The U.S. government predicts it could bring in nearly $9 billion in additional tax revenue over the next decade under a new law that requires foreign financial institutions to help snag tax cheats.
But don't expect international bankers to be too impressed. Not when they might, collectively, spend more than that to build the compliance and auditing programs they say would be necessary to identify unreported taxable holdings. According to both the U.S.-based Institute of International Bankers and the European Bankers Association, large global institutions might each incur expenses of $250 million or more to prepare for the Foreign Account Tax Compliance Act in the next two years, as they upgrade technology and familiarize employees worldwide with U.S. tax withholding policies.
"They're joking, 'Can we just write [the U.S. Treasury] a check and ask them to do away with this?" says Laurie Hatten-Boyd, a principal at KPMG in Washington.
Under the proposed enforcement guidelines set by Treasury and the Internal Revenue Service last fall, foreign banks have little choice but to comply with FATCA when it goes into effect in January 2013. Those that fail to report the offshore holdings of U.S. nationals to the IRS would face onerous consequences: a 30 percent withholding penalty on payments they receive from U.S.-based financial firms.
An alternative would be to pull out of all U.S. investments-a nearly unthinkable option for global institutions dependent on access to U.S. capital markets.
The cost of complying is only one of the complaints coming from across Canada, the Caribbean, Europe and Asia. More than 30 banks, trade associations and government officials from other countries have argued they may have no practical or legal access to information FATCA would have them collect. Some also complain that FATCA would require banks in countries such as Japan and Canada to duplicate the tax reporting already happening under treaties with the U.S.
"We are definitely supportive of the overall objective, which is basically trying to identify people who don't pay their fair share of tax in the U.S.," says Peter van Dijk, a senior vice president in Toronto-based TD Bank Group's taxation unit. "Our objection is we don't believe there is necessarily a big reason for building a brand new system."
U.S. banks have obligations under the new law as well. They must verify whether a foreign financial institution is FATCA compliant so they can enforce the 30 percent withholding provision when needed.
The Treasury and IRS expect to finalize the regulations in the summer, after considering industry suggestions that could settle many of the concerns of foreign institutions. Among the ideas put forth are limiting scrutiny to new accounts; exempting certain types of investments with lower risk of tax evasion activity; and letting banks comply with FATCA by using data already on hand from current anti-money laundering and know-your-customer regulations.
"There still continues to be a lot of lobbying," says Denise Hintzke, a director of the financial services tax practice at Deloitte. "We still see organizations sending in letters to try to influence Treasury in the drafting of the regs."
FATCA became an Obama administration priority following the U.S. Justice Department's hard-line negotiations with the Swiss financial giant UBS in 2009 to obtain the names of thousands of alleged tax evaders. That put a spotlight on the extent of unpaid taxes from offshore accounts and led to a Democratic push to add FATCA to the jobs stimulus bill signed into law last March. "This bill offers foreign banks a simple choice: If you wish to access our capital markets, you have to report on U.S. account holders," said Rep. Charles Rangel, D-N.Y., one of the sponsors of FATCA, in a statement released when the bill was passed. "I am confident that most banks will do the right thing and help to make bank secrecy practices a thing of the past."
Ellen Zimiles, managing director for Navigant Consulting and a former New York federal prosecutor of fraud and money- laundering crimes, says that Congress and Treasury have overstated the simplicity of the choice. Banks in some countries either have not maintained records that would point to nationality, citizenship or permanent resident status, or only have that information in paper records. "The financial institutions, in their onboarding, may not have previously asked all those questions in the way they need to for FATCA purposes," says Zimiles. "They may have some information, but I'm sure they have not asked if you're a U.S. green card holder."
Though anti-money laundering and know-your-customer procedures were introduced globally in the last two decades, they applied only to new accounts, says KPMG's Hatten-Boyd. "The Treasury and IRS thought [gathering data] was not going to be a big deal, because everybody's got AML and KYC documentation on file now," says Hatten-Boyd. "Well, it's not true."
Because of the lack of records, some large banks may have to vet tens of millions accounts around the globe, industry trade groups contend.
Many of the comment letters to Treasury have asked regulators to limit the scope of searches to electronic records. Otherwise, verification could involve having to search external public records for information on customers or contacting them directly to have them attest to their non-U.S. status-including possibly filling out IRS forms. That could infuriate foreign banks' domestic customers, who'd have to "prove" they have no American ties to avoid U.S. withholding taxes, says Hatten-Boyd. "Can you imagine your bank coming to you and saying, the government of China is asking me to get this documentation from you?"
The Institute of International Bankers and the European Bankers Association wrote that their members didn't believe such verification efforts "can successfully be implemented without substantial potential tax exposure and reputational risk to the financial institution attempting to do so."
Banks also argue that the compliance burden would be heavier in some countries than others. In Japan, where multiple bank accounts across households are commonplace, the 258 member banks of the Japanese Bankers Association will have to cull through 790 million bank accounts of its 127 million citizens. Out of those accounts, very few are expected to have U.S. ties since existing anti-money laundering measures make tax evasion difficult, and only 52,000 Americans live in the country, according to the JBA.
In addition, the trade group says, the country has an existing tax treaty with the United States that already gives the IRS much of the information that FATCA reports would provide.
Canada also has an agreement with the United States to exchange tax information, says TD's van Dijk. "We believe we catch all the people under our current tax compliance rules," and already share information on residency status and account activity of U.S. citizens on TD's books.
"We don't think there is any need for collecting any more information for these people, because they are being taxed in the first place," he says.
Several of the groups seeking to relax the FATCA rules have conceded the law will help fill the reporting and disclosure loopholes that enable tax evasion-a crime that costs the U.S. Treasury an estimated $100 billion a year, according to the Congressional Joint Committee on Taxation.
Still, trying to close those gaps could prove troublesome for some foreign banks, particularly with domestic privacy laws, says Deloitte's Hintzke. In Switzerland, for example, banks legally cannot seek waivers on consumer privacy or even acknowledge a customer has an account.
Under Canada's privacy laws, banks cannot compel accountholders to reveal certain information, says TD's van Dijk.
All this leaves unclear whether the U.S. can succeed in getting so many foreign companies to do what it wants. According to a recent report from KPMG, more than 200,000 foreign financial institutions, including banks, private equity firms, pension funds and other investment firms, are subject to the new law-far too many for Treasury to oversee.
The Treasury has the authority under FATCA to exempt whole classes of investors and asset-holders who pose a low risk for tax evasion, the report says. "To make this new regime manageable, it must be willing to use this authority."
Though Treasury could relax the final rules, and many expect it will, analysts warn foreign banks not to rely on that happening. If only minimal changes ensue, large institutions that haven't already begun preparing for FATCA may find that time-not just money-will be their primary challenge. "Gathering that information and remediating your old accounts will be a huge undertaking," says Zimiles. "That will take more than two years."
