The U.S. is negotiating with Japan and Switzerland on detailed procedures for sharing U.S. account holders’ offshore bank information under an anti-tax-evasion law scheduled to take effect in 2013, the Treasury Department announced.
Banks and financial institutions from around the world have been complaining to the U.S. about the burdens caused by the Foreign Account Tax Compliance Act, or Fatca. The agreements announced today are part of the governments’ efforts to create a smoother process for information exchange.
Under the law, overseas banks will be required to inform the Internal Revenue Service annually about the balances and activity in their U.S. customers’ accounts. The U.S. can impose a 30 percent tax on some U.S.-related payments being sent to financial institutions outside the country that don’t comply with the rules.
“The intergovernmental framework announced today provides a second model for implementing Fatca in a way that addresses domestic legal impediments and reduces burdens on financial institutions,” Emily McMahon, acting assistant secretary for tax policy, said in a statement.
At a hearing at the IRS on May 15, representatives from banks in Japan, Switzerland and other countries warned that in some cases, Fatca conflicts with local privacy laws, making it illegal for them to comply.
The negotiations with Japan and Switzerland represent a different model from potential agreements the U.S. announced earlier this year with France, Germany, Italy, Spain and the U.K. In those other countries, financial institutions would report information to their governments, and the governments would share information directly, and automatically, with each other.
The agreements with Japan and Switzerland would allow financial institutions to report information directly to the U.S. and permit the U.S. to request any additional information it seeks from the foreign government under existing treaties.
The agreements don’t absolve financial institutions from their requirements under Fatca, a senior Treasury official said on a conference call with reporters today. The Swiss government would change its law to allow banks to report some information to the U.S.
The model announced today could be extended to other countries, said the official, who spoke on the condition of anonymity to discuss the details of the agreements.
Among the countries that might be interested in similar agreements are Mexico, Australia, Canada and Israel, said Laurie Hatten-Boyd, a principal at KPMG LLP.
“Seeing that Switzerland has made it this far would give everybody a great sense of hope that they would be able to negotiate something that would be workable for them,” she said.
Congress passed Fatca in 2010 to help cover the costs of a tax incentive for companies to hire additional workers. The Treasury Department expects to issue final regulations on Fatca later this year, the official said.
In a statement, the Swiss government said the agreement would reduce the cost of implementation for financial institutions and that refusal to participate would cause “major disadvantages” for the country’s financial industry.
“Negotiations between Switzerland and the United States on the resolution of outstanding tax issues concerning the past are still ongoing,” the Swiss Department of Finance said in the statement. “It is hoped that an agreement will be reached by year-end.”
Hatten-Boyd said the international agreements will reduce compliance burdens because financial institutions won’t have to set up the withholding systems.