Mountain Vision
March 21, 2012
Mountain Vision
THE FATCA PARTNER FRAMEWORK - THE FOUNDATION FOR AUTOMATIC INFORMATION EXCHANGE IS FIRMLY PLANTED

"A great wave of oppressive tyranny isn´t going to strike, but rather a slow seepage of oppressive laws and regulations from within will sink the American dream of liberty."
~ George Baumler (Libertarian, Blogger ‘Baumler´s Rant´)

Dear Mountaineers,

Across the world, but particularly in OECD countries, a growing number of regulations are being enacted at a continuously accelerating pace. Ultimately, this trend leads to a convoluted system of barriers to your personal movement and the movement of your wealth.

America has certainly been at the forefront in this regard. On March 18th, 2010, as part of the HIRE Act and as a politically safe "revenue offset for the tax being waived under the HIRE Act incentives", the US Administration enacted the Foreign Account Tax Compliance Act (FATCA). For the first time, we informed you about FATCA in the Mountain Vision Update of April 8th, 2010.

We warned you back then of our concerns that this law should not only concern Americans and that it might well be the beginning of a very dangerous course - a course risky for your wealth and your freedom.

Instead of repairing fiscal and monetary problems by addressing their root causes, an internationally concerted and politically opportune crusade against ‘tax havens´, ‘tax evaders´ and ‘offshore investment strategies´ was launched. What might be considered the enforcement of law has long become a game of capital exchange controls, protectionism and citizen intimidation.

Taking FATCA to the Next Level
Citizen transparency, with everything you do being passed under the government´s microscope, appears to be the common objective across indebted nations. In this context, on February 8th, 2012, the IRS released the latest proposed FATCA regulations. On the same day, the US Treasury released a joint statement with the governments of the UK, France, Germany, Italy, and Spain announcing an inter-governmental framework for FATCA implementation and tax compliance.

This latest development has created a lot of attention, and it should alert you too - not because you are a tax evader, but because you may value your rights to property, privacy and freedom. It should concern you because you may have to protect yourself from not only the unforeseen, but also rather the foreseeable, consequences of sovereign de facto bankruptcy.

Our Attempt to Help and Clarify
Much has been reported on the topic of FATCA over the past several weeks. Some of our Mountaineers have asked us for clarification - in an easy to understand language. Regulations written in big government language are by design never meant to be clear or easy to understand. Nevertheless, we would like to provide some assistance here. Bernarda Pesantez, in the article below, has prepared a concise and yet relatively (or sensibly) comprehensive summary.

I strongly recommend you take the time to read this thoroughly. The implications are potentially broad in scope and scale. FATCA has been taken to the next level and is no longer just a US matter. Via the proposed inter-governmental Partner Framework, the foundation for an international system of automatic information exchange has been built.

Unfortunately, I have to tell you that I expect A LOT MORE of the kind to be headed our way. The FATCA Partner ‘innovation´ already enjoys a growing following amongst politicians in the European Union and, obviously, amongst the ranks of OECD bureaucrats.

Sincerely,
Your "Swiss Mountain Guide"

Frank R. Suess
UNDERSTANDING THE IMPACT OF THE NEW PROPOSED FATCA REGULATIONS
      By Bernarda Pesantez, Director of Advisory Services, BFI

On February 8th, 2012, the IRS released the latest and long-awaited proposed regulations. On the same day, the US Treasury released a joint statement with the governments of the UK, France, Germany, Italy, and Spain announcing an intergovernmental framework for FATCA implementation and tax compliance.

Below, please find a summary of the key aspects of the new proposed regulations, the joint statement, plus a few comments on the potential implications.

FATCA in a Nutshell
Under FATCA, foreign entities are classified in two groups: (i) foreign financial institutions ("FFIs"), and (ii) non-financial foreign entities ("NFFEs"). A 30% withholding tax is imposed on "withholdable payments" to FFIs, unless the FFI enters into an agreement with the IRS to directly report information about financial accounts held by U.S. taxpayers, or foreign entities in which U.S. taxpayers hold a substantial ownership interest. The withholding tax is implemented via a group of enlisted U.S. ‘withholding agents´; in general, a select group of large commercial banks in America.

