The Death of the Secret Swiss Bank Account? U.S. and Switzerland Agree to FATCA Implementation

Amidst ongoing negotiations between the US and foreign governments to increase taxpayer compliance abroad, Switzerland became the eighth country to sign a Foreign Account Tax Compliance Agreement (FATCA) on Feb . 13, 2013, joining: Italy, Norway, the U.K., Denmark, Ireland, Mexico and Spain.  The Swiss are known for their banking secrecy and as being a “tax haven,”making the signing a huge step towards the Internal Revenue Service’s (IRS) goal of increasing tax compliance abroad.

The accord requires Swiss financial institutions to report information on US accounts held there to the IRS, provided there is consent between parties.  In the absence of consent, group requests can be made on the basis of the administrative assistance clause in the agreement.  In essence, no US account holder in Switzerland will be immune from transparency to the IRS.  The stated goals of the agreement are: “to Improve tax compliance, combat international tax evasion and implement FATCA.”

The US will phase in FATCA on Jan. 1, 2014, meaning Swiss institutions will be forced to implement the changes from this date; refusal to do so would cause major disadvantages for the Swiss financial centre.

“The Final Regulations include a step-by-step process for U.S. account identification, information reporting, and withholding by FFIs. Under one type of agreement, FFIs can report FACTA data to their own governments who then exchange information with the IRS. Under the second type of agreement, FFIs must register with the IRS and report FATCA data directly.” The following simplifications were finalized in the agreement, affecting large sectors of Swiss financial markets:

• Social security funds, private pension funds and property and casualty insurers are excluded from the scope of FATCA.
• Collective investment vehicles and financial institutions with a predominantly local clientele (i.e. at least 98% of clients are from Switzerland or the EU) are deemed FATCA-compliant under certain conditions and are subject only to a registration obligation and the associated obligations.
• The due diligence requirements for the identification of US clients, to which all other Swiss financial institutions are subject, are designed in such a way that the administrative burden is kept within reasonable limits.

The final rules are meant to implement FATCA in a way that “addresses domestic legal impediments and reduces burdens on financial institutions”, Emily McMahon, assistant secretary for tax policy at the US Treasury, said in an official statement.

FATCA was signed into law in 2010.  The IRS calls it “an important development in U.S. efforts to improve tax compliance involving foreign financial assets and offshore accounts.”  FATCA requires certain US taxpayers to report foreign assets to the IRS, as well as requiring FFIs to report directly to the IRS information about US accounts held abroad or of foreign entities in which US taxpayers hold a substantial ownership interest.  If account holders refuse to reveal themselves than institutions must impose a 30% tax on any payments or transfers.  With Switzerland signing on, this could spell the end of the secret Swiss bank account.

FATCA has drawn sharp criticism for treating foreign account holders as criminals and for increasing administrative costs and burdens.  Swiss Finance Minister Eveline Widmer-Schlumpf said, “Fatca is not something to rejoice about. But it is a pragmatic solution.”  See: What FATCA did to American Bank Customers in Switzerland.

FATCA is seperate from FBar, which establishes reporting obligations for foreign account holders who held more than $10K at any point through the year.  The reporting thresholds for FATCA are higher ($50K at the end of the tax year or more than $75K at any point through the year) and are filed via form 8938.  Click here for a guide to understanding each, or here for an IRS questionnaire on determining if you need to file a form 8938.  Failure to comply with either can result in serious criminal penalties; consult a tax attorney for any legal questions.

Related articles

• US and Switzerland Sign New FATCA Agreement (forbes.com)
• Final Regulations Under FATCA Address Phased-In Due Diligence, IGAs, Compliance Obligations and More (joyoftaxlaw.com)
• Exclusive: Foreigners’ accounts in U.S. banks eyed in tax crackdown (news.yahoo.com)
• Judge Gives IRS Access to More Accounts at UBS and Wegelin (forbes.com)

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