US rethinks offshore tax evasion reporting rules

The US has responded to pressure from foreign governments and financial institutions over its crackdown on offshore tax evasion by proposing a significant change in how it will implement stringent reporting rules for overseas banks.

Officials held talks with their European Union counterparts in Paris last week about the scope for bilateral agreements, under which European banks would transfer data on US citizens to their national authorities which would then pass that information on to Washington.

The new approach to the Foreign Account Tax Compliance Act is being explored in response to concerns that forcing overseas institutions to report details of their US clients directly to the Internal Revenue Service would breach privacy laws.

The European Commission said: “The discussions with the US are very constructive, and we’re optimistic we’ll be able to find a mutually acceptable solution that will make it possible to implement Fatca in a business-friendly way.”

The administrative burden on banks of complying with the new rules, drawn up in the wake of a string of evasion scandals in 2008 and 2009, is also expected to be addressed in regulations to be issued this week.

Banks have lobbied strenuously against the new rules, saying that searching through records for US citizens and then reporting them could cost billions of dollars. If they refused to comply, they would have to withdraw from the US market or face a 30 per cent withholding tax on payments received from the US.

Emily McMahon, acting assistant secretary for tax policy at the US Treasury, said in a speech last week: “We believe that these proposals will substantially address the many comments we have already received regarding administrative burden, and will do so in a manner consistent with ensuring that the underlying objectives of Fatca are met.”

Stephen Land, head of Linklaters’ US tax practice, said: “The US is prepared to play ball. It’s a concession to practicality.”

In its latest set of regulations, the IRS is expected to narrow the focus of the rules on to larger accounts and bring the procedures required to identify US clients closer in line with the procedures that financial institutions already follow to comply with anti-money laundering rules.

Foreign banks have accused the US of trying to conscript them as arms of the US tax authority. But Ms McMahon said the US recognised that “bilateral solutions require reciprocity” and Fatca could serve as a catalyst for further advances in global information sharing.

She underlined Washington’s commitment to a controversial reporting proposal affecting foreigners with money in US banks, which could help overseas governments track down tax evaders. This proposal has come under fire from banks and US congressmen who say it is likely to result in the flight of hundreds of billions of dollars from US financial institutions.

“We see no principled basis on which to require that financial institutions based in other countries collect and provide us with information on US taxpayers, if we take the position that our own institutions should be exempt from similar requirements,“ Ms McMahon said.

In June, Timothy Geithner, US Treasury secretary, said authorities were “taking a very close look at what we can do to . . . make it workable within the scope of current law”.

He added: “There are things we can do that will . . . achieve the objectives of the law without too much risk of unintended consequences or too much collateral damage.”

Ms McMahon said the bilateral information sharing under discussion with trading partners of the US would build on the existing network of agreements under which the US exchanged tax information, in certain circumstances, with more than 60 countries.

The British Bankers Association welcomed the US proposals but warned that many details remained to be worked out. “We are hopeful the Americans have been listening and they will be pragmatic and make this work.”

Angela Foyle, partner at BDO, an international accountancy network, said: “It is clear the IRS is coming under increasing pressure from national and supranational bodies to rethink the extent of Fatca.”

The US Treasury declined to comment beyond Ms McMahon’s speech.