The Death of All Banking Freedom?

These foreign banks, which are called foreign financial institutions, or FFIs, and also foreign entities that are not banks — called non-financial foreign entities, or NFFEs [for example securities brokerages] — have to enter into a compliance agreement with the IRS starting Jan. 1, 2013 … they’ll agree to basically [disclose] the names, Social Security numbers and account balances of U.S. [account holders] every year. … And if they don’t enter into this agreement and they invest in U.S. stocks or securities, or have any U.S. source income, then there’s going to be a 30 percent withholding tax on all payments, including interest, rents, royalties, and things like that.

• to forge information-sharing agreements with foreign governments;
• to “persuade” foreign institutions to cooperate;
• and thereby to reduce the number of stubborn Americans who still refuse to comply.

Under present law, the measures available to assist the United States in obtaining this information include both treaty relationships and statutory provisions. The effectiveness of these measures depends significantly, however, on the United States’ ability to reciprocate.

Under this global standard [the OECD Model Tax Convention and other accords] a country cannot refuse to share tax information based on domestic laws that do not require banks to share the information. In addition, under the global standard, a country cannot opt out of information exchange based on the fact that the country does not itself need the information to enforce its own tax rules.

The reporting of information required by these regulations will also directly enhance U.S. tax compliance by making it more difficult for U.S. taxpayers with U.S. deposits to falsely claim to be nonresidents in order to avoid U.S. taxation on their deposit interest income.

It is obvious hypocrisy to allow U.S. banks to hide U.S.-source income information while strong-arming other countries (and their banks) into disclosing information about U.S. taxpayers.

The IRS has backed itself into this corner and must force disclosure of interest paid to nonresidents or be laughed out of the diplomatic room. The move will have predictable consequences for U.S. banks. I would expect capital flight to commence. I already encourage nonresident clients to bank outside the United States, as much for the paperwork problems as anything else. This will add one more reason for them to avoid bringing capital to the United States.