What Happens When FATCA Kicks In
There’s a bill that will go into effect on July 1. It’s known as H.R. 2847 which contains FATCA (the Foreign Account Tax Compliance Act of 2010).
H.R. 2847 also known as HIRE (the Hiring Incentives to Restore Employment Act) was a law passed in March 2010 which will go into effect on July 1. The bill seeks to provide payroll tax breaks and incentives for businesses to hire unemployed workers.
However, “the worry” is the FATCA piece of that bill. FATCA deals with U.S. taxpayers that hold foreign accounts overseas. It requires them to report their foreign accounts and offshore assets to the government and foreign financial institutions (banks, stock brokers, hedge funds, pension funds, insurance companies, trusts, etc.) are also required to report information about the ownership of overseas assets.
These institutions will have to send annual reports to the IRS on the name and address of each U.S. client as well as their largest account balance in the year and their total debits and credits within the accounts. If an institution does not comply, the United States will impose a 30 percent withholding tax.
There are other requirements too. This is just an overview to better inform you about this bill and what it entails.
There are reports that attempt to spark fear in the investor, saying that the dollar will collapse on July 1 when this bill goes into effect.
I just want to go on record by saying that is ridiculous and that it’s not going to happen. Yes, the dollar will continue its gradual erosion…but there will not be a collapse on that date nor any other date soon.
Why? Everything always goes back to politics. So you must view this through the eyes of an elected official.
If the dollar instantly collapses, what’s going to happen? There would be riots in the streets and the risk of a political overthrow. At best, the current elected officials would not be re-elected and new officials would be voted into their places.
They can’t have this. Therefore, they aren’t going to allow a quick dollar collapse to happen.
Secondly, the Federal Reserve has much more to do with the speed of dollar depreciation than any governmental law that’s passed.
Now, with that said…will this bill be a “dollar negative” and a negative for the U.S. overall?
Yes! There’s no doubt about it.
Why? The more pain and headaches you cause foreigners, the more they’re going to just want to say, “We’re just not going to deal with U.S. clients. We’ll focus on other countries that don’t have all this red tape to deal with.”
Why is all of this happening now? Remember, the United States has enormous debts that are growing massively on a daily basis. Also, the tax receipts that the government takes in aren’t high enough to meet their outgo.
So what does the government do to help rake in more cash? They go searching for the money abroad.
The more indebted our government gets, the more aggressive and unreasonable they’re going to be on the public (until or unless there is a massive public outrage).
But back to FATCA. Yes, it will be bad for the dollar, bad for U.S. assets and the U.S. economy.
Why? More foreigners will cut ties with the United States as the red tape gets ridiculous relative to what they have to deal with in other countries.
It will also make it harder for U.S. citizens that want to do more investing abroad and who want to own more assets abroad. After all, what bank, broker or insurance company is going to want to deal with the headaches that an American will bring upon them due to these new requirements?
Instead, they’ll just focus their business more on Europeans and on emerging markets where there isn’t such strict regulations placed upon them.
Don’t get me wrong. I’m all for people paying their fair share of taxes and not trying to dodge any taxes that they are supposed to pay. But these regulations are going to make foreigners back away from Americans and America in general.
That’s going to be just one more hurdle for our dollar, our economy and financial markets.
By the way, FATCA is just the beginning. There will likely come a day where the United States doesn’t allow you to take money outside of its borders. They’ll want even more control over you and your assets and if you can’t take your money out of the country — they’ve got you!
But for now, a “side effect” of FATCA is that you’ll have more high net-worth individuals expatriating and giving up their U.S. citizenship. After all, if you have sizable assets overseas and you have a home overseas, etc. (like many ultra-wealthy people do) and you still want foreign banks and brokerages to want to deal with you — then you’ll need to cut ties with the United States.
And the only way you’re getting out of U.S. taxation is if you expatriate and turn loose of your U.S. citizenship. (By the way, even if you do this, you can still come back into the U.S. for a number of months each year.)
So FATCA will have an impact. It will be a negative impact and not a positive impact. But these reports that you’re hearing where “the dollar will collapse on July 1,” etc., are just hog wash! Don’t believe a word of it.
Granted, it is effective marketing on their part — it will likely be effective in getting them more clients, but at the end of the day it’s just fear-mongering at its worst. And to top it off, it’s simply not true.
Should you change your investing strategy in light of FATCA? The way you invest should be to invest in light of a falling dollar and rising inflation anyway. So if you’re doing that already, then you don’t need to change anything.
It will be a “dollar negative” and certainly play its part in the dollar’s gradual erosion but it’s not going to cause a collapse in the dollar.
And if your investments benefit with the decline of the dollar and the rise of inflation and there were to be a collapse of the dollar — then your investments would just go up that much quicker. So even though a “collapse” isn’t going to happen … the positioning of your investments is key, either way.
If you don’t know how to position your investments to benefit from the rise of inflation and for dollar devaluation, then come and look over my shoulder in the Ultimate Wealth Report newsletter as I show my 134,000 subscribers how to do this.