Tags: Facta | Financial | Markets

The ‘FATCA Effect’ to Rock Financial Markets

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Monday, 27 Feb 2012 09:20 AM Current | Bio | Archive

History does repeat itself. Especially when it comes to tax.

The Tax Reform Act of 1986 gave us a great lesson in the infallibility of the Law of Unintended Consequences when it comes to tax legislation and regulations.

While widely praised, it led quickly to a major real estate crisis, the legalized looting by insiders through the RTC, and the destruction of the savings and loan industry.

Now comes more of the same courtesy of Congress and the Obama administration by the enactment of the Foreign Account Tax Compliance Act (aka FATCA).

The Law of Unintended Consequences is being proved right again.
Passed in 2010 as part of the Hiring Incentives To Restore Employment Act (another piece of Congressional fantasy legislation), FATCA is supposed to raise some $8.6 billion a year for ten years through taxing secrete foreign accounts.

Right now, that doesn't appear to be how this will actually go down.

What is really occurring?

The beginning of chaos among both the international and U.S. financial institutions, and the undermining of our already fragile investment markets.

The concept behind FATCA seems simple. Foreign secrete accounts by U.S. taxpayers and even some non-U.S. persons should be paying income tax.

The problem is that the process or procedure to make this happen is a disaster.

In order to make FATCA work, every foreign financial institution will need to gear up to put in place extraordinary complex compliance systems and agree to be subject to IRS liability.

Already, foreign institutions are dumping U.S. account holders and U.S. securities. They are cutting the ties that bind.

Now that some 400 pages of proposed tax regulations have been issued, the financial institutions are getting a real glimpse of what is coming. Very nasty stuff.

It is likely the foreign institutions will be spending some $300 billion or so just so the U.S. can collect, at best, $8.6 billion. What's more, the U.S. government cannot yet articulate what it is they are going to have to comply with.

Not many institutions are going to spend that kind of capital on compliance — spending that will not return a dime of income — just to help the U.S. government possibly collect some taxes.

And it seems that more than a few foreign banks, hedge funds, insurance companies, and a long list of others who make their living from servicing U.S people are not happy seeing their livelihood disappear.

It isn't just the foreign institutions that are being buried under this mass of governmental control by the U.S. tax authorities.

The U.S. financial institutions, investments funds, insurance companies and all the rest are going to be also required to put in these compliance systems.

Not just for the U.S. but because they will have to be compliant to the tax authorities of all foreign governments who enter into an intergovernmental agreement with the U.S.

Up to now, the United States has been the world's biggest tax haven and secrecy jurisdiction. Not good for the U.S. taxpayer,
but great for foreigners. All kinds of money just poured into the U.S.

The result of this intergovernmental agreement, so far with France, Germany, Italy, Spain, and the United Kingdom, is that U.S. financial institutions are going to have to report also. Something they have never been required to do before.

The U.S. wants information and enforcement on U.S. people abroad, and the foreign countries want information on their citizen's accounts in the U.S. Fair is fair.

Two things can be expected.

One, that without privacy protection, foreign investors in the U.S. will find it less desirable to invest in the U.S. That's bad for our already fragile and volatile securities and other investment markets.

Second, U.S. financial institutions will be required to spend billions of dollars on compliance which, like their foreign counterparts, will not return a dime of income. That's bad for our financial institutions which are struggling just to maintain enough capital to keep the doors open.

Nobody as yet has calculated the impact of the FATCA effect on both the U.S. and foreign financial markets. Investment winners will take notice now, investment losers will wait until it is too late.

Smart investors will want to start repositioning their financial and tax situation since clearly the FATCA Effect will rock the financial markets.

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2012-20-27
Monday, 27 Feb 2012 09:20 AM
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