Capital controls and what you should know

When a government plans to do something unpopular, they try to hide it.
For instance, when the Democrats decided last month to renew the draconian Patriot Act, they hid it in a medicare reform bill. They originally tried to hide it in a Pentagon funding bill.

It turned out to be a very successful strategy because it was almost totally ignored by the major media. In fact, it was so successful that last week Congress slipped in what might be the most ominous law of the year.

The law in question was the HIRE Act.

The bill includes $17.5 billion in tax cuts, business credits and subsidies for state and local construction bonds, and moves $20 billion into the highway trust fund for spending on highway and transit programs. It exempts businesses that hire unemployed workers from paying the payroll security tax through December of 2010.

The bill was radically scaled down from the original $150 Billion that might have made a real dent in the unemployment rate.

Obviously no journalist from the major media bothered to read the huge bill. It required the blogoshpere to unearth the gem. Buried in the bill at page 27, under the subtitle of "Foreign Account Tax Compliance" was this critical tidbit:

SEC. 1471. WITHHOLDABLE PAYMENTS TO FOREIGN FINANCIAL INSTITUTIONS.
‘‘...(b), the withholding agent with respect to such payment shall deduct and withhold from such payment a tax equal to 30 percent of the amount of such payment.

This act applies to any account over $50,000. What's more, the law also requires foreign financial institutions to give complete information about the account's identity. Banks that fail to comply for any reason are required to close the accounts.

‘‘(A) The name, address, and TIN of each account holder which is a specified United States person and, in the case of any account holder which is a United States owned foreign entity, the name, address, and TIN of each substantial United States owner of such entity.
‘‘(B) The account number.
‘‘(C) The account balance or value (determined at such time and in such manner as the Secretary may provide).

So What?

It is no secret that some of the wealthy of this country, not to mention drug dealers, the mob, and corrupted bankers, hide their money overseas to avoid taxes. This law will not be kind to them. No one is going to shed a tear on their behalf.
But let's be clear - this act doesn't discriminate. It goes after everyone that isn't politically connected enough to get an exemption through the Treasury. It goes after middle-class Americans who want to retire overseas in cheaper nations, or any investor who wants to diversify their life savings by nation.

In essence it is capital controls by proxy.

I believe its main effect will be to further restrict access for U.S. citizens—especially those living in the United States—from offshore banks, brokers, and other foreign financial services companies. This is likely to occur because the cost for these companies to continue doing business with Americans will increase sharply when these portions of the law become effective.

"control of capital movements, both inward and outward, should be a permanent feature of the post-war system."
- John Keynes

Since the 2008 crisis the whole world has been moving towards capital controls. It's already law that the rich must buy their way out of American citizenship. Before the crisis hit there was near universal agreement that capital controls created distortions in the market, therefore they were to be avoided.
That opinion hasn't changed. What has changed is the decision that those distortions are the lesser evil compared to full-scale meltdowns of the financial system. Even the IMF has come around to this point of view.

Capital controls on inflows can be very useful for avoiding bubbles in the economy. The problem is that if you have a trade agreement with the U.S., chances are they are illegal. The Bush Administration made sure of that for the trade agreements with Chile and Colombia.

It isn't capital controls on inflows that concern me. It's capital controls on outflows that do.
Governments create capital controls on inflows to prevent a bubble. They create capital controls on outflows to stem the damage from when a bubble bursts.

For instance, when Iceland's financial system collapsed on October 9, 2008, Iceland's central bank set up restrictions on the private purchase of foreign currencies.
At the time the Krona had virtually collapsed. The capital controls have since been considered a success since they eventually stabilized the currency.

But let's look at it from the point of view of a citizen of Iceland with some savings. On October 15, 2008, the exchange rate was 150 Kronas per Euro. Today that rate is 174 Kronas per Euro. By preventing the people of Iceland from moving their money into other currencies, they effectively prevented them from avoiding losses.
That may seem like mild, acceptable losses given the extent of currency collapse that preceded it, but it isn't always that way.

On December 2, 2001, Argentina imposed currency controls on not just outflows of capital, but even on how much money you could take out of the bank. Those controls weren't lifted for a year. During that time the Argentina Peso was devalued from a 1-to-1 ratio with the dollar, to a 4-to-1 ratio. People's savings were forcibly converted from dollars to pesos using the old ratio. The savings of the people of Argentina were wiped out.
Historically, the Argentina example is much more common when capital controls are imposed (see Thailand 1997). That is why they are so feared.

