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In the wake of the UBS tax evasion debacle, a bill combining proposals from the U.S. House, the Senate and the Obama administration is getting attention in legal and financial circles for the effects — some unintended — the legislation could have as it attempts to prevent the use of overseas accounts to hide taxable assets. “There are a number of tax treaty obligations that need to be reconciled and perhaps studied further,” said Tony Santos, a veteran Miami corporate attorney with 25 years of international practice. “The bill in its present form very likely is not going to pass, but you certainly have a very clear road map of the issues that are being tackled.” While lobbying, amendments and other legislative tactics could alter its details, the Foreign Account Tax Compliance Act of 2009 would provide the U.S. Treasury Department with significant new tools to find and prosecute U.S. individuals who hide assets overseas from the Internal Revenue Service. The proposed law would force such foreign entities to provide information about their U.S. account-holders. President Obama has made a personal mission of combating the use of foreign financial institutions, trusts and corporations to evade domestic taxes, noting the billions of dollars it costs in revenue. “This bill offers foreign banks a simple choice — if you wish to access our capital markets, you have to report on U.S. account-holders,” Charles Rangel, D-N.Y., chairman of the House Ways and Means Committee, notes on the committee’s Web site. The bill comes against the backdrop of the ongoing UBS case. Zurich-based UBS bank in February agreed to pay $780 million in penalties in exchange for deferred prosecution on charges it aided tax evasion. Though many foreign accounts are legitimate if reported, others are tax dodges that cheat the U.S. government. Even before the bill is formally debated, there is evidence it is having some effect. Some foreign banks have already sent “Dear John” letters to existing American clients, asking them to move their money elsewhere, and have stopped accepting new accounts from the U.S. “Most first-line foreign banks aren’t taking U.S. customers anymore,” said Steven Hagen, an international tax attorney with Harper Meyer in Miami. “They don’t want to have a UBS-type situation.” Hagen said he sees nothing bad in the bill for a compliant taxpayer or foreign entity, and initial reaction seems excessive, given the aberration of the UBS scheme’s size and scope. “This is eliminating an ant pile with an atomic bomb,” he said. “UBS really was perpetrating a fraud on the United States.” Many foreign banks in Switzerland, especially, are no longer taking U.S. accounts, even if an American can prove to them they are being fully compliant, he said. “We have an issue where we have a foreign client, a European citizen, who has never lived in the United States,” Hagen said. A widower, “he has a will that says his assets will be split among his three children, one of whom is a U.S. citizen. The bank has told him that they don’t want his money. They don’t want to have to do the reporting, they don’t want to have to be responsible. That’s just ridiculous.” Mark Scheer, international tax attorney and shareholder in the Gunster, Yoakley & Stewart‘s Miami office, said that some institutions have reason for concern. “A lot of what’s being proposed is going to scare the daylights out of a lot of banks,” Scheer said. “This bill says that anyone who makes a payment to a foreign financial institution must withhold 30 percent of that payment, period — unless that foreign institution enters into a contract with the Internal Revenue Service that says they and any entity they are affiliated with agrees that they will basically track down who the U.S. account-holders are.” That’s a big change in the way financial institutions, some of which have billions of dollars going back and forth between them and the U.S., have been operating, Scheer said. The bill says you should know who your customers are, and “we’re not going to listen to you anymore telling us how difficult it is,” Scheer said. “The banks today will often point to how expensive it is to comply with the current anti-money-laundering laws. This could potentially dwarf the cost to comply.” Hagen said one of the more problematic provisions is that anyone assisting an American in forming a foreign entity must report to the IRS that they assisted that person. “Now, that would mean lawyers and accountants would have to give the IRS information on their clients,” he said. “That’s a first. It could violate Florida Bar rules and probably the bar rules in every state. So that would probably have to be massaged a little bit.” The bill stems in large part from UBS, which courted wealthy Americans to hide their assets through shell corporations. The deadline for a tax amnesty program to avoid criminal prosecution passed last month. The change in U.S. policy and the prosecution of a handful of UBS account-holders has convinced many tax litigators that the days of squirreling away wealth in secret overseas accounts, corporations, foundations and other vehicles is over, at least for Americans. UBS sent letters to many American customers this year telling them their business was no longer wanted and to move their assets or their accounts would be frozen. Others received letters from the bank telling them they were about to be exposed to the IRS criminal investigation unit under a court settlement in which the bank agreed to release information about 4,450 customers. In January, the Government Accountability Office issued a report that found 83 of the 100 largest publicly traded U.S. corporations reported subsidiaries in countries listed as tax havens. At least 40 countries have been identified as tax havens by the international Organisation for Economic Co-operation and Development, which claims the clandestine global network stretches beyond the Caribbean, Panama, the Isle of Man and Liechtenstein to the financial centers of Southeast Asia. The nonpartisan Joint Committee on Taxation has estimated that the provisions would prevent $8.5 billion in tax evasion over the next 10 years. Some foreign financial institutions have voluntarily agreed to provide information about the U.S. assets of American account holders as part of the “Qualified Intermediary” program since 2000. But many of the foreign financial institutions that hold such accounts are beyond the reach of U.S. law, limiting the federal government’s ability to force disclosure on U.S. account holders. The bill would impose a 30 percent withholding tax on income from U.S. financial assets held by a foreign financial institution — unless the foreign financial institution agrees to disclose the identity of any American with an account at the institution (or the institution’s affiliates) and to annually report on the account balance, gross receipts and gross withdrawals and payments from such account. Foreign financial institutions would also be required to agree to disclose and report on foreign entities that have substantial U.S. owners. These disclosure and reporting requirements would be in addition to any imposed under the Qualified Intermediary program. It is expected that foreign financial institutions would comply with these disclosure and reporting requirements in order to avoid paying this withholding tax. “The United States has been very vocal about going after these accounts that are not visible,” said Santos, the Miami corporate attorney. Santos notes that the OECD has set out some guidelines that define a tax haven that should be blacklisted — including the inability to have a transparent ownership structure visible to the taxing authorities. “Now that the U.S. has said ‘we’re going to have an extra-territorial ability to crack open your own bank secrecy laws,’ some of those jurisdictions have said if you start doing that,” they could retaliate, Santos said. “It happens particularly with the LLCs [limited liability companies], where the LLCs don’t have to show anybody is the owner, they’re run by managers. Even in corporate circles, nobody really lists the owners,” Santos said. “So some countries have said, ‘We may have to blacklist the U.S. as a tax haven … effectively cutting off the U.S. from foreign investment.’”

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