March 31, 2010 - Phil Hodgen

Well, there’s the other possibility that Congress didn’t see

Tax law changes recently here in the U.S.  Purpose:  stop evil Americans from avoiding their tax obligations by opening accounts outside the United States and failing to report the income earned.

Method employed by Congress:  a foreign investment firm (banks, everyone) must either tell the IRS everything it wants to know, or else.  The “or else” is a 30% tax on U.S. investments held by foreign institutions.  Conventional wisdom is that Swiss banks will weep:

Under the bill, a 30 percent withholding tax would be imposed on foreign financial institutions that refuse to provide details on their United States clients’ accounts, such as who owns them and how much money moves through them. The tax would be assessed on earnings generated by investments these foreign institutions have in United States Treasury securities, stocks, bonds or debt and equity interests in American businesses.

The law was written broadly and covers banks, hedge funds, securities houses, derivatives dealers, commodity traders and private equity firms. Indeed, any financial firm that holds or trades assets for its own account or for clients must comply with the new reporting requirements.

Spot the hidden assumption.

  • (Hint:  the hidden assumption is that all foreign financial institutions will find the U.S. capital markets so irresistible that IRS information requests will be willingly answered, or Americans will be turned away as potential clients, thus thwarting attempted tax evasion.)

Test the hidden assumption.

  • (Hint:  there are other capital markets in the world.  Buying U.S. Treasuries and U.S. stocks and bonds — investors can live without this.)

Financial institutions would never entirely reject the U.S. capital markets, would they? [PDF]  What could possibly go wrong?

US Real Estate Investments Voluntary Disclosure