No capital controls in the USA... yet
September 2008 we wrote in US exchange rate and capital controls or bust?
Exchange rate and capital controls are viewed by our modern economics orthodoxy as the retrograde policy of desperate third world countries that can't hack free markets. However, history teaches us to not discount the possibility that major economies even in our current times may use them as a last resort. Each day the front page of the newspaper is plastered with reports of one last resort measure after another. It's time to give the possibility of exchange rate and currency controls serious consideration.
In March, the Foreign Account Tax Compliance Act of 2009
was tagged on as an amendment to the Hiring Incentives to Restore Employment Act (HIRE), Obama administration's latest bid to restore US labor markets to pre-crisis levels. Over the weekend, several hysterical reports began to circulate claiming that this bill amounts to enforcement of capital controls.
Here's an excerpt of the bill.
To amend the Internal Revenue Code of 1986 to prevent
the avoidance of tax on income from assets held abroad,
and for other purposes.
TITLE I—INCREASED DISCLOSURE OF BENEFICIAL OWNERS
Sec. 101. Reporting on certain foreign accounts.
Sec. 102. Repeal of certain foreign exceptions to registered bond requirements.
TITLE II—UNDER REPORTING WITH RESPECT TO FOREIGN
Sec. 201. Disclosure of information with respect to foreign financial assets.
Sec. 202. Penalties for underpayments attributable to undisclosed foreign financial assets.
Sec. 203. Modification of statute of limitations for significant omission of income in connection with foreign assets.
TITLE III—OTHER DISCLOSURE PROVISIONS
Sec. 301. Disclosure of assistance in acquiring or forming a foreign entity.
Sec. 302. Reporting of activities with respect to passive foreign investment companies.
Sec. 303. Secretary permitted to require financial institutions to file certain returns
related to withholding on foreign transfers electronically.
TITLE IV—PROVISIONS RELATED TO FOREIGN TRUSTS
Sec. 401. Clarifications with respect to foreign trusts which are treated as having a United States beneficiary.
Sec. 402. Presumption that foreign trust has United States beneficiary.
Sec. 403. Uncompensated use of trust property treated as a distribution.
Sec. 404. Reporting requirement of United States owners of foreign trusts.
Sec. 405. Minimum penalty with respect to failure to report on certain foreign trusts.
TITLE V—DIVIDEND EQUIVALENT PAYMENTS RECEIVED BY
FOREIGN PERSONS TREATED AS DIVIDENDS
Sec. 501. Dividend equivalent payments received by foreign persons treated as dividends.
1 TITLE I—INCREASED DISCLOSURE OF BENEFICIAL OWNERS
4 SEC. 101. REPORTING ON CERTAIN FOREIGN ACCOUNTS.
5 (a) IN GENERAL.—The Internal Revenue Code of
6 1986 is amended by inserting after chapter 3 the following
7 new chapter:
8 ‘‘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.
11 ‘‘SEC. 1471. WITHHOLDABLE PAYMENTS TO FOREIGN FI12
13 ‘‘(a) IN GENERAL.—In the case of any withholdable
14 payment to a foreign financial institution which does not
15 meet the requirements of subsection (b), the withholding
16 agent with respect to such payment shall deduct and with
17 hold from such payment a tax equal to 30 percent of the
18 amount of such payment.
To make a long story short, this legislation applies to financial institutions that are not exempt from existing withholding tax rules that have been in place under the IRS code since 1986--enacted under the Reagan administration by the way. If non-exempt institutions fail to report a withholding they will be taxes at a rate of 30% on payments rather than the normal tax rate that ranges from 0% to 10%.
Here is a report on the bill by the International Tax Blog:
Passage of HIRE Act Means Increased Foreign Account Reporting
The HIRE Act imposes additional reporting and disclosure requirements for U.S. persons with any interest in a “specified foreign financial asset” if the aggregate value of all such assets exceeds $50,000. These reporting requirements apply to any domestic entity formed or availed of for purposes of holding directly or indirectly “specified foreign financial assets” as if the entity were an individual taxpayer. more...
No new tax. No capital controls. The bill imposes additional reporting and disclosure requirements.
A complete and accurate analysis of the bill is available from James Hamilton, Principal Analyst at Wolters Kluwer Law & Business. Hamilton has been tracking, analyzing and explaining securities law and regulation for 30 years as an analyst for CCH.
Jobs bill places Offshore Financial Firms under Reporting and Tax Regime (pdf)
The Hiring Incentives to Restore Employment Act (HIRE), HR 2847, creates a vast new reporting and taxing regime for foreign financial institutions with U.S. account holders. Under Title V, the Foreign Account Tax Compliance Act, the legislation casts a wide net in search of undisclosed accounts and hidden income. It adds a new Chapter 4 to the Internal Revenue Code, essentially requiring foreign financial institutions to identify their customers who are U.S. persons or U.S.-owned foreign entities and then report to the IRS on all payments to, or activity in the accounts of, those persons. Participation in the existing Treasury Qualified Intermediary program will not exempt a firm from the new reporting obligations.
The legislation’s principal focus is tax compliance by U.S. persons that have accounts with foreign financial institutions. The Act imposes substantial new reporting and tax-withholding obligations on a broad range of foreign financial institutions that could potentially hold accounts of U.S. persons. The reporting and withholding obligations imposed on the foreign financial institutions will serve as a backstop to the existing obligations of the U.S. persons themselves, who have a duty to report and pay U.S. tax on the income they earn through any financial account, foreign or domestic.
These new reporting obligations for financial institutions will be enforced through the imposition of a 30-percent U.S. withholding tax on a wide range of U.S. payments to foreign financial institutions that do not satisfy the reporting obligations.
The legislation provides substantial flexibility to Treasury and the IRS to issue regulations detailing how the new reporting and withholding tax regime will work. It also gives Treasury broad authority to establish verification and due-diligence procedures with respect to a foreign financial institution’s identification of any U.S. accounts.
✔ New reporting and tax withholding requirements imposed
✔ Most foreign investment firms and entities covered
✔ IRS agreements specified for reporting, in lieu of withholding
✔ Qualified Intermediary program participants not exempted
✔ IRS authorized to establish verification and due-diligence procedures
✔ Bearer bond tax sanction extended to foreign markets
✔ Penalty for under-reporting foreign financial assets imposed
✔ Rules for determining if foreign trust has U.S. beneficiaries codified
✔ Dividend-equivalent payments subjected to withholding more...
Where are the new capital controls supposedly contained in this bill? There aren't any.
The whole idea that capital controls will appear this way and at this time makes no sense.
When and if capital controls are imposed, they will not come about in legislation the way the Foreign Account Tax Compliance Act of 2009 appeared as an amendment to the HIRE legislation. Capital controls will come out of nowhere and without warning. Capital controls don't work otherwise.
In addition, the timing is wrong. As we explained in September 2008 after net capital inflows had recently reversed, the time to worry about capital controls is when foreign capital is flowing out of an economy, not when it's flowing in.