ARE NEW CURRENCY LAWS OR “CURRENCY CONTROLS” AROUND THE HORIZON?

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ARE NEW CURRENCY LAWS OR “CURRENCY CONTROLS” AROUND THE HORIZON?

 

Some very controversial regulations passed way back in 2010 and finalized in 2012 are scheduled to go into effect on July 1 of this year, and most Americans know little or nothing about this new law. Yet the effect of these new regulations could send shockwaves through the financial system worldwide. Basically, the regulations that take effect July 1 will make it very difficult and costly for Americans to hold money or investments outside the US.

Starting in July, foreign banks and financial institutions will be required to report to the IRS any accounts they hold which are owned by Americans – including the owner’s name, address, Tax ID number (or Social Security number) and account balances of all offshore accounts if the combined amount is over $50,000. Many foreign institutions are up in arms about this, and some are kicking their US clients out to avoid reporting this information to the IRS. Most US investors who have money in offshore banks, funds, etc. will very likely close such accounts and bring their money home when they learn about this.

The Democrats who passed this law (back in 2010 when they controlled Congress) say these new regulations were designed simply to identify “tax cheats” who do not pay the IRS taxes on their gains earned outside the US. But the unintended consequence may be a major disruption in the global financial system that could cause the US dollar to plunge. Some even believe it could threaten the US dollar’s status as the world’s “Reserve Currency.”

Some analysts are calling the new law “currency controls,” which have never happened before in the US. As a result, ALL US investors need to know about this ASAP, not just those who have money or investments in offshore accounts, due to the potential for global repercussions. It’s complicated, and no one knows exactly what the outcome will be, but I will do my best to explain it today.

“The Foreign Account Tax Compliance Act”

To begin this discussion, we have to go back to 2010 when the Democrat-controlled Congress passed the “Foreign Account Tax Compliance Act “ (FATCA).  At the time, supporters said the new law was designed to ensure that US citizens banking and/or investing internationally could not avoid paying taxes on their income from offshore accounts and assets. In essence, it is a program aimed at uncovering “undeclared income” hidden by Americans in banks, funds, etc. around the world.

The premise of FATCA seems relatively simple: identify account holders and the dollar value of each account they hold in foreign banks, other financial institutions, offshore funds, etc. – if it is over $50,000 collectively.  That’s not hard, right? Well, it depends.

 

FATCA relies on partner nations (like Britain, Germany, France, Italy, Spain and many others) and other information pathways to discover both the identity of American foreign account holders and the taxable amount in those same accounts. Once the IRS has this information, it can compare it to taxpayers’ income tax filings to see if they have declared such offshore income and paid any tax owed on it.

Any foreign entity making a payment (interest, dividends, capital gains, etc.) to American-owned accounts must consider whether it is subject to FATCA. And FATCA may apply to both financial and non-financial operating companies abroad. Due to this breadth, FATCA impacts virtually all non-US financial entities, directly or indirectly, that act as custodians for offshore accounts owned by Americans.