UPDATE 1-US Treasury tells how to comply with offshore account law

Thu Jul 26, 2012 2:49pm EDT

By Patrick Temple-West and Kevin Drawbaugh

WASHINGTON, July 26 (Reuters) - The U.S. Treasury Department on Thursday spelled out different ways for countries and foreign financial institutions to comply with new U.S. disclosure rules on offshore accounts controlled by Americans, ramping up a crackdown on tax evasion.

Treasury is gradually implementing 2010's Foreign Account Tax Compliance Act, or FATCA, a controversial statute that is shaking the foundations of financial secrecy worldwide.

"Today's announcement is an important milestone in our joint efforts to combat offshore tax evasion and make our tax systems more efficient and fair," said Treasury Secretary Tim Geithner.

FATCA requires Americans to disclose overseas holdings directly to the Internal Revenue Service, and it requires foreign institutions to tell the IRS about offshore accounts controlled by Americans if assets in them top $50,000 in value. Institutions in other countries have been struggling for months to square FATCA's demands with existing home-country privacy laws and the sensitivities of account-holders accustomed to secrecy, especially in places such as Switzerland.

The IRS is on track to begin penalizing foreign banks in 2014 for failing to comply with FATCA, pressuring them and their home country governments to work out solutions.

Treasury said last month it had reached tentative agreements with Switzerland and Japan. In February, Treasury said it was negotiating with France, Germany, Italy, Spain and Britain to set up government-to-government information sharing deals.

On Thursday, all sides offered signs that negotiations were moving ahead, but that many details remained to be worked out.

Treasury offered two ways to structure agreements. One involves two-way, or reciprocal, information-sharing between national tax collection agencies.

"This version ... will be available only to jurisdictions with whom the United States has in effect an income tax treaty or tax information exchange agreement," Treasury said.

In addition, the department said reciprocal arrangements would be limited to governments with "robust protections and practices to ensure that the information remains confidential and that it is used solely for tax purposes."

The second way to comply focuses on one-way information sharing from the host government to the IRS. Financial institutions in countries that lack any U.S. agreement will have to report American account holders directly to the IRS.

"Both the reciprocal and non-reciprocal versions should help financial institutions reach important FATCA objectives, while potentially reducing costs to comply," said Denise Hintzke, a global tax leader at Big Four accounting firm Deloitte.

The pathways to compliance outlined on Thursday cater to countries that already have tax treaties or some information sharing arrangements with the United States, said Scott Michel, a tax lawyer with Caplin & Drysdale.

"This does make the FATCA pill a bit easier for these institutions to swallow since they will largely be dealing with their own domestic regulators throughout the process," Michel said of the new model agreements.

FATCA stemmed from a 2009 settlement between the United States and Swiss bank UBS AG, which was forced to pay a fine and release the names of 4,500 clients to U.S. officials.

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