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HIRE, FATCA, QFFI - BEWARE OF RAMPANT LAWS IN RESPONSE TO RAMPANT SPENDING
"Frank. When I think of America I always keep a pocket of optimism alive somewhere in my soul. To be honest, I think this bill [the Healthcare bill] is the straw that breaks the camel´s back. We are already technically insolvent, and yet keep inventing ways to spend money (and raise taxes). This Healthcare bill precedes a debt downgrade, massive inflation, and the demise of the dollar. What was likely to happen is now written in stone. Seeing what is ahead, I am now afraid."
~ a US ´Mountaineer´ and good friend
Dear Mountaineers,
My friend´s concerns in the quote above are a reflection of the concerns and fears many of you may be experiencing these days. Here at BFI, we get numerous e-mails and comments that express a growing concern over government insolvency, debt, inflation and the increasing fiscal repression found in most of the G7 countries.
Indeed, over the past few weeks, an amazing sequence of laws, treaties and acts have been put in place to facilitate more deficit spending and more big brother powers. None of these laws enhance your liberties. None of them are aimed at protecting fundamental rights of freedom, property, or privacy. None of them enforce government fiscal discipline and accountability. On the contrary, they are tailored toward a continuation of out-of-control Keynesian madness -- more public spending, more deficits, more debt, and of course, more taxation.
Instead of fixing fiscal and monetary issues at their roots, an internationally concerted crusade against ‘tax evaders´ and ‘offshore investment strategies´ has been launched. However, what may be considered as enforcement of law has long become a game of capital controls, protectionism and taxation horror.
In the UK, for instance, as part of the UK 2010 Budget, the British government last week decided to come down yet a little harder on offshore tax evasion. Penalties for offshore evasion were increased to a maximum of 200% of the unpaid tax. Penalties of up to 150% will apply where exchange of information is on a "upon request" basis rather than automatic. The stiffest penalties apply where non-compliance arises in jurisdictions that have not signed exchange information agreements with the UK.
Meanwhile, in Germany, the Anti-Tax Evasion Act was passed. This Act, approved by the German Federal Council, entails new regulations that deal with tax evasion and "unfair tax practices" (translation: low-tax jurisdictions with healthy balance sheets, such as Switzerland). Even in Israel, the Parliament permanently approved regulations for "enhanced" reporting requirements, as well as regulations against "aggressive" tax planning measures.
Finally, the worst -- and most amazing -- law of all was passed in the US under the very marketable title (you have to give them that) of ‘HIRE´. I briefly discussed this phenomenal law and particularly its section on foreign accounts in the last Mountain Vision Update.
After reviewing HIRE again and thoroughly studying its implications, I am convinced this law could actually be a blessing. I will tell you why in just a moment. But first, a bit more background...
HIRE - or simply another layer of hidden capitol controls
Last month, President Obama signed into law possibly the "worst bill ever" (Wall Street Journal, November 1, 2009). Some predict that it will inevitably lead to full-scale socialized medicine. Then, shortly after the Health Care Bill had passed, Obama slipped in another silent bomb.
On March 18th, with little if any pomp and circumstance -- downright unnoticed by most -- he signed off on the US$ 17.5 billion ‘Hiring Incentives to Restore Employment Act´ (H.R. 2487), in brief ‘HIRE´. Amidst a long mire of legal gibberish that few would ever bear the pain of reading, provisions on ‘Foreign Account Tax Compliance´ (FATCA) were hidden.
With these provisions, the noose on capital mobility has certainly tightened a little more for Americans. But, the implications are much broader and may well, and possibly should quickly, affect the wealth management decisions of investors worldwide.
In brief, these provisions require that foreign financial institutions (so called FFI´s -- and not just banks!) not only withhold 30% of all US source capital flows (remitting the collection promptly back to the US Treasury) but also to disclose the full details of non-exempt accountholders to the US and the IRS. In order to avoid the 30% withholding tax, an FFI would have to agree to become a QFFI (a Qualified Foreign Financial Institution). Of course, under such circumstances, a QFFI must fully report all "non-exempt US accountholders", i.e. give up any and all client confidentiality against US tax authorities.
