Congress and the IRS Tell 500,000 Foreign Financial Institutions to u201CGet Lostu201D

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Back in March,
President Obama signed the largest-ever expansion of offshore disclosure
requirements in U.S. history.

These provisions
were neatly tucked into the “HIRE Act,” a bill designed
to provide incentives for businesses to hire new employees. I wrote
about it here
and here.

For instance,
once the offshore reporting provisions of the HIRE Act come into
effect on Jan. 1, 2011, a single investment in an offshore mutual
fund through a bank account held by an offshore LLC will require
that you file seven separate reporting forms. (I discussed this
and other provisions of the HIRE Act in my presentations last week
at The Sovereign Society’s Offshore Advantage conference in
Cabo San Lucas, Mexico.)

However, the
longer-term impact of the HIRE Act is even greater. The law imposes
a 30% withholding tax on certain types of U.S-source income and
gross sales proceeds to foreign financial institutions (FFIs) and
many non-financial foreign entities (NFFE). (Broadly speaking, a
NFFE is any non-U.S. entity that is not a FFI.) The only way to
avoid the tax is for the FFI or a “withholding agent”
for the FNFE to enter into a broad-based information reporting agreement
with the IRS. These rules become effective in 2013.

If entering
into such an agreement violates foreign law…well, too bad.
For instance, the HIRE Act states that if a FFI refuses to enter
into an agreement with the IRS, it must close all accounts owned
by U.S. taxpayers. The definitions of a FFI and FNFE are so broad
that these provisions will affect more than 500,000 foreign companies.
By giving them this ultimatum, Congress and the IRS have, in effect,
told them to “get lost.”

The real question,
though, is whether U.S. citizens and permanent residents will even
be able to obtain offshore financial services after 2012. I think
they will, but it will be in a sanitized form offered primarily
by subsidiaries of offshore banks and brokers. Those subsidiaries
will deal only with U.S. persons. They may elect to be taxed and
regulated as a U.S. bank or securities broker. That means a reduced
menu of investment options and zero privacy, since the subsidiary
will be subject to most if not all U.S. laws and regulations.

Most offshore
banks and brokers will take the easy way out, though. They’ll
simply stop dealing with U.S. persons altogether, along with any
type of entity with a U.S. owner

I’ve wondered
if there might not be another way the offshore banks and brokers
might deal with these regulations. What would happen they withdrew
all their investments from the United States, closed their U.S.
dollar clearing accounts in New York, and simply stopped dealing
in dollars? In that event, it would be difficult for the IRS to
enforce the HIRE Act withholding provisions. The banks could then
deal with anyone they wanted to deal with, including U.S. persons,
but only outside the U.S. dollar.

When I broached
this idea in Cabo with some of my fellow speakers, they voiced skepticism.
However, the idea clearly intrigued them. The biggest criticism – to
which I don’t have an answer – is that any bank that took
these steps would quickly find itself on a Treasury blacklist. The
Treasury would simply announce that any FFI or FNFE that sent or
received funds from the blacklisted institution would itself be
blacklisted, or subject to other sanctions.

Of course,
this assumes that by 2013, the U.S. Treasury will still have the
financial and political clout that it does now. In a world where
U.S. financial and political clout is rapidly declining, that’s
hardly assured.

What do you
think of this idea? I’d
love to hear your comments!

November
15, 2010

Mark Nestmann is a journalist with more than 20
years of investigative experience and is a charter member of The
Sovereign Society's Council of Experts. He has authored over a dozen
books and many additional reports on wealth preservation, privacy
and offshore investing. Mark serves as president of his own international
consulting firm, The Nestmann Group, Ltd. The Nestmann Group provides
international wealth preservation services for high-net worth individuals.
Mark is an Associate Member of the American Bar Association (member
of subcommittee on Foreign Activities of U.S. Taxpayers, Committee
on Taxation) and member of the Society of Professional Journalists.
In 2005, he was awarded a Masters of Laws (LL.M) degree in international
tax law at the Vienna (Austria) University of Economics and Business
Administration.

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