It's a very small world when it comes to money and banking, as we all learned in 2007. Now the Internal Revenue Service is extending its reach to financial activities of U.S. citizens who have money in foreign financial institutions.
On July 1, 2014 FATCA -- the Foreign Account Tax Compliance Act, which is an effort by the IRS to "improve reporting compliance of U.S. taxpayers who have foreign financial assets and earn income outside the country" -- goes into effect. The United States is one of the few developed countries that taxes income earned by its citizens, regardless of where they are residents. So U.S. citizens living and working abroad often must pay taxes to two countries!
FATCA is designed to make sure financial institutions report not only income but assets of U.S. citizens held in foreign countries. In other words, there will be no easy way to hide money offshore from IRS scrutiny -- unless, of course, you are a major U.S. corporation that has earned money abroad, paid taxes there, and chosen not to bring those profits back to the U.S. to be taxed again. But that's another story.
Now U.S. citizens not only must report the existence of foreign bank accounts (as is currently the case), but, under FATCA those foreign institutions that hold accounts for U.S. citizens must go through onerous reporting obligations to the IRS. They must report the owner's name, address, Social Security or tax ID number, and the combined balances if the amount is over $50,000. The reporting is so complex that many foreign banks are simply turning American clients away -- even if they are ex-pats, living and being paid in that foreign country by their U.S. employers.
The IRS has entered into intergovernmental agreements with these foreign countries, and they in turn are putting the pressure on the financial institutions. Not only financial institutions abroad are subject to FATCA, but corporations that pay dividends, interest or capital gains. Big brother is truly watching your money worldwide.
A Dollar Collapse?
Some are calling this a critical moment in government overreach, and predicting some sort of global financial collapse will ensue. But that's not the likely result. Instead the burden of financial reporting will close off certain aspects of global finance to all but the largest corporations.
Pessimists say this is the first step toward government extending control over your right to move money out of the United States, much as South Africa and other countries imposed currency controls on their citizens as they attempted to flee repressive or changing regimes.
Of course, as the markets have demonstrated so far, the United States dollar is still viewed as the "safest" global currency, despite our debt problems. And that is likely to remain the case even after FATCA takes effect on July 1.
And it is doubtful that Americans will flee, although there have been a significant increase in the number of Americans voluntarily giving up their citizenship. A record 1,780 Americans gave up their passports in the most recent year reported. But that pales beside the numbers of foreigners who seek to come to America.
Perhaps one of the most famous, was the co-founder of Google, Eduardo Saverin, who avoided huge taxes estimated at $96 billion when the company went public by renouncing his citizenship in favor of Brazil, where he was born. When the dollars become large enough, the tax and reporting consequences take on huge importance.
The Irony of FATCA
Perhaps the greatest irony of FATCA is that it grew out of the 2010 Act that was titled "Hiring Incentives to Restore Employment (HIRE) Act." But instead of contributing to economic growth, FATCA has just put another regulatory and reporting burden on global financial trade, throwing a roadblock into the free markets that move money to where it gets the best risk-based return.
This law is unfair to individuals compared to corporations, which can earn money abroad and not pay taxes until, and unless, they repatriate it. Since the tax rates here are much higher for companies than in most of Europe, a lot of that money stays overseas -- and is not used to create jobs in the United States. In fact, some companies are merging with European corporations just to become taxpayers in those countries instead of the United States.
If U.S. citizens want to seek out investments abroad with the money they have earned and paid taxes upon, the government shouldn't stand in the way. Instead it should concentrate on making the United States the best and most attractive place to invest by cutting tax rates and encouraging growth. And that's the Savage Truth.