By Kevin Brekke, World Money Analyst
Maybe it's just me, but I'm starting to see a greater than usual number of articles covering the rise in the number of Americans leaving the country. This seems in line with the figures released by the US Treasury that show those renouncing their US citizenship is growing.
Just for kicks, I plotted the number of US renunciations since 1998 against the gold price. Except for the “everybody feels good about America” bubble that burst in 2008, the slope of both lines is strikingly similar. If one believes that gold is a crisis barometer, this makes sense. As the fiscal crises in the US persist, the higher taxes are likely to climb, adding more incentive for the wealth creators to leave… and take their wealth with them. The IRS appears to be losing one taxpayer for every dollar rise in the gold price.
The omnipresence of warnings about the impending “fiscal cliff” will certainly not help to soothe any unease among those contemplating expatriation.
This clever yet vivid metaphor describes the fate that likely awaits the US economy should DC legislators fail to extend the expiration of several key tax breaks and incentives that sunset in January. If the original legislation is left unaltered, taxes will rise and further constrain an already stretched consumer.
In turn, absent moderate growth in consumer spending, employers will lack the incentive and confidence to begin hiring. Today, elevated unemployment is a chronic problem facing the US economy, and is seen by Federal Reserve Chairman Bernanke as a challenge that will take quite some time to correct.
A stagnant to falling work force means at best a wobbly stream of tax revenue, and more probably falling tax receipts. With all levels of government starved for revenue the circle completes, as they are forced to raise taxes and cut government employees to meet the operating costs of government services and pension benefits.
And this highlights a further taxing dilemma that might lay in wait for taxpayers. As desperate as the fiscal situation might be at the federal level, hundreds of state and local governments are in dire straits. So we may see a perverse scenario in which the tax breaks that are extended by Washington are offset by a rise in income, property, and other taxes and fees by state and local jurisdictions.
Yet, another ledge on the cliff-of-state concerns the rise in costly and intrusive regulations dreamed up in Washington. One of the most far-reaching and sinister is the Foreign Account Tax Compliance Act, or FATCA.
I have covered this area in past International Man articles, so most readers will be familiar with it. But for anyone who's been in a cave for the last two years, in a nutshell, this new compliance regime effectively forces all foreign financial institutions to identify, track, monitor, and report the movement of funds by all US persons (and entities with a US person or persons as the beneficial owner) and report it to the IRS.
That is a grossly simplified explanation, but nonetheless accurately conveys how broad the reporting net has grown. Failure by any foreign institution that is deemed to be “financial” to comply with FATCA reporting will result in 30% of the funds in question to be withheld and forwarded to the IRS as a penalty.
A Crumbling Ledge
The ledge on which US international investors stand just got a bit narrower. On Sept 11, 2012, the IRS released the draft versions of four compliance reporting forms for individuals and entities. They are:
– Form W-8IMY, Certificate of Foreign Intermediary, Foreign Flow-Through Entity, or Certain US Branches for United States Tax Withholding
– Form W-8ECI, Certificate of Foreign Person's Claim that Income is Effectively Connected with the Conduct of a Trade or Business in the United States
– Form W-8EXP, Certificate of Foreign Government or Other Foreign Organization for United States Tax Withholding
– Form W-8BEN, (Individuals), Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding
As shown, FATCA regulations have continuously expanded to the point that it covers all forms of wealth structures. For any US person with an interest in a foreign entity, this is an important progression. Professional advice and counsel should be sought to avoid missing a filing deadline, or otherwise failing to comply with FATCA.
The financial and manpower burden that FATCA will impose on foreign institutions to comply is big and getting bigger. In response, many foreign banks and brokerages have opted to bar US persons as clients and forgo the hassle. In this sense, FATCA should be seen as the back-door implementation of exchange controls. And it will get worse. Anyone sitting on the fence about internationalization must take steps to get some wealth outside the US now. That window is closing fast.
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