Banks Get Break on New Tax-Evasion Enforcement--Update 1

By Dow Jones Business News, 
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Banks Get Break on New Tax-Evasion Enforcement -- Update


By John D. McKinnon and Eyk Henning

WASHINGTON--The Treasury Department said it would ease enforcement of a sweeping new U.S. law aimed at curbing offshore tax evasion, in a victory for banks worried about the costs and possible disruptions to the financial system.

The law, the Foreign Account Tax Compliance Act, or Fatca, will go into effect July 1, but the Treasury and Internal Revenue Service won't rigorously enforce many of its requirements in 2014 and 2015, as long as firms are making a good-faith effort to comply, officials said.

The law, enacted in 2010, requires foreign banks to start turning over information about U.S.-owned accounts to the IRS. It also would force banks around the world to withhold a share of many types of payments to lenders that aren't in compliance with the law.

The action comes as U.S. officials have cracked down against U.S. citizens with undeclared assets in foreign bank accounts. Tens of thousands of taxpayers have admitted to having undeclared accounts and paid stiff penalties since 2009. Scores have been criminally prosecuted, and some have gone to prison.

Many banks in the U.S. and elsewhere have been lobbying in recent months to slow implementation of the law. Banks have worried that a full rollout would cause a loss of customers and widespread disruptions, particularly given that several major countries, including China and Saudi Arabia, haven't signed agreements with the U.S. to help implement the law.

Financial institutions have complained that compliance has created heavy administrative burdens. A recent survey of major members of industry group the Securities Industry and Financial Markets Association, or Sifma, showed that banks would spend about $1 billion in 2013 and 2014 on Fatca compliance.

"The amount of time remaining to achieve the effective, full implementation of Fatca is woefully inadequate," Sifma warned in an April letter to the Treasury. "If banks and securities firms are not afforded sufficient time for an effective implementation of Fatca, [the association] believes that adverse consequences could include severe disruptions to global and U.S. financial markets."

U.S. officials have said banks are overestimating the level of possible disruption that could occur to the financial system.

For most U.S. taxpayers, the postponement is unlikely to have much effect. "This does little or nothing to relieve the intense pressure on Americans abroad to come in compliance with complex reporting requirements that were widely ignored before Fatca," said David Kuenzi, founder of Thun Financial Advisors LLC in Madison, Wis., which manages $75 million.

Treasury officials don't expect the delay to have much of an effect on the law during the next year and a half. Fatca rules already phase in a number of financial institutions' new duties through 2016.

"Based in part on feedback from stakeholders, today's notice outlines several measures to help institutions comply with Fatca in a timely manner," said Deputy Assistant Secretary for International Tax Affairs Robert B. Stack.

A former IRS adviser who helped write the Fatca legislation, J. Richard Harvey, said the delayed enforcement ultimately could help the regulatory effort, by helping to avoid a failed launch.

"If the first several months are a disaster, it could lead to calls for its repeal," said Mr. Harvey, now a Villanova University law professor. "By signaling they will ease enforcement, they are hopefully taking some of the pressure off the initial implementation."

Banks have been meeting with Treasury officials to emphasize the need for more time. Industry groups praised Friday's move.

"It appears to represent a constructive response to our concerns by recognizing good-faith efforts to comply with Fatca during the transition period," said Sally Miller, chief executive officer of the Institute of International Bankers.

Already, the law's requirements have led some global banks to drop U.S. customers. In a letter reviewed by The Wall Street Journal, Deutsche Bank AG is asking U.S. clients of its operations in Belgium to close their accounts with the German bank and transfer them to rivals in a move to comply with the U.S. rules. The bank said it regrets having to terminate client relationships in what it called a consequence of Fatca implementation.

The bank said in its letter that because "it is no longer allowed to use Internet, email, phone or fax to serve retail clients" who are U.S. taxpayers with accounts in European branches, a business relationship is untenable in countries where it has only a limited number of branches. Deutsche Bank is organized in Belgium in a way that compels clients to use online banking and call centers for their daily banking needs since it has only 34 branches in the country, said a bank spokesman.

Treasury officials said Deutsche Bank is misinterpreting the rules, adding that the law doesn't prohibit banks from providing online banking or phone services to customers.

In Europe, banks such as HSBC Holdings PLC and UniCredit SpA's German unit have decided to close certain services for U.S. residents outside of America, including securities accounts, mortgage products or insurance policies.

The broader U.S. crackdown on suspected tax cheats has caused problems, especially for Swiss banks. Some are participating in a Justice Department program and have begun compiling information on how they may have helped U.S. taxpayers avoid tax obligations. Banks found to have undeclared U.S. assets may face fines but may also receive nonprosecution agreements.

Julie Steinberg and Daisy Maxey contributed to this article.

Write to John D. McKinnon at john.mckinnon@wsj.com

Subscribe to WSJ: http://online.wsj.com?mod=djnwires


  (END) Dow Jones Newswires
  05-02-141923ET
  Copyright (c) 2014 Dow Jones & Company, Inc.


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