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US legislation


Swiss banks to tell all under FATCA


By Armando Mombelli



The American FATCA legislation comes into effect on July 1. The world’s banks will be required to supply Washington with regular updates on customers liable to pay US tax. This means the end of Switzerland’s much-vaunted tradition of banking secrecy.

Swiss banks and asset managers are gearing up to implement the FATCA (Foreign Account Tax Compliance Act) rules, by which the US government is to get all information on capital held anywhere in the world by people liable to pay American taxes.

How FATCA works

Washington’s new legislation, the Foreign Account Tax Compliance Act (FATCA), aims to fight tax evasion by wealthy Americans (the “fatcats” lambasted by President Barack Obama) by ensuring that tax is paid on all capital held abroad – in banks, insurance companies and other entities.

According to the legislation, foreign financial institutions have to register with the American tax authorities (IRS) and send in periodic reports on the assets that they hold for American taxpayers. The information should start to flow by April 30, 2015.

In an initial phase, only deposits over a certain limit, such as $50,000 for personal accounts, will be reported. Later all capital will have to be declared.

So far about 80 countries are negotiating or have concluded agreements with Washington to implement the FATCA system.

The American legislation is the model for the standards developed by the OECD to introduce automatic exchange of information on a global level.

This willingness to do the bidding of a foreign government would have been a surprise not many years ago. But by now even the most uncompromising defenders of banking secrecy have decided to get into line after the US Department of Justice went after 15 Swiss banks accused of helping tens of thousands of well-heeled Americans to dodge paying tax.

Switzerland was in fact one of the first countries to sign an agreement with the US spelling out how the FATCA rules are to be applied by its financial industry.

Steep costs

Unlike most other European countries, Switzerland opted for a “model 2” agreement, whereby it is not the Swiss tax man but the banks themselves that are to supply the data to Washington.

To do this, the industry players first need to identify all those customers subject to American tax: this means American citizens, of course, but also Green Card holders, and other individuals or companies legally domiciled in the US.

This was a huge operation for the Swiss financial industry to mount. “Implementing FATCA is not so crucial for other countries whose financial institutions have few American customers or who have already been supplying data. Swiss banks, however, manage the biggest slice of transnational wealth in world terms”, says Mario Tuor, communications manager with the Swiss government’s State Secretariat for International Financial Matters (SIF).

“It’s a very complex process,” notes Thomas Sutter, spokesman for the Swiss Bankers Association (SBA), which is looking at costs of CHF200-300 million for the nation’s banks. “We can’t just push a button to find all the customers liable for American tax. We have to identify them, track them down, explain to them what is involved and ask them if they are willing to have their data transmitted”.

Powerful sanctions

Customers may indeed refuse to let their data be handed over – but this will not be enough for them to escape the long arm of the Internal Revenue Service (IRS), the American tax collector. In such cases, banks will still need to tell Washington the number and total amount of undeclared assets.

To get the information it wants on these hold-outs, the IRS can send the Swiss government a “request for administrative assistance” on the whole group.

Bern has to respond with information on all cases within eight months – so gone are the days in which information was released in dribs and drabs over a period of years. “Administrative assistance will be provided, if there is any evidence of an infraction. If the customer is not willing to oblige, he is admitting that he is not at rights with the American tax system,” points out Patrick Dorner, director of the Swiss Association of Asset Managers (SAAM).

“With FATCA, there is practically no more banking secrecy for customers liable for American tax,” admits Sutter. The Swiss government and parliament have had to accept this fact.

FATCA comes with a toolbox of powerful sanctions against banks or customers unwilling to comply, starting with a 30% withholding on all payments of dividends, interest or other revenue from American sources. Financial institutions also are at risk of being locked out of the world interbank market.

Required to register

All wealth management firms, trust companies, insurers and even major industries which have significant financial activities have to get with the American programme. All these companies are required to register with the IRS to avoid being labelled as “uncooperative”.

US citizens abroad given lifeline

The Internal Revenue Service has given US citizens living abroad further breathing space to get their tax affairs in order.

On June 18 the IRS lifted restrictions to its offshore voluntary compliance programme by allowing citizens to apply if they have less than $1,500 of unpaid tax to declare.

Penalties will also be waived for those who can show that they did not wilfully hide assets.

This might apply to thousands of dual citizens living outside of the US who did not know that they should have been filing US tax returns.

To apply the FATCA legislation, the American Treasury Department has proposed to other countries two kinds of agreement, which provide mechanisms to relieve some of the administrative burdens.

On the IRS website there are already 4,000 Swiss companies listed. “For months we have been mounting a big information campaign to tell all the asset managers that they have to register, even if they have no American customers or investments," says Dorner. "If an asset manager declines to register, banks won’t work with them. The banks can’t take the risk of working with managers not in conformity with FATCA," he explains.

Two kinds of FATCA

FINMA, the Swiss government’s financial markets watchdog, has issued a warning to all financial institutions calling on them to fulfil their obligations under the American regulations and in particular “not to engage in any action to get around FATCA”.

The new Swiss federal legislation on the FATCA accord, which takes effect on June 30, provides for fines up to CHF250,000 where there is intentional violation of the regulations, including that of having to register with the IRS.

Logical change

It’s a spectacular paradigm shift for this country. Until a few years ago, sanctions fell on those who violated banking secrecy and cooperated with foreign governments. Now they fall on whoever does not go along with shipping data to Washington.

Already the Swiss government wants to go further. By this autumn it intends to start negotiations with the US with a view to switching from a “model 2” FATCA accord to a “model 1”, which would essentially mean automatic exchange of information between the tax authorities.

This change is considered “logical” by the associations of bankers and assets managers. “When talk of FATCA started, automatic exchange of information was still a taboo topic in Switzerland. But we will soon have the OECD international standards, which Switzerland will have to conform to. So the best thing is to adopt this model now for our dealings with the US,” says Dorner. 

Model types

Model 1, chosen by most European countries, is based on the principle of automatic exchange of information. Financial institutions provide details of all capital subject to US tax to their local authorities, who pass these details on to the IRS.

Switzerland opted for model 2, according to which Washington is supplied with information directly by the financial institutions – but this only concerns capital held by American customers who consent to their details being released.

For customers who do not consent to this, the financial institutions must tell the IRS the number and the total value of these accounts. The IRS can then put in a request for “administrative assistance” to the Swiss government to get the full details.

By Armando Mombelli, swissinfo.ch
(Translated from Italian by Terence MacNamee)