The rule may also affect entities and accounts that are held by foreign taxpayers (i.e. non-U.S. taxpayers) if they receive US sourced income or hold US investments (stocks or securities).

A "withholdable payment" can be (i) passive investment income from sources within the US, such as dividends, interest, rents, etc; and (ii) any gross proceeds from the sale of any property that could produce passive investment income from sources within the US. By "gross proceeds" it is understood that 30% will be imposed on the entire proceeds of the sale, even if such property was sold at a loss.

The Intergovernmental "FATCA Partner Framework"
Probably the most prominent note on the proposed regulations was a joint statement issued by the US Treasury together with the governments of the UK, France, Germany, Italy and Spain, in which they as entire countries enter into a "FATCA Partner" agreement. A copy of the joint statement is attached.

Under this agreement, instead of information collection and delivery being arranged between individual FFIs and the IRS, the information gathering and sharing will be effectuated at the national level. In other words, governments who enter the intergovernmental system - the so-called "FATCA Partners" - will domestically collect all client information from the financial institutions in their jurisdictions and automatically forward it to the IRS.

In exchange, FFI´s in those jurisdictions will have a lower burden for implementation of FATCA. Furthermore, the U.S. has promised to reciprocate by automatically sending their FATCA Partners the information of accounts of FATCA Partner taxpayers held with financial institutions in the US.

A World of ‘Good FFIs´ and ‘Bad FFIs´...
The trend seems to foreshadow that in order to avoid withholding taxes, FFIs will become a Participating Foreign Financial Institution (PFFI) either by (1) individually signing the agreement with the IRS, or (2) being domiciled in a jurisdiction that becomes a FATCA Partner.

Accounts held with a PFFI should (subject to audit and operational error risks) be able to avoid the 30% withholding tax. To be exempt from withholding, a PFFI must commit to a number of rules. In particular, a PFFI will be obliged to:
obtain information on all accountholders to determine which accounts are US accounts,
report information on US accounts,
comply with required due diligence/verification procedures and certify completion of such procedures,

comply with IRS information requests,

attempt to obtain a privacy waiver if applicable bank secrecy or other information disclosure limitations exist, or close the US account, and
deduct and withhold a 30% tax on any pass-through payments to ‘recalcitrant accountholders´ (e.g. those not willing to give up client confidentiality) or to other FFI´s that are not PFFI´s.

Due Diligence Requirements of PFFIs
Pre-existing individual accounts: Accounts with values of $50,000 or less ($250,000 for certain cash value insurance or annuity contracts) shall be exempt from due diligence review. Accounts with a balance or value in excess of these amounts but less than $1 million will be subject only to review of electronically searchable records for indicia of US ownership, with further due diligence required if US indicia is found.
For accounts with balances that exceed $1 Million (an increase from the previously $500,000 threshold) will be required to undergo manual review of paper records for US indicia. It also requires inquiries with the relationship manager responsible for the account.
New accounts: For new accounts, PFFIs will be required to review all information at the account opening in order to look for ‘US indicia´. If any is found, the FFI must obtain additional documentation or treat the account as a "recalcitrant account".

Implementation Schedule of Reporting Obligations
2014-2015: FFIs will be required to report the name, address, taxpayer identification number (TIN) and account information of US accountholders for 2013 and 2014.
2016: FFI´s will be required to report income information on US accounts for 2015 in addition to the above listed requirements.
2017: Beginning with the fiscal year of 2016, full reporting will be required, including gross proceeds from broker transactions.
Annual reporting deadline: For 2014, 30th of September; and starting in 2015, 31st of March.

Trusts Not Exempted
Trusts have probably received the ‘worst´ news with the newly proposed regulations. The ‘small trust´ exemption of the original FATCA proposals has been removed. The regulations have made clear that professional trustee companies and foreign trusts are considered FFIs. Furthermore, the foreign companies held within a trust will also qualify as FFIs.

The proposed regulations do, however, afford ‘delegation´ of FATCA requirements. A foreign trust may avoid the need to enter into a separate agreement with the IRS if they qualify as "owner documented" FFI´s and if they hold their accounts with a withholding agent or PFFI that agrees to perform the reporting on the trust´s behalf.

