Chile Forum

Like it sez in the text... "...mentioned by zero MSM outlets"
Hmmm... this might cause a few shudders thru the xpat banking ranks...
Any allchileans see any "implications" from this - bizness or personal?

It's Official - America Now Enforces Capital Controls
03/28/2010 -

It couldn't have happened to a nicer country. On March 18, with very little pomp and circumstance, president Obama passed the most recent stimulus act, the $17.5 billion Hiring Incentives to Restore Employment Act (H.R. 2487), brilliantly goalseeked by the administration's millionaire cronies to abbreviate as HIRE. As it was merely the latest in an endless stream of acts destined to expand the government payroll to infinity, nobody cared about it, or actually read it. Because if anyone had read it, the act would have been known as the Capital Controls Act, as one of the lesser, but infinitely more important provisions on page 27, known as Offset Provisions - Subtitle A—Foreign Account Tax Compliance, institutes just that.
In brief, the Provision requires that foreign banks not only withhold 30% of all outgoing capital flows (likely remitting the collection promptly back to the US Treasury) but also disclose the full details of non-exempt account-holders to the US and the IRS. And should this provision be deemed illegal by a given foreign nation's domestic laws (think Switzerland), well the foreign financial institution is required to close the account. It's the law. If you thought you could move your capital to the non-sequestration safety of non-US financial institutions, sorry you lose - the law now says so. Capital Controls are now here and are now fully enforced by the law.

Let's parse through the just passed law, which has been mentioned by exactly zero mainstream media outlets.
Here is the default new state of capital outflows:

(a) IN GENERAL.—The Internal Revenue Code of 1986 is amended by inserting after chapter 3 the following new chapter:
‘‘CHAPTER 4—TAXES TO ENFORCE REPORTING ON CERTAIN FOREIGN ACCOUNTS
‘‘Sec. 1471. Withholdable payments to foreign financial institutions.
‘‘Sec. 1472. Withholdable payments to other foreign entities.
‘‘Sec. 1473. Definitions.
‘‘Sec. 1474. Special rules.
‘‘SEC. 1471. WITHHOLDABLE PAYMENTS TO FOREIGN FINANCIAL INSTITUTIONS.

‘‘(a) IN GENERAL.—In the case of any withholdable payment to a foreign financial institution which does not meet the requirements of subsection (b), the withholding agent with respect to such payment shall deduct and withhold from such payment a tax equal to 30 percent of the amount of such payment.

Clarifying who this law applies to:

‘‘(C) in the case of any United States account maintained by such institution, to report on an annual basis the information described in subsection (c) with respect to such account,
‘‘(D) to deduct and withhold a tax equal to 30 percent of—
‘‘(i) any passthru payment which is made by such institution to a recalcitrant account holder or another foreign financial institution which does not meet the requirements of this subsection, and
‘‘(ii) in the case of any passthru payment which is made by such institution to a foreign financial institution which has in effect an election under paragraph (3) with respect to such payment, so much of such payment as is allocable to accounts held by recalcitrant account holders or foreign financial institutions which do not meet the requirements of this subsection.

What happens if this brand new law impinges and/or is in blatant contradiction with existing foreign laws?

‘‘(F) in any case in which any foreign law would (but for a waiver described in clause (i)) prevent the reporting of any information referred to in this subsection or subsection (c) with respect to any United States account maintained by such institution—
‘‘(i) to attempt to obtain a valid and effective waiver of such law from each holder of such account, and
‘‘(ii) if a waiver described in clause (i) is not obtained from each such holder within a reasonable period of time, to close such account.

Not only are capital flows now to be overseen and controlled by the government and the IRS, but holders of foreign accounts can kiss any semblance of privacy goodbye:

‘‘(c) INFORMATION REQUIRED TO BE REPORTED ON UNITED STATES ACCOUNTS.—
‘‘(1) IN GENERAL.—The agreement described in subsection (b) shall require the foreign financial institution to report the following with respect to each United States account maintained by such institution:
‘‘(A) The name, address, and TIN of each account holder which is a specified United States person and, in the case of any account holder which is a United States owned foreign entity, the name, address, and TIN of each substantial United States owner of such entity.
‘‘(B) The account number.
‘‘(C) The account balance or value (determined at such time and in such manner as the Secretary may provide).
‘‘(D) Except to the extent provided by the Secretary, the gross receipts and gross withdrawals or payments from the account (determined for such period and in such manner as the Secretary may provide).

The only exemption to the rule? If you hold the meager sum of $50,000 or less in foreign accounts.

