No capital controls in the USA... yet

[FRED]

No capital controls in the USA... yet

September 2008 we wrote in US exchange rate and capital controls or bust?

Exchange rate and capital controls are viewed by our modern economics orthodoxy as the retrograde policy of desperate third world countries that can't hack free markets. However, history teaches us to not discount the possibility that major economies even in our current times may use them as a last resort. Each day the front page of the newspaper is plastered with reports of one last resort measure after another. It's time to give the possibility of exchange rate and currency controls serious consideration.

In March, the Foreign Account Tax Compliance Act of 2009 was tagged on as an amendment to the Hiring Incentives to Restore Employment Act (HIRE), Obama administration's latest bid to restore US labor markets to pre-crisis levels. Over the weekend, several hysterical reports began to circulate claiming that this bill amounts to enforcement of capital controls.

Nonsense.

Here's an excerpt of the bill.

MCG09515 S.L.C.

A BILL

To amend the Internal Revenue Code of 1986 to prevent
the avoidance of tax on income from assets held abroad,
and for other purposes.

TITLE I—INCREASED DISCLOSURE OF BENEFICIAL OWNERS
Sec. 101. Reporting on certain foreign accounts.
Sec. 102. Repeal of certain foreign exceptions to registered bond requirements.
TITLE II—UNDER REPORTING WITH RESPECT TO FOREIGN
ASSETS
Sec. 201. Disclosure of information with respect to foreign financial assets.
Sec. 202. Penalties for underpayments attributable to undisclosed foreign financial assets.
Sec. 203. Modification of statute of limitations for significant omission of income in connection with foreign assets.
TITLE III—OTHER DISCLOSURE PROVISIONS
Sec. 301. Disclosure of assistance in acquiring or forming a foreign entity.
Sec. 302. Reporting of activities with respect to passive foreign investment companies.
Sec. 303. Secretary permitted to require financial institutions to file certain returns
related to withholding on foreign transfers electronically.
TITLE IV—PROVISIONS RELATED TO FOREIGN TRUSTS
Sec. 401. Clarifications with respect to foreign trusts which are treated as having a United States beneficiary.
Sec. 402. Presumption that foreign trust has United States beneficiary.
Sec. 403. Uncompensated use of trust property treated as a distribution.
Sec. 404. Reporting requirement of United States owners of foreign trusts.
Sec. 405. Minimum penalty with respect to failure to report on certain foreign trusts.
TITLE V—DIVIDEND EQUIVALENT PAYMENTS RECEIVED BY
FOREIGN PERSONS TREATED AS DIVIDENDS
Sec. 501. Dividend equivalent payments received by foreign persons treated as dividends.

1 TITLE I—INCREASED DISCLOSURE OF BENEFICIAL OWNERS
2
3
4 SEC. 101. REPORTING ON CERTAIN FOREIGN ACCOUNTS.
5 (a) IN GENERAL.—The Internal Revenue Code of
6 1986 is amended by inserting after chapter 3 the following
7 new chapter:
8 ‘‘CHAPTER 4—TAXES TO ENFORCE REPORTING ON CERTAIN FOREIGN ACCOUNTS
‘‘Sec. 1471. Withholdable payments to foreign financial institutions.
‘‘Sec. 1472. Withholdable payments to other foreign entities.
‘‘Sec. 1473. Definitions.
‘‘Sec. 1474. Special rules.
11 ‘‘SEC. 1471. WITHHOLDABLE PAYMENTS TO FOREIGN FI12
NANCIAL INSTITUTIONS.
13 ‘‘(a) IN GENERAL.—In the case of any withholdable
14 payment to a foreign financial institution which does not
15 meet the requirements of subsection (b), the withholding
16 agent with respect to such payment shall deduct and with
17 hold from such payment a tax equal to 30 percent of the
18 amount of such payment.

To make a long story short, this legislation applies to financial institutions that are not exempt from existing withholding tax rules that have been in place under the IRS code since 1986--enacted under the Reagan administration by the way. If non-exempt institutions fail to report a withholding they will be taxes at a rate of 30% on payments rather than the normal tax rate that ranges from 0% to 10%.

