(snip)"Back in March, President Obama signed the largest-ever expansion of offshore disclosure requirements in U.S. history.
These provisions were neatly tucked into the “HIRE Act,” a bill designed to provide incentives for businesses to hire new employees. I wrote about it here and here.
For instance, once the offshore reporting provisions of the HIRE Act come into effect on Jan. 1, 2011, a single investment in an offshore mutual fund through a bank account held by an offshore LLC will require that you file seven separate reporting forms. (I discussed this and other provisions of the HIRE Act in my presentations last week at The Sovereign Society’s Offshore Advantage conference in Cabo San Lucas, Mexico.)
However, the longer-term impact of the HIRE Act is even greater. The law imposes a 30% withholding tax on certain types of U.S-source income and gross sales proceeds to foreign financial institutions (FFIs) and many non-financial foreign entities (NFFE). (Broadly speaking, a NFFE is any non-U.S. entity that is not a FFI.) The only way to avoid the tax is for the FFI or a “withholding agent” for the FNFE to enter into a broad-based information reporting agreement with the IRS. These rules become effective in 2013.
If entering into such an agreement violates foreign law…well, too bad. For instance, the HIRE Act states that if a FFI refuses to enter into an agreement with the IRS, it must close all accounts owned by U.S. taxpayers. The definitions of a FFI and FNFE are so broad that these provisions will affect more than 500,000 foreign companies. By giving them this ultimatum, Congress and the IRS have, in effect, told them to “get lost.”
The real question, though, is whether U.S. citizens and permanent residents will even be able to obtain offshore financial services after 2012. I think they will, but it will be in a sanitized form offered primarily by subsidiaries of offshore banks and brokers. Those subsidiaries will deal only with U.S. persons. They may elect to be taxed and regulated as a U.S. bank or securities broker. That means a reduced menu of investment options and zero privacy, since the subsidiary will be subject to most if not all U.S. laws and regulations.
Most offshore banks and brokers will take the easy way out, though. They’ll simply stop dealing with U.S. persons altogether, along with any type of entity with a U.S. owner
I’ve wondered if there might not be another way the offshore banks and brokers might deal with these regulations. What would happen they withdrew all their investments from the United States, closed their U.S. dollar clearing accounts in New York, and simply stopped dealing in dollars? In that event, it would be difficult for the IRS to enforce the HIRE Act withholding provisions. The banks could then deal with anyone they wanted to deal with, including U.S. persons, but only outside the U.S. dollar."(snip)
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