‘‘(B) EXCEPTION FOR CERTAIN ACCOUNTS HELD BY INDIVIDUALS.—Unless the foreign financial institution elects to not have this subparagraph apply, such term shall not include any depository account maintained by such financial institution if—
‘‘(i) each holder of such account is a natural person,and
‘‘(ii) with respect to each holder of such account, the aggregate value of all depository accounts held (in whole or in part) by such holder and maintained by the same financial institution which maintains such account does not exceed $50,000.

And, while we are on the topic of definitions, here is how "financial account" is defined by the US:

‘‘(2) FINANCIAL ACCOUNT.—Except as otherwise provided by the Secretary, the term ‘financial account’ means, with respect to any financial institution—
‘‘(A) any depository account maintained by such financial institution,
‘‘(B) any custodial account maintained by such financial institution, and
‘‘(C) any equity or debt interest in such financial institution (other than interests which are regularly traded on an established securities market). Any equity or debt interest which constitutes a financial account under subparagraph (C) with respect to any financial institution shall be treated for purposes of this section as maintained by such financial institution.

In case you find you do not like to be subject to capital controls, you are now deemed a "Recalcitrant Account Holder."

‘‘(6) RECALCITRANT ACCOUNT HOLDER.—The term ‘recalcitrant account holder’ means any account holder which—
‘‘(A) fails to comply with reasonable requests for the information referred to in subsection (b)(1)(A) or (c)(1)(A),
or ‘‘(B) fails to provide a waiver described in subsection (b)(1)(F) upon request.

But guess what - if you are a foreign Central Bank, or if the Secretary determined that you are "a low risk for tax evasion" (unlike the Secretary himself) you still can do whatever the hell you want:

‘‘(f) EXCEPTION FOR CERTAIN PAYMENTS.—Subsection (a) shall not apply to any payment to the extent that the beneficial owner
of such payment is—
‘‘(1) any foreign government, any political subdivision of a foreign government, or any wholly owned agency or instrumentality of any one or more of the foregoing,
‘‘(2) any international organization or any wholly owned agency or instrumentality thereof,
‘‘(3) any foreign central bank of issue, or
‘‘(4) any other class of persons identified by the Secretary for purposes of this subsection as posing a low risk of tax evasion.

One thing we are confused about is whether this law is a preamble, or already incorporates, the flow of non-cash assets, such as commodities, and, thus, gold. If an account transfers, via physical or paper delivery, gold from a domestic account to a foreign one, we are not sure if the language deems this a 30% taxable transaction, although preliminary discussions with lawyers indicates this is likely the case.

And so the noose on capital mobility tightens, as very soon the only option US citizens have when it comes to investing their money, will be in government mandated retirement annuities, which will likely be the next step in the capital control escalation, which will culminate with every single free dollar required to be reinvested into the US, likely in the form of purchasing US Treasury emissions such as Treasuries, TIPS and other worthless pieces of paper.

Congratulations bankrupt America - you are now one step closer to a thoroughly non-free market.

Not that the new TISA between the IRS and SII wasn't already open for abusive fishing expeditions.

I'll bump this from it's languishing status down the list... obviously, the impacts of this legislation seem to be lost on (Yankee) xpats in Chile and elsewhere...
Here's a second attempt to raise some awareness and righteous outrage?
" ...this act doesn't discriminate. It goes after everyone that isn't politically connected enough to get an exemption through the Treasury. It goes after middle-class Americans who want to retire overseas in cheaper nations, or any investor who wants to diversify their life savings by nation."

Bottom line... "bend over and spread 'em"... but to try and preserve any semblance of future privacy and non-invasiveness in your financial dealings... seems like any individual financial transaction should (as always) be kept under $10k and your total funds in any one foreign account should always be kept under $50k.
Easy for peasants like greg~judy(?)... but some folks with fatter wallets and larger business investments, or employment, or real estate dealings, or (???)... in Chile (or anywhere offshore) may not be "amused" at how the vampire squids intend to impact your financial lives

Capital controls and what you should know

When a government plans to do something unpopular, they try to hide it.
For instance, when the Democrats decided last month to renew the draconian Patriot Act, they hid it in a medicare reform bill. They originally tried to hide it in a Pentagon funding bill.

It turned out to be a very successful strategy because it was almost totally ignored by the major media. In fact, it was so successful that last week Congress slipped in what might be the most ominous law of the year.

The law in question was the HIRE Act.

The bill includes $17.5 billion in tax cuts, business credits and subsidies for state and local construction bonds, and moves $20 billion into the highway trust fund for spending on highway and transit programs. It exempts businesses that hire unemployed workers from paying the payroll security tax through December of 2010.

