Tax-havens law raising global concerns

A sweeping new federal law has a seemingly simple goal - curbing offshore tax evasion by Americans through foreign banks, trusts and shell companies.

But behind the scenes, foreign banks and financial firms are increasingly finding that complying with the new law is creating a major headache.

U.S. Treasury Department officials say they are moving apace in getting the world’s banks on board with the law, the Foreign Account Tax Compliance Act. They say they have reached agreements with some large countries, are working on deals with others and are refining parts of the law, which is set to take effect on June 30, 2014.

But some financial institutions, trade groups, scholars and members of Congress have raised an array of concerns, starting with the cost of creating the complex computer systems needed to track Americans’ accounts.

In addition, tax havens like China, Panama and Russia have yet to sign on. And American banks are unhappyabout a Treasury Department pledge to foreign banks, not part of the original law, to require American financial institutions to share data with other countries about foreign investors who have accounts in the United States.

“You can search a long time for comments from the private sector or other governments singing the praises” of the law, said Mark Matthews, a tax lawyer at Caplin & Drysdale in Washington, and a former deputy commissioner of the Internal Revenue Service. “It’s all criticism, and that speaks volumes about the challenges.”

Still, even the critics acknowledge that they cannot stop the law, which aims to become a model for global finance rules, from going into effect. The question is whether all the global financial institutions will comply equally.

The law, known informally as FATCA, effectively makes all foreign banks and foreign financial institutions arms of the IRS by requiring them to disclose data on American clients with accounts containing at least $50,000, or to withhold 30 percent of thedividend, interest and other payments due those clients and to send that money to the IRS. The law applies to banks and financial institutions even if their home countries have secrecy laws. Those that do not comply could face significant fines or be locked out of doing business with American clients.

Robert B. Stack, deputy assistant secretary for international tax affairs at the Treasury Department, described the law as a success. “We have worked very closely with financial institutions to come up with a practical, risk-based approach that balances benefits and burdens,” he said in an email. “We think those efforts have paid off.”

Pascal Saint-Amans, director of the Organization for Economic Cooperation and Development’s Center for Tax Policy and Administration, called the regulation “a reality,” adding that “all countriessupport its underlying policy goals.”

But global banks and investment firms have made their dislike of the law known, though they are reluctant to speak out individually.

Payson Peabody, managing director and tax counsel at the Securities Industry and Financial Markets Association, Wall Street’s main lobbying group, said: “The goals are laudable, but there’s the risk of a train wreck” if some countries and banks do not comply.

IRS rules already provide for limited sharing of data, generally covering interest income from bank deposits held by nonresidents. The new intergovernmental agreements declare that the Treasury Department will seek legislative approval to disclose a much broader array of data covering investments, pensions and insurance.

In April, the Florida Bankers Association and the Texas Bankers Association, two trade groups, filed a federal lawsuit seeking to block the law from taking effect, saying that “reciprocity” was spurring nonresident customers to withdraw deposits - $50 million from one unnamed bank. In May, U.S. Sen. Rand Paul, R-Ky., introduced a bill seeking to outlaw parts of the data-sharing provisions. The bill cites privacy concerns.