Update: U.S. Currency Control Implementation Has Been Delayed Until Jan. 1, 2017! How Will It Affect You? (+7K Views)

Long the champion and beneficiary of free trade and the free flow of capital, the United States has enacted legislation that becomes effective on January 1, 2017 that a growing number of commentators and professionals believe could be the start of capital  controls in America and have serious unintended consequences. Let me explain. Words: 1252

So says Joel M. Nagel in edited excerpts from his original article* posted on www.hemispherespublishing.com entitled Have Exchange and Capital Controls Come to the United States? 

Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!), has edited the article for length and clarity. This paragraph must be included in any article re-posting to avoid copyright infringement.

Nagel goes on to say, in part:

While the intent of the new law is admirable – to force U.S. tax compliance with regard to foreign  accounts and transactions between the U.S. and individuals in countries that are  considered to be tax havens – the unintended consequences could result in the flight of capital from the country and long  term devaluing of our currency through simple supply-and-demand manipulations.

The provisions are found in a jobs’ bill – H.R. 2847 (also  known as the HIRE Act), which became  law  in March 2010. Title V of the law largely encompasses the Foreign Account Tax  Compliance Act of 2009, or “FATCA”, also referred to as the “Offset Provisions”  of the bill.

On their face, these  provisions appear intended to:

• force US tax compliance with regard to foreign  accounts and transactions between the U.S. and individuals in countries that are  considered to be tax havens (meaning the banks and financial institutions in  those countries that do not share account information with US authorities). Section 1474 refers to “withholdable payments” to Foreign Financial Institutions that  don’t meet United States standards for information sharing.

The law requires that any financial institution (US or foreign) remitting any foreign payment to a bank in such a country withhold 30% of the amount of such payment and remit that percentage to the Internal Revenue Service (IRS) as a tax. [This requirement has been postponed to January 1, 2017 – see here.]

A withholdable payment is defined as any payment of  interest, dividends, rents, salaries, wages, premiums, annuities, compensation,  enumerations, emoluments, and other fixed or determinable annual or periodical  gains, profits and income, if such payment is from sources within the United  States.

On its surface, the withholdable payment is designed to  ensure that “pre-tax” monies are not sent abroad without applicable US federal  taxes being paid. Looking a little deeper however, the law does two things that  go beyond the responsibility of each tax payer to pay what they owe to the IRS:

1. under Section 1474 of the bill, the law makes banks,  as a third party, responsible for the enforcement of government tax policy. The  banks are liable for the customer’s tax obligation on  transferred funds, if they don’t withhold the  required 30% to cover any possible tax liability. The banks essentially  become the tax police, working for the government as hammers to bring about  individual compliance.
2. the same provision holds the banks harmless and  indemnifies them if they improperly withhold the 30% tax and it is not due.

[As such, according to #2 above,] if banks are third-party tax enforcers on the one hand,  and completely indemnified from improper tax withholding on the other, then it  is clear what banks will do.  It would be  difficult in any case for banks to determine the difference between a pre-tax  remittance versus a post-tax payment.

They will be inclined to simply withhold 30% tax on all foreign  payments to banks and countries that do not have what are considered  “information sharing” agreements with the United States.

The net effect of provision #2 will be to greatly  discourage any financial transactions between US banks and foreign banks not  entering into information sharing agreements with the United States government. [Read status of U.S. in Talks with 50+ Nations on FATCA Tax Enforcement.]

To wire transfer $100,000 to Panama, for example, to purchase a piece of real  estate, one would have to agree to send $142,000 so that a net $100,000 would  reach its destination. Who would be inclined or willing to pay 30% more  in a global transaction in order to satisfy these requirements? Almost nobody.

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International payments beginning January 1, 201[7] will be  subject to these new withholding requirements to:

1. force foreign governments (especially those in tax havens) to enter  into agreements with the United States by January 1, 2017 now, instead of the original 2013 date, and
2. put extreme pressure on individual  foreign banks to enter into private-sector agreements with the IRS to disclose  all United States account holders, or risk having all US transactions moving to  their individual bank being subject to 30% tax withholding.

In addition to those intended effects, I believe the new law  will have a number of  unintended consequences as well, namely:

1. Both US and non-US  persons, fearing how the implementation of the new law will impact them after  January 1, 201[7], may be inclined to move asserts outside the United States before the effective date, meaning we could see significant capital flight… [out of] the U.S….
2. Foreign financial institutions may drop US clients as one way to avoid being subject to the 30% withholding requirement, as well  as avoiding the US regulatory compliance costs (again, probably an intended  consequence of the law). These compliance costs to worldwide bankers have been estimated by the Swiss Banking Association to total nearly $40 billion dollars annually, while the measure is projected to generate only around $8 billion to the U.S. Treasury in increased taxes.
3. Foreign financial institutions and many foreign, private sector interests may simply stop conducting their business in  dollars. A dollar-denominated transaction will ultimately pass through a US  Federal Reserve Bank and potentially subject the transaction to the risk of a  US bank levying a 30% withholding tax on any payment. One method for foreigners to ensure that this would not happen  would be to designate the contract in a currency other than US dollars. So if a  German businessman for example contracts with his Japanese counterpart to do a  deal to sell equipment in China, the best way to ensure that the transaction  would not be subject to US withholding tax would be to designate the contract  in Euros, Yen, Won or any other currency than dollars. Those currencies would  not pass through a US Federal Reserve Bank and therefore not become subject to  the backup tax regime. Russia and China announced at the end of last year that  they would no longer be doing trade transactions in US dollars but rather in  their own currencies. The two countries indicated that there was too much risk  in utilizing the dollar for their trade.
4. As more global transactions (especially oil, gold and other  commodities) are done in non-dollar currencies, the global demand for the U.S.  dollar will decrease and it will no longer be the world’s reserve currency. As  demand decreases, the value of the dollar will surely fall as well.

Given the above, while  exchange and private capital controls may well have been envisioned in the HIRE Act, additional unintended consequences of immediate capital flight and long  term devaluing of our currency through simple supply-and-demand manipulations  were probably less well-considered.

Conclusion

[As mentioned at the beginning of this article,] while the intent of the new law is admirable – to force US tax compliance with regard to foreign  accounts and transactions between the U.S. and individuals in countries that are  considered to be tax havens – the unintended consequences could result in:

• the flight of capital from the country and
• long  term devaluing of our currency through simple supply-and-demand manipulations.

[Furthermore,] as it is unlikely that President Obama…will undo… the legislation, [it is imperative]…to plan for the new law and take steps [now] to avoid the consequences.

[IMPORTANT UPDATE: The Internal Revenue Service announced on October 24th – see here – that it had delayed the timelines for withholding agents and foreign banks in completing the due diligence requirements. Foreign financial institutions will have:

• until Jan. 1, 2017 to start withholding taxes from U.S. taxpayers’ investment gains and
• until Jan. 1, 2014, to put in place the reporting requirements mandated by FATCA’s decision to modify the timelines for withholding agents and foreign banks to comply with the stiff new due diligence requirements under the Foreign Account Tax Compliance Act.]

*http://www.hemispherespublishing.com/Issues/2011/February-14th/Exchange_and_Capital_Controls_Come_to_United_States.html (Attorney-entrepreneur-investor Joel M. Nagel is a frequent writer and speaker on asset protection concepts…and creates legal structures around the world to protect his global clientele. Mr. Nagel welcomes response from readers or via telephone in the U.S. at 412-749,-0500.)

The above post may have been edited ([ ]), abridged (…), and reformatted (including the title, some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.