The bill was radically scaled down from the original $150 Billion that might have made a real dent in the unemployment rate.

Obviously no journalist from the major media bothered to read the huge bill. It required the blogoshpere to unearth the gem. Buried in the bill at page 27, under the subtitle of "Foreign Account Tax Compliance" was this critical tidbit:

SEC. 1471. WITHHOLDABLE PAYMENTS TO FOREIGN FINANCIAL INSTITUTIONS.
‘‘...(b), the withholding agent with respect to such payment shall deduct and withhold from such payment a tax equal to 30 percent of the amount of such payment.

This act applies to any account over $50,000. What's more, the law also requires foreign financial institutions to give complete information about the account's identity. Banks that fail to comply for any reason are required to close the accounts.

‘‘(A) The name, address, and TIN of each account holder which is a specified United States person and, in the case of any account holder which is a United States owned foreign entity, the name, address, and TIN of each substantial United States owner of such entity.
‘‘(B) The account number.
‘‘(C) The account balance or value (determined at such time and in such manner as the Secretary may provide).

So What?

It is no secret that some of the wealthy of this country, not to mention drug dealers, the mob, and corrupted bankers, hide their money overseas to avoid taxes. This law will not be kind to them. No one is going to shed a tear on their behalf.
But let's be clear - this act doesn't discriminate. It goes after everyone that isn't politically connected enough to get an exemption through the Treasury. It goes after middle-class Americans who want to retire overseas in cheaper nations, or any investor who wants to diversify their life savings by nation.

In essence it is capital controls by proxy.

I believe its main effect will be to further restrict access for U.S. citizens—especially those living in the United States—from offshore banks, brokers, and other foreign financial services companies. This is likely to occur because the cost for these companies to continue doing business with Americans will increase sharply when these portions of the law become effective.

"control of capital movements, both inward and outward, should be a permanent feature of the post-war system."
- John Keynes

Since the 2008 crisis the whole world has been moving towards capital controls. It's already law that the rich must buy their way out of American citizenship. Before the crisis hit there was near universal agreement that capital controls created distortions in the market, therefore they were to be avoided.
That opinion hasn't changed. What has changed is the decision that those distortions are the lesser evil compared to full-scale meltdowns of the financial system. Even the IMF has come around to this point of view.

Capital controls on inflows can be very useful for avoiding bubbles in the economy. The problem is that if you have a trade agreement with the U.S., chances are they are illegal. The Bush Administration made sure of that for the trade agreements with Chile and Colombia.

It isn't capital controls on inflows that concern me. It's capital controls on outflows that do.
Governments create capital controls on inflows to prevent a bubble. They create capital controls on outflows to stem the damage from when a bubble bursts.

For instance, when Iceland's financial system collapsed on October 9, 2008, Iceland's central bank set up restrictions on the private purchase of foreign currencies.
At the time the Krona had virtually collapsed. The capital controls have since been considered a success since they eventually stabilized the currency.

But let's look at it from the point of view of a citizen of Iceland with some savings. On October 15, 2008, the exchange rate was 150 Kronas per Euro. Today that rate is 174 Kronas per Euro. By preventing the people of Iceland from moving their money into other currencies, they effectively prevented them from avoiding losses.
That may seem like mild, acceptable losses given the extent of currency collapse that preceded it, but it isn't always that way.

On December 2, 2001, Argentina imposed currency controls on not just outflows of capital, but even on how much money you could take out of the bank. Those controls weren't lifted for a year. During that time the Argentina Peso was devalued from a 1-to-1 ratio with the dollar, to a 4-to-1 ratio. People's savings were forcibly converted from dollars to pesos using the old ratio. The savings of the people of Argentina were wiped out.
Historically, the Argentina example is much more common when capital controls are imposed (see Thailand 1997). That is why they are so feared.

What does this have to do with America?

Spain recently voiced interest in selling dollar denominated bonds. They are only the latest country to enter this market. Portugal, Russia, and Germany have already done so.
While there are a lot of reasons given for this trend, one thing is for certain - the only way it makes economic sense to sell bonds denominated in another currency is if you expect that currency to decline in the future. Otherwise you will end up paying a far higher price.

Two days before the HIRE act was passed, and the same day that Portugal sold its dollar-denominated bonds, Moody's released a report saying that America's AAA rating was in danger.

A downgrade would affect more than American pride. The bigger risk would be to the country’s ability to keep borrowing money on extremely favorable terms, and therefore to keep spending more money than it takes in from tax revenue.

