FATCA could stand for “For Americans Toiletpaper Costs Alot”.
FATCA is a shoot yourself in the foot legislation. If banks around the world decide they won’t or can’t comply, then it will require that transfers to purchase goods will be subject to a 30% withholding. If I am not mistaken, to buy manufactured goods and resources, foreign companies which use non-compliant FFIs, could be subject to a 30% withholding and US retailers will have to pay 30% (grossed up) just to put products on their shelves, because no foreign company is going to be rich or stupid enough to let the IRS have 30% of their gross sales until income tax time, and there is after all, international competition for products and resources. Walmart, which fills its shelves with barge after barge of goods from East, won’t be cheap if China refuses to comply with FATCA.
Simon Black writes the following about FATCA, in post, The Despicable truth emerges about FATCA:
Here’s the kicker. Foreign banks who thumb their nose at the US government and do not enter into the information sharing agreement face a steep penalty: a 30% tax will be withheld on US-source income that goes to, or through, their bank.
So let’s say XYZ Bank in some offshore jurisdiction doesn’t enter into the agreement. The next time a payment goes from JP Morgan to any account holder at XYZ Bank, JP Morgan will withhold 30% of it.
John Williams of Shadowstats (see video below) predicts that hyperinflation will soon be a problem. He recommends that Americans stock up on basic items that they need, such as canned foods and toilet paper, whose inflating prices will give American’s better nominal return on investment than a bank account. It is true that stocking up on food and other items with real value and rotating their inventory is a means of storing wealth. I bought Toronto public transit tokens at $2.00 each about seven years ago. They are now worth $3 each. Thus, they gained 50% in nominal dollars, and zero % in actual value. No savings account has done that well in the same period. And that’s in Canadian money, which does not function as the world’s soon-to-fail reserve currency. But Williams is only thinking about monetary policy. He does not include the devastating impact that FATCA (For Americans Toiletpaper Costs Alot) will have on prices.
Hat tip: Monty Pelerin
Hate to be pessimist… but my guess is that the banks around the world will comply.
Well, coin dealers are (for the moment) classified as NFFEs not FFIs. I try very hard to keep my goldbug ranting under control so as to avoid boring the living snot out of everyone else, but seriously: if a shop selling krugerrands has an account at a FATCA bank, all you have to do is transfer money from your FATCA bank to his FATCA bank, buy the gold coin, hold it until you want to sell it, and deposit the money in a non-FATCA bank. Boom, no 30% withholding. I guess this goes against FOFOA’s whole deal that gold is supposed to be a store of value rather than a medium of transfer, but hey, when the IRS is on your tail, what are you going to do?
@Eric I think you describe a scenario for which the term “pass-thru [sic] payment” was invented. I have not pinned this down yet. I think (from reading the abstract) that this was the subject of the article that Mopsick’s blog refers to here: http://www.mopsicktaxlaw.blogspot.com/2011/12/professor-dick-harvey-jr-gives-us.html
No it’s not passthru, but it’s also not getting away with anything, as the 30% penalty withholding on asset sales is on the proceeds of US assets only.
@p33t: 30% withholding also applies to transfers between a FATCA-participating institution and a non-FATCA-participating institution. This is the whole “virality” concept: how they’re getting FFIs to sign up for FATCA in the first place even if they have no US investments.
@ Eric Do you mean to say that if a payment goes from the US to a FATCA compliant FFI–that the compliant FFI is then supposed to withhold 30% before transfering it to a non-compliant FFI?
This is what I mean. I’ve not studied the meaning of pass-thru, so I have no idea what they mean by it. If this is what they mean, then there is no way that FATCA is even possible. I mean, you can’t restrict what FFIs do between themselves. You can try, but it’s just not workable.
P33, so are you saying that there’s only a 30% withholding of money I would send from America to here? If that’s the case, then why does Big hulk on steroids even need a W-9?
