Fiscal Cliffs And Taxageddon
“You have about 25 months to make your plan,” advised international tax and structures attorney Joel Nagel to attendees at our first Emergency Offshore Summit in December 2010.
Today, 19 months later, that window has narrowed accordingly.
I resist watching cable news because it’s usually more bad news than I can bear, but, this morning, Lief turned on CNN as we were dressing for the day. The coming changes Joel was referring to 25 months ago, the ones that are now just about 6 months away, were the topic for discussion among a bunch of U.S. tax and policy experts.
“We’re coming to a fiscal cliff,” one said.
“It’s Taxageddon,” added another.
Our resident U.S. tax expert Joel Nagel, as I mentioned, has been speaking and reporting on the coming changes for more than a year-and-a-half. As Joel puts it, “If you can see the freight train coming from a few miles down the track, you should be able to save yourself from being run over.”
The serious reality is that this freight train is nearly upon us. The unprecedented legislation that will take effect starting Jan. 1, 2013, will affect and seriously restrict the ability of Americans to move their money around as they want. Some say it’s the first step toward exchange controls.
We all should be concerned by what this new legislation is going to mean, in practical terms.
Starting Jan. 1, 2013, for example, every time U.S. dollars are wired offshore, the U.S. bank involved in the wire transfer will have to make a decision. Is tax owed on this money? If yes, the bank will be required by law to withhold that tax (at a rate of 30%) before making the transfer of funds.
If the bank fails to take any withholding, and it turns out the owner of the funds in question did, in fact, owe tax on the money transferred, the bank will be liable for the entire amount of the tax. If, on the other hand, the money is not taxable, but the bank mistakenly withholds the 30%, no harm, no foul, as far as the U.S. Treasury is concerned. In other words, no penalty for the bank.
Potentially big liabilities if they make a mistake in one direction. Not so much as an admonishment if they make a mistake in the other.
In which direction, therefore, would you imagine banks are likely to err? Every banker I’ve spoken with around the world agrees: Banks will have no way of knowing when tax is owed and when it’s not. It’s impossible for a bank to make that kind of determination. They’ll have no choice, really, practically speaking, but to withhold the 30% from every transaction.
Meaning that, starting Jan. 1, 2013, any time you arrange to wire money to another country, you’ll have to count on 30% being taken off the top, in the form of tax withholding.
This isn’t a new tax. Theoretically, you should be able to have any amount withheld in error refunded to you after you’ve filed your taxes for that year. The underlying issue here, though, has to do with something even more troubling than the mistaken withholding of some of your hard-earned money.
It has to do with a shift in how taxation works in the United States. Until now, Americans have paid their taxes according to a kind of honor system. We Americans know that we must pay our taxes, but we also understand that we have the right to figure the amount owed ourselves. We declare our income and our assets, and then we calculate what’s due Uncle Sam as a result.
With this new legislation, banks will become responsible for figuring when tax is owed. And for withholding it.
These are the kinds of worrisome realities we’re going to address in August when we convene our next Offshore Summit.
We’re going to do something else, perhaps even more important, during the three days of this event. We’re going to present your options.
We’re not CNN. Reporting on the world’s woes isn’t our beat. Our beat is opportunity. Choices.
And here’s the good news: You have good ones. Fully compliant ones. And, right now, you also still have time to take advantage of them.
After Jan. 1, 2013, some of these options are going to disappear. Indeed, some have already. I had news this morning that another of our preferred offshore banks, this one in Panama, has decided, as of today, that it will no longer open an account for any American who has not been legally resident in Panama for at least two years. One less offshore banking option available to Americans.
Indeed, you have fewer choices today, if you’re an American interested in protecting and preserving your wealth and diversifying your assets and your investments, than you did a year ago. And, in another six months, you will have seriously fewer choices still.
It’s not too late. But, no kidding, it will be soon.
If you have money, assets, business interests, investments, and a future to protect…I urge you to join us here in Panama in August for our final Emergency Offshore Summit to find out how.
I say “final” Emergency Offshore Summit, because, by year-end, the emergency situation will have passed. The aftermath will be upon us.
Kathleen Peddicord
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