You're All Invited...

 The table is being set.  Join the United States Treasury and the Internal Revenue for dinner on January 1, 2014 – P.S. Bring your check book.

FATCA stands for the Foreign Account Tax Compliance Act.  It is a devastating piece of legislation with a hidden agenda.  FACTA was quietly enacted in 2010 by Congress as part of the Hiring Incentives to Restore Employment Act (HIRE).  Under the auspices of taxing Americans on income worldwide, it is really the mechanism by which the United States Govt. can trap capital in the United States.  The Govt. is constructing the barricades now for the anticipated capital flight.  I know, I know….Another conspiracy theory right?  But think about it.  There already exists a withholding mechanism for payments to non-residents (also 30%) on FDAP Income.  The estimated revenue from these new withholding code sections added by FATCA are minimal, so why do it?  More on that below.

FACTA imposes a 30% withholding tax on any foreign financial institution (FFI) that doesn’t comply.  That is 30% withholding.  And get this, it applies to gross proceeds from the sale of securities.  There is already a 30% foreign withholding on interest and dividends code section that has been around forever, but this FACTA withholding is a new framework. And there is a pass through concept.  So if an FFI is compliant but deals with an FFI that isn’t they must withhold on the payments they make to a non-compliant FFI.  Ever play dominoes?

On April 8, 2011, the Internal Revenue Service (“IRS”) and Treasury Department (“Treasury”) issued Notice 2011-34 (the “Notice”) setting forth additional guidance with respect to the reporting and withholding requirements under the Foreign Account Tax Compliance Act (“FATCA”).1 FATCA introduced a new 30% withholding tax on any “withholdable payment” made to either a foreign financial institution (“FFI”) or a non-financial foreign entity (“NFFE”) unless the FFI meets certain reporting obligations or the NFFE discloses certain information regarding substantial U.S. owners. A “withholdable payment” generally includes any payment of interest, dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, and other fixed or determinable annual or periodical gains, profits, and income from sources within the U.S. It also includes gross proceeds from the sale of property that is of a type that can produce U.S.-source dividends or interest, such as stock or debt issued by domestic corporations. The new 30% withholding tax on any “withholdable payment” made to an FFI (whether or not beneficially owned by such institution) applies unless the FFI agrees, pursuant to an agreement entered into with Treasury (“FFI Agreement”), to provide information with respect to each “financial account” held by “specified U.S. persons” and “U.S.-owned foreign entities.”

To the above most people would think……WTF……What does that even mean?

FATCA will be a major challenge for non-U.S. financial and non-financial entities with U.S. investors or owners. FFIs, including most Qualified Intermediaries (QIs) and Non-qualified Intermediaries (NQIs), have three basic choices: (1) enter into an agreement with the IRS to put procedures in place to identify and disclose U.S. account holders, (2) accept the 30% withholding tax on U.S. payments, or (3) restructure their businesses to stop serving U.S. customers, stop offering (and owning) U.S. investments, or both. 

The US is the power house county in the world economy and facing debts never seen before in the history of the world.  They know full well a day of reckoning is coming.  They know full well that when that day come rich people may want to move their money out of US institutions.  But where?  What if the USA were to impose a tariff, or a tax, or a levy, call it whatever you will, that was so punitive that foreign financial institutions (FFI’s) or Non-Financial Foreign Entities, (NFFE’s) just threw up their hands and said, forget it.  We will not take any more money from US citizens or permanent residents.  Where will all that money go?  Where will all those rich US guys put their money?  I guess they will just leave it here....

Michael

The Inevitable Headline

 The coming headline:

XXXXXXX defaults on debt.  To leave EU and reissue Currency. 

Greece? Spain? Or perhaps Portugal goes first.  The seismic shifts from this first domino will be huge.  The Greek "bailout" was anything but that. A mere band-aid on an open wound. The debt problems still exist, and the austerity measures that are causing riots will surely deepen the recession. Or maybe the people will fight back enough to cause the government to lift the measures. Either way its bad for the world economy.

You know the evil empire guys at Goldman Sachs have worked out the fair market value for all the EU member country’s currencies if they go back to them.  They will not tell anyone, as they want to trade on this information.  The United States Treasury and Federal Reserve have target currency conversion rates too.  But theirs are surely inferior to those of Goldman’s.  So in the confusion and chaos that will follow such an announcement what is likely to happen?  Well – surely such confusion is good for the dollar.  Good for Treasuries. 

Is it possible for Treasury yields to go negative, again?  It has happened already right.  Is it possible the United States of America could start charging for the right to buy a US Treasury?  Why not.  If you want to buy a US Treasury you must pay 1%.  And this might not be a short term phenomenon, but one lasting months, quarters or even years.  Negative interest rates on US Treasuries for extended periods.  Why not?

Now if you can wrap your head around that concept, that buyers will have to pay for the privilege of buying US Treasuries, then try this one.  What happens when all currencies are no longer benched to the dollar.  What happens when US Treasuries are not viewed as the safe haven.  What happens if the sentiment turns so abruptly that instead of paying the US to issue them a T Bill, they avoid us like the plague.  I don’t know….Where in the world will all those dollars go then?

-Michael (from Feb 6th)