by Bobby Casey, Global Wealth Protection LLC

On March 28, 2010 President Obama signed the Foreign Account Tax Compliance Act into law.  According to official government press releases, this was enacted to prevent offshore tax abuses by US persons.  While this is certainly true, it doesn’t tell the whole story.  In reality it is a way to prevent an outflow of capital from the US as well as implement very strict currency controls robbing you of your personal freedom.

Even though it has been nearly one year since this legislation was slipped into the HIRE Act (Hiring Incentives to Restore Employment Act), the fact remains there are more questions than answers regarding implementation.

What is known is that beginning January 1, 2013 the US will implement this far reaching legislation and effectively make FFI’s (Foreign Financial Institutions) their worldwide watchdogs.  This is a typical American egotistical action that just assumes that the entire world will kneel at the feet of the master in order to gain good favor with the largest economy in the world (at least for the time being).

At this stage with so many uncertainties, the affected entities will have difficulty becoming compliant with the new requirements by the effective date or making an informed decision on whether it still makes sound business sense to continue ‘business as usual’ after FATCA is effective.  For some smaller financial institutions it may just make sense to divest of all US assets and/or US clients.

What do we know today about FATCA?

• A 30% withholding tax will be imposed on any withholdable payment made to an FFI that fails to enter into an agreement with the IRS whereby it agrees to identify and annually disclose its US account holders directly to the IRS.
• A 30% withholding tax will be imposed on any withholdable payment made to a non-financial foreign entity (NFFE) that fails to certify that it does not have any substantial US owners or fails to disclose the identity of those US owners.
• A FFI can elect to report on IRS form 1099 in lieu of annual reporting requirements under FATCA (form 1099 requires the use of a US tax ID number for the receipient).
• The definition of an FFI currently includes hedge funds, private equity funds, and other investment vehicles.
• The definition of withholdable payment currently includes payments of US sourced fixed and determinable annual or periodical income (FDAP), as well as gross proceeds from the sale of assets that generate US source interest or dividend income.

What are the FATCA unknowns?

• How should a withholding agent or FFI identify whether a payer is a FFI or NFFE?  Given the vagueness of the current definition of ‘investment vehicle’, it may not be readily apparent whether a particular entity is falls into the classification.
• Will FATCA reporting documentation for all FFI’s be standardized given the vagueness of the FFI definition?
• Will the FFI be able to rely on its previously obtained KYC (know your customer) and AML (anti-money laundering) documentation?
• What will be the documentation standards required for FFI’s that are not bound by the local country’s KYC/AML regulations?
• Will existing documentation be grandfathered in for existing accounts?
• Will the FFI be required to adhere to the same reporting requirements if the account holder will never receive a withholdable or pass-through payment?
• What will be the FFI requirement if the account holder refuses to waive the right to non-disclosure and the FFI is prohibited by local law or contract from closing the account?
• Will the IRS exclude from FATCA those entities that possess a low risk of tax evasion or will the requirements be less rigorous?
• How will a NFFE pass on the information related to its US owners?
• Would a NFFE or NFI be required to prove the non-existence of US account holders or owners?
• If there are over payments of withholding money, how will refunds be processed?
• How will FATCA rules be applied in the insurance industry?
• How will FATCA rules be applied to multinational corporations that make offshore vendor payments?
• And most importantly, “How does the IRS enforce FATCA rules on companies owned and managed within their own sovereign jurisdictions?”

To me, the last statement is the most important.  How can the US rightly expect to enforce its own laws in other countries?

How can American politicians arrogantly expect companies in other countries to comply with extra-territorial laws?

For example, why would a bank in Hong Kong provide the IRS with all US account holder information?  What is their benefit?  This is an extra cost of doing business for the Hong Kong bank that also decreases the demand for US depositors to open an account at their bank.   This is nothing more than the US attempting to protect and grow the American empire worldwide.

What happens if Hong Kong refuses to comply?  Will US troops march in and demand to see the bank records?  Will the US impose huge import tariffs on Hong Kong goods?  Will the DHS (department of homeland security) demand visas for all Hong Kong residents visiting the US?

The absurdity of this new law defies common sense.  But as we all know by now, common sense is not always that common.  There will be huge unintended consequences here.  The confusion and complication will drive away business from entrepreneurs and investors.  While the Obama administration may sell this package as a benefit for the common man, it will have zero positive impacts on the American people.

Why would you want an Offshore Bank Account?

Keep in mind, the new FATCA rules are designed to control capital outflow from the US financial system.  Unless you have been living under a rock for the past few years, the US financial system has dramatically weakened and will continue to do so.

The Federal Reserve and big Wall Street banks have developed incestuous relationships over the past several years thus making them completely dependent on one another and leaving you and me out in the cold.

Under the Obama administration, the US federal deficit has increased more than the cumulative total of all previous US presidents.  In other words, all presidents from George Washington through George W Bush borrowed less money combined than Barack Obama.  That is worth reiterating, the US deficit has increased more in the past 3 years than in the previous 235 years combined!!!

Does that sound like a recipe for financial success to you?  I should think not.  The question you need to ask yourself is, “Do I really want to have 100% of my financial future tied to the US economy?”

Beyond the obvious problems facing the economy at the present time, the US is also hugely litigious.  Now more than ever people are looking for any way they can to make money.  Frequently that means what I call, “Wealth through Litigation” or also called the “Lottery Effect”.

While some people are just desperate, others are just too lazy to actually do any productive work so they would rather sue you to acquire their riches.  By moving a portion of your financial assets offshore, you will have escaped (at least partially) the clutches of the US court system.  Even if your offshore bank account could be found, a Seychelles court would not recognize a US civil judgment.

What should you do now?

If you are serious about asset protection planning and internationalization, now is the time to open an offshore bank account for Americans.   These rules take effect starting January 1, 2013, but who knows when the next directives are released that clarifies FATCA rules.  The new rules could impose restrictions on FFI’s they aren’t willing to comply with thus cutting off the ability for you to open an account.

For sure, as 2012 progresses it will become increasingly difficult (read:  more expensive) to open an offshore bank account.  I cannot stress enough the importance of having some assets held outside of your home country.  By having some cash held in a private bank outside of your home country, you have implemented the first step in your “Global Escape Hatch” strategy.

To open an offshore bank account that offers the utmost in privacy today, as well as going forward with the FATCA rules of tomorrow, you would want to first register an offshore company in a jurisdiction that respects privacy.  Offshore companies in Seychelles, Belize, or Nevis are perfect options for this as they do not require disclosure of ownership information and have very good privacy laws.

Once you have the offshore company registered, you would then want to find a good offshore bank that has no offices or branches in the US.  Ideally the bank should offer a variety of services including standard deposits, term deposits, debit card, credit card, brokerage account, wealth management and multi-currency accounts.  This allows you maximum flexibility in managing your liquid assets as well as maximum control with online and debit card account access.

If you are interested in learning more about offshore companies, offshore bank accounts, and establishing your own “Global Escape Hatch”, please contact us using the form below.