Is the Foreign Account Tax Compliance portion of the HIRE Act really a surprise?Article added by Michael Nelson on July 9, 2010
Michael Nelson

Michael Nelson

new york, NY

Joined: June 21, 2010

My Company

I have read a few articles and heard comments about the recently enacted Hiring Incentives to Restore Employment (HIRE) Act, HR 2847, specifically relating to the Foreign Account Tax Compliance portion of the Act. This part of the Act has generated emotion and pontification about the downfall of America and its economy as the Act purports to punish countries for acting as investment and banking facilities for Americans in the international marketplace.

I am not sure this is a correct analysis of the Act or that President Obama is only focused on the ruination of world monetary transactions. Since Obama was inaugurated on January 20, 2009 as the 44th President of the United States, he has been instrumental in passing many Acts, including the HIRE Act and the even more recent Patient Protection and Affordable Care Act. Here is a listing of the Federal Acts that have passed so far under his Presidency:

03/30/10 Patient Protection and Affordable Care Act

03/18/10 H.R. 2847 The Hiring Incentives to Restore Employment Act

03/01/10 H.R. 4213 The American Workers, State, and Business Relief Act

01/27/10 S. 2949 Emergency Aid to American Survivors of the Haiti Earthquake Act

01/22/10 H.R. 4462 Haiti Assistance Income Tax Incentives Act

12/24/09 H.R. 3590 Patient Protection and Affordable Care Act of 2009

12/18/09 S. 2917 Small Business Penalty Fairness Act of 2009

11/16/09 S. 2771 Small Business Penalty Relief Act of 2009

11/06/09 H.R. 3548 Worker, Homeownership, and Business Assistance Act of 2009

10/27/09 S. 1934 Foreign Account Tax Compliance Act of 2009

10/01/09 111th Congress - Miscellaneous Tariff Bills

08/06/09 S. 1631 Customs Facilitation and Trade Enforcement Reauthorization Act of 2009

07/20/09 S. 1474 Transportation Preservation and Improvement Act of 2009

06/09/09 S. 1213 Patient-Centered Outcomes Research Act of 2009

06/08/09 S. 1203 Grow Research Opportunities With Tax Credits' Help Act (GROWTH Act)

05/19/09 H.R. 1 American Recovery and Reinvestment Act of 2009

03/26/09 S. 722 Taxpayer Certainty and Relief Act of 2009

03/19/09 S. 651 Compensation Fairness Act of 2009

02/04/09 H.R. 2 Children's Health Insurance Program Reauthorization Act of 2009

Students of the American legislative processes know that the formation and finalization of any national-level piece of legislation involves significant negotiations and that Congressional men and women, as well as Senators, strive to secure preferential treatment of law and/or revenue for their own projects and/or those that benefit their particular state. In addition, a national Act is an opportunity for the codification of the wishes of the Executive Branch to become immediate law without the public argument for it becoming an enforceable law, with the exception of the House and Senate. As an example, the Internal Revenue Code has example after example of private laws enacted into the Code for the benefit of single individuals who may have been major contributors to the Congress, Senate, the President's campaign or due to pressure from the professional lobbyists in Washington, D.C. Is this system perfect? No, but it is arguably one of the best systems on the planet. Why else are so many people still striving to immigrate into the United States?

This begs the question: Does the Foreign Account Tax Compliance portion of the Act actually control the flow of capital on a global level?

As those of us who read the papers and watch television know, this administration has made promises to make trillions of U.S. dollars available to public entities as a means of bringing the country out of this recession. The recently enacted health care bill may, arguably, require massive cash outlays from the United States government. Therefore, the U.S. Treasury is placed in a very difficult position of collecting revenue to support and fund these cash outlays, as well as meet the ever growing cost of running this country and its war on terrorism. Wars have always placed financial strain on the U.S. government. Even as far back as March 3, 1791, just 15 years after fighting the War of Independence, the U.S. Government enacted its first tax, which was imposed on distilled spirits and stills. This initial tax legislation was modified to include international transactions by including foreign spirituous liquors. In 1802, this revenue collection act and its related government offices established for enforcement of the revenue law were abolished. However, the War of 1812 put the country in severe financial difficulties and one year later, the revenue taxes were imposed again, as well as the government offices to enforce collection of revenues. It was the 16th Amendment to the Constitution that provided the basis for the current Internal Revenue Code Section 61, by stating, "[t]he Congress shall have the power to lay and collect taxes on income, from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration." The 16th Amendment was effective as of February 25, 1913 and continues on today in IRC Section 61.

