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The American A

As the US signs in legislation regarding hiring new staff, it sneaks in a clampdown on tax evasion through the back door. MarketW looks at the implications

atch journalist Alistair Barr

MERICAN politicians have a nasty habit of sneaking expensive extras into the laws they pass. These are often pet projects to keep

constituents happy, like the infamous ‘bridge to nowhere’ in Alaska, and (my favourite) $500,000 in 2006 for a teapot museum in Sparta, North Carolina (population 1,800). But earlier this year, Congress snuck something in a ‘big jobs’ bill that’s no laughing matter for offshore finance centres such as Jersey and Guernsey. President Obama signed the HIRE Act

into law in March. It dangles tax breaks to encourage companies to hire new staff. While all the focus has been on jobs, jobs, jobs, the $18bn bill will be partly paid for through a crackdown on people who evade taxes by squirrelling assets away in offshore accounts and not reporting it to the US government. This part of the legislation is the offspring

of the Foreign Account Tax Compliance Act, or FATCA, which never made it into law on its own. It also shares some DNA with the Stop Tax Haven Abuse Act of 2007, which was co-sponsored by then-Senator Obama, but also went nowhere. Now that HIRE has been passed, people

working in international tax and offshore finance are calling it FATCA, so I will too – the missing ‘t’ that would make it FATCAT hasn’t gone unnoticed, by the way. When the law kicks in in early 2012, foreign financial institutions will have to report the name, address and tax ID number of US account holders to the Internal Revenue Service (IRS), America’s tax collector. If institutions don’t want to play along,

or can’t prove to the IRS that they have no US clients, payments from American sources will be slapped with a 30 per cent withholding tax.

28 June/July 2010

This includes interest payments, dividends, rents, salaries, wages, premiums, annuities… the list goes on. Congress is hoping for almost $9bn in extra taxes over a decade from this.

Feeling the ripples “The impact of this is just starting to sink in,” says Thomas Delaney, a financial institution tax lawyer at New York-based Mayer Brown LLP. “A lot of firms that have nothing to do with the US are going to have to pay attention.” Most troubling are the ‘negative presumptions’ embedded in FATCA. If a client of a UK bank doesn’t provide enough information to prove that they’re not American, it’s assumed they’re a US citizen. “The key is the asset,” Delaney explains.

“If there are any US assets in accounts, then they are potentially exposed to a withholding on income of up to 30 per cent.” This could apply to US assets owned directly by financial institutions, not just investments beneficially owned by account holders of those firms, he warns. John Harris, Director General of the Jersey

Financial Services Commission (JFSC), seems unperturbed. “FATCA is of some interest to Jersey, but actually far less than you might imagine, given the relatively low levels of business that the island’s financial institutions transact with US nationals and US persons,” he says. But a real-world example from

Guernsey illustrates the potential for US ties that aren’t apparent on the surface. AremisSoft Corp, a US-listed software company, collapsed in a massive accounting fraud almost a decade ago. Before the demise, President Roys Poyiadjis transferred millions of company shares and options into the names of various nominees. The options were exercised and all shares were sent to

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