Here is a report on the bill by the International Tax Blog:

Passage of HIRE Act Means Increased Foreign Account Reporting

The HIRE Act imposes additional reporting and disclosure requirements for U.S. persons with any interest in a “specified foreign financial asset” if the aggregate value of all such assets exceeds $50,000. These reporting requirements apply to any domestic entity formed or availed of for purposes of holding directly or indirectly “specified foreign financial assets” as if the entity were an individual taxpayer. more...

No new tax. No capital controls. The bill imposes additional reporting and disclosure requirements.

A complete and accurate analysis of the bill is available from James Hamilton, Principal Analyst at Wolters Kluwer Law & Business. Hamilton has been tracking, analyzing and explaining securities law and regulation for 30 years as an analyst for CCH.

Jobs bill places Offshore Financial Firms under Reporting and Tax Regime (pdf)

The Hiring Incentives to Restore Employment Act (HIRE), HR 2847, creates a vast new reporting and taxing regime for foreign financial institutions with U.S. account holders. Under Title V, the Foreign Account Tax Compliance Act, the legislation casts a wide net in search of undisclosed accounts and hidden income. It adds a new Chapter 4 to the Internal Revenue Code, essentially requiring foreign financial institutions to identify their customers who are U.S. persons or U.S.-owned foreign entities and then report to the IRS on all payments to, or activity in the accounts of, those persons. Participation in the existing Treasury Qualified Intermediary program will not exempt a firm from the new reporting obligations.

The legislation’s principal focus is tax compliance by U.S. persons that have accounts with foreign financial institutions. The Act imposes substantial new reporting and tax-withholding obligations on a broad range of foreign financial institutions that could potentially hold accounts of U.S. persons. The reporting and withholding obligations imposed on the foreign financial institutions will serve as a backstop to the existing obligations of the U.S. persons themselves, who have a duty to report and pay U.S. tax on the income they earn through any financial account, foreign or domestic.

These new reporting obligations for financial institutions will be enforced through the imposition of a 30-percent U.S. withholding tax on a wide range of U.S. payments to foreign financial institutions that do not satisfy the reporting obligations.

The legislation provides substantial flexibility to Treasury and the IRS to issue regulations detailing how the new reporting and withholding tax regime will work. It also gives Treasury broad authority to establish verification and due-diligence procedures with respect to a foreign financial institution’s identification of any U.S. accounts.

Highlights
✔ New reporting and tax withholding requirements imposed
✔ Most foreign investment firms and entities covered
✔ IRS agreements specified for reporting, in lieu of withholding
✔ Qualified Intermediary program participants not exempted
✔ IRS authorized to establish verification and due-diligence procedures
✔ Bearer bond tax sanction extended to foreign markets
✔ Penalty for under-reporting foreign financial assets imposed
✔ Rules for determining if foreign trust has U.S. beneficiaries codified
✔ Dividend-equivalent payments subjected to withholding more...

Where are the new capital controls supposedly contained in this bill? There aren't any.

The whole idea that capital controls will appear this way and at this time makes no sense.

When and if capital controls are imposed, they will not come about in legislation the way the Foreign Account Tax Compliance Act of 2009 appeared as an amendment to the HIRE legislation. Capital controls will come out of nowhere and without warning. Capital controls don't work otherwise.

In addition, the timing is wrong. As we explained in September 2008 after net capital inflows had recently reversed, the time to worry about capital controls is when foreign capital is flowing out of an economy, not when it's flowing in.

As you can see, unlike Sept. 2008 when we issued the warning to keep an eye out for capital controls, net capital inflows are now strongly positive. The time to look for capital controls is when net capital inflows reverse again.

We'll let you know.

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[ThePythonicCow]

Re: No capital controls in the USA... yet

When and if capital controls are imposed, they will not come about in legislation the way the Foreign Account Tax Compliance Act of 2009 appeared as an ammendment to the HIRE legislation. Capital controls will come out of nowhere and without warning. Capital controls don't work otherwise.

