The following article appeared in the American Thinker this morning:
FATCA: A Ticking Time Bomb for the Economy
Peter W. Dunn
Buried in an ostensible jobs bill signed by President Obama last year is a little-noticed job-destroying government regulation that threatens to trigger a massive outflow of capital from the American economy.
The US economy is in bad shape. Many want the federal government to fix it — to end the deficits, create jobs and get America back onto the track of growth and stability. President Obama came to Washington with great promises: to restore international respect for the United States and to bring back the jobs. When signing the HIRE Act of 2010 on March 18, 2010, President Obama said:
A consensus is forming that, partly because of the necessary — and often unpopular — measures we took over the past year, our economy is now growing again and we may soon be adding jobs instead of losing them. The jobs bill I’m signing today is intended to help accelerate that process.
Now the HIRE Act of 2010 contains a time bomb called FATCA (Foreign Account Tax Compliance Act), which has indeed accelerated a process. Unfortunately that process is not job generation but job destruction caused by an exodus of capital from the United States. Investment means jobs; a departure of investment capital means job losses. Thus, the HIRE Act is really the “FIRE Act”.
The Background of FATCA and FBAR
FATCA (Foreign Account Tax Compliance Act) is the brood of FBAR (Foreign Bank Account Report). FBAR requires that US persons divulge foreign accounts to the Treasury Department, but few knew about or ever complied with it (see When Government turns Predator). To stanch the bleeding of US capital into secret bank jurisdictions like the Cayman Islands and Switzerland, Congress introduced FATCA into law as part of the HIRE Act. FATCA requires that Foreign Financial Institutions (FFIs) reveal the accounts of US persons to the IRS. The FFIs will then have to collect tax withholdings for the IRS from these clients. If by January 1, 2014 the FFI is unwilling to reveal their US clients’ accounts, the IRS will impose a punitive 30% withholding on all payments to the FFIs, on dividends, interest and gross sales of stocks, bonds, and financial derivatives.
A sample transaction
Let’s suppose a foreign investor trades stocks on a US exchange, but his broker is FATCA non-compliant. One day he buys 10,000 shares of XYZ at $25 per share, and the next day, he takes advantage of a nice uptick of $1.00 in XYZ and sells at $26 per share. He makes a tidy profit of $10,000. But because his broker is non-compliant, the IRS now withholds 30%, not of the profit but of the gross proceeds of the sale! So the client now receives the sum of $260,000 minus 30%. The foreign investor is unhappy because his $250,000 investment has become $182,000. If he wants his money back, he must file a US tax return.
No investor would accept such conditions. Hence, an FFI must either comply with the invasive regulations of FATCA or simply abandon the US markets.