What does this have to do with America?

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Spain recently voiced interest in selling dollar denominated bonds. They are only the latest country to enter this market. Portugal, Russia, and Germany have already done so.
While there are a lot of reasons given for this trend, one thing is for certain - the only way it makes economic sense to sell bonds denominated in another currency is if you expect that currency to decline in the future. Otherwise you will end up paying a far higher price.

Two days before the HIRE act was passed, and the same day that Portugal sold its dollar-denominated bonds, Moody's released a report saying that America's AAA rating was in danger.

A downgrade would affect more than American pride. The bigger risk would be to the country’s ability to keep borrowing money on extremely favorable terms, and therefore to keep spending more money than it takes in from tax revenue.

Historically, Moody's is not on the cutting edge for these things. Generally they only make these announcements after everyone in the market has already figured it out and priced it in.
Another factor that must be considered is that this week marks the end of the Federal Reserve's program of buying $1.25 Trillion worth of mortgage-backed securities. Like Moody's warning, the end of this program is expected to cause interest rates to rise significantly.

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It appears that the major players in the world's currencies are betting that America's current low interest rates and currency strength are about to expire. In anticipation, the federal government is preparing to prevent any potential flight out of the dollar.
Someone will lose from this arrangement, and that someone is anyone with dollars in their pockets.

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Comments

exemption

(2) Any international organization or any wholly owned agency or agent instrumentality thereof;

Am I missing something but doesn't that right there imply MNCs can go ahead and move money around the globe, no problem and avoid U.S. taxes?

i.e. this isn't the "anti-offshore outsourcing" tax as claimed but does seem to be against individuals as you are pointing out?

It's more offshore banking, finance, stashing and seemingly against individuals, has nothing to do with even stopping the manipulation of national tax codes, which corporations do by parking a lot of profits offshore and also reinvest offshore (ship jobs offshore).

I'm looking at the exemptions listed on the Zero Hedge article.

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Re: exemptions

You are right. Central Banks and the politically connected will be exempt from this new law.
I didn't bother mentioning this because it's almost implied anymore.

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ETFs

I am assuming that if one wanted to invest in foreign currency ETFs, whoever is actually running such an ETF would have to pay this 30% tax and pass it onto shareholders of the ETF, thereby making such ETFs a prohibitively sucky investment. Is this correct?

miasmo.com

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Collectibles

It should be noted that such ETF's as GLD already pay prohibitive tax levels on profits. The reason is because the IRS doesn't consider gold to be an actual "investment" (15% on capital gains). It taxes gold as a "collectible", which is around 30%.

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More like an tax on individuals moving out of the country

It appears as if Trusts would be exempted as well, a financial tool used for international offshoring of funds.

It would seem more like legislation for taxing individuals who plan to vacate the USA.

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h.r. 2847

Here is the actual bill here and ZeroHedge uploaded the final PDF here.

I scanned through it once and it's fairly complex, beyond what is quoted, but it still does appear to boil down to individuals. I found a host of "financial advisers" and "tax professionals" who haven't figured it out yet.

That said I find it disgusting that they exempted corporations who are the very ones moving funds around the globe for tax avoidance purposes.

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this post is slowly but surely being picked up on

As your friendly neighborhood admin, I see the web stats and I'm seeing this piece being picked up on.

Very good call out, I sure didn't read this and over and over again we get these 2,000+ page bills precisely so they can bury stuff which if scrutinized will outrage people.

We almost need a gang of 1000, each taking a few pages of each bill and studying them and writing up what we find. I've done more than a few and just one bill is a huge 2 day job really (and I'm not an attorney, if we had some attorneys working on this it would go much faster).

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It's not enforceable

The US does not have the power to force foreign banks to comply. OK, perhaps UBS and other International Banks that have a US presence can be coerced into compliance. These banks will (and already have) simply not do business with US citizens.

In a couple of years the dollar won't be worth the paper it is printed on so why take the liability?

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this post has gone viral

Way to go Midtowng. This post is viral. All EPers, this post represents something really important for all of us to attempt to do and that's read legislation. Every damn time Congress passes something, you can bet there is some sort of clause, loophole or something that slides by, hidden under legislative legalize. If we can read the bills and get others to join in on reading the bills, we might be able to catch more of this stuff. Sometimes you don't find out about the loopholes until a good 5 years has passed since the bill was put into law.