A concise and understandable summary of the law is provided by Withers at the following link. Let there be no mistake, this latest AMERICAN law may have implications for ALL of us. It may very well affect YOUR portfolio very soon. Therefore, I strongly recommend that ALL Mountaineers study this thoroughly!
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So, why on earth would I consider this horrific new law a potential blessing?!?!
The FATCA provisions are draconian. America´s current administration leaves George Bush looking like a whimp. These guys really push a heavy pencil. In fact, these laws are so blatantly coercive and outrageously encumbering for these so-called "Foreign Financial Institutions" (FFIs) that I don´t think they will accept it. In fact, I think there is a considerable chance of an international backlash. And that backlash might well severely impact US financial markets.
After pushing their QI (Qualified Intermediary) rules down the throats of banks worldwide, the US Administration now aims at creating a ‘co-operative´ global network of QFFIs (Qualified Foreign Financial Institutions). In other words, this network of institutions would administer America´s desparate search for tax dollars in every nook and cranny, spying and reporting on their client´s in the interest of squeezing that wealthy taxpayer lemon yet a little harder.
I don´t think this will happen. To use my friend´s words at the beginning of this Update, I believe this law is the straw that breaks the camel´s back. Even if all these FFIs were highly willing and dedicated to supporting America´s wild goose chase, the problem is that they would not know how to do it, and even if they did, they might not be able to afford it.
First of all, these rules are not practicable. For instance, these rules would require a hedge fund with QFFI status to identify on each subscription to the fund whether the ultimate beneficial owner is a ‘US person´. Now, this might be fairly straight-forward in a constellation where the investor is an individual who subscribes directly to the fund. However, what if another fund invests in this fund? And then, what if the investor in the second fund is not an individual but rather a foundation? What if this foundation is held by an international conglomerate of corporations? You get the idea.
Secondly, let´s assume that via the proper standards, procedures and, of course, in conjunction with the required IT systems, FFIs worldwide could in fact fulfill Mr. Obama´s daydreams, most FFIs would not be able to afford it. And many will not be WILLING to afford it.
I´ve discussed this with several top Swiss bankers and legal experts. They all agree that this law leaves many unanswered questions. If indeed the US is hellbound on pushing this through as defined, there will be a backlash, and soon. As stated in our last Update, non-US banks, asset managers, insurance companies, hedge funds and financial advisors may -- once and IF the law is implemented as foreseen -- very well simply stop investing in US assets altogether.
There´s a world of investment opportunities that are non-US. Why bother with American markets?!?!
Sincerely,
Your "Swiss Mountain Guide"
Frank R. Suess |
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NEWS BRIEFS
Learning from What Works -- Low Taxes and Financial Privacy Laws should be Emulated
In his article printed in the Washington Times last week, Mr Richard W. Rahn recommends emulating the Swiss system to fix the economic and political landscape.
Economists, political scientists, reporters and pundits spend too much of their time looking at dysfunctional societies and trying to explain why there is poverty, joblessness and hopelessness. In many ways, Haiti is easy to explain -- no rule of law and 200 years of corrupt and incompetent governments.
Switzerland is the polar opposite. It has almost no corruption and has the rule of law with honest, competent judges and government administrators. The question should be, "What can we learn from the Switzerlands of the world about how to do things right" rather than "what is wrong with the Haitis of the world". Switzerland manages to run a smaller government as a share of gross domestic product than the United States and most other countries while providing a higher level of service, security, prosperity and freedom. How does it do that?
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More and More Bank Failures in America - Safety is Found ELSEWHERE
March has produced another 19 US bank failures. It brings the count up to 42 bank failures for 2010. Annualized, at the current Q1 rate, this would imply a total of 168 bank failures, more than in 2009 with over 140 defaults. Has the financial crisis really subsided in the US? It appears that the pace of bank failures is accelerating, as losses mount on loans made for commercial property and development.
In most cases, the deposits of these failed banks are assumed by other institutions, sometimes bridge banks run by the FDIC. However, that is not always the case. Increasingly, the FDIC is carrying at least part of the load and, for depositers with assets of US$ 250,000 or more -- the FDIC insurance limit -- funds can be lost.
