WASHINGTON, Oct 29 (Reuters) - Foreign banks and investment funds got more detail from the Treasury Department on Tuesday about how to comply with a new U.S. anti-tax evasion law, including a draft agreement that some institutions must sign to avoid possible penalties.
The new details underscore the importance of certain bilateral agreements Treasury officials are negotiating with dozens of countries to implement the Foreign Account Tax Compliance Act (FATCA), set to take effect in July 2014.
FATCA targets Americans who try to hide assets overseas to avoid paying tax. As it has taken practical form since passage by Congress in 2010, its shape has shifted amid complaints by banks, insurers and expatriates.
The law will require foreign financial institutions to tell the tax-collecting U.S. Internal Revenue Service about Americans’ offshore accounts worth more than $50,000.
The U.S. government has finished seven bilateral agreements with countries that will allow their financial institutions to comply with FATCA via their home-country regulators.
So-called Model 1 “intergovernmental agreements” (IGAs) of this sort have been signed with Denmark, Germany, Ireland, Mexico, Norway, Spain and Britain.
The draft agreement just released, along with some new rules also proposed on Tuesday, will not apply to financial institutions in countries with Model 1 IGAs. Where pacts of this type are absent, institutions will need to comply with FATCA rules and deal with the IRS on their own.
Switzerland and Japan have Model 2 agreements. Their firms will need to sign the new draft FATCA agreement. The Model 2 IGA protects foreign banks from violating local privacy laws, but it does not spare them having to report to the IRS.
Foreign institutions that fail to comply at all with FATCA face a potential 30-percent withholding tax on their U.S. source income, a penalty that could effectively freeze them out of U.S. financial markets.
The Treasury hopes to get comments from firms before finalizing the draft agreement by the end of the year.
“The agreement and forthcoming guidance have been designed to minimize administrative burdens and related costs for foreign financial institutions and withholding agents,” Deputy Treasury Assistant Secretary for International Tax Affairs Robert Stack said in a statement.