Amidst many new challenges that expats are facing with more restrictive immigration policies in many countries around the world, a new difficulty has reared its head for Americans living abroad — but this one comes from the country they left behind.
Part of the HIRE Act, signed into effect by the president in mid-March 2010, requires foreign banks to report to the Internal Revenue Service account information for US citizens with savings in excess of $50,000. They are fishing for tax evaders and Americans keeping funds in foreign tax havens, but they are going to catch an entire sea worth of law abiding, tax legit US foreign residents in their nets.
If foreign banks do not report the income holdings of US citizens to the IRS, they face a 30% withholding on all investment payments they receive from the USA until they comply. In reaction to this policy, some foreign banks have closed their doors to US citizens altogether — it is apparently better to loose the money of potential American clientele than it is to deal with their government.
The U.S. government – under a new law incorporated in the Hiring Incentives to Restore Employment Act signed by President Barack Obama on 18 March 2010 – is demanding that international financial institutions reveal which of their clients are U.S. citizens with accounts of more than $50,000. Foreign banks are, in effect, being asked to act as the international enforcement arms of the Internal Revenue Service. Those banks that don’t comply will be subject to a 30% withholding tax on all payments made to them in the U.S. Many banks and wealth managers have decided it is far easier to politely show their U.S. clients the door. -Wall Street Journal
This tax fishing wing of the HIRE Act is meant to be a fund raiser for the rest of the program, which is a domestic employment stimulation initiative. So economic incentives are to be granted to employers who hire perpetually unemployed laborers with money appropriated from American tax dodgers.
The $15 billion bill was primarily designed to create jobs. The tax elements were added during the final stages of negotiations in order to help cover the cost of the incentives being offered to employers. -US Tax Proposal May Affect Expats
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Sounds fair, but, as with most things in government, I hold strong doubts as to the efficiency of its implementation, and a fresh problem is created in the process:
The USA is trying to police the banking practices of the entire planet. Some of the banks of the world are not taking too kindly to such intrusions into where their money comes from. A few have even closed their doors to American citizens.
The Wall Street Journal reports:
Mr. Krause says: “We’re likely to see a scenario in which U.S. expats are encourage – or forced, depending on your point of view – to use U.S. banking affiliates abroad. They will have options but nowhere near the same range of options as everyone else.” -Wall Street Journal
But the extent to which banks in other countries are really closing their doors to US citizens is unclear to me right now. This is a new policy, much of what I read about it is just speculation about what could happen — the real knee jerk effects of the HIRE Act on Americans living abroad will take time to tell, though renouncements of US citizenship have reputedly risen sharply around the world since this act was signed into law in March.
The aim of these HIRE laws are not really to police the financial institutions that Americans use when living and working abroad but to help the IRS take their due from very wealthy US citizens — most of whom are living in the USA and are not expats or foreign residents — who are harboring excessive amounts of money in tax havens abroad. The expat, who is often just etching out simple a living for himself abroad, stands to be caught in the cross fire.
The biggest problem for US expats working abroad is that they generally get paid in foreign currency that they keep in foreign bank accounts. If they were denied access to local banking, they would be economically blighted on many fronts: financial actions like direct deposit, debit card withdraws, and sending electronic transfers to make purchases has become the standard ways of moving money all over the world. Without access to a local bank account, an expat is put into a financially limiting position and is at a disadvantage in the country that, for all intensive purposes, is their home.
I have had bank accounts abroad on two occasions, both in China. I would receive money through local direct deposit which I would therefore access with an ATM card. I was in the country long term, I had temporary residency status, and it was much to my benefit to have the local bank accounts. I received money electronically and I withdrew it electronically — this was the rule, there was no other way.
Although I never made that much money in China, many people do. If you work as an English teacher in China, you stand to collect a decent amount of savings; if you work as an English teacher in Japan or Oman, you stand to make a lot of money. In the recent economic scheme, a person working and living abroad really needs a local bank account to interact financially in the place they live. This is simply, the money classes of the world use their funds electronically — the days of holding on to your money are gone, money is now moved electronically.
I cannot tell you how someone can deposit hard currency into a bank that they are half way around the world from. If I did not have my local bank accounts in China, I would not have been able to put money in the bank short of sending Western Union transfers home to my parents to deposit into my account. With debit card technology quickly becoming the rule of accessing money and making large purchases all around the world, bank access is beyond convince, it is becoming essential. For people making money abroad, a local bank account is the clutch first move towards digitalizing their money.
And once money is digitalized it can be sent all over the world, regardless of what country you are in.
If the banks of the world really do start denying American citizens accounts en masse, American expats and foreign workers will be put in a very compromising position.
Where will they keep their money if not in a local account — in a shoebox? I have a friend teaching English in Oman. He told me that he was able to save $30,000 from one year of work. He would need a mighty large shoe box indeed.
I have a friend who was traveling through Kyrgyzstan, he recounted a story of talking with a group of nomads who once ask him how big his bag of money was. He had to explain, with difficulty, that Americans don’t keep money in bags, they keep it in banks. The knee-jerk reactions from this HIRE act may send Americans living abroad back to the financial stone age. We live in a world where money is computed electronically, commerce and wealth are not only measured by paper and coin but by little numbers on a computer screen. To remove the ability of US expats to deposit their legally earned foreign income in banks is to greatly limit their ability to use their own money.
The money that American expats receive from working abroad is that they are often already taxed locally. The United States is the only developed country in the world that seeks to tax its expats twice. If you Work Abroad, you must file your earnings with the IRS — even if you have already paid taxes in the country where the money was made. Many US expats that I have known do abide, in some part at least, by the tax rules of their home country. If you are in the USA for under 30 days in a given year and make under $80,000, you don’t have any tax liability anyway. Requesting the bank details of these individuals is a moot point to start with.
The number of people the HIRE Act is going after is a relatively small minority of very wealthy Americans who stash money away from the tax man abroad, but this policy could drastically impact great numbers of law abiding, tax legit, Americans working, living, and using the banking resources in other countries. The rich who are keeping their money in tax havens are more than likely rich enough to find ways to continue side stepping laws such as this — but the American citizen living abroad, teaching English, working another job, or running a small time business may have their bank account information seized and analyzed by the IRS, or their accounts may be closed by foreign banks ill disposed to being given orders by the US government.
If the HIRE Act really does cause the knee jerk reaction that some sources are predicting, the American expat is given another new obstacle when making a home abroad: they must find a way to ship their earnings to the USA, only use US banks when abroad, denounce their citizenship, or keep their earnings in a shoe box.
My government seems to be digging behind the couch cushions for any scrap of loose change it can find, it is cannibalizing its own people in the process.
The life of the expat is always precarious — one shift in governmental policy in their surrogate home can send them packing for the hills, one turn in geo-political relations can give them the boot, twists and turns in international economic relations can present new challenges, more obstacles, and addition hoops to jump through in an ever changing world. When you live in a foreign country you are forever floating on the ebbs and flows of international Politics, economics, and immigration policy. Expats are perpetually floating on their moorings at the dock of their chosen country, very rarely do they ever find themselves with firm ground to build upon.
The effects of the HIRE Act are just one of a number of new obstacles placed before the American living abroad.
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