Foreign bank accounts, already under scrutiny by U.S. regulators, have a new set of complications created by the government shutdown.
The rollout of the Foreign Account Tax Compliance Act is tougher with the partial U.S. government closing, which may lead to delays in guidance on the rules and U.S. efforts to negotiate agreements with other countries, Bloomberg BNA reported.
“The program was already somewhat behind,” Candace Ewell, principal in PricewaterhouseCoopers LLP’s Washington national tax services group, said of the act, known as Fatca. “All of this time is lost time in moving that forward. This certainly is putting additional pressure on the very aggressive deadlines that Fatca has.”
Enacted in 2010 to curb cross-border tax evasion, Fatca creates a new information reporting and withholding regime for foreign banks and accounts. The law is intended to ensure U.S.- owned accounts are properly reported to the Internal Revenue Service. It also impacts a range of entities outside of banks, including investment companies, funds and brokers.
If the shutdown is brief, “it’s disruptive, but it doesn’t cause things to completely fall apart,” said John Harrington, a partner with Dentons in Washington. If the closing goes for an extended period of time or if there are multiple shutdowns, it could have “a very negative impact,” said Harrington, a former international tax counsel at the Treasury Department.
It remains a possibility that Fatca agreements in the final stages of negotiations may be signed soon.
The first wave of reporting under the law is set to begin July 1, 2014, and more guidance was expected within the next few weeks. On a parallel track, the Treasury Department has been working on dozens of accords with other countries, known as intergovernmental agreements or IGAs, to allow for government-to-government reporting under the law.
Nine have been signed so far, including pacts with Denmark, Germany, Ireland, Japan, Mexico, Norway, Spain, Switzerland and the U.K. Many more are nearing the finish line, Treasury officials have said.
Both those talks and the Fatca guidance may be delayed by the shutdown, although the full impact remains a question, said Philip West, a partner with Steptoe & Johnson LLP in Washington.
“Some members of the team needed to write the regulations and negotiate the IGAs are not working,” said West, a former Treasury international tax counsel. “That’s going to bog down forward progress.”
Still, banks have been waiting for the agreements for a long time and may not have expected the accords would be done immediately.
“It’s not like anyone promised that an IGA would be forthcoming last week and now it’s not,” West said. “It’s hard to know the precise impact.”
If guidance is issued that tightens Fatca requirements and taxpayers have less time to implement the changes, “that could be a problem,” West said.
Timing is key for many agreements, with the possibility that a foreign government may have flexibility to negotiate a pact only in a particular window of time, Harrington said.
“Some of this truly could be lost opportunities because of local circumstances,” he said. “But in some cases it might be just a delay.”
The deadlines already are tough to meet, and the government shutdown could make it even more difficult, PwC’s Ewell said. The IRS and Treasury gave taxpayers a six-month extension from the original deadline of Jan. 1, 2014.
That might not be enough, Ewell said.
“You’re going to see stakeholders still asking for additional time,” she said. “A year was requested and only six months was granted. There’s just so much work to do.”