US delays reporting rule for foreign banks

August 4, 2011, 11:40 / Advisory / Jurisdiction: USA, Source: Finacial Times (FT.com)

The US Internal Revenue Service has responded to pressure from foreign governments and banks by delaying a controversial law that requires financial groups to report their American clients to the US tax authorities.

The Foreign Account Tax Compliance Act, a sweeping attempt to fight tax evasion which was supposed to come into force at the start of 2013, will be phased in over several years, the IRS said.

The law has sparked a firestorm of protest from overseas banks, which complained they were being deputised as US enforcement officials under instructions to identify US-linked accounts worth more than $50,000. If they refuse to comply, they would face a choice of a punitive 30 per cent withholding tax on payments received from the US or trying to withdraw completely from US markets.

Under the new schedule, private banks, which face the most onerous requirements, will have to provide details on clients with accounts with more than $500,000 by the middle of 2014. Lower value accounts at private banks can wait until the end of 2014 while other accounts do not have to be reported until 2015.

“The phased-in approach recognises the operational reality faced by financial institutions,” Doug Shulman, IRS commissioner, told the Financial Times. He said a lot of banks had complained that their computer systems were not set up to meet the US requirements and that much of the extra time was designed to allow them to change these.

Banks have said they have already been racking up significant costs and that eventually the task of scouring records for US citizens and reporting them could run into the billions of dollars and conflict with domestic privacy laws.

Mr Shulman said the US was in talks with other governments about ways to make Fatca easier to comply with but said there would be no “substitution” of the law with bilateral agreements. “We’re talking with a number of governments to make sure that places where local laws need to be adjusted or reporting regimes need to be put in place to make this doable,” he said.

He said there would be more guidance to come – “There’s still lots of questions about who’s in, who’s out” – and said he hoped not to be imposing the withholding tax on non-compliant institutions.

“The goal was never to be a withholding regime,” he said. “The goal is that there’s no withholding, that we just get that transparency.”

If the withholding tax is imposed, it will only be imposed on US-sourced interest and dividend payments in 2014. Proceeds from the sale of US securities will not be taxed until 2015 and more indirect US sourced income will not be taxed until 2015 at the earliest.

Some believe the tax threat will lead to foreign groups trying to remove themselves from US capital markets. But officials are sceptical that the burden of Fatca will outweigh the benefit of access to the US but have stressed that even indirect contact with US markets will ultimately incur the withholding tax.

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