US Fight against Tax Evasion Creates Significant Problems for Companies

Passport USA

Despite an excellent credit rating and flawless company reputation, the bank is not advancing funds. The reason: the bank is not prepared to comply with FATCA rules. "We are already seeing problems like this today when Swiss banks are involved. They are expected to increase with other financial institutions in the near future as well," warns Oliver Biernat, auditor and specialised consultant for international tax law at the Benefitax accounting firm in Frankfurt. "FATCA applies whenever US citizens or German companies in which US citizens hold shares want to open an account with or apply for a loan from a German bank."

The Foreign Account Tax Compliance Act (FATCA) is responsible for this dilemma. With this act, the USA wants to impose extensive and costly identification and reporting obligations on banks, insurers and financial service providers that administer accounts or investments for Americans. "The key is that account holders who do not want to comply with data collection for the USA are punished with a flat rate withholding tax," Biernat explains. "For their unwillingness to cooperate, 30% of all investment income, other income and capital gains from American sources are ultimately deducted by the paying party."

Prof. Robert Simon from WithumSmith+Brown, an accounting firm represented in six US states, describes the consequences: "Either the institutions comply with the FATCA rules, or they forgo their business with customers from the USA and US assets entirely in the future." However, all banks will be required to identify all customer relationships with a US background in the course of a due diligence process. "It has already been established that the reporting obligations arising from the FATCA violate national laws in many countries, for example under civil law or data privacy laws," Biernat stresses.

The new rules which are to come into force starting in 2014 may have an impact on business relationships between banks and their customers even now. Germany, France, Great Britain, Italy, Spain and the USA have expressed their intention for bilateral cooperation in fighting tax evasion. Information about German, French, Italian, Spanish and English citizens with accounts in the USA will also be reported to their respective home countries starting in 2014.

"US citizens living abroad and companies with US citizens as shareholders do not have much time to adjust to the new situation," warns Biernat, who heads the international tax law practice group of the global consulting alliance Geneva Group International (GGI) and also has close and personal connections to around 270 tax experts in 67 countries. "They should promptly examine their situation in regards to FATCA and prepare for the new conditions." This may mean switching banks since some institutes will not comply with the FATCA rules. On the other hand, internationally active financial institutions will bow to the US demands in spite of all tedious reporting and monitoring obligations in order to protect their business with customers from the USA.

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