Big LOL @ the “toilet paper” tag on this article. Presumably, if somewhere typed in a search for FATCA-themed toilet paper on a search engine this would be the first hit 🙂
The fact is, despite The US’s imperial reach with this act, even they can’t try to keep back money that doesn’t originate in the States. The obviously attributable payments (US interest, proceeds of sale of US securities etc) can be withheld at a rate of 30%, and indeed must be once the FATCA/non-FATCA boundary is crossed. What they recognised is that there could still be blocking entities, and if payments were not obviously attributable to US source were paid across the boundary, the withholding penalty is avoided. What they then attempted to do was close this gap by saying that a foreign financial institution is duty bound to calculate the percentage of the assets of that institution that are US, and then apply the 30% withholding to that proportion of ALL payments to non FATCA entities. This latter is the biggest bone of contention across the world, as it actually creates the possibility of an institution withholding part of a payment where there is no obvious US connection and then paying this to the IRS. This has now been temporarily parked, pending inter-governmental discussions with some treaty partners, until 2017 at the earliest.
@p33t thanks for that summary. For others who are interested, here’s what the regs (or rather, the “preamble” of the regs) has to say about it. From page 9:
And page 20:
So I’m guessing that if I wanted to move my assets out of my already participating FFI (located in the UK) into a non-compliant FFI that they would withhold 30% of the transfer?? This is becoming Orwellian.
@ Eric, p33t: thanks for explaining that. This passthru regulation is the stupidest thing I’ve ever seen, and it can’t possibly be legal for any FFI to implement it. It would be literally stealing from clients on behalf of the IRS. This is “deciding with your ass instead of your brain”(as Eric has translated). It is one thing if the 30% withholding takes place in the US, but once the money is in another country, it must necessarily be subject to the banking laws of that country, not the US.
Any thoughts on the original post? do you agree that this means that US retailers like Walmart will probably have to pay 30% more than retailers from other countries for goods, at least given how the regulations now stand? (With the further caveat that China banks, et al., would be non-compliant).
It depends on what you mean by ‘move your assets’, when you want to do it and what your status under FATCA is with the participating FFI.
Firstly, at the moment there is no such thing as a participating FFI, and can’t be until 1/1/2013. Whatever you do before then is subject only to current tax laws and agreements, and no withholding under FATCA.
If you mean liquidate investments held with a participating FFI (PFFI) after that, then the withholding can only happen if you have become a ‘recalcitrant’ in the PFFI, and hold US assets that you dispose of. In this case the PFFI is obliged to withhold 30% of the US sourced money before it is credited to your account. Transferring it from the PFFI to the NPFFI is not relevant because the withholding would theoretically have happened before that. If you transfer holdings from PFFI to NPFFI then there is no payment to withhold on, but income from US sources and proceeds of US asset disposals after that will then be withheld on before they reach the NPFFI you transferred to.
@petros – simple answer to that is no. The definition of a withholdable payment does not include payment for goods and services – it is limited to FDAP income and the proceeds of sales of assets that could generate FDAP income.
@p33t Thanks, can you show me what that is in the regulation. And what is FDAP anyway.
@p33t Also it comes to mind that it is not clear without some kind of textual basis in the regs that what you are saying is correct. I cited in an earlier post, that Mexican authorities were worried that transfer payments from workers in the United STates to their families in Mexico would be subject to the 30% withholding. Is it indeed clear that non-compliant FFIs can receive money for the payments of goods and services–when normal individuals can’t make transfers?
Take for example the following work around. I sell 25000 of XYZ with Smith Barney. I then transfer it to ABC bank, then to my Canadian non-compliant FFI. FATCA would be useless.
I know US asset custodians such as the DTCC has mechanisms to withold regular interest and dividend payments up to 30% already in place but do they have mechanisms to withold proceeds of sales or is that something they are developing right now.
But in the end, the regulation requires tons of paper work to show a legitimate paper trail, or just the assumption that the payment is withholdable. So you would have to prove that the money you are transferring is not withholdable and that could result in several pages of paperwork for every transaction, to prove that the funds did not result from a withholdable payment. This is a nightmare.
I once got involved in a payment to my brothers company for a real estate transaction in Austin. They wanted to know every detail of where the money had come from an how long it had been in my possession. I’ll never go through that ever again. I was treated as a money launderer and had to prove that I wasn’t.
