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Latest U.S.-Swiss Deal Makes Clear: No Hiding Cash In Big Swiss Banks

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Uncle Sam will find out about your Swiss accounts. (Photo credit: Wikipedia)

The U.S. Treasury said today that it has reached deals with both Switzerland and Japan that will allow the U.S.---with just a few extra steps---to get the comprehensive reporting of foreign bank accounts held by U.S. citizens required by the Foreign Account Tax Compliance Act (FATCA).  The agreements are just frameworks, so more details must still be worked out before they take effect.

FATCA was passed by Congress in 2010 as a part of the U.S. crackdown on offshore tax cheating that is estimated to cost Uncle Sam $100 billion a year. The new law requires foreign banks either to report annually to the Internal Revenue Service on all accounts owned by U.S. citizens (and by foreign entities owned by U.S. citizens) or to withhold as tax and send to the IRS 30% of the proceeds from  U.S. source payments to those accounts. Foreign banks must enter into a reporting agreement with the IRS by June 30, 2013 or else begin withholding on U.S. source payments on Jan. 1, 2014.

In recent years , dozens of wealthy Americans, including billionaire California developer Igor Olenicoff,  have pleaded guilty to hiding money in undisclosed accounts at UBS AG in Switzerland, HSBC in India and other offshore banks.  In 2009, as part of a deferred prosecution agreement with the Department of Justice, UBS agreed to pay the U.S.  $780 million in fines, penalties and restitution and turn over the names of thousands of U.S. account holders. The U.S. is still investigating other Swiss banks, including Credit Suisse and Julius Baer, and the Swiss are seeking a  global resolution of all those cases.  In its own press release today announcing the new FATCA agreement, the Swiss State Secretariat for International Financial Matters said it hopes an agreement with the U.S.  “on the resolution of outstanding tax issues concerning the past"  will be reached by year-end.

FATCA aims to make it almost impossible to hide accounts at major foreign banks going forward.  Foreign banks and governments have objected to FATCA as burdensome, overreaching and in many cases in conflict with their own countries’ laws, but most major banks see little choice but to come into compliance.  (Some smaller foreign banks, to the dismay of U.S. expatriates, have said they no longer want U.S. citizen customers.)  As the Swiss Secretariat noted in its statement today: “The implementation of these provisions is generating high costs and legal uncertainty worldwide. Switzerland's refusal to implement FATCA would cause major disadvantages for the financial centre. The prohibitive withholding tax of 30% on all payments from the United States and the likely consequence that foreign financial institutions would terminate their business relationships with Swiss financial institutions in the medium term would result in exclusion from the world's largest capital market.”

In February, the U.S. reached a deal with France, Germany, Italy, Spain and the United Kingdom which would reduce the burden on banks---and opportunities for tax evasion by citizens of all the participating countries ---with a direct, government to government exchange of information on accounts. That exchange would exempt financial institutions in those countries from either reporting directly to the IRS or withholding 30%, so long as they report the information required to their own governments and register with the IRS as Foreign Financial Institutions (or are in a category exempt from FFI registration) .

The agreement with Switzerland creates a more cumbersome process, but would also exempt the banks there from 30% withholding.  Under the framework, Swiss banks would report directly to the IRS on any U.S. owned account---if the account owner consents. (Even that is technically a criminal violation of Swiss bank secrecy laws, but the Swiss authorizes have agreed to grant an exception.) If a  a U.S. account owner doesn’t consent to such reporting, the information will eventually be handed over anyway, after a process described by a  Treasury official during a background briefing for reporters. According to the official, the Swiss bank would give the IRS a summary of the number of accounts and total value of accounts owned by “recalcitrant” U.S. citizens who  refused to permit their information to be sent directly to the IRS.  The U.S. government would then formally ask the Swiss government to collect and turn over information about the account holders on the list, under the terms of  a separate agreement covering the exchange of tax information.

Similarly, the Japanese agreement would allow for direct reporting by banks to the IRS, where account owners agree, and the reporting of an aggregate number and value of recalcitrant accounts, with a follow up request to the Japanese government. The Treasury official said that the deal with the European nations and the agreements with Switzerland and Japan, present two different models other countries could use to bring their banks into compliance with FATCA. Final regulations implementing FATCA are expected to be issued later this year.

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