The Wall Street Journal BUSINESS December 29, 2011
Banks Sweat as Tax Net Tightens New Rules Target U.S. Citizens With Accounts Abroad and Noncitizens With Deposits at U.S. Banks
Financial institutions around the world are bracing for new U.S. tax regulations that are prompting some foreign banks to ditch their customers and their American counterparts to worry that they could lose crucial deposits.
The rules--one of which is being phased in, while the other hasn't been finalized--are aimed at reducing tax evasion by making banks report more details about income earned by customers who keep deposits in countries other than their own.
Overseas, some banks have alerted customers that accounts will be closed at the end of the year.
U.S. banks, meanwhile, are trying to quash a proposed regulation that would require them to report interest income earned by non-U.S. residents to the Internal Revenue Service, which could then pass the information to their home countries. Banks in Florida, Texas and California are fighting the effort, saying that it could drain the coffers of banks that rely heavily on foreign deposits.
Together, the regulatory changes could affect hundreds of billions of dollars worth of deposits in accounts across the globe. While it isn't known what customers will do with the affected funds, some could shift their money to countries that have looser rules on reporting income earned on deposits.
"The policy objective is to have transparency so that governments can work together to avoid offshore tax evasion," says Manal Corwin, deputy assistant secretary for international tax affairs at the U.S. Treasury Department.
The new rules are already affecting U.S. residents who keep accounts in overseas banks, which will soon face stricter rules on reporting income earned by those customers. The regulations will be phased in gradually over the next several years, but certain requirements take effect in 2013.
The rules are part of the Foreign Account Tax Compliance Act of 2010, which applies to individuals and financial institutions as part of an effort to rein in offshore tax evasion.
Some banks are cutting off their customers.
Munich-based HypoVereinsbank, a subsidiary of Italy's Unicredit SpA, has sent letters to between about 1,000 and 2,000 clients, advising them that at the end of the year, it will terminate securities services for customers who live in the U.S., as well as for U.S. nationals who live abroad. In the letter, the bank blamed increasing U.S. regulatory pressure, including "heightened reporting and supervisory obligations."
"The effort just got too huge," a bank spokeswoman said.
Unicredit and its other subsidiaries haven't done the same, said a person familiar with the matter.
Bank Leumi in Switzerland sent a similar letter to securities customers last month, saying the law "requires substantial changes in the reporting regime for banks with respect to accounts held by U.S. customers." A spokeswoman for the Israel-based bank declined to comment, saying, "As a matter of bank policy, we do not comment on questions about our clients, individually or in the aggregate."
This summer, Deutsche Bank AG cut off all service to U.S. citizens with securities accounts after a growing number of regulations made the business a hassle, according to a person familiar with the matter who said the move affected a "small number" of clients.
In the U.S., banks are fighting a proposed rule from the IRS that would require them to report interest paid to noncitizens living in the country. No final rule has been issued, but banks say they worry that it could drive deposits away from U.S. institutions.
"This is just a bad, bad idea," says Alex Sanchez, president and chief executive of the Florida Bankers Association. He estimates that Florida banks hold about $80 billion of deposits from non-U.S. residents, representing about 20% of the state's deposits. An IRS spokesman declined to comment.
Across the U.S., banks held roughly $2 trillion in deposits from foreign companies and individuals as of June 30, according to the Treasury Department. The agency doesn't provide figures on individuals' aggregate holdings.
Bankers in Florida, Texas and California say that the proposed rule could be devastating for institutions that rely on those deposits. They also contend that many customers keep their money stashed in the U.S. because they are afraid to disclose financial information to their home countries, particularly in Latin America.
"This is not the time to be looking at these types of proposed rules because it would have negative impact on many financial institutions," says Gerry Schwebel, executive vice president at International Bancshares Corp. in Laredo, Texas. Roughly one-third of the bank's $7.8 billion of deposits would be affected by the rule.
Ms. Corwin of the Treasury Department says that the proposed rule doesn't represent a significant shift because the IRS already has the authority to request the information from banks. If the change goes ahead, banks would have to automatically provide the information to the IRS, which could then share it with countries that have tax treaties with the U.S. In Latin America, only Panama, Venezuela and Mexico have such agreements.
"It's a little bit hard for the U.S., which has been at the forefront of the transparency battle, to have this kind of resistance to these regulations, which should not be a problem for people who are properly reporting their tax information," Ms. Corwin said.
Matthias Rieker and Laura Saunders contributed to this article.
Credit: By Robin Sidel And Laura Stevens