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July 15, 2013

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FATCA Foreign Bank Rule Delayed Another Year

The Foreign Account Tax Compliance Act (FATCA) compliance requirement for foreign banks dealing with the US has been delayed until July 1, 2014 so that these banks can continue to implement the changes and agreements necessary to avoid penalties. FATCA was enacted in 2010 to require that foreign banks report to the IRS information about American clients or otherwise face a 30% withholding penalty on all “dividends, interest or other payments they’re slated to receive” from U.S. financial institutions.

The issue has been that many countries’ laws do not allow their banks to divulge their customers’ information to any government, let alone their own domestic one. In those cases, the US government has been able to sign inter-governmental agreements to address these concerns while also maintaining the viability of FATCA. So far, nine countries have signed such agreements, and several more are expected to do so soon. The Treasury Department has determined delaying the penalties mandated by FATCA for another year is necessary to ensure that countries in the process of complying aren’t penalized in the interim.

One country that has been the largest focus of American tax collection efforts is Switzerland. With their famed bank secrecy laws, Switzerland has had a hard time coming to terms with American efforts to collect taxes. After the UBS scandal of 2009, Switzerland has begun cooperating more with the United States, much to the ire of the Swiss legislature and banking industry. However, earlier this month the Swiss federal government enacted changes that would allow its banks to comply with the United States and FATCA without violating the country’s bank secrecy laws.

Offshore Accounts/International Tax Disputes