New tax evasion law has foreign investors looking to K Street

A new law designed to prevent offshore tax evasion has set off a surge of lobbying, with several foreign financiers and trade associations turning to K Street for the first time.

At issue is the Foreign Account Tax Compliance Act (FATCA), which requires foreign financial institutions to report their accounts held by American citizens to the U.S. government. Firms that fail to provide that information would face a 30 percent withholding tax on their U.S. revenue.

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The IRS is crafting regulations to implement the law, which was passed in March of 2010 in an attempt to crack down on offshore havens that are often used to dodge tax payments.

 “It is going to affect all foreign financial institutions unless the IRS grants them an exemption,” said Tom Yancey, a partner in Sidley Austin’s tax firm. “It includes banks, brokers, investment funds and some insurance companies. It has a very broad scope.”

 FATCA is set to take effect in 2013. Since the midterm elections, close to a half-dozen banks and business groups with overseas ties have hired leading tax lobbyists to work on the law.

 In November, Patton Boggs disclosed that it was lobbying for the Australian Bankers’ Association. The firm’s lobbying team includes Stephen McHale, who worked at the Treasury Department for 12 years, including a stint as acting general counsel, according to lobbying disclosure records.

 Barclays Capital Inc. signed up with Washington Council Ernst & Young to help lobby on the law, according to records released this March. Nick Giordano, once chief tax counsel for the Senate Finance Committee and a former aide to Sen. Max Baucus (D-Mont.), is lobbying for the bank.

Jeff Levey, the firm’s executive director, who is also registered to lobby for Barclays, said Congress has left it to the executive branch on how the tax law is applied. 

“There’s just a tremendous amount of detail left to the IRS and Treasury to determine through regulations so it would make sense that financial institutions would want to be fairly aggressive in talking to regulators,” Levey said.

 And according to disclosure records released last month, Deloitte Tax was hired to lobby for the Investment Funds Institute of Canada, the Life Insurance Association of Japan and the Association of Private Client Investment Managers & Stockbrokers, a London-based trade group. The firm, however, has already filed terminations for those clients.

 Some of the biggest names in finance and business are lobbying on the law, including IBM, JPMorganChase and New York Life Insurance Co., according to lobbying reports from the first quarter of 2011.

 Rebecca Wilkins, senior counsel for federal tax policy at Citizens for Tax Justice, said foreign banks fear losing their U.S. clients because of the law.

 “They are using arguments like ‘competitiveness’ and ‘regulatory burden.’ What they are really afraid of is they are going to lose their tax-evading customers,” Wilkins said.

 Foreign governments are also concerned. In an April 6 letter to Treasury Secretary Timothy Geithner and IRS Commissioner Douglas Shulman, Hungarian Finance Minister György Matolcsy and the European Union’s tax commissioner, Algirdas Šemeta, called for a dialogue on how to apply the law without hurting the European financial sector. 

 Yancey, of Sidley Austin, is part of his firm’s legal team representing the Cayman Islands government, which is particularly anxious about the looming tax rules. At a seminar sponsored by the government at the Marriott Grand Cayman Island Beach Resort last month, Yancey said organizers had to stop a speech he was delivering because of an overflowing crowd.

 “They cleared the room and brought in more seats so more people could get in,” Yancey said.

 Yancey helped file