WSJ: Banks Sweat as Tax Net Tightens: New Rules Target U.S. Citizens With Accounts Abroad and Noncitizens With Deposits at U.S. Banks

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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

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