Defending the Dollar
CNBC published a story on February 14th this year entitled ‘Is the Dollar Dying? Why US Currency Is in Danger’. Many believe that the one of the key pillars of the US economy is the fact that the US dollar remains the world’s reserve currency which for me includes the petrodollar system. This allows the US to continue running deficits and printing currency to stimulate its economy. The CNBC article is pointing out that according to the International Monetary Fund, the dollar has drifted to a 15-year low and is shrinking as a percentage of the world's currency supply, raising concerns that the greenback is about to see its long run as the world's premier denomination come to an end.
While more countries are willing to use other currencies to do business, the American currency still reigns supreme. It constitutes $3.72 trillion, or 62 percent, of the $6 trillion in allocated foreign exchange holdings by the world's central banks. The Japanese yen, Swiss franc and what the IMF classifies as "other currencies" such as the Chinese Yuan are gaining.
For me this background or context is an important one because it is within this context that the recent congressional hearings in the US and public accounts committee meeting here in the UK, must be placed. Why else would leaders of companies like Apple, Google and Amazon be accused of being ‘evil’ simply for carrying out their ‘fiduciary duty’ to minimize tax liabilities within the law, for the benefit of its shareholders? I have recently read that even Winston Churchill, as Chancellor in the 1920s, said that ‘'the highest authorities have always recognized that the subject is entitled so to arrange his affairs as not to attract taxes enforced by the Crown so far as he can legitimately do so within the law!’
A NY Times article printed on May 21st explains that US multinationals now hold more than $1.6 trillion in cash classified as “permanently invested overseas.” These funds will face the 35 percent federal corporate tax only if it is returned to the country. I am wondering whether the recent enthusiasm by the political elite to pressure companies to repatriate this money is actually an attempt to defend the US dollar and release the funds into circulation within the domestic economy. After all, the Congressional Joint Committee on Taxation estimated that if foreign profits of United States corporations were fully taxed it would generate an additional $42 billion this year for the government, which given the $16 trillion plus deficit would not exactly turn things around.
The same principle applies to FATCA. The Foreign Account Tax Compliance Act (FATCA) is part of the effort by the US government to prevent money laundering, and reduce tax evasion. It requires all Americans whose foreign financial assets cross a certain threshold, to declare these assets as part of their returns. This obligation exists regardless of where the American citizen or legal permanent resident actually resides. Furthermore, it places a considerable burden on financial institutions around the world to report the financial holdings of any US persons. In order to comply with FATCA, financial institutions outside of the US are now required to identify from amongst existing customers, those with any US citizenship / residency / earnings or even US addresses/monthly payments/IDs/accents. Furthermore, on boarding is made more difficult as some financial institutions attempt to avoid legal persons with any American ties to avoid costly compliance. In Switzerland today there are only two banks in the entire country that will accept a US client for even a basic checking account, and all new and potential clients must go through rigorous questioning to ensure they are not a 'US person' before the bank can offer them any service at all.
It is noteworthy that FATCAdoes not necessarily levy any additional taxes, rather it is a reporting requirement. At the same time, the implicit cost of complying with these additional obligations sends a not to subtle message to American persons – ‘bring your money back to the US’.
Recently the European Parliament held a public hearing on FATCAwhich is available on YouTube as well as on my blog. The UK was the first nation to sign a FATCA intergovernmental agreement (IGA) because the financial systems of the two nations are so inextricably linked that there was no real choice. From the debate within the European Parliament however, it is clear that there is a momentum towards a global FATCA. Noble sentiments but the most obvious obstacle for me is that even though there may be a bill drafted and thus willingness by the White House, I anticipate serious opposition in Congress to any legislation that gives foreign governments (even Russia or China?) or foreign financial institutions access to the financial details of holdings in US financial institutions. This reciprocity to FATCAis sometimes termed DATCA by the media.
If you think the resistance to gun control was tough, wait till someone tries to push DATCA thru Congress!
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