Historically, Moody's is not on the cutting edge for these things. Generally they only make these announcements after everyone in the market has already figured it out and priced it in.
Another factor that must be considered is that this week marks the end of the Federal Reserve's program of buying $1.25 Trillion worth of mortgage-backed securities. Like Moody's warning, the end of this program is expected to cause interest rates to rise significantly.

It appears that the major players in the world's currencies are betting that America's current low interest rates and currency strength are about to expire. In anticipation, the federal government is preparing to prevent any potential flight out of the dollar.
Someone will lose from this arrangement, and that someone is anyone with dollars in their pockets.

Another Brick in the Wall...!

Hmmm. Not lost to me.

One of those things if you didn't start preparing for this years ago or can read between the lines and take appropriate action, then yes, spread 'em.

BTW, in terms of privacy, for many many years there has been a reporting requirement to the IRS of foreign financial accounts that exceed $10,000 combined at any time during the reporting year. So this $50,000 means nothing regarding privacy, it just insures that any foreign financial institution will no longer bother dealing with US persons.

Thanks for the bump... don't know how I missed this before...

speechless

So everyone who thought they were safe under the Bush Administration's 'Exit Tax' on total portfolios over $2m now needs to reevaluate things very quickly.

%*&# me

Found relevant article here:
http://www.kslaw.com/Library/publication/ca032610b.pdf

One thing that caught my untrained eye:

Effective Date
This provision generally would apply to payments made after December 31, 2012. The provisions apply to
payments made on “obligations” issued after March 18, 2012. Because of the significant issues involved in
implementing this provision, this effective date may be very optimistic. When the original Qualified
Intermediary rules were introduced, their effective date was pushed back several times due in part to the
complexities of implementation.
It is unclear whether the rules regarding identification and reporting of United States accounts will apply
equally to current accounts and new accounts. It is also unclear what level of diligence will be necessary.
These and similar issues will need to be resolved very quickly by guidance in order to allow sufficient time
for financial institutions to begin planning their implementation of this new and comprehensive regime.

Please keep in mind that my IQ is effectively halved when I start reading tax law... so fair warning...I probably missed something really important and shouldn't be clinging to the above mentioned date...


Dagny ~ REALLY LOOKING FORWARD TO JOHN HYRE'S INPUT

...the bottom line is if a foreign financial institution operates in the US or has a subsidiary in the US, they have to comply. That means the law is easy to get around, but the very fact that government has implemented Capital Controls is ominous.
... We also understand that those (foreign financial institutions) who have offices in the US must reveal all information in a foreign account in a foreign country and if that information is not forthcoming the US government demands the account be closed. Many banks will leave the US and that is understandable. Very few Americans have foreign accounts, thus this is just more harassment, and an attempt to further control the lives of Americans...

So do I/we read this as...
We can avoid any (Chilean) larger, multi-national bank + those with US subsidiaries... (BAD banks)
But our accounts in smaller, national banks will not be scrutinized or reported... (GOOD banks)
Anyone have a list of GOOD Chilean banks we may wish to consider choosing - for future financial bizness
Or, alternatively... a list of BAD banks we may wish to avoid?

I have said it before:

Freedom is the right to obey the police.

Didn't anyone believe me?

Uhmm like I said before:

(1) there is already a long time reporting requirement for US persons foreign financial accounts if at any time during the reporting year the combined total of all accounts exceeded $10,000.

(2) the new TISA (tax information sharing agreement) between Chile and the USA has provisions for the full sharing of tax info. Think about it, US passport number - Chilean RUN carnet number or RUT for non-residents - nearly your whole life laid bare in Chile.

(3) another longtime rule is that a foreign institution can be obligated to share info if they deal with any USD currency at all since all such transactions eventually clear via the US banking system.

If you want the system to change, you must push for the repeal of the dollar as the reserve currency and reject any other new currency by the same crew that made the USD the reserve currency in the first place.

Unfortunately, I believe the world has been at spread 'em control by that group for the past 5,000 years.

Atlas Shrugged has they key, the capitalist's version of dropping out and waiting for the monster to crash or pretending to be in and giving it a good helpful push over the cliff.

Greg and Judy, if you are worried about all your millions that you never paid taxes on, simply open separate accounts and keep your money in accounts of less than $50,000. Or if you are really determined to cheat on your taxes, keep your money buried in a jar in the back yard.

It's difficult for me to feel any sympathy for people who cheat on their taxes, because when they don't pay, that leaves more for me to pay to make up for their avoidance of responsibility.