Congress has rightly been concerned with wholesale tax evasion by fat cats – though with the current regressive tax regime in the US it would seem to me that there are more foreign fat cats hiding their incomes in US tax havens such as Nevada and Delaware. In April 2010 President Obama signed the Foreign Account Tax Compliance Act (FATCA) into law. Its provisions are designed – as a largely unintended consequence – to chill US exports.
I base my discussion here on a Lexology post on the law.
Let’s just imagine a scenario where your company wants to invest with a venture partner in China in a 50/50 joint venture – say to export to China your great new widgets. Your Chinese partners are going to provide local contacts, sales, management and facilities, you are going to provide capital of say $1 million, and your exported widgets.
Enter FATCA. Which under Section 1472 (for those interested in the details) imposes a 30 percent withholding tax on any payment made to a foreign entity from a U.S. bank even if the payment is to a non-financial foreign company, if it has any substantial U.S. owners (i.e., more than a 10 percent direct or indirect interest).
Under FATCA, as of 1 January 2013, your company will need to put up $1.3 million to make the investment in China. The 30 percent withholding will be taken off by your US bank prior to the transfer and given to the IRS.
Your German, French, Russian and Chinese competitors will, of course, have no such charge on capital.
How does this help exports?
Oh by the way, the revenues collected from FATCA are (ironically) supposed to go to fund the Hiring Incentives to Restore Employment (HIRE) Act.
Scottish truck drivers are now allowed to drive unlimited hours so they can get supplies delivered despite the snow while in Spain the striking air traffic controllers are forced back to work at gunpoint. This is legitimised by calling it martial law but the point is when those in charge say whatever they want and call it law, it isn’t. I don’t know quite what you’d properly name it as but this isn’t the rule of law.
[…] at the WSJ wrote about Toxic Citizens, the concerns that I have outlined in my earlier post on Fatca are also amplified here.It deserves a long excerpt: American expatriates are fast becoming the […]