@Petros FDAP = Fixed, Determinable Annual or Periodic income
Except as otherwise provided in this paragraph (a), the term withholdable payment means –
3-1(a)(1)(i) Any payment of U.S. source FDAP income (as defined in paragraph (a)(2) of this
section); and [§1.1473-1(a)(1)(i)]
3-1(a)(1)(ii) For any sales or other dispositions occurring after December 31, 2014, any gross
proceeds from the sale or other disposition (as defined in paragraph (a)(3)(i)) of
any property of a type which can produce interest or dividends that are U.S. source
FDAP income. [§1.1473-1(a)(1)(ii)]
In your example I assume that XYZ is US stock? Smith Barney are obliged to determine your FATCA status BEFORE they pay you your money and withhold if you are recalcitrant- so all transfers after that would be post withholding.
@Tim US asset custodians are primary withholders under the current Qualified Intermediary regime (a sort of proto-FATCA) and as such will be able to withhold on both income and sales proceeds payments already
By definition in the HIRE act is as follows:
‘‘(1) WITHHOLDABLE PAYMENT.—Except as otherwise provided
by the Secretary—
‘‘(A) IN GENERAL.—The term ‘withholdable payment’
means—‘‘(i) any payment of interest (including any original issue discount), dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, and other fixed or determinable annual or periodical gains, profits, and income, if such payment is from sources within the United States, and ‘‘(ii) any gross proceeds from the sale or other disposition of any property of a type which can produce interest or dividends from sources within the United States.
@ p33t FATCA status? I used Smith Barney as an example of US side broker.
Ok, here’s another scenario. I sell my Condo. The money goes into ABC Bank in US. Does ABC bank withhold 30% because I’m a Canadian resident?
I transfer the funds from ABC to TD Bank, then to my non-compliant credit union: is that a passthru payment?
What if such funds are commingled with my own money that are not withholdable payments?
By the way, why would Smith Barney withhold my stocks sale proceeds. What do you mean by FATCA status? I am a US citizen, right? (for the sake of the scenario, I lost my citizenship).
@Petros – you are talking about Anti Money Laundering procedures, where banks must determine the source of ‘wealth’ as it is deposited with them This is unaltered by FATCA.
Withholdable payments are easy to identify as such (coupon on T-Bill, sale of Microsoft shares etc), where this is not the case they are not withholdable.
@ p33t Yes, I know that it was anti-money laundering. But it was so intrusive and frustrating to me that I WILL NEVER DO IT AGAIN. I am not a patient person and every time the idiot banker called me up asking me for more proof etc., I became frustrated, defensive and angry. I.e., the United States is killing investment in the United States.
Withholdable payments are not that easy to detect if commingled with other assets. I don’t think it is that easy. But I suppose some knuckleheads in the US government think it is.
The idea of withholding 30% of the gross proceeds of a stock sale is nuts. No investor (and I am a trader, I know what I’m talking about), will accept that 30% of the sale of an asset be withheld. That is just ridiculously confiscatory.
But thanks for trying to help me answer the basic premise of the original post. That is useful. In theory, transfers of money for purchasing goods would not be withholdable payments. In practice, though, I wonder what will happen. I am not totally satisified that the implementation of the regulation will not have that practical effect.
@Petros – you’re right about the clarity, and I know what you mean about the effect. I also agree about the unacceptability of 30% withholding of sales proceeds, which is true whether there is profit OR loss.
Bear in mind though that the withholding obligation starts with the initial receiver of the payment (broker, custodian etc) who must then determine whether the payment is withholdable, and what the status of the payee is, and each successive FFI in the potential chain must determine the FATCA status of the next link. Once withholding happens (i.e. where the next link is either a non-participating FFI or recalcitrant person) all further payments down the line are less this deduction, which must only be withheld once.
It is the responsiblity of the FIs to determine the source.
When you mention proving the withholdability of a payment also remember that if you are a recipient of a payment that has been withheld on you have the opportunity to reclaim any unjust witholding by complying. As a non-complier (institution or individual) you have either refused to become a participating institution, or refused to prove that you are not American, where you appear to be. That is the point of the penalty payment, to make those two statuses either undesirable or untenable.
@p33t: “…prove that you are not American”
Now, that’s always baffled me. Absence of evidence is not evidence of absence. I really don’t know how one could fully prove this.
Of course, all banks really need is some sign that you’re a citizen of some other country, and that’s likely enough for them to cover their butts. Perhaps congress wrote FATCA on smoke-a-bowl-of-crack Friday.