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Not capital control, but control of tax cheats

You can still send as much money as you desire overseas, you just can't sent it to a BANK who won't report the transaction.

I guess, in reply to those who are afraid there is some hidden goal here, I'd ask "what alternate method would YOU propose to fix the problem of hidden Swiss accounts?". These cost tens of billions of tax revenue/year.

I'll note you've been required to report any foreign accounts over 10K (if memory serves), yearly, for at least the 10 years of so I've had one. Problem was, since the Swiss (and others) guaranteed you they wouldn't tell, you could cheat if you wanted. Hence this new reg.

So, zero difference if you were already law-abiding. Again, you can send as much as you like, as long as, if you're sending it to a bank, that bank agrees to report US holdings. If not, and the amount is over 50K, Uncle Sam withholds 30%.

Here's the KPMG breakdown on the new regs:

• Foreign account tax compliance measures, including:
• the imposition of 30-percent withholding requirements on certain payments made to foreign financial institutions unless those institutions agree to adhere to certain reporting requirements for U.S. account holders;
• the imposition of 30-percent withholding requirements on certain payments made to non-financial foreign entities unless those entities comply with certain reporting requirements as to U.S. owners;
• the repeal of preferred treatment for foreign-targeted bearer bonds;
• a requirement that individuals holding more than $50,000 in reportable foreign assets report information about such assets on their U.S. tax returns, and a penalty of up to $50,000 for failure to so report;
• penalties of 40 percent for under-payments attributable to undisclosed foreign financial assets;
• a presumption that where a U.S. person transfers property to a foreign trust, the trust has a U.S. beneficiary;

http://us.kpmg.com/microsite/tax/ies/2010_Flash_Alerts/fa10-066.pdf

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Money overseas, but not in a bank.

As I understand this new law, only dollars (FRNs) sent to overseas banks are subject. FRNs sent to an entity such as goldmoney.com is not subject to the law, as it is not a bank. Is this correct?

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Capital controls

As commented by pulpcutter this new reg seems a lightening of the established $10000 regulation, ie it increases the unreported amount one can hold in a foreign bank without being penalised for non reporting.
Or am I too optimistic?

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$10k+ reporting threshold

Seems 1 must still report any interest in overseas
accounts at $10k+.
But if 1 sends funds to a bank that does not report
details (most will), then if over $50k, 30% will be held back.

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Non=bank accounts included

0 hedge,32810, etc comments say experts not clear yet.
But new rules seem to include all accounts
including with 'non financial entities."
But what about antiques, houses, held overseas
directly owned (with no account except to pay overseas
taxes on houses)?

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IMF suggests capital controls

It's interesting to see how much has changed since the 1990's and free market fundamentalism.

(Bloomberg) -- The International Monetary Fund said regulators should consider imposing capital surcharges to discourage financial institutions from evolving in ways that threaten the stability of financial markets.
Regulators may find it necessary to weigh “direct preemptive measures,” including constraining the size of certain activities to limit the emergence of “systemically important” firms, the Washington-based IMF said today in its bi-annual Global Financial Stability Report.

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capital controls

I think we seriously need some corporate capital controls and frankly this is one area I need to personally go research/learn more on precisely why Financial institutions pushed things like the China PNTR....from what I can tell, they make huge loans in EEs (emerging economies) and get a series of tax breaks plus incentives to do so and also almost push EEs as a marketing thing to get very high returns. Kind of the Thailand bubble deal. But I don't know the specifics.

I just know they are pushing pushing China, India, Brazil, even Vietnam as an investment and instead of building plants and facilities in the U.S. Then, there is the currency swap situation like Greece and Goldman Sachs, these lease as loans deals and so on.

Then, there is manipulation of the international tax codes and a motivation to offshore outsource. IBM literally tried to patent their "find the cheapest country" offshore outsourcing algorithm, which was calculating all of this out.

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hey midtowng, this post is #3 in links into the site!

Capital Controls and what you should know. I'm in de Google webmaster tools because I'm doing "some stuff" trying to get things straightened out as I tackle the upgrades...

So anywho they have different analyzes and I saw this is #3 and it's not that old! People clearly are interested in this information.

What I was surprised about, because it seems no one comments, on all of my little EI analysis, where i graph out and dig around in the gov. data and stats....those are being linked all over hell too.

That's good, sometimes is hard to get any feedback thinking it's just comments and they don't comment but they sure are using the material on their own sites, including MSM.

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