U.S. enlists 5 EU nations in offshore tax crackdown

Wed Feb 8, 2012 10:08pm GMT

(Reuters) - The U.S. Treasury Department on Wednesday enlisted five EU nations to help crack down on offshore tax evasion by Americans and ease the burdens the effort has imposed on many banks and financial institutions.

After complaints from the global financial industry about costs and legal issues, Treasury announced a new multilateral approach to implementing the Foreign Account Tax Compliance Act, or FATCA.

Enacted by the U.S. Congress in 2010, FATCA is intended to help the U.S. Internal Revenue Service gather information about Americans' accounts with more than $50,000 in assets in foreign banks and other institutions.

Scheduled to take effect in 2013, the new law as drafted calls for banks and financial institutions worldwide to gather the information and directly disclose it to the United States' Internal Revenue Service (IRS) tax collection agency.

Under Treasury's proposed "new government-to-government framework for implementing FATCA," the governments of France, Germany, Italy, Spain and the United Kingdom will work together to create a means to collect the information from their banks and send it to the United States.

Treasury said that once these five "FATCA partner" countries finalized the framework, banks in those countries would not have to enter into separate data disclosure agreements with the IRS.

In addition, in a reciprocating agreement, Treasury said the United States would collect and share information with the five participating EU countries about accounts held by their citizens in U.S. financial institutions.

For nations not invited to become "FATCA partners" with the United States, banks and financial institutions in those countries must still cooperate on their own with the IRS.

Noticeably absent from the new framework were major international banking nations such as Canada, Switzerland and the Netherlands, not to mention tax haven jurisdictions such as Ireland, the Cayman Islands and Bermuda.

LIST OF 'FATCA PARTNERS' MAY GROW

A Treasury official said in a conference call with reporters that more countries may join the "FATCA partners" list.

"We've had numerous conversations with other governments beyond the five that are cited," the official said.

Asked about Canada's exclusion from the list of five countries, a senior government official with knowledge of the matter told Reuters that the United States "was open to exploring a similar arrangement with Canada."

Canadian Finance Minister Jim Flaherty said the ministry had raised "serious concerns" about FATCA with the United States.

"Today's announcement appears to demonstrate an interest in greater joint government collaboration to address such concerns. We will continue to work with our American counterparts towards an approach acceptable to both our countries," he said.

Michael Mundaca, a co-director at Big Four accounting firm Ernst & Young and formerly the U.S. assistant secretary for tax policy, said: "It will be interesting to see how other countries and especially other financial centers react."

Becoming a "FATCA partner" means being able to ensure adoption of suitable disclosure laws, no easy task in countries with bank secrecy and client confidentiality laws; getting banks to collect and disclose data to their own national authorities; and then transmitting that data to the United States.

The new multilateral framework addresses secrecy issues in some countries that prevent banks from directly disclosing client data to the United States, Treasury said.

TEMPLATE FOR OTHER DEALS

Opting for a multilateral approach "acknowledges the detrimental impact to the United States of the 'go it alone' mechanism that was ... inherent in the FATCA regime," said Scott Michel, a tax lawyer at the firm of Caplin & Drysdale.

"This agreement ... will obviously provide a template for other agreements," he said, adding that countries declining to strike similar deals may find their own financial institutions will face overly burdensome compliance and reporting costs.

As originally drafted, FATCA will require that foreign financial institutions either collect and turn over data on U.S. clients with accounts of at least $50,000, or withhold 30 percent of the interest, dividend and investment payments due those clients and send the money to the IRS.

Foreign institutions and entities that refuse or fail to comply would face bills for taxes due, a penalty of 40 percent of the amount in question and heightened scrutiny by the IRS.

Financial institutions and intermediaries had objected that forcing banks to track pass-through payments on syndicated loans, swaps, foreign currency trades and routine money transfers was unduly burdensome.

Pass-through payments are payments that flow through separate legal entities on their way to the recipient.

Those affected by FATCA include commercial, private and investment banks and shells and trusts; broker-dealers; insurers; mutual, hedge and private-equity funds; domiciliary companies; limited liability companies, partnerships; and other intermediaries and withholding agents.

Treasury said it would allow foreign financial institutions to rely on information they have already collected under anti-money laundering and "know your customer" rules to determine whether they have U.S. taxpayers as clients and thus must collect and disclose information about them under FATCA.

(For more Reuters tax and accounting coverage, see: blogs.reuters.com/taxbreak/)

(This version Corrects Michael Mundaca's former job title in paragraph 15)

(Reporting by Lynnley Browning in Fairfield, Connecticut; additional reporting by Patrick Temple-West in Washington, D.C., and Louise Egan in Ottawa; writing by Lynnley Browning and Kevin Drawbaugh; editing by Howard Goller and Andrew Hay)