The Tax Times: US Boycott Leaves Russia No Time to Comply With FATCA

The US government has broken off FATCA treaty negotiations with Russia because of the Ukraine crisis. As the United States attempts to punish Russia for its actions in Ukraine, the Treasury Department is deploying an economic weapon that could prove more costly than sanctions: the Internal Revenue Service.

Beginning in July, U.S. banks will be required to start withholding a 30 percent tax on certain payments to financial institutions in other countries, unless those foreign banks have agreements in place to share information about U.S. account holders with the IRS. The withholding applies mainly to investment income.

Russia and dozens of other countries have been negotiating information-sharing agreements with the U.S. in an effort to spare their banks from such harsh penalties.

But after Russia annexed Crimea and was seen as stoking separatist movements in eastern Ukraine, the Treasury Department quietly suspended negotiations in March. With the July 1 deadline approaching, Russian banks are now concerned that the price of investing in the United States is about to go up.

The new law means that Russian banks that buy U.S. securities after July 1 will forfeit 30 percent of the interest and dividend payments. The withholding applies to stocks and bonds, including U.S. Treasuries. Some previously owned securities would be exempt from the withholding, but in general, previously owned stocks would not.

Private investors who use Russian financial institutions to facilitate trades also face the withholding penalty. Those private investors could later apply to the IRS for refunds, but the inconvenience would be enormous.

The withholding would expand in 2017, if there was still no information-sharing agreement. At that point, if investors sold stocks or bonds, U.S. banks would be required to withhold a 30 percent tax on the gross proceeds from those sales.

The law would also snag big global banks with subsidiaries that don’t have agreements with the IRS to share information. At first the withholding could be limited to the subsidiaries. But eventually, if any part of a large global bank refused to comply with the information-sharing requirements, the entire bank would be penalized.

For Russia, the penalties could be more damaging to its economy than U.S. sanctions, said Brian L. Zimbler, managing partner of the Moscow office of Morgan Lewis, an international law firm.

The Treasury Department said Russian banks can still apply on their own to share information about U.S. account holders directly with the IRS. But those banks may risk violating local privacy laws by sharing such information with a foreign government.

“They can’t do it,” Zimbler said. “Russia does have bank secrecy laws.”

It is a problem that banks around the world are facing. To get around the hurdle, the Treasury Department has been negotiating agreements in which foreign governments will collect the information from their banks and then share it with U.S. authorities. Russia was negotiating one of these agreements when the U.S. broke off talks.

Russian banks face another hurdle: time. In June, the Treasury Department is scheduled to release a list of foreign banks that are exempt from withholding. If your bank isn’t on the list, U.S. banks are required to start withholding 30 percent of your payments in July.

The deadline for getting on the list was Monday, just a few weeks after the U.S. and Russia suspended negotiations.

The Russian government is now trying to amend its banking laws in time to avoid at least some of the penalties imposed by the US Foreign Account Tax Compliance Act when its reporting requirements come into force in July.

Russia is in a race against time to adapt its laws to the U.S. Foreign Account Tax Compliance Act, or FATCA, and save its banks from financial sanctions.

Legislation allowing Russian financial institutions to share information about their U.S. clients with the U.S. tax service, the IRS, was submitted to the State Duma on Wednesday April 23, 2014, but has no hope of being passed before FATCA comes into force on July 1, 2014.

Realizing this, legislators have resorted to creative law-making, pinning a package of stopgap measures to unrelated legislation due to be passed by the parliament on Friday April 25, 2014. But this has not been enough to soothe bankers' nerves, and they have appealed to the Central Bank for clarity.

Banks must register with the IRS by May 5, and the law comes into force on July 1. After that date, Washington will block 30 percent of payments made to non compliant financial institutions by U.S. entities.

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