FATCA, the Foreign Account Tax Compliance Act, was a little known, almost hidden, part of the innocuous sounding Hire Act which was passed into law by the U.S. legislators in 2010. It has absolutely nothing to do with improving the job prospects of Americans as the principal act was intended to do. Much of U.S. legislation is like this. A well publicized act is put up and supported by too few members of the legislature to command a majority voting for it. The promoters set out to garner support by agreeing to add on to their proposed bill small additions which are of no consequence to the act for which support is being sought. An approached member of the House or Senate may have no leanings one way or the other about the act to be introduced. Support can be guaranteed by promising to "add on" to the main act funding for a pet project of the indifferent legislator. Such appendages are called "earmarks" and although much has been done to discourage the practice it still occurs. FATCA was an item of this nature.
Certainly it is the case that
its repercussions could have been seen when it was passed but its
horrific effects were probably not anticipated by the government. The
Americans are resourceful and inventive people. They could not have
sent men to the moon and brought them back alive without so being.
These qualities extend also to the administrative as well as the
technological and scientific fields.
By way of this law the U.S. Treasury is getting overseas banks to act as tax collectors all over the world. The reason that the U.S. Treasury wanted the Act stems from the fact that the country is almost alone in the world in taxing people according to their citizenship and residential status regardless of where they happen to be working or living. The Inland Revenue Service had become convinced that many were hiding their wealth overseas and avoiding tax by having funds in private offshore bank accounts.
FATCA was made possible because the U.S. Dollar is the world's reserve currency. For trade every country needs dollars. This was reinforced when President Nixon took the currency off of the gold standard but at the same time negotiated an agreement with OPEC (Organization of Petroleum Exporting Countries) that oil should be traded only with U.S. dollars. For these reasons the U.S.A. has been able to run trade deficits for decades. If more dollars were needed then they were simply printed. This situation is changing. More and more countries are doing business between themselves for their own local currencies. This is happening also with oil. Venezuela and Iran in particular have been trading oil in currencies other than the U.S. dollar. Trade and financial sanctions imposed particularly on Iran have encouraged this. For business to be done with a country faced with sanctions and embargoes the buyers and sellers require only confidentiality. The years of Ian Smith's illegal regime in Rhodesia (now Zimbabwe) was a worldwide apprenticeship in how sanctions could be bypassed without risk to trading partners.
This weakening of the status of the U.S.dollar threatens the country's position as the world's largest debtor and the position of its currency with the loss of being the world's reserve. This reserve status has given rise to the current system of "quantitative easing" as the printing of money is now known since the 2008 Global Financial Crisis. The economic illogicality that the way out of debt is to borrow more is slowly being realized. What this may mean for the U.S.A. economically and financially is not clear. It is worth noting that no fiat currency has ever survived in the long term.
Most overseas banks and financial institutions need to do business with the U.S.A. To continue to do so the I.R.S forces upon them an onerous, voluminous and detailed reporting requirements about all customers with U.S. connections. It also calls for similar declarations by individuals about their overseas holdings and business. It is easier for the foreign organizations to declare their compliance with this act by having no clients with U.S. citizenship or residency. Many are doing this by closing existing accounts and doing no new business with such customers. The penalties for failing to make the required declarations are astronomical in scale for the individual and the overseas entities. For failing to declare overseas accounts of $US10,000 (or more) an individual can be fined a minimum of $US100,000 (with custodial penalties as alternatives or in addition) and a foreign dealer can face the withholding of 30% of its U.S. income if it fails to report on a customer with an account in excess of $US50,000.
The effects on U.S. citizens who retire abroad will be and have been disastrous. The inability to open a bank account in the new country means that accessing U.S. social security entitlements and other U.S. earnings have become difficult and expensive. Those who have retired to the U.S.A. are finding that their accounts in their countries of origin are being forcibly closed. Access to pensions and earnings becomes a major problem. There are ways round these difficulties but none are cheap and most are circuitous and time consuming.
There is no doubt that this act is the worst example of U.S. financial and commercial hegemony that the world has ever seen. How long this situation will be tolerated cannot be known. In a world of increasing bilateral relationships between countries the need for a reserve currency diminishes. Without this favored status and in spite of its enormous output and technological expertise the U.S.A. will have to work for every foreign penny that it needs. At first it may not cope with the situation of becoming the world's poorest trading nation very well. The problems experienced recently by Ireland, Cyprus, Greece and Zimbabwe may be small in comparison with what the U.S.A. could face. Retirees were the hardest hit and the least able to recover in these countries and they will suffer most with any deterioration of circumstances in the U.S.A.
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