Swiss Banks Mourn As US Tax Transparency Dramatically Increases

Gretchen Morgenson is one of our favorite financial writers on the New York Times, responsible – along with colleague Louise Story – for breaking those “hidden in plain sight” stories about Goldman Sachs’s various machinations with derivatives,

Gretchen Morgenson is one of our favorite financial writers on the New York Times, responsible – along with colleague Louise Story – for breaking those “hidden in plain sight” stories about Goldman Sachs’s various machinations with derivatives,

Gretchen Morgenson is one of our favorite financial writers on the New York Times, responsible – along with colleague Louise Story – for breaking those “hidden in plain sight” stories about Goldman Sachs’s various machinations with derivatives,

both in general, in the Christmas Eve revelation that no one except us seems to have seen 😉 , and its shenanigans on behalf of the Greek government that have now come back to so badly haunt them, altho not GS of course … 😉 … [br]

In this piece in the Times, she explains how a little noticed section of an employment bill signed by President Obama in mid-March is going to make it MUCH harder for wealthy tax-evading Americans to safely park income off-shore,

via a 30 percent withholding tax that would be imposed on foreign financial institutions that refuse to provide details on their United States clients’ accounts,

such as who owns them and how much money moves through them.

The tax would be assessed on earnings generated by investments these foreign institutions have in United States Treasury securities, stocks, bonds or debt and equity interests in American businesses.

To answer the obvious question – does this mean we no longer think Obama is too much in the pocket of the TBTF and other banks ??? –

the answer is NO, WE DON’T THINK THAT … 😉 … and the reason is, as Morgenson explains, US banks will actually be likely to BENEFIT from this new rule,

which DOES, of course, hurt their foreign competitors … 😉 …

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Foreign tax havens like Switzerland, Liechtenstein and some Caribbean countries thrive by keeping their clients’ money under wraps and safe from tax authorities’ reach.

Now, Congress is attacking some of these schemes, courtesy of interesting provisions aimed at curbing tax avoidance that legislators wrote into the new jobs bill, known as the Hiring Incentives to Restore Employment Act.

The most substantive section of the bill states that foreign financial institutions will face a 30 percent tax on their United States investments if they refuse to disclose information about accounts they have opened for American citizens in offshore jurisdictions.

Another aspect of the bill eliminates a clever derivatives strategy used by investors to make their tax bills on dividends disappear.

Individuals have stashed an estimated $1 trillion in offshore accounts, the government says, allowing them to avoid up to $70 billion in taxes each year.

The federal government estimates that abusive offshore schemes by corporations cost our Treasury an estimated $30 billion in tax revenue as well.

Given our large and growing deficits, $100 billion in annual tax revenue would sure come in handy …

UNDER the bill, a 30 percent withholding tax would be imposed on foreign financial institutions that refuse to provide details on their United States clients’ accounts, such as who owns them and how much money moves through them.

The tax would be assessed on earnings generated by investments these foreign institutions have in United States Treasury securities, stocks, bonds or debt and equity interests in American businesses.

The law was written broadly and covers banks, hedge funds, securities houses, derivatives dealers, commodity traders and private equity firms.

Indeed, any financial firm that holds or trades assets for its own account or for clients must comply with the new reporting requirements.

It will be up to the Treasury Department to decide how the law applies to insurance companies.

The Treasury will also have to create a system to withhold the tax from institutions that do not comply with the reporting requirements. It has until the end of 2012 to do so …

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And given the way Tim Geithner’s Treasury works, you can bet they won’t come up with anything UNTIL the end of 2012 …

Assuming, of course, they don’t ask for an extension … 😉 …

Now here’s the fun part about the derivatives … 😉 …

[quote]

Under our laws, dividends paid by United States companies to foreign shareholders are supposed to be taxed at 30 percent.

But for many years, banks have structured deals using derivatives that allow clients to turn dividends into “dividend equivalents.”

Though these payments look like dividends, because they are embedded in a derivative, they do not generate a tax.

Here’s how they work: Say a hedge fund holds shares in General Electric.

By entering into a swap agreement with a financial institution, the fund can simultaneously sell its G.E. shares a few days before the dividend is issued

and receive a derivative tied to the value of the shares and the dividend payment.

After G.E. pays the dividend, the swap is canceled and the investor gets back the shares plus the dividend equivalent payment.

The bank that did the trade typically charges a fee linked to the amount of tax savings the hedge fund reaps.

The new law eliminates the tax-free aspect to this transaction, because it treats the swap payments as dividends.

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Sounds good … let’s see if it works …