As CF&P has consistently warned, the Foreign Account Tax Compliance Act passed last year is driving foreign investment out of the US, which means less capital investment for the economy and thus fewer jobs for Americans. A group of Taiwanese banks fed up with the burdensome requirements of the law are reducing their US holdings, according to this report:
Taiwan’s domestic banks will reportedly reduce holdings of American bonds worth an estimated NT$100 billion (US$3.33 billion) due to the U.S. government’s recent decision to impose 30% tax on foreign-investment income in U.S. securities as bonds.
…On April 8, 2011, the U.S. government issued a notice advising foreign financial institutions to meet certain obligations under the Foreign Account Tax Compliance Act (FATCA), under which foreign financial institutions are subject to complex reporting rules related to their U.S. accounts. Failure to meet such reporting obligations means the U.S. will impose a 30% withholding rate on certain U.S. source payments to foreign financial institutions.
Foreign institutions holding U.S. securities are required to ink FATCA with the U.S. government before June 2013 or be levied the said 30% rate starting 2014.
Accordingly, Taiwanese banks holding U.S. financial products have decided to lower the positions of such holdings.
Stories such as this can be expected to increase in frequency as we get closer to the final implementation date should Congress not act to overturn this mistake.
Recently, I co-wrote an article with Dan Mitchell laying out our objections to FATCA and why this is likely just the tip of the iceberg. We wrote:
…[T]he FATCA law creates a powerful disincentive for foreign investment in the US. FATCA thus has the net impact of potentially reducing both economic prosperity and government tax revenues.
The Act looks to accomplish its goals through heavy use of new reporting requirements and excessive penalties for non-compliance. Institutions that do not comply with the reporting requirements on US persons – the costs of implementing the necessary changes across the financial sector will likely reach into the hundreds of billions – have already begun dropping US clients and divesting in US assets. The alternative to compliance is either a new 30% withholding tax on payments to foreign financial institutions that do not comply with the disclosure requirements, or avoiding any US business altogether. The results should have been predictable.
…FATCA is simply a fundamentally wrong-headed approach to tax policy. Rather than looking at how to make the US tax system more hospitable to foreign investors, more conducive to economic growth, and easier for everyone involved to understand, the US Congress decided to engage in the fools errand of trying to track down and collect every last dollar of possible unpaid tax, despite the fact that the US has relatively high compliance rates and even though the marginal cost of extracting additional revenue is much higher than the marginal benefit.