Taxation & Estate Planning

Proposed Tax for Foreign Banks

By Darrin Mish

There is a new law being proposed that would impose a tax on foreign banks if they do not reveal the details of Americans having offshore accounts with them. Under this law, the US government would impose a 30% withholding tax on the income foreign banks earn from US depositors.

Presently, it is legal for Americans to hold offshore accounts in foreign banks provided they pay taxes on interests and dividends they earn on these accounts and declare their bank balances that exceed $10,000. At the same time the IRS Qualified Intermediary program necessitates foreign banks declaring US depositors' identities and notifying the IRS of the income earned in their accounts. However Swiss bank UBS AG was found violating the program and intentionally advising thousands of US depositors on how to deposit their assets while avoiding taxes.

But with the proposed new law, the foreign banks would have to pay the withholding tax if they default on complying with their responsibility to declare US assets deposited with them. This puts banks like UBS AG and Credit Suisse of Switzerland in a quandary. They either pay the tax or violate their own country's bank secrecy laws.

The withholding tax is one of 13 provisions in the newly proposed law aimed at ensuring greater accountability and transparency in foreign banks often used as tax havens. The rationale is the fact that tax dodgers using tax havens cost the US government billions of dollars annually. Thus this tax is expected to generate about $3.1 billion in revenue over the next decade. The proposed law also levies a fine on those who try to avoid paying the 30% withholding tax. The fines levied are expected to generate a further $1.6 billion over the next decade. This levy will especially affect foreign investors who try to avoid the 30% withholding tax using a derivative transaction known as the total return swap.

Under this swap arrangement, offshore investors like a bank or a hedge fund sells their stocks to Wall Street firms near the time for dividend payments. These firms enter into a swap contract with these offshore investors in which for a fee, the firms agree to pay the investors the equivalent of the dividend and any stock gain. Within the context of this arrangement, the payments from these firms do not come under the definition of income under IRS rules hence the offshore investors escape the 30% withholding tax. On the other hand, the Wall Street firms would owe taxes on the dividends but at a lower 15% for US taxpayers while claiming large deductions for the swap payments made to the foreign investor.

The newly proposed law aims to put a stop to all this hanky-panky.

Darrin T. Mish is a veteran, nationally recognized tax attorney who has focused on providing IRS help to taxpayers for over a decade. He regularly travels the country training other attorneys, CPAs and enrolled agents on how to handle their toughest cases with the IRS. He is highly ranked among the top attorneys in the country, with an AV rating from Martindale-Hubbell and a perfect 10 on Avvo.com. Martindale-Hubbell has also honored him with a listing in their Bar Register of Preeminent Lawyers. He is a member of the American Society of IRS Problem Solvers and the Tax Freedom Institute. With clients on every continent but Antarctica, he has what it takes to solve your IRS problems no matter where you live in the world. If you would like more information about his practice and how he can help you, please call his office at (813) 229-7100 or toll free at 1-888-GET-MISH.

Proposed Tax for Foreign Banks is a post from: IRS Tax Problem Solver Blog - IRS Help

Full post as published by IRS Problem Solver Blog on December 24, 2009 (boomark / email).