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BARRON'S December 4, 2000 Page 66
EDITORIAL COMMENTARY (Thomas G. Donlan)
Following the Flag
The IRS enlists foreign banks for global tax enforcement
For those who believe the recent American prosperity has rested on a flow of
foreign capital
seeking investment opportunities on these shores, a test is under way.
Acting in zealous pursuit
of evildoers, the Internal Revenue Service claims a tax lien on every
investment held by foreign banks
and brokers whose clients might turn out to be American taxpayers.
Those Americans, you see, might be trying to evade taxes on interest,
dividends or capital gains.
So unless the foreign financial institution happens to be located in a
country the Treasury designates as cooperative, and unless the institution
also pledges to investigate its own customers, there will
be the IRS to pay before any money leaves the US.
How much? Starting January 1st, a withholding tax of31% on interest,
dividends and gross proceeds of securities sales will be levied on all
securities transactions that are not carried out through "Qualified
Intermediaries," unless the unqualified intermediary identifies its client so
the IRS can verify
the client's claim that no American tax should be due.
Unidentified clients of unqualified intermediaries will be subject to the
withholding, even if they are not
Americans, even if they are not subject to any U.S. tax. If they won't
identify themselves, the withholding will become a permanent confiscation.
American taxpayers with a passion for privacy, however, will be able to keep
their secrets and pay their taxes if they deal through a Qualified
Intermediary.
There has not yet been a rush for the exits, but imagine the coming annoyance
of foreign investors who own stocks and bonds traded on U.S. markets whose
bankers have neglected to become Qualified Intermediaries. Especially
imagine the annoyance of those who sell their stocks or bonds
at a loss, since the withholding applies to the gross proceeds, not to
taxable net profit.
The first obvious result of the new rules is that they will reduce the supply
of foreign capital for investment in American companies. A second is that
more American companies will incorporate themselves offshore and keep their
securities off the U.S. markets.
Neither result will be good for America. The IRS has confused the pursuit of
income tax with the pursuit of happiness. The value of the damage could be
far greater than any possible revenue gain.
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