). This Healthcare bill precedes a debt downgrade, massive inflation, and the demise of the dollar. What was likely to happen is now written in stone. Seeing what is ahead, I am now afraid." – a Mountain Vision reader and good friend
My friend´s concerns in the quote above are a reflection of the concerns and fears many of you may be experiencing these days. Here at BFI, we get numerous e-mails and comments that express a growing concern over government insolvency, debt, inflation and the increasing fiscal repression found in most of the G7 countries.
Indeed, over the past few weeks, an amazing sequence of laws, treaties and acts have been put in place to facilitate more deficit spending and more big brother powers. None of these laws enhance your liberties. None of them are aimed at protecting fundamental rights of freedom, property, or privacy. None of them enforce government fiscal discipline and accountability. On the contrary, they are tailored toward a continuation of out-of-control Keynesian madness – more public spending, more deficits, more debt, and of course, more taxation.
Instead of fixing fiscal and monetary issues at their roots, an internationally concerted crusade against 'tax evaders' and 'offshore investment strategies' has been launched. However, what may be considered as enforcement of law has long become a game of capital controls, protectionism and taxation horror.
In the UK, for instance, as part of the UK 2010 Budget, the British government last week decided to come down yet a little harder on offshore tax evasion. Penalties for offshore evasion were increased to a maximum of 200% of the unpaid tax. Penalties of up to 150% will apply where exchange of information is on a "upon request" basis rather than automatic. The stiffest penalties apply where non-compliance arises in jurisdictions that have not signed exchange information agreements with the UK.
Meanwhile, in Germany, the Anti-Tax Evasion Act was passed. This Act, approved by the German Federal Council, entails new regulations that deal with tax evasion and "unfair tax practices" (translation: low-tax jurisdictions with healthy balance sheets, such as Switzerland). Even in Israel, the Parliament permanently approved regulations for "enhanced" reporting requirements, as well as regulations against "aggressive" tax planning measures.
Finally, the worst – and most amazing – law of all was passed in the US under the very marketable title (you have to give them that) of 'HIRE'.
After reviewing HIRE and thoroughly studying its implications, I am convinced this law could actually be a blessing. I will tell you why in just a moment. But first, a bit more background...
HIRE – or simply another layer of hidden capitol controls
Last month, President Obama signed into law possibly the "worst bill ever" (Wall Street Journal, November 1, 2009). Some predict that it will inevitably lead to full-scale socialized medicine. Then, shortly after the Health Care Bill had passed, Obama slipped in another silent bomb.
On March 18th, with little if any pomp and circumstance – downright unnoticed by most – he signed off on the US$ 17.5 billion 'Hiring Incentives to Restore Employment Act' (H.R. 2487), in brief 'HIRE'. Amidst a long mire of legal gibberish that few would ever bear the pain of reading, provisions on 'Foreign Account Tax Compliance´ (FATCA) were hidden.
With these provisions, the noose on capital mobility has certainly tightened a little more for Americans. But, the implications are much broader and may well, and possibly should quickly, affect the wealth management decisions of investors worldwide.
In brief, these provisions require that foreign financial institutions (so called FFI's – and not just banks!) not only withhold 30% of all US source capital flows (remitting the collection promptly back to the US Treasury) but also to disclose the full details of non-exempt accountholders to the US and the IRS. In order to avoid the 30% withholding tax, an FFI would have to agree to become a QFFI (a Qualified Foreign Financial Institution). Of course, under such circumstances, a QFFI must fully report all "non-exempt US accountholders", i.e. give up any and all client confidentiality against US tax authorities.
A concise and understandable summary of the law is provided by Withers at the following link. Let there be no mistake, this latest AMERICAN law may have implications for ALL of us. It may very well affect YOUR portfolio very soon. Therefore, I strongly recommend studying this thoroughly!
To read story, Click Here.
So, why on earth would I consider this horrific new law a potential blessing?!?!
