(Reuters) - The U.S. Treasury Department said on Friday it will postpone enforcement of a new law that cracks down on offshore tax avoidance by Americans by six months to give foreign banks more time to figure out how to comply.
The Foreign Account Tax Compliance Act, or FATCA, requires foreign banks, insurance companies and investment funds to send the U.S. Internal Revenue Service information about Americans’ offshore accounts worth more than $50,000.
The United States has struggled to implement FATCA since it was enacted in 2010 following a scandal over secret Swiss bank accounts. Enforcement of FATCA penalties was delayed once already from an original 2013 start date and has now been pushed back to July 1, 2014.
To help implement FATCA worldwide, Treasury officials last year started negotiating deals with foreign governments. Those efforts in part prompted the law’s delay, Treasury said.
“We are providing an additional six months to complete agreements with countries and jurisdictions across the globe,” Robert Stack, Treasury deputy assistant secretary for international tax affairs, said in a statement.
The latest FATCA delay comes a week after the postponement until 2015 of part of another complicated law - a sweeping overhaul of the U.S. healthcare insurance system. Both laws were signed by President Barack Obama in March 2010.
In both cases, the IRS has been slow to ramp up its ability to carry out the new laws. Complaints and foot-dragging by the business community have also been widespread and persistent.
In the case of FATCA, the IRS and Treasury had little choice but to delay implementation, said Laurie Hatten-Boyd, a principal at Big Four accounting firm KPMG LLP.
Treasury and the IRS still have not finished the new forms that businesses will need to sign up for FATCA.
“How can you push ahead and tell people they need to comply with something in less than six months from now when they don’t have the tools they need?” Hatten-Boyd said.
Foreign businesses that do not comply with the law can be effectively frozen out of U.S. capital markets because of a 30-percent withholding tax on U.S. source income.
Immediately after the law was signed, foreign banks and other businesses started complaining about its costs and its scope, saying in some cases it conflicts with home-country banking laws that shield account holder information.
To help banks in countries with legal issues, Treasury and the IRS have been working on agreements that will let the home-country governments of foreign banks act as information-disclosing intermediaries to deal with the IRS.
The United States has finalized intergovernmental agreements (IGAs) for FATCA compliance with Germany, Spain, Norway, Switzerland, Ireland, Mexico, Denmark and the United Kingdom. Dozens more of these pacts are in negotiation.
Progress on these deals was “the most encouraging thing to us” in Treasury’s statement, said Josh Simmons, a legal fellow at Global Financial Integrity, a Washington activist group.
“It’s still disappointing” to see the law delayed, he said.
Though the deals, known as intergovernmental agreements (IGA), do not need congressional approval, many foreign governments need to approve their ends of the deals. Foreign businesses were left in limbo, unsure if their local governments would approve an IGA before penalties kicked in.
“I don’t think the delay in any way weakens the United State’s ability to negotiate IGAs,” said Itai Grinberg, a former Treasury official, now a professor at Georgetown Law School.
In Friday’s announcement, Treasury said a new registration website for banks to sign up with the IRS and ensure they are complying with FATCA is now set to open on August 19. The portal had previously been scheduled to open on Monday.
Businesses need to register by April 25, 2014 to avoid FATCA penalties starting on July 1.
Editing by Kevin Drawbaugh, Gerald E. McCormick, Jan Paschal, Andrew Hay and Leslie Gevirtz