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 US ‘Mountaineer´ 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´. I briefly discussed this phenomenal law and particularly its section on foreign accounts in the last Mountain Vision Update.
After reviewing HIRE again 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 that ALL Mountaineers study this thoroughly!

http://www.withersworldwide.com/news-publications/705/the-hiring-incentives-to-restore-employment-act-2010.aspx

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?!?!

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