The FATCA provisions are draconian. America´s current administration leaves George Bush looking like a whimp. These guys really push a heavy pencil. In fact, these laws are so blatantly coercive and outrageously encumbering for these so-called "Foreign Financial Institutions" (FFIs) that I don't think they will accept it. In fact, I think there is a considerable chance of an international backlash. And that backlash might well severely impact US financial markets.
After pushing their QI (Qualified Intermediary) rules down the throats of banks worldwide, the US Administration now aims at creating a 'co-operative´ global network of QFFIs (Qualified Foreign Financial Institutions). In other words, this network of institutions would administer America's desparate search for tax dollars in every nook and cranny, spying and reporting on their client's in the interest of squeezing that wealthy taxpayer lemon yet a little harder.
I don´t think this will happen. To use my friend's words at the beginning of this Update, I believe this law is the straw that breaks the camel's back. Even if all these FFIs were highly willing and dedicated to supporting America´s wild goose chase, the problem is that they would not know how to do it, and even if they did, they might not be able to afford it.
First of all, these rules are not practicable. For instance, these rules would require a hedge fund with QFFI status to identify on each subscription to the fund whether the ultimate beneficial owner is a 'US person'. Now, this might be fairly straight-forward in a constellation where the investor is an individual who subscribes directly to the fund. However, what if another fund invests in this fund? And then, what if the investor in the second fund is not an individual but rather a foundation? What if this foundation is held by an international conglomerate of corporations? You get the idea.
Secondly, let's assume that via the proper standards, procedures and, of course, in conjunction with the required IT systems, FFIs worldwide could in fact fulfill Mr. Obama´s daydreams, most FFIs would not be able to afford it. And many will not be WILLING to afford it.
I've discussed this with several top Swiss bankers and legal experts. They all agree that this law leaves many unanswered questions. If indeed the US is hellbound on pushing this through as defined, there will be a backlash, and soon. As stated in our last Update, non-US banks, asset managers, insurance companies, hedge funds and financial advisors may – once and IF the law is implemented as foreseen – very well simply stop investing in US assets altogether.
There´s a world of investment opportunities that are non-US. Why bother with American markets?
Posted by Of on 05/21/10 05:22 PM
I just checked on a couple of those conspiracy things, Bilderberger, Skull & Bones.
Well, those are not really conspiracies.
This is done out in the open, for everybody to see.
Bilderberger, as I understand it, is just a catholic decentralization protection team of the Vatican.
Everybody ought to know by now, that any religion which turns brick and mortar is a church of the anti-christ.
Which does not mean "they" have any powers. These people are really not very intelligent as they may only do some fakir-conspiracy.
They cannot conspire against death. Believe me, they are completely helpless.
What they can do, they can do only to bodies.
Just avoid them. They smell of the stupidity of the living dead.
Death can only be overcome by THE LOVE.
No other power can do that.
The greatest and most dangerous conspiracy in this universe is the conspiracy of the individual human ego against itself and the body.
That the ego wants to make you believe you are a body.
That's dangerous as you might miss your individual mission, or rather, delay "time".
You are not your body. You are Love. Forever.
Posted by Dennis Murphy on 04/18/10 11:45 AM
Please Pres. Obama PASS this law (overnight) if you will. Then the ass kicking that you and your socialist cronies in Washington deserve will bear fruit.Oh!! and by the way it the crooked and devious methods that your government/administration use that will soon flush your government down the LOO. " One term is proving to be that of your presidency and warped socialist administration.
Posted by Bill Ross on 04/18/10 10:58 AM
Dominant REAL Theme: The tighter they squeeze (and the cost of the "squeezers"), the more slips through their fingers. ANYTHING that diverts resources from productive to unproductive activities alters the motivational economics of the productive (reducing their productive time and energy = life) towards unproductive defense, collapsing civilization (the rules by which we cooperate for MUTUAL self-interest).