The expensive economic burdens upon the U.S. in times of war go back as far as the War of Independence, and the most recent conflicts/wars waged overseas have become dramatically more costly. To this end, the U.S. Treasury is now facing the daunting task of collecting revenue without, at this time, increasing the tax rates on individuals. The Treasury has become very modern in its methods and means of collecting revenue. In the past, the Treasury was usually many steps behind what was happening in the world in terms of finding revenue for collection. Now, the Treasury has hired advisors who are on top of the schemes to avoid tax as well as tried-and-true methods to frustrate or confuse the Treasury. This Foreign Account Tax Compliance portion of the Act is supported by explanations from the House, Senate, Executive Branch, U.S. Treasury, Internal Revenue Service and the many speeches of the I.R.S. Commissioner. Additionally, you can look at the most recent Department of the Treasury's Notice of Proposed Rulemaking found at 31 CFR Part 103, RIN 1506-AB08, Financial Crimes Enforcement Network; Amendment to the Bank, Secrecy Act Regulations--Reports of Foreign Financial Accounts.

There have been some concerns and comments on the taxation and reporting requirements on gold and other commodities. However, this matter was addressed in 1970 where The House of Representatives Report stated:

Considerable testimony was received by the Committee from the Justice Department, the United States Attorney for the Southern District of New York, the Treasury Department, the Internal Revenue Service, the Securities and Exchange Commission, the Defense Department and the Agency for International Development about serious and widespread use of foreign financial facilities located in secrecy jurisdictions for the purpose of violating American law. Secret foreign bank accounts and secret foreign financial institutions have permitted proliferation of `white collar' crime; have served as the financial underpinning of organized criminal operations in the United States; have been utilized by Americans to evade income taxes, conceal assets illegally, and purchase gold have allowed Americans and others to avoid the law and regulations governing securities and exchanges; have served as essential ingredients in frauds including schemes to defraud the United States; have served as the ultimate depository of black market proceeds from Vietnam; have served as a source of questionable financing for conglomerate and other corporate stock acquisitions, mergers and takeovers; have covered conspiracies to steal from the U.S. defense and foreign aid funds; and have served as the cleansing agent for `hot' or illegally obtained monies.

Specifically refer to H.R. Rep. No. 975 91st Cong. 2d Sess. 12 (1970).

Under the above mentioned Proposed Notice, there is again the mention of gold:

Under 31 U.S.C. 5314 the Treasury Secretary is authorized to require any ``resident or citizen of the United States, or a person in, and doing business in, the United States, to keep records and file reports, when the resident, citizen, or person makes a transaction or maintains a relation for any person with a foreign financial agency.'' For this purpose, foreign financial agency means ``a person acting for a person as a financial institution bailee, depository trustee or agent, or acting in a similar way related to money, credit, securities, gold, or in a transaction in money, credit, securities or gold.

The paradigm of reporting foreign bank matters has a long history in the United States. The Treasury's need to know the amount of transactions/assets, types of transactions/assets and the situs is for not only determining the taxable income, but also the amount of wealth for taxable gifting of wealth as well as taxable estates of deceased Americans. Without this type of knowledge, the U.S. Treasury is almost blind as to the taxability of transactions that occur outside of the United States as it relates to U.S. citizens, green card holders and resident aliens. We are not the only country that attempts to keep track of assets belonging to its citizens. For example, a transfer of assets into a foreign trust by an English citizen that is a long-term resident of the United Kingdom will trigger an immediate tax on the entire value of assets transferred outside of its jurisdiction.

Conclusion

This Foreign Account Tax Compliance part of the Act was drafted to bring about a reduction in the number of foreign noncompliance. The method provided to bring about this reduction is to increase the Treasury's ability to detect, deter and discourage offshore tax abuses. This included 30 percent withholding on U.S. source payments to foreign financial institutions, foreign trusts, and foreign corporations that do not agree to disclose their U.S. account holders and owners to the IRS; requiring taxpayers to disclose their foreign accounts on their U.S. tax returns; increasing the statute of limitations to six years for failure to report certain offshore transactions and income; clarifying when a foreign trust is considered to have a U.S. beneficiary; and treating substitute dividend and dividend equivalent payments to foreign persons as dividends for purposes of U.S. withholding. This new legislation is designed to raise US $8.7 billion of revenue over 10 years.

If the American taxpayers are responsible citizens and abide by the law, I do not see where this type of legal abiding with the current law will force America to its knees nor inhibit legal investment activities overseas or the use of foreign banking facilities. As with any piece of national legislation that crosses into other jurisdiction, there will exist a conflict of laws matter. These conflicts are dealt with on an almost daily basis, from child abduction to repatriation of criminals. Many of these conflicts have been successfully resolved and many continue to exist and are resolved over time and on a country by country basis.

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