Home' Trinidad and Tobago Guardian : May 11th 2014 Contents SBG22 INTERNATIONAL
SUNDAY BUSINESS GUARDIAN www.guardian.co.tt MAY 11 • 2014
The United States is planning
to use an anti-tax-evasion
law to punish Russia for its
actions in Ukraine, a tactic
that could prove to be more
costly than sanctions.
The law was passed in 2010, long before the
crisis in Ukraine. But it could become a powerful
Beginning in July, federal law requires US
banks to start withholding a 30 per cent tax on
certain payments to financial institutions in other
countries unless those foreign banks have agree-
ments in place to share information about US
account holders with the Internal Revenue Serv-
ice. The withholding applies mainly to investment
Russia and dozens of other countries have
been negotiating information-sharing agreements
with the US 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 sus-
pended 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.
"It s a huge deal," said Mark E Matthews, a
former IRS deputy commissioner. "It would
throw enormous uncertainty into the Russian
The new law means Russian banks that buy
US securities after July 1 could forfeit 30 per
cent of the interest and dividend payments. The
withholding applies to stocks and bonds, including
US Treasurys. 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 with-
holding penalty. Those private investors could
later apply to the IRS for refunds, but the incon-
venience would be enormous.
"It s a big problem for them," said Matthews,
who is a lawyer at Caplin & Drysdale, a tax firm
based in Washington. "It decreases their com-
petitiveness, and they may have capital flight
The US and Russia are significant trading
partners, though not all transactions would be
subject to withholding. Last year, the US imported
US$27 billion in goods from Russia, which ranked
18th among importers to the US, according to
the Census Bureau. The US exported US$11
billion in goods to Russia.
The withholding would expand in 2017, if
there was still no information-sharing agreement.
At that point, if investors sold stocks or bonds,
US banks would be required to withhold a 30
percent tax on the gross proceeds from those
The law would also snag big global banks with
subsidiaries that don t have agreements with
the IRS to share information. At first the with-
holding 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 penal-
"That keeps an institution from deciding that
it s going to register its entity in Germany but
not register the entity it has in Switzerland," said
Denise Hintzke of Deloitte Tax.
It would also provide a tremendous disincentive
for large global banks to do business in countries
where they can t share information with US
More than 50 countries have reached agree-
ments with the US to share tax information
about US account holders. The list includes
countries famous for bank secrecy, such as
Switzerland and the Cayman Islands.
For Russia, the penalties could be more dam-
aging to its economy than US sanctions, said
Brian L Zimbler, managing partner of the Moscow
office of Morgan Lewis, an international law
"If sanctions are going to be limited to certain
targeted individuals and banks, where this applies
to everybody in the market, yes, I think this
could potentially be worse than sanctions for
the Russians," Zimbler said.
The 2010 law is known as FATCA, which
stands for the Foreign Account Tax Compliance
Act. It was designed to encourage---some say
force---foreign banks to share information about
US account holders with the IRS, making it more
difficult for Americans to use overseas accounts
to evade US taxes.
Under the law, US banks that fail to withhold
the tax would be liable for it themselves, a pow-
erful incentive to comply. On Friday, the Treasury
Department issued guidance saying it will give
US banks a temporary reprieve. As long as US
banks make a good-faith effort to withhold the
proper tax, they won t be liable for mistakes
The new guidance also gives some leeway to
U.S. banks that may have trouble identifying all
payments subject to withholding by July 1. Those
banks will be given an extra six months to com-
ply.The goal of the law was to set up a penalty
so harsh that foreign banks would have little
choice but to share information with US author-
ities, Matthews said.
"Withholding is a failure of the system,"
Matthews said. "Withholding was just a big
stick out there. No one hoped that would hap-
The Treasury Department said Russian banks
can still apply on their own to share information
about US account holders directly with the IRS.
But those banks may risk violating local privacy
laws by sharing such information with a foreign
"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 US authorities. Russia was negotiating one
of these agreements when the US 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,
US banks are required to start withholding 30
per cent of your payments in July.
The deadline for getting on the list was Mon-
day, just a few weeks after the US and Russia
US to wield Fatca against Russian banks
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