It appears Luddites and Malthusians are in control, aided and abetted by coerced TRAITORS and criminals at the highest levels. It appears we are being coerced (environmental control 101) back to feudalism with a much smaller population (civil war between productive and legally entitled and social / economic collapse - starvation) by a sequence of fake crisis, steering us on the desired course. Darwin WARNED us:
The remedy is to NOT be Pavlov's citizens. THINK about it:
Posted by Scott on 04/18/10 03:43 AM
Can you provide more details on the changes in Israeli tax law?
Reply from The Daily Bell
We will pass along your request.
Posted by MetaCynic on 04/17/10 11:26 PM
The government keeps coming up with taxes and regulations to destroy yet more American jobs. It is as though the political classes are deliberately creating situations forcing people to become dependent on government support and eager to vote for politicians promising ever more handouts.
First we have the federal takeover of the management of health care by, among other things, forcing employers to provide medical insurance to their employees. This additional cost of doing business will kill jobs.Next we have looming, once again, the cap and trade bill which will artificially increase the cost of energy across the board. This translates to more job losses to Asia.
And now we have this Gordian Knot of financial reporting mandates which will discourage foreign investment in America. Added to this witches brew of wealth and job destruction, are all kinds of tax increases on the wealthy - people in a position to create jobs - and we have a nation on a trajectory to join the former Soviet Union on the trash heap of history.
Let's hope that when the time comes, America will mimic the peaceful dissolution of the U.S.S.R. And Bill Clinton wonders why ever more Americans hate the government?!
Posted by Vasco (PT) on 04/17/10 01:33 PM
Thanks for your clairvoyance on this issue Mr Frank. As you said: "Why bother with American markets?", Asia and Latin America are so big, they are growing in front of our eyes and with another important issue, they are willing to work in the same conditions as those in the industrial revolution implemented in USA and England: without massive business regulations, low taxes, salaries and high savings.
The West will go through serious problems, which no one sees a bright future.We entered in debt mode a long time ago and we will have to pay the bill. Like it or not, a new economic model will came to the west, one that can bring us something in the way to get rid of the socialism implemented by Keynes and worse, by the Neo-Keynesians as Krugmans, etc.: the so loved political economists. The history is simple: we will repeat the errors until the time we learn from our mistakes.
Posted by Scott Cherf on 04/17/10 01:10 PM
Mr. Suess mentions "non-exempt account holders", I wonder if he has any insights into the criteria for exemption? I ask because I've filed for exemptions on withholding on equities account transactions in the past and the process was pretty lightweight, I just filled out a form, signed it and returned it to the bank. If an option like this were available at least the new law wouldn't send me into a bipolar fit cycling between rage and depression.
This question is not academic as I am currently in the process of creating an IBC for reasons other than tax Click to view link appears that the US Government is fixated on tax evasion and feels that's the only reason for a US citizen to incorporate in another country, which is simply not true. Many corporations are created in foreign countries for legal reasons that have nothing to do with taxation.
These corporations pay taxes on any funds re-patriated to the US and if the Government seeks to 'improve' enforcement the very simple method is to abandon the progressive and draconian tax structure created by the IRS in favor of a flat VAT on US sales.
Profits neither earned or distributed in the US should not be subject to US tax and a flat VAT on sales works very effectively to that end; if I am an employee or owner of a company that derives income outside the US, any earnings re-patriated (used) in the US will be taxed. It's simple and effective. We need to abandon the current tax code.
It is incredibly wasteful in terms of Government personnel employed to interpret and enforce it as well as the private sector resources employed to comply with it. The purpose of taxation is to provide funding for useful public infrastructure and the enforcement of our Constitution, it is not a jobs program for accountants (no offense to accountants intended). It is wasteful, like so many government programs, and it needs to be streamlined not made more onerous and convoluted.
Posted by Rob Carlin on 04/17/10 10:48 AM
Would you succinctly list the consequences of halting of foreign investment in US assets if the law is implemented. Could this be a deliberate effort on behalf of Obama's group to curb the growth of US economy through the halting of foreign investment? Decrease growth: Smaller economy; Less powerful US??
Reply from The Daily Bell
You answered your own request. The result would be a loss of appetite by foreign investors in US-based assets.