A United States law forcing foreign financial firms to reveal details of American clients could force banks to stop trading across the Atlantic, observers believe.
The law, passed by the US Senate this week, is unworkable in its present form and could have “disastrous effects”, according to the Swiss-American Chamber of Commerce. US citizens living in Switzerland also criticised the law.
The Foreign Account Tax Compliance Act (FATCA) is the latest attempt by the US to crack down on tax evaders, who are costing the economy billions of dollars in unpaid revenues.
Swiss bank UBS was forced to pay a $780 million (SFr828 million) fine last year and hand over confidential details of clients after admitting to aiding tax evaders in the US. The bank announced in 2008 that it would stop offshore activities in the US.
UBS was found to have exploited loopholes in tax compliancy regulations, known as the Qualified Intermediary (QI) accord. FATCA is partly designed to close those loopholes, which the US believes will bring in $8.5 billion in extra tax revenues over the next ten years.
Kinks need to be ironed
The law obliges foreign firms to report offshore accounts and security trades by US clients that amount to more than $50,000. If they fail to do so, they will be hit with a 30 per cent withholding tax. FATCA was also passed by the House of Representatives at the end of last year.
Martin Naville, chief executive of the Swiss-American Chamber of Commerce, believes the measures to be practically unenforceable and the law would need to be revised before it comes into force in 2013.
“Now that the politicians have had their say, the Act will be passed over to the technical administrators who will understand the disastrous effects of trying to implement this within two-and-a-half years,” he told swissinfo.ch.
“A lot of banks simply will not be able to do business in the US and that would cause considerable damage to the US economy. I expect the implementation of the Act will probably end up closer to QI with the loopholes closed.”
The Swiss Bankers Association (SBA) and the Swiss Funds Association (SFA) both recognised that the law did not single out Switzerland, but was applicable to all countries.
The SBA said it was too early to gauge the effects on the Swiss financial sector, but it also highlighted possible unintended consequences for the US economy.
“These measures could have a boomerang effect and make the US less attractive for foreign investors,” spokesman James Nason told swissinfo.ch.
Nason also pointed out that Swiss banks have been putting forward withholding taxes as a possible answer to the tax evasion question.
“We find it interesting that the US shares our enthusiasm for withholding taxes. Switzerland has over 60 years’ experience with withholding taxes and we have always said they are a very efficient and effective way of discouraging tax evasion and promoting taxpayer honesty,” he said.
FATCA is another example of the US government bullying its nationals living overseas, according to Andy Sundberg of the Swiss chapter of the American Citizens Abroad group. Members have been complaining for some time about the increasing difficulty of opening a bank account abroad as a result of the US government tax evasion offensive.
“Bad by default”
“What started out as legislation aimed at those with the specific intent of hiding money abroad has become a lot more draconian and is scaring US people living abroad,” he told swissinfo.ch.
“It is reasonable to assume that thousands of US citizens may not want to go home again. We appear to be labelled as bad people by default and we are faced with nothing but threats and denunciations.”
UBS and Credit Suisse, the two largest Swiss banks with most exposure in the US, declined to comment on FATCA.
However, the scope of the Act goes well beyond these two institutions and would affect the activities of smaller banks, asset managers and securities dealers. The administrative cost of tracking down all US clients and making reasonable efforts to make sure they are tax compliant could be enormous.
Matthew Allen, swissinfo.ch
US-Swiss tax treaties
Bilateral agreements between banks and the US tax authorities are nothing new. Many banks have signed a so-called “Qualified Intermediary” (QI) accord.
American customers who invest in US securities authorise their banks to give their identities to the tax authorities (Internal Revenue Service). A 30% withholding tax is levied on dividends and interest.
The new law can be seen as a broadening of the QI programme. Regulations applying to individuals will be extended to companies and a much larger circle of financial institutions.
The suspicion by the US authorities that Swiss bank UBS had violated QI regulations was the beginning of the tax dispute between the bank and the IRS and led to closer investigations.
It came to light that UBS had helped individuals liable to tax hide their identities behind offshore companies like foundations. As a result the new regulations include companies, plugging a gap.