US tax evaders will find it much harder to hide money abroad from today, when a sweeping new law is to come into effect requiring foreign banks to report their offshore accounts.
Banking centers like Switzerland and Luxembourg that agreed to the US Foreign Account Tax Compliance Act (FATCA) will have to begin turning over account names and other data to US financial authorities so that they can tax unreported income.
The US Treasury has spent much of the past several years pressing the issue on some of the world’s most powerful and secret banking centers with threats of punitive action if they do not join in.
That means Americans are to have far fewer options to stash their cash offshore away from the eyes and hands of the US Internal Revenue Service (IRS).
The effort to track down tax evaders has already pushed thousands of US expatriates to give up their citizenship in order to escape the US IRS.
However, it is also having a big impact on the business of offshore banking centers, which have long marketed account secrecy to depositors from around the world.
“It is the earthquake that has collapsed the dam,” said Pascal Saint-Amans, who heads the unit fighting tax havens at the Organisation for Economic Cooperation and Development.
The US has already carried out long campaigns against banks like UBS AG and Credit Suisse AG for helping Americans hide money and both have been hit with large fines.
However, they and other Swiss banks, and thousands of others around the world, have now agreed to file reports on accounts exceeding US$50,000, held by US citizens, to US authorities.
If a bank does not comply with US rules, the US has threatened to withhold 30 percent of certain payments made from the US.
“This is a nuclear weapon,” Saint-Amans said.
About 70 countries have signed treaties or agreed to cooperate with the US on FATCA.
“The strong international support for FATCA is clear, and this success will help us in our goal of stopping tax evasion and narrowing the tax gap,” said Robert Stack, the Treasury’s deputy assistant secretary for international tax affairs.
The US launched in earnest the campaign to tax income held offshore by US citizens and residents in 2009, a time when US government budget deficits were soaring and income falling due to the economic crisis.
Since then, Washington has pulled onto its side the developed countries of the G20, many of them also concerned about tax evasion.
Unsurprisingly, Washington has endured hostility from the banking industry, which says that, besides the impact on business, the reporting rules create a huge and costly burden on their operations.
“The law is incredibly complicated and we wonder sometimes whether the compliance benefit is worth the cost,” said Payson Peabody of the Society of Insurance Financial Management.
“We’re particular concerned about the shifting of governmental burden to the financial industry,” he added.
Swiss banks estimate they have to spend at least 250 million euros (US$340 million) to adjust their systems and begin complying with the new rules.
“It’s going to be much more difficult to use the traditional schemes that have been used for tax evasion. But there’s no doubt that people will find new ways to get around the new law. People will look for countries and banks that don’t have agreements with the US,” Heather Lowe of Global Financial Integrity said.
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