It's Official - America Now Enforces Capital Controls

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John99's picture
John99
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It's Official - America Now Enforces Capital Controls

The Zerohedge article does a pretty good job of explaining this new law. A must-read for US residents with accounts abroad.

It's Official - America Now Enforces Capital Controls

Tyler Durden's picture

Submitted by Tyler Durden on 03/28/2010 20:27 +0100

It couldn't have happened to a nicer country. On March 18, with very little pomp and circumstance, president Obama passed the most recent stimulus act, the $17.5 billion Hiring Incentives to Restore Employment Act (H.R. 2487), brilliantly goalseeked by the administration's millionaire cronies to abbreviate as HIRE. As it was merely the latest in an endless stream of acts destined to expand the government payroll to infinity, nobody cared about it, or actually read it. Because if anyone had read it, the act would have been known as the Capital Controls Act, as one of the lesser, but infinitely more important provisions on page 27, known as Offset Provisions - Subtitle A—Foreign Account Tax Compliance, institutes just that. In brief, the Provision requires that foreign banks not only withhold 30% of all outgoing capital flows (likely remitting the collection promptly back to the US Treasury) but also disclose the full details of non-exempt account-holders to the US and the IRS. And should this provision be deemed illegal by a given foreign nation's domestic laws (think Switzerland), well the foreign financial institution is required to close the account. It's the law. If you thought you could move your capital to the non-sequestration safety of non-US financial institutions, sorry you lose - the law now says so. Capital Controls are now here and are now fully enforced by the law.

Let's parse through the just passed law, which has been mentioned by exactly zero mainstream media outlets.

Here is the default new state of capital outflows:

(a) IN GENERAL.—The Internal Revenue Code of 1986 is amended by inserting after chapter 3 the following new chapter:

‘‘CHAPTER 4—TAXES TO ENFORCE REPORTING ON CERTAIN FOREIGN ACCOUNTS
‘‘Sec. 1471. Withholdable payments to foreign financial institutions.
‘‘Sec. 1472. Withholdable payments to other foreign entities.
‘‘Sec. 1473. Definitions.
‘‘Sec. 1474. Special rules.
‘‘SEC. 1471. WITHHOLDABLE PAYMENTS TO FOREIGN FINANCIAL INSTITUTIONS.

‘‘(a) IN GENERAL.—In the case of any withholdable payment to a foreign financial institution which does not meet the requirements of subsection (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.

Clarifying who this law applies to:

‘‘(C) in the case of any United States account maintained by such institution, to report on an annual basis the information described in subsection (c) with respect to such account,
‘‘(D) to deduct and withhold a tax equal to 30 percent of—

‘‘(i) any passthru payment which is made by such institution to a recalcitrant account holder or another foreign financial institution which does not meet the requirements of this subsection, and

‘‘(ii) in the case of any passthru payment which is made by such institution to a foreign financial institution which has in effect an election under paragraph (3) with respect to such payment, so much of such payment as is allocable to accounts held by recalcitrant account holders or foreign financial institutions which do not meet the requirements of this subsection.

What happens if this brand new law impinges and/or is in blatant contradiction with existing foreign laws?

‘‘(F) in any case in which any foreign law would (but for a waiver described in clause (i)) prevent the reporting of any information referred to in this subsection or subsection (c) with respect to any United States account maintained by such institution—

‘‘(i) to attempt to obtain a valid and effective waiver of such law from each holder of such account, and
‘‘(ii) if a waiver described in clause (i) is not obtained from each such holder within a reasonable period of time, to close such account.

Not only are capital flows now to be overseen and controlled by the government and the IRS, but holders of foreign accounts can kiss any semblance of privacy goodbye:

‘‘(c) INFORMATION REQUIRED TO BE REPORTED ON UNITED STATES ACCOUNTS.—
‘‘(1) IN GENERAL.—The agreement described in subsection (b) shall require the foreign financial institution to report the following with respect to each United States account maintained by such institution:
‘‘(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).
‘‘(D) Except to the extent provided by the Secretary, the gross receipts and gross withdrawals or payments from the account (determined for such period and in such manner as the Secretary may provide)
.

The only exemption to the rule? If you hold the meager sum of $50,000 or less in foreign accounts.

