The Obama administration appears ready to water down a key piece of its tax crackdown on offshore financial accounts.
U.S. Treasury Department officials are looking at relieving some of the “administrative burden” of the Foreign Account Tax Compliance Act, which will require Canadian and other foreign financial institutions to identify all their U.S. customers starting in 2014.
Draft Internal Revenue Service regulations are due out shortly, and the government is “keenly aware” of the challenges of the law for foreign banks, brokers and other financial institutions, said Emily McMahon, acting assistant Treasury secretary for tax policy.
“We believe that these proposals will substantially address the many comments we’ve already received regarding administrative burden,” Ms. McMahon told a New York State Bar Association meeting in New York.
The concessions apparently include an extended phase-in period and a work-around of domestic privacy laws.
The United States is facing a barrage of criticism over FATCA in Canada and Europe. Canada, for example, has complained that implementing the new regime will be hugely costly, dangerously extraterritorial and may run afoul of privacy laws.
Canadian Bankers Association Terry Campbell President said he’s encouraged the U.S. is acknowledging the “very real compliance concerns.” But he said the industry is still wary of what’s coming.
“This is a very complex issue and the devil's in the details,” he said. “We'll still need to look at the proposed regulations when they're released to see if our concerns have in fact been addressed.”
Major financial institutions have warned they could each face bills of $100-million to reprogram computer systems and introduce new paperwork to help the IRS track Americans. Canadian financial institutions also risk being hit with a hefty withholding tax on their U.S. operations if they don’t co-operate with the IRS.
Ms. McMahon said the Treasury Department realizes banks need lead time to configure reporting systems, and said the proposed regulations will phase in reporting requirements over an extended transition period.
Moreover, the proposed regulations will try to align FATCA compliance with procedures already in place to comply with anti-money laundering and other customer rules, she said.
Treasury’s international team also has been talking with several U.S. trading partners about how to overcome legal obstacles to compliance, Ms. McMahon added.
One problem with compliance is that privacy laws in many countries may prohibit financial institutions from reporting directly to the IRS, Ms. McMahon said.
One option being explored is having financial institutions report to their home countries’ government, which could transmit information to the IRS, she said.
The proposed regulations are in the final stages of clearance by the Treasury and IRS and will be released soon, she said.
But reducing the administration burden of FATCA may not provide much solace for the roughly one million Americans in Canada, many of whom don’t file taxes and other reports to the IRS, as required by U.S. law.
And its doesn’t absolve individuals of those IRS obligations. New reporting requirements kick in this year for Americans who have significant foreign financial accounts (at least $200,000 U.S. for individuals and $400,000 for couples). IRS Form 8938 – Statement of Specified Foreign Financial Assets – is the latest in a string of measures aimed at tightening the noose around Americans with money offshore. Americans with foreign accounts must also file annual Foreign Bank Account Reports (FBARs), disclosing the contents of bank, brokerage and pension accounts.
With files from Reuters