So now they're just upgrading the camera at the intersection.

It won't be a "control" until they start using the camera to issue tickets, right?

[jimmygu3]

Re: No capital controls in the USA... yet

So now they're just upgrading the camera at the intersection.

It won't be a "control" until they start using the camera to issue tickets, right?

Cow, did we read the same article? People and corporations who cheat on their taxes by failing to report income are who the "camera" is for, and it is being turned on to issue tickets immediately. Is your point is that this added oversight could be modified in the future to control the flow of capital out of the US?

FRED, is this plausible?

-Jimmy

[Slimprofits]

Re: No capital controls in the USA... yet

It's hard to disagree with that analogy

Stoel Rives LLP:

Provisions Affecting Foreign Activities of U.S. Businesses:

New Tax and Withholding Regime. The HIRE Act imposes a 30% tax, withheld at the source, on certain payments to foreign financial institutions and certain other foreign nonfinancial entities. The types of payments subject to this new tax are: (1) U.S.-source fixed or determinable annual or periodic ("FDAP") income (e.g., interest, dividends, rents, and royalties); (2) gross proceeds from the sale of property that produces interest and dividend income; and (3) interest on deposits with a foreign branch of a U.S. commercial bank. Foreign financial institutions generally can avoid being subject to this withholding tax by entering into an agreement with the IRS that, among other provisions, generally would require the foreign financial institution to provide information about "U.S. accounts." Subject to certain exceptions, an account constitutes a U.S. account if it is owned by a U.S. person or by a foreign entity in which a U.S. person owns, directly or indirectly, more than 10% of the interests. Other foreign nonfinancial entities generally can avoid being subject to this withholding tax by providing the withholding agent (generally, the person making the payment) with either (1) certification that no U.S. person owns, directly or indirectly, more than 10% of the interests in the entity or (2) the name, address, and taxpayer identification number of each U.S. person that owns, directly or indirectly, more than 10% of the interests in the entity. The withholding tax regime does not apply to certain foreign nonfinancial entities, including publicly traded foreign corporations. The new withholding tax regime generally is effective starting in 2013.

[Chris Coles]

Re: No capital controls in the USA... yet

As an British inventor who has been granted US patents that are "held" in a US Holding company, I will certainly be interested in a clear determination of the meaning of the word Royalties.

[ThePythonicCow]

Re: No capital controls in the USA... yet

Cow, did we read the same article?

Heck if I know .

Is your point is that this added oversight could be modified in the future to control the flow of capital out of the US?

That sounds like what I was thinking, yes.

[Fiat Currency]

Re: No capital controls in the USA... yet

As an British inventor who has been granted US patents that are "held" in a US Holding company, I will certainly be interested in a clear determination of the meaning of the word Royalties.

If I had more time - I'd start an "Advanced Business Architecture" forum here on iTulip.

The short answer Chris is - never use a "Royalty" structure or fee (or even a HoldCo) for things like this when doing business Internationally. A management fee structure, or my favourite - a "Brand and Technology" agreement is much more effective - for both tax and legal ramifications.

[LargoWinch]

Re: No capital controls in the USA... yet

What would be the impact of Capital Control on the "all-important" equities indexes (i.e. confidence meters)? Wouldn't they tank, hence creating bigger problems?

[Fiat Currency]

Re: No capital controls in the USA... yet

Here's another take on this ...

Exchange controls in the United States?

By Simon Black

March 30, 2009
Panama City, Panama

I’ve been flooded with emails over the last few days about new law in the United States that many people believe to be government imposed exchange controls. Here’s the deal, in case you haven’t heard:

On March 18th, President Obama signed into law the innocuous sounding “Hiring Incentives to Restore Employment Act.” Buried in the bill are several provisions that impose new taxes, penalties, and requirements regarding the reporting of foreign bank accounts.

One of the biggest issues is that the bill imposes a 30% withholding tax on most US-source income paid to foreign financial institutions which do not comply with IRS reporting requirements.