‘‘(B) EXCEPTION FOR CERTAIN ACCOUNTS HELD BY INDIVIDUALS.—Unless the foreign financial institution elects to not have this subparagraph apply, such term shall not include any depository account maintained by such financial institution if—
‘‘(i) each holder of such account is a natural person,and
‘‘(ii) with respect to each holder of such account, the aggregate value of all depository accounts held (in whole or in part) by such holder and maintained by the same financial institution which maintains such account does not exceed $50,000.

And, while we are on the topic of definitions, here is how "financial account" is defined by the US:

‘‘(2) FINANCIAL ACCOUNT.—Except as otherwise provided by the Secretary, the term ‘financial account’ means, with respect to any financial institution—
‘‘(A) any depository account maintained by such financial institution,
‘‘(B) any custodial account maintained by such financial institution, and
‘‘(C) any equity or debt interest in such financial institution (other than interests which are regularly traded on an established securities market). Any equity or debt interest which constitutes a financial account under subparagraph (C) with respect to any financial institution shall be treated for purposes of this section as maintained by such financial institution.

In case you find you do not like to be subject to capital controls, you are now deemed a "Recalcitrant Account Holder."

‘‘(6) RECALCITRANT ACCOUNT HOLDER.—The term ‘recalcitrant account holder’ means any account holder which—
‘‘(A) fails to comply with reasonable requests for the information referred to in subsection (b)(1)(A) or (c)(1)(A),
or ‘‘(B) fails to provide a waiver described in subsection (b)(1)(F) upon request.

But guess what - if you are a foreign Central Bank, or if the Secretary determined that you are "a low risk for tax evasion" (unlike the Secretary himself) you still can do whatever the hell you want:

‘‘(f) EXCEPTION FOR CERTAIN PAYMENTS.—Subsection (a) shall not apply to any payment to the extent that the beneficial owner
of such payment is—
‘‘(1) any foreign government, any political subdivision of a foreign government, or any wholly owned agency or instrumentality of any one or more of the foregoing,
‘‘(2) any international organization or any wholly owned agency or instrumentality thereof,
‘‘(3) any foreign central bank of issue, or
‘‘(4) any other class of persons identified by the Secretary for purposes of this subsection as posing a low risk of tax evasion.

One thing we are confused about is whether this law is a preamble, or already incorporates, the flow of non-cash assets, such as commodities, and, thus, gold. If an account transfers, via physical or paper delivery, gold from a domestic account to a foreign one, we are not sure if the language deems this a 30% taxable transaction, although preliminary discussions with lawyers indicates this is likely the case.

And so the noose on capital mobility tightens, as very soon the only option US citizens have when it comes to investing their money, will be in government mandated retirement annuities, which will likely be the next step in the capital control escalation, which will culminate with every single free dollar required to be reinvested into the US, likely in the form of purchasing US Treasury emissions such as Treasuries, TIPS and other worthless pieces of paper. 

Congratulations bankrupt America - you are now one step closer to a thoroughly non-free market.

http://www.zerohedge.com/article/its-official-america-now-enforces-capital-controls

nickbert's picture
nickbert
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Re: It's Official - America Now Enforces Capital Controls

Great googly-moogly......

I expected something like this was inevitable but I didn't think it would start quite this SOON.  Granted this does not prevent you from moving capital to foreign locations, but I expect it will eventually make it much HARDER.  Thinking of it from the foreign bank or investment firm's point of view, wouldn't this discourage many of them from doing business with US persons in general?  Maybe the truly wealthy will not be terribly affected (having lots of money opens doors), but the average American who's simply saved up a good-sized nest egg over his/her lifetime may find it exceedingly hard to find places outside the US to put their money.  And as much as I hate to indulge in slippery-slope thinking, given the covetous and desperate nature of the US gov't it's hard to imagine that this will stop here.  It's probably just setting the stage to more easily accomodate future capital controls and 'special' taxation on foreign investments.

- Nickbert

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Erik T.
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Re: It's Official - America Now Enforces Capital Controls
John99 wrote:

The Zerohedge article does a pretty good job of explaining this new law. A must-read for US residents with accounts abroad.

I'd have to strongly disagree with you John.

I really like ZeroHedge, but Tyler's sarcastic, alarmist, exaggerated writing style gets worse day by day. This is indeed an important development, but it has nothing to do with Capital Controls. That's just more Tyler Durden fear mongering. See the comments on ZH for some similar but more elaborate critique.

Tyler needs to grow up and demonstrate some professionalism in his writing before he looses his audience.