Exception for "Grandfathered Obligations"
The proposed regulations state that payments made with respect to "grandfathered obligations" are not subject to FATCA.

"Obligations" include any legal agreement that produces or could produce withholdable payments other than any instrument treated as equity for US tax purposes, or any legal agreement that lacks a definitive expiration term; AND that was in place prior to 1st of January, 2013, and not materially modified thereafter.

Under these grandfathered obligations it is understood that, for instance, foreign insurance policies issued before January 1st, 2013, would be and should remain grandfathered in, as long as they are not materially modified thereafter.

Insurance Companies
Insurance companies have been confirmed to be FFIs. The FATCA definition for "financial account" includes annuity contracts and insurance contracts with cash value. At the same time it excludes contracts providing pure insurance protection, term life insurance contracts and contracts held by a transferee under transfer for value scenarios.

An insurance or annuity contract is treated as held by the policyholder if such person can access the cash value or change the beneficiary. Otherwise, such contracts will be treated as ‘held by the beneficiary´.

Insurance policies and annuity contracts issued before January 1st of 2013 fall under the "Grandfathered Obligations" as mentioned above. This is a concession to insurance companies who, contrary to banks, cannot simply send clients away who are opposed to waiving the secrecy rights.

What is next?
Additional guidance is needed in a number of areas such as how to prevent US financial institutions from serving as "blockers" with respect to foreign pass-through payments; further clarification on pass-through payments altogether; methods to determine the amount of gross proceeds allocable to partners or beneficiaries of flow-through entities; issues regarding coordination with other US withholdings tax rules and the QI regime; etc.

The IRS itself has still quite some work ahead, including review of comments received on these proposed regulations; drafting of the actual FFI Agreement; and issue final regulations.

Lastly, the intergovernmental approach will need to be observed closely. The FATCA Partner approach is already being considered by some offshore financial centers and could prove appealing for other countries within the EU and the OECD. However, the lingering questions being discussed and that remain open at this point pertain to the consequences and potential discriminations faced by those countries who decide not to participate in the Partner approach.

NEWS BRIEFS

And, By the Way, FATCA is Not the End of It!
And yet we need to inform you of more bills and regulations that will, ultimately, install implicit exchange controls for Americans, and those who do business with Americans. On March 8th, 2012, an amendment was added to the Transportation Projects and Programs bill that would block access to the U.S. financial system of foreign financial institutions that are deemed as "impeding United States tax enforcement."

Under the current flood of regulations, this amendment passed largely unnoticed. If this does not move American families with wealth to protect themselves, send part of their wealth overseas and implement a solid and properly devised multi-jurisdictional plan, it is questionable what will. If this bill passes, the Amendment would give the Secretary of the Treasury the power to determine which foreign jurisdictions and foreign banks are considered to be impeding the enforcement of U.S. tax laws. The Secretary of the Treasury could then act to impose conditions on or completely prohibit such foreign jurisdictions´ or banks´ access to certain financial transactions in the United States.

Among other conditions and prohibitions that may be imposed under the Amendment, U.S. banks would be prohibited from accepting wire transfers from foreign jurisdictions and banks that are determined to be aiding tax evasion, and debit and credit cards issued by such foreign banks would not be honored in the United States.
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Volcker: A Little Extra Inflation Would Backfire
The U.S. economy is recovering "pretty well" and trying to juice it up by allowing a little extra inflation would be disastrous, said Paul Volcker, the former Federal Reserve chairman known for successfully reining in double-digit inflation. "I think that is kind of a doomsday scenario," Volcker told an economic summit when asked if the Fed should foster higher inflation to stimulate faster growth.

Higher inflation would backfire by causing interest rates to rise. "You are not going to get any stimulus and you are going to make it much harder to restore price stability," Volcker told the Atlantic magazine conference.
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VIX Bets at Record High as Volatility Sinks to Five-Year Low
Daily price changes in the Standard & Poor´s 500 Index, as measured by the volatility index VIX, are decreasing the most that they have in eight decades, shrinking to the smallest since 1995 when investors abandoned stocks just before the biggest rally ever.