Essentially, Tim Geithner expects foreign financial institutions to become unpaid spies of the US government. Account holders of banks who do not wish to comply will have 30% of their funds withheld if those funds are income from US sources.

It is this 30% withholding tax that has set off alarm bells across the blogosphere.

The bill goes on to aggressively expand the definition of a “US beneficiary of a foreign trust,” extend the penalty period for erroneous reporting, and expand the offshore financial account reporting requirements.

I spoke with two asset protection and tax attorneys as well as a handful of CPAs about this bill, and I plan on interviewing a few of them soon to shed some light on the new law… in the meantime, though, here’s what you need to know:

All of these measures are a major step in the wrong direction and indicative of the federal government’s assault on economic freedom. To be clear, though, these measures are NOT capital controls, nor do they make it illegal for US citizens to open a foreign bank account.

Remember, capital controls are laws that prevent the free flow of capital in and out of a particular currency, either through international bank transfers, purchase of gold and hard assets, or conversion into a foreign currency.

For centuries, capital controls have been extremely popular tools of government; in fact, they were used around the world as recently as the 1970s and 1980s. Today, capital controls are still in effect in many countries such as Cuba where locals are forbidden to hold foreign currencies.

Capital controls give the government authoritative, sweeping economic powers, providing for total control over the currency and regulation of inflows and outflows. This benefits corrupt, overspending governments by trapping wealth within a nation’s borders and enslaving capital to further taxation and inflation.

Given the dire financial straits of most governments, I’m convinced that capital controls will once again be imposed in the western world and United States some day soon. But today is not that day.

Clearly, this new law is the strongest evidence of things to come. But the window of opportunity to do something is still open. The 30% withholding tax does not make it illegal to hold funds overseas, but rather it is an administrative penalty to ensure the flow of tax information.

You can be sure that more invasive measures are coming soon… so the time to heed the warning signs is now. Besides, when capital controls finally are passed, it will be in the exact same manner as these measures were passed– quietly. You don’t want to wake up one morning and realize that you’re too late.

The language in the bill is extremely complex… so when I publish my interview with tax attorneys and asset protection experts, we’ll discuss the bill at length, as well as some long-term solutions.

In the meantime, I strongly recommend that you read the following level-headed, plain English interpretation of the bill from Mark Nestmann’s website.

I would also strongly encourage you to check out Mark’s book, The Lifeboat Strategy, which contains some excellent strategies and solutions for dealing with the decline in personal and economic freedom.

[ThePythonicCow]

Re: No capital controls in the USA... yet

Here's another take on this ...

Useful - thanks.

[Fiat Currency]

Re: No capital controls in the USA... yet

Useful - thanks.

No problemo. BTW - the book is worth every depreciating penny if you have assets & wealth spread around the Globe to protect.

Book.gif

[*T*]

Re: No capital controls in the USA... yet

But reporting requirements can be as onerous and byzantine as they like. 30% witholding tax unless you give us you firstborn.

[skidder]

Re: No capital controls in the USA... yet

It seems to me that any law enacted to discourage the movement of money overseas or to discourage foreign banks from taking on US customers, is a capital control mechanism.
Of course they get to call it anything they want and control the debate. The gov't has pretty much convinced the american public that anyone with a foreign account is a billionaire crook whose sole purpose in having the account is to evade taxes. The sheeple then willingly give up one more privacy in their dwindling inventory of personal issues they can keep the US gov't from poking it's nose into.


This has been in the works for quite a while as evidenced by my personally receiving and having to sign (or my account would be closed) a U.S. w-9 form sent to me by a swiss bank, that I have a safe deposit box with, several months back.

[Thailandnotes]

Re: No capital controls in the USA... yet

Here in Thailand when the baht was crashing, it got harder and harder to get money out. It was not that new laws or regulations were passed. It was the paper work the banks required and the lines and the waiting. People gave up on going to the bank...and watched their savings be cut in half.

[dbarberic]

Re: No capital controls in the USA... yet

I wonder if this law would consider Goldmoney.com an offshore foreign investement firm and require them to withold taxes.