In our view, the accelerating rate of failures points out one fact: the threat of another debt crisis, this time triggered in the commercial US real estate sector, is real and growing. Prudent investors in America will look very closely at the balance sheet, the business model, and the management of their banks. And, some will look for international diversification -- in terms of jurisdiction, institutions and currency.
As we´ve pointed out many times in the past, the banks you should work with are commercial. They do not provide credit. They are based on a traditional private banking model, where loans are provided only on a Lombard basis, i.e. backed by a depositer´s funds. We work with such banks. Yes, in Switzerland. Yes, they still accept American clients. And yes, it is perfectly legal.
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Here Comes the Debt Trap - Bill Gross Says So...
According to Bill Gross, who manages the world´s biggest bond fund, the 30-year bull market in fixed-income securities is ending. "Real interest rates are moving higher," said Gross. "That´s the main bear element in the bond market."
Mr. Gross will be responsible for a new fund that invests in stocks (along with high-yield bonds and distressed debt). It´s hard to say if Mr. Gross is truly concerned about the bond market or if he is just talking his book. However, it is noteworthy that Mr. Gross and several other key players in the market ARE noticing the movement in interest rates.
Some interpret higher interest rates as a strong sign for recovery. Others point out the risk of the rapidly rising costs of financing rapidly rising public debt...
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Insiders Continue to Sell into the Rally
Insiders continue to be skeptical about the the stock market, at least when it comes to actual personal investments, versus what they are saying publicly. The latest statistics on insider transactions shows a considerable "surplus" on the SELL side.
For the week ending April 2nd, insiders sold $421 million while buying only $13.5 million!!
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Ron Paul on Universal Healthcare vs. Economic Realities
Dr. Ron Paul, in his March 30th contribution to the Daily Bell, points out that the Federal Reserve finds itself in "an unprecedented and unenviable position". Since September of 2008, the monetary base has been increased by nearly US$ 1.5 trillion to finance government spending.
Dr. Paul begins his commentary as follows: "With passage of last week´s bill, the American people are now the unhappy recipients of Washington´s disastrous prescription for healthcare ‘reform´. Congressional leaders relied on highly dubious budget predictions, faulty market assumptions, and outright fantasy to convince a slim majority that this major expansion of government somehow will reduce federal spending. This legislation is just the next step towards universal, single payer healthcare, which many see as a human right. Of course, this ‘right´ must be produced by the labor of other people, meaning theft and coercion by government is necessary to produce and distribute it."
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China Passed REGRESSIVE Tax Rules!?!?
In the March 31st Economist, we found the following: "As America and Europe plan new ways to claw back money from high earners in finance, China is going the other way. When the Communist Party decided to transform Shanghai into a financial center, it gave a great deal of thought to personal-tax incentives. A ruling put out at the end of 2008 by the city´s Pudong district is the most regressive form of taxation imaginable."
"Ordinarily, China imposes one of the highest top marginal income-tax rates in the world, 45%. There are few complaints about this from locals: nothing good is likely to come from provoking the authorities´ attention. But it is a turn-off for employees of companies that Shanghai wants to attract to the skyscrapers popping up on the western bank of the Huangpu River."
We are certainly living during a period of immense change! While the poll on Chinese prosperity is split into two camps of devout optimists and pessimists, most certainly, not all is good in China. It´s a mixed picture, as Google will be able to tell you loud and clear. Nevertheless, we ALL must realize that free market policies, capitalism and the virtues of hard work, saving and productivity are moving EAST, and fast. This trend will not end any time soon!
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Obama Sets Sights on Merging Mexico and US?
Another timely and very important comment from the Daily Bell in consideration of a recent article on Obama´s next big chip to gamble for - merging Mexico and the US.
"This article is the story of a canvas now being painted. It may even end up with a portrait of an international couple being married. But it is not a pretty picture by any means. Investors with holdings in the United States - dollars, bonds and stocks - will have to beware of what is coming. Some of the largest markets in the world could be further destabilized in the near or fairly-near future."
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Google Getting Out of "Dodge"...
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| © Copyright 2010, 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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