HIRE Act, Part 3: How Will Banks Worldwide Respond?
by Joel Nagel, Esq.
Editor's Note: This month, international business attorney Joel Nagel explains the impact of a new tax law on banks worldwide -- and how their response could affect you and your finances.
FATCA, or the Foreign Account Tax Compliance Act, comprises sections 1471 – 1474 of the U.S. Internal Revenue Code (IRC). The code sections were passed into law in March of 2010 as part of H.R. 2847, a job creation bill known as the HIRE Act. The law attempts to ensure that U.S. persons don't move money abroad without paying any taxes owed on it to the U.S. government.
The law is an attempt by the United States government to force both U.S. persons utilizing foreign financial institutions, as well as the foreign financial institutions themselves, into enforcing U.S. tax laws. The primary mechanism to force compliance is through the use of a 30 percent withholding tax on all U.S. dollar transactions that pass through a U.S. Federal Reserve Bank and are sent to a non-compliant financial institution.
Foreign Financial Institutions (or FFIs), regardless of whether their national jurisdiction has entered into a Tax Information Exchange Agreement (TIEA) with the United States, will be forced to enter into a Private Sector Agreement with the U.S. IRS, or risk losing the U.S. and dollar-denominated markets, by becoming a “non-compliant” FFI.
Every individual bank now must determine how it plans to operate vis-à-vis U.S. persons after January 1, 2013, when the new act takes effect. Because the law requires retroactive information sharing, an individual bank must decide how it plans to operate and give notice to its clients in 2011, so they have an opportunity to close or move their accounts prior to January 1, 2012.
The specific decisions that each bank must make are:
- Will it serve U.S. customers after January 1, 2013?
- Will it limit U.S. customers to an account size of $50,000 or less?
- Will it enter into private agreements with the U.S. IRS to supply
information about U.S. clients, even if the bank's own jurisdiction prohibits banks from sharing client information?
Of course the easiest method of compliance is simply to eliminate service to U.S. clients or clients above the $50,000 threshold. This is the logical solution for banks that only have marginally profitable U.S. business.
If the bank decides to continue serving U.S. clients after January 1, 2013, then it must further decide whether or not to be compliant with the provisions of FATCA.
The choice is to either provide the information required by the U.S. IRS to be compliant, and thereby waive bank privacy to those U.S. clients, or maintain bank privacy and thereby be in noncompliance with the IRS as a FFI. Noncompliance would subject the bank to a 30 percent back-up withholding tax on any funds moving to that FFI.
If the bank chooses to enter into a private agreement as a compliant FFI, it will be required to gather a wide range of information on both individual and entity accounts, to determine whether there is U.S. ownership of the account. The bank will also require that the client sign a waiver of any restrictions (such as Belize’s bank privacy laws) that would prohibit the bank from reporting to the IRS on the client and their activities.
The law also requires extra due diligence on high-value accounts over $500,000, as well as annual retesting of those accounts beginning in year three of the FFI Agreement. Additionally, each bank entering into a FFI will be asked to certify that it did not engage in any activity or have any formal or informal policies and procedures in place directing, encouraging or assisting account holders with respect to strategies for avoiding identification of their accounts as U.S. accounts.
It is clear that compliance as a FFI with the FATCA provisions will require extra operational costs and compliance efforts on behalf of all banks worldwide. Every client, whether individual or corporate, will need to undergo due diligence to determine whether there is any connection between the client and the United States. The FFI will also need to certify its customer identification procedures as part of its FFI Agreement.
All of these procedures greatly increase the cost of doing business with U.S. persons. Banks serving U.S. persons will most likely need to increase their various fees to offset the extra internal costs of compliance and certification. For banks with only marginal U.S. business, it will be more cost effective to eliminate the business than to try to comply with the new laws’ requirements.
Banks continuing to offer services to U.S. persons under a compliant FFI Agreement will need to create internal systems for training bank personnel to become conversant with FFI Agreements, and for carrying out the necessary requirements of the private and “voluntary” agreements, especially the collection and dissemination of personal and financial data.
While many of the technical issues, including a model FFI Agreement, have not yet been released for public comment, the IRSlast month released Notice 2011- 34 providing further guidance for banks and requesting comments on implementation of the provisions.
How will individual U.S. citizens be affected by the new requirements? They can only make international banking more expensive and difficult.
The surest way to avoid and minimize the difficulty for individual U.S. persons is to open your foreign bank accounts before the law takes effect on January 1, 2013, and move funds that you want to use to buy international assets out of the U.S. before then. Expect account-opening documentation to include U.S. tax forms, such as W9 forms disclosing your U.S. Social Security number, to ensure that you comply with your income tax reporting requirements. Despite this extra disclosure, it will be easier to move funds now and comply with U.S. law in the future with your money outside the US, than to risk being unable to move your money at all and thereby be locked into the downward spiral of the US dollar.
Joel M. Nagel is an international business attorney, entrepreneur and investor. He practices in Pittsburgh, Pennsylvania, and creates legal structures around the world to protect the assets of his global clientele. He is a contributing editor to Hemispheres, and speaks at conferences worldwide on international business law and asset protection. To contact him, click here.