I heard that Muslims are not allowed permanent tattoos on the body because it hinders water from reaching the skin. Hence making the Wudhu and Ghusl never valid.
Please quote some references in your answers.
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There is no need of reference from hadith or Quran for this issue.
If one's wudu/ghusl will be invalid , then his/her prayers will be invalid.
So, not-only tatto any other things like nail polish which hinder water from reaching the skin would never be allowed in Islam.
Most of the scholars said that tattoo is not allowed since it is a way of changing the creation of Allah.
References regarding tatoos are not allowed in Islam:
Having tattoos is not haram in Islam (from a shiite perspective, afaik).
As for ghusl and wudu being invalid because water does not reach the part of skin having tattoo is a misconception.
From Wikipedia article on tattoo (emphasis mine):
... inserting indelible ink into the dermis layer of the skin ...
dermis (part of the skin) is below the surface not on top of the skin. (Source: Skin)
Therefore water does reach the part of the skin having tattoo.,
On the other hand, temporary tattoo (henna/mehndi, Decal-style, etc) could be problematic because, if I'm not wrong, it inhibits water from reaching the skin and therefore would be advisable to not have. Even then it's not that it's not allowed to have, just that you'll have to remove it in case you want to do wudu and/or ghusl.
Now, to back-up the above with a ruling (although indirect):
If a verse of the holy Qur'an or Name of the Almighty Allah is written or tattooed on the body of a person then such a person while doing Wudhu or Ghusl, will be required to pour water on that part without touching the writing.
This fatwa proves the fact the Wudu can be performed when one has a tattoo.
I am unsure about henna/mehndi (temporary tattoo) because it is widely practiced among the Muslim population of the Subcontinent and Middle-East, so I am guessing there would be a different ruling for it due mehndi's material properties. Same could be the case for pen ink because the above stated fatwa also mentions written.