Banks outside the United States already
tread carefully when it comes to taking on US citizens or green card
holders (permanent residents) as depositors, in the wake of the American
crackdown on tax evasion.
But new laws passed earlier this year
could mean more compliance challenges for all banks and even funds, as the
US seeks to unilaterally clamp down on assets not declared by its
nationals.
The new rules are embedded in the
Hiring Incentives to Restore Employment Act (Hire Act), which sets out to
encourage employment. What will be of interest to banks and funds are
provisions relating to financial reporting, which aim to prevent US
nationals dodging tax by hiding behind foreign financial institutions (FFIs).
These foreign banks and funds could be
compelled to report on the assets of their US clients. A 30 per cent
withholding tax on any US-sourced income, interest or dividend payment,
including rent and salary, is on the cards.
Harder still is a 30 per cent
withholding tax on the gross proceeds from the sale of any property that
produces US-sourced income or dividend. The tax applies whether or not the
sale was profitable. The provisions are expected to take effect between
2012 and 2013.
Institutions that refuse to report on
their US clients will have to pay those withholding taxes. For those who
agree to the reporting rules, their US clients' holdings will still be
subject to the 30 per cent withholding tax on income, interest or
dividends earned.
Sources are concerned that such rules
will eventually erode US competitiveness and cause investors and
intermediaries to shun US securities altogether. Already, many non-US
banks are reluctant to take on US clients.
According to a consultant: 'The biggest
implication will be the time and cost from a practical standpoint to
become compliant.'
Exemptions may be possible for FFIs
that certify that they have no US clients. But institutions are unlikely
to sign such a certification, as clients' residency and citizenship status
may change.
Says Kurt Rademacher, director of
international tax practice at Butler, Snow, O'Mara, Stevens & Cannada:
'I think the rules are overreaching in that they paint all non-US
financial institutions with the same brush . . . even if there is
absolutely no evidence that a particular non-US bank participated in tax
evasion.
'I would have preferred to see some
level of evidence of negative behaviour on behalf of a particular bank
before these onerous reporting rules would apply. Instead, the law
effectively forces any bank that wishes to offer US portfolio exposure to
its clients to implement an expensive system of US-style reporting - even
if the bank has very few US customers.'
Michael Brevetta,
PricewaterhouseCoopers senior manager (US tax consulting), says: 'It is
understandable that the US will want to curb tax avoidance. But it needs
to be careful to balance that interest with the need for continued
investments into the US. If you consider the US financial system today and
the state of the US economy, it certainly seems logical that the US
government should not jeopardise the desirability of US investments.'
US tax rules apply to global assets,
regardless of where they are. It is fairly common for Asians to hold US
residency or citizenship along with their Asian citizenship.
Despite the widespread publicity
arising from the tax evasion suit brought against UBS by the US Justice
Department, some Asians persist in thinking offshore assets need not be
declared to the US tax authority. Worse still, some may not disclose their
US citizenship or residency status to their banks.
UBS was embroiled in a three-year
dispute with US tax authorities which demanded the names of thousands of
depositors with undeclared assets in offshore accounts. This year,
Switzerland signed a treaty with the US to hand over some 4,450 names.
More recently, the US Justice Department was reportedly investigating
clients of HSBC Holdings who may have failed to disclose accounts in
Singapore and India.
As the market awaits detailed US
regulations, banks are bracing themselves for what they see as 'onerous'
compliance requirements. At the moment, non-US banks in Singapore do have
US nationals as clients, but only deposit accounts are allowed. Banks' due
diligence seeks to ascertain why an account is needed - the client may
live and work here for instance, or may have children studying here.
Investment products and portfolios cannot be marketed to them.
Banking services to companies will be
an even trickier area, as banks will have to ascertain whether there are
US nationals among shareholders.
Says a banker who declines to be named:
'The impact is that the bank has to establish that customers are not US
persons; they must sign a certificate that swears so. For us, 99.99 per
cent of clients are not US persons but we still have to go through that
process.
'The law puts the onus of due diligence
on us to establish whether the person is a US person. We need to see to
what degree we have to do that. Today, we ask you and rely upon the
customer telling the truth.'
Customers today are typically asked to
show their identity cards (ICs), but not their passports, he said.
Requiring banks to ask clients for passports would be an 'overwhelming'
effort, which may also be seen by clients as intrusive.
-- 2010 August 12 BUSINESS
TIMES