Erik

 

 

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Re: It's Official - America Now Enforces Capital Controls

I agree with Erik.  Let's not jump to conclusions.   Here is an excerpt from the statute regarding the effective date of the law which was not mentioned in  the Zerohedge article:

"SEC. 1474  SPECIAL RULES

……

(d) EFFECTIVE DATE.—

(1) IN GENERAL.—Except as otherwise provided in this subsection,

the amendments made by this section shall apply to

payments made after December 31, 2012.

(2) GRANDFATHERED TREATMENT OF OUTSTANDING OBLIGATIONS.—

The amendments made by this section shall not require

any amount to be deducted or withheld from any payment

under any obligation outstanding on the date which is 2 years

after the date of the enactment of this Act or from the gross

proceeds from any disposition of such an obligation."

Nevertheless, such issues require our continuing vigilance.

 

John99's picture
John99
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Re: It's Official - America Now Enforces Capital Controls

hucklejohn, what link is that at?

hucklejohn's picture
hucklejohn
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Re: It's Official - America Now Enforces Capital Controls

John:  Go to the Zerohedge article, scroll down, click on "Full HIRE Act text" or open up the full text of the statute in "Scribd." 

Morpheus's picture
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Re: It's Official - America Now Enforces Capital Controls

I agree with Erik in that Tyler is too alarmist at times, but his nose to the metal's market is very keen. 

I have not read this yet so I plead ignorance. 

huckle. What does the date of enforcement have to do with whether this is capital controls or not? I'm puzzled. 

 

John99's picture
John99
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Re: It's Official - America Now Enforces Capital Controls

Thanks for the link, hucklejohn.

Erik and Morpheus, you find Tyler alarmist or extreme??? Guess that's what makes the world go round. I find him a cross between, say, 20% George Carlin and 80% Bill Hicks. Helps me smile at all this excritment :-)

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hucklejohn
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Re: It's Official - America Now Enforces Capital Controls

Hi Morpheus, always appreciate your thoughtful posts.  The purpose of my post was merely to add that, whether you wish to characterize the law as capital controls or not, the law will not go into effect until the end of 2012.  The effective date of the law was not discussed in the Zerohedge article. 

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Erik T.
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Re: It's Official - America Now Enforces Capital Controls

John, to each his own I guess. I really liked ZH at first but the more I read Tyler's writing the harder it becomes to sift the facts out of the rhetoric.

I almost had a coronary when I read that headline, since I still have most of my assets in U.S. markets. Perhaps that's why I found it so offensive that Tyler is irresponsibly putting misleading labels on stories. This isn't the only example.

This law has absolutely nothing to do with Capital Controls. What this law says is that if U.S. citizens who own offshore financial accounts fail to comply with existing reporting requirements that have been in place for years, then the bank has to impose backup withholding rules. That has absolutely nothing to do with Capital Controls, a term which refers to a country either prohibiting flow of money across its borders or taxing same. Under this new rule, U.S. citizens still have the same exact rights to expatriate funds that they had before it passed, but now when they break the previously existing rules, there is a new remedy for the gov't. It does not prohibit U.S. citizens or foreigners from moving money into or out of the United States, nor does it tax such transactions. Thus it has nothing to do with Capital Controls.

Here's a level-headed analysis of what this is really about: http://nestmannblog.sovereignsociety.com/2010/03/congress-enacts-obamas-.... Note also that Mark wrote about this the day it was signed, whereas Tyler is acting like he found some earthshattering news here more than a week later.

Erik

 

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Morpheus
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Re: It's Official - America Now Enforces Capital Controls
hucklejohn wrote:

Hi Morpheus, always appreciate your thoughtful posts.  The purpose of my post was merely to add that, whether you wish to characterize the law as capital controls or not, the law will not go into effect until the end of 2012.  The effective date of the law was not discussed in the Zerohedge article. 

K. Got it. Still haven't read it yet. :)

wildjo's picture
wildjo
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Re: It's Official - America Now Enforces Capital Controls

I agree with Erik's well-stated analysis.

This is simply another tug by the U.S.  in the ongoing tug-of-war with UBS over off-shore accounts made with the intent to evade taxes.

Plus, it only applies to very large accounts (those with deposits in excess of $50k at the same institution).  You could shift an unlimited amount of money overseas, as long as each account was at a different institution and had less than $50k.  Pretty lame capital control, if you ask me.

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