Oct. 27 (Bloomberg) -- Two leading U.S. lawmakers proposed legislation that would impose new taxes on foreign banks that refuse to disclose the identity and contents of accounts owned by Americans.

The measure would impose a 30 percent withholding tax on income from U.S. assets held by non-U.S. institutions that refuse to name American account holders and report balances, deposits and withdrawals.

“It’s basically a fee for maintaining bank secrecy,” said Philip West, a former international tax counsel at the U.S. Treasury who is now a partner with Steptoe & Johnson LLP in Washington. “The IRS has a very legitimate interest in knowing if there are Americans holding assets offshore in an undisclosed account.”

The legislation, sponsored by Senate Finance Committee Chairman Max Baucus of Montanta and House Ways and Means Committee Chairman Charles Rangel of New York, both Democrats, would strengthen an Internal Revenue Service program in which foreign banks agree to confirm U.S. depositors’ identities and notify the IRS of income earned in the accounts.

The so-called Qualified Intermediary program was criticized by lawmakers after UBS AG admitted violating it by helping tens of thousands of Americans secretly deposit their money offshore. UBS spokesman Serge Steiner in Zurich declined to comment on the proposal.

Hidden Assets

“A small number of individuals and businesses hide their assets overseas solely in order to shirk their responsibilities, even as the vast majority of hard-working Americans honor the obligations of citizenship and fulfill their responsibilities,” said President Barack Obama in a statement supporting the bill.

Treasury Secretary Timothy Geithner said the bill would “help narrow the tax gaps and create the fairer tax system we need.”

The bill would force banks such as UBS and Credit Suisse Group AG to choose between paying the U.S. tax or violating bank-secrecy laws in their own countries that bar them from disclosing their account holders’ information, said Reuven Avi- Yonah, a tax law professor at the University of Michigan.

“This really becomes a fight between two countries over bank secrecy,” Avi-Yonah said.

Tax Havens

The proposed withholding tax is one of 13 provisions aimed at punishing tax havens that are projected to generate $9 billion in revenue over the next decade.

“These tax evaders cost our country tens of billions of dollars every year in unpaid taxes, and honest, law-abiding taxpayers pay the price,” Baucus said in a statement.

“It is expected that foreign financial institutions would comply with these disclosure and reporting requirements in order to avoid paying this withholding tax,” according to a summary of the legislation. That additional compliance is projected to generate about $3.1 billion in tax revenue over the next decade.

It is legal for Americans to have an offshore bank account, provided they pay taxes on interest and dividends earned and they declare accounts worth more than $10,000.

The legislation also would impose $1.6 billion in levies over the next decade on foreign investors who try to avoid 30 percent withholding taxes on dividend payments by using a derivative transaction known as a total return swap.

Swaps

In such a transaction, offshore investors such as hedge funds sell stocks to Wall Street firms near the time for dividend payment. At the same time, the securities firms enter into swap contracts in which, for a fee, they agreed to pay investors the equivalent of the dividend plus any stock gains.

The swaps changed the definition of the income under IRS rules, letting offshore funds claim they didn’t earn dividends subject to the 30 percent tax. The Wall Street firm in turn, might owe taxes on the dividends -- at the lower, 15 percent rate for U.S. taxpayers -- while claiming even larger deductions for the swap payment to the investor.

“This was an approved loophole in the sense that everybody knew it was happening,” Avi-Yonah said.

The Baucus-Rangel bill proposes changes that were proposed by the Obama administration and stops short of more sweeping changes proposed by Senator Carl Levin of Michigan, a Democrat whose Permanent Subcommittee on Investigations held hearings exposing UBS’s efforts to solicit U.S. customers in violation of the Qualified Intermediary program and separately on the use of total return swaps, which were marketed as “dividend enhancement products.”

To contact the reporter on this story: Ryan J. Donmoyer in Washington at rdonmoyer@bloomberg.net

Last Updated: October 27, 2009 14:41 EDT