The benchmark gauge for U.S. equities has gained or lost an average 0.46 percent a day this year, compared with 1.04 percent in 2011, the biggest reduction since 1934, during the Great Depression, according to data compiled by Bloomberg. Swings are diminishing after valuations fell 40 percent and correlation among shares weakened the most in at least three decades.

At the same time, trading on the New York Stock Exchange has slumped to the lowest rate in 13 years, spurring concern about the biggest first-quarter rally since 1998. Bulls say the decline in trading and daily swings signal fear is dissipating after one of the most volatile years on record. Bears say falling volume is a warning that gains will reverse should economic reports and earnings fail to match expectations.
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No False Sense of Economic Security!
IMF Managing Director Christine Lagarde urged policy makers to be vigilant as oil prices, debt levels, and the risk of slowing growth in emerging markets threatened global economic stability. "Optimism should not give us a sense of comfort or lull us into a false sense of security," Lagarde said Monday in a speech in Beijing at the China Development Forum.

Greece has just completed the world´s largest sovereign-debt overhaul and agreed to deeper spending cuts to obtain new funds as it faces a fifth year of recession. "The measures that were proposed are ambitious and it will be important to focus on steady rigorous implementation of the situation on the ground," Lagarde said.

Brent crude oil futures have risen 18% this year on concern Iran´s stand-off with the West over its nuclear program will escalate into military action in a region that holds 54 percent of global petroleum reserves. Increased gasoline prices threaten to slow consumer spending in the U.S., tempering the recovery in the world´s largest economy. Oil prices are "becoming a threat to global growth," Lagarde said. "I think it´s a major threat."
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Yes, High Tax Rates Don´t Mean High Tax Revenue
Curiously, many economists who claim to admire the "free market" are always devising ways for governments to obtain more tax revenue. Their interest may lie in keeping tax rates low but for some reason these confused defenders of capitalism wish politicians had more money to throw at favored interests. The goal of lowering taxes should be to decrease the amount of tax revenue collected, not increase it.

Those who assume higher tax rates will bring in more income take production for granted and view it solely as wealth to be pilfered. These so-called forward thinkers still infatuated with the 1950s have bastardized the word ‘progressive´ for their preferred policies, taken to their full extent, would take man back to the days of serfdom.
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The Perils of Money Printing´s Unintended Consequences
Marc Faber does not mince words. He believes that the money printing policies of the Federal Reserve and its sister central banks around the globe have put the world´s currencies on an inexorable, accelerating and inflationary down slope. Says Dr. Faber: "Once you choose that path, you´re in it and you have to print more money..."

The dangers of money printing are many, in his eyes. But in particular, he worries about the unintended consequences it subjects the populace to. Beyond currency devaluation, it creates malinvestment that leads to asset bubbles that wreak havoc when they burst. And even more nefarious, money printing disproportionately punishes the lower classes, resulting in volatile social and political tensions.
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President Obama Signs Executive Order Giving Him Control of All US Resources in Times of War or Emergency - or Peace!?!?
On March 16th, President Obama signed a new Executive Order which expands upon a prior order issued in 1950 for Disaster Preparedness, and gives the office of the President complete control over all the resources in the United States in times of war or emergency.

The National Defense Resources Preparedness order gives the Executive Branch the power to control and allocate energy, production, transportation, food, and even water resources by decree under the auspices of national defense and national security. The order is not limited to wartime implementation, as one of the order´s functions includes the command and control of resources in peacetime determinations.
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Western Double Standards - Ranging from Embarrassment to Harassment



© Copyright 2012, by BFI Capital Group AG, Bahnhofstrasse 29, 6300 Zug, Switzerland, website: www.bficapital.com. The MOUNTAIN VISION UPDATE is published by BFI Capital Group (‘BFI’). Quotation is allowed if credit is given. Although every care has been taken in the preparation of Mountain Vision, BFI does not guarantee and cannot be held responsible for the accuracy of any statistic, statement or representation made. We recommend that you consult qualified professional advisors to determine the applicability of this information and opinion. The publisher is not a registered investment advisor. Readers should not view MOUNTAIN VISION as offering personalized legal or investment advice.
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