December 20th, 2011 by Angela Offerman
New FATCA tax laws are being met with opposition from multinational financial institutions across the globe, but Canadian financial institutions are particularly reluctant to the changes. Their uneasiness comes with good reason, as the new laws pose major concerns for the large number of Canadian financial institutions who have several U.S. clients claiming dual citizenship. The U.S. has demanded that its citizens report their global income to the IRS for several years now, regardless of where they live, work, or pay taxes; however, FATCA goes even further by threatening significant penalties if banks fail to identify all their American-held accounts and share U.S. Social Security numbers with the IRS.
Compliance will be an issue for Canadian financial institutions in particular because they do not always know whom of their millions of customers are Americans or dual citizens, and Canadian law does not require them to ask. To remedy the problem, they will soon start asking clients to sign consent forms, granting the banks permission to share required information with the Internal Revenue Service. Even more problematic are the major costs—up to $100 million—banks will face in reprogramming computer systems and creating new paperwork to help identify Americans and avoid the 30-per-cent tax imposed on non-compliance. Currently, Canada’s Finance Minister, Jim Flaherty, has voiced he thought it would be in the best interest of all involved if Canada was granted an exemption, however the U.S. Treasury has stated none will be forthcoming.
While Canadian banks are concerned with the new tax laws, uneasiness may be an understatement for European financial institutions. Major banks including Credit Suisse, HSBC, Deutsche Bank, and Commerzbank are already releasing American customers in their refusal to comply with FATCA. The IRS is seeing major criticism from these concerned financial institutions, who are frustrated with the delays in releasing draft rules that are leaving them with minimal time to prepare. However, IRS Commissioner Doug Shulman vowed to “work through these tricky changes in a practical fashion.” While the IRS has provided some relief to financial institutions by delaying certain FATCA provisions, the U.S. will most likely not back down on these efforts to create the world’s most leak-proof tax system.
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