US issues final tax anti-evasion rules, enforcement ahead

WASHINGTON,  (Reuters) – Non-U.S. pension funds and mutual funds were spared the full brunt of new U.S. information-reporting rules on overseas accounts meant to catch Americans who dodge U.S. taxes by keeping their assets offshore.

Chiefly targeting banks, the Foreign Account Tax Compliance Act (FATCA) rules, published by the U.S. Treasury yesterday, require foreign financial institutions with $50,000 of any American taxpayer’s assets to report the holdings to the U.S. Internal Revenue Service.

The Treasury rejected a request by businesses, banks and foreign investment funds to delay a January 2014 start date for big penalties imposed on individuals and financial firms that do not comply with the law.

The announcement completes the rule-writing process for FATCA, a law that Congress passed in March 2010 after a Swiss bank scandal revealed that U.S. taxpayers had hidden millions of dollars overseas from the IRS.

Certain retirement funds, life insurance and other “low-risk” financial products held abroad that are not considered vehicles for dodging taxes are exempted from reporting their U.S. account holders’ information to the IRS. Financial firms and foreign governments had been calling for these exemptions.

The law, the first of its kind globally, has been decried by companies and U.S.-ally countries as unilateral, over-reaching and a breach of privacy. U.S. law requires that Americans pay taxes on their global income, not just domestic.

Treasury officials are hoping to sign up more than 50 countries with FATCA agreements and kick-start a dragnet of tax enforcement.

“The real story here is that looks like it is going to become a global model,” Manal Corwin, deputy assistant Treasury secretary for international tax affairs, told Reuters in an interview.

Companies affected by the new rules, including BlackRock , Western Union and Prudential, may spend more than $100 million each to comply with the law. Some firms are asking Treasury for additional time to prepare.

Financial institutions that refuse to comply with the law will be effectively shut out of U.S. securities markets.

The businesses must report to the IRS – in English – account holders’ names, addresses, account balances plus dividends and interest. The first reports are due in 2015.

The roughly 500 pages of final rules, which were initially proposed in February 2012, give breathing room to some asset managers, such as mutual funds, for how they need to report investors’ information.

Treasury has not started registering financial firms, but it must do so by July 15, 2013. The final rules said firms must register by Oct. 25, 2013, to avoid next year’s penalties.

The rules also incorporate the government-to-government agreements Treasury has been signing with countries to get their local firms compliant with the law. Norway became the seventh country to forge an agreement, Treasury said on Thursday.

GOVERNMENT PACTS

Soon after Congress passed FATCA, Treasury officials surmised the law could not be broadly implemented as intended. Too many foreign firms would be breaking domestic laws by reporting client information to the IRS.

The government agreements offer a workaround. The United Kingdom, Mexico, Denmark, Ireland, Switzerland and Spain are finalizing FATCA agreements.

Though the pacts help firms comply with FATCA, they have added new headaches for some international companies.

“FATCA’s scope is being expanded because Treasury is trying to close every hole,” said Harris Horowitz, the global head of tax at BlackRock, which has more than 50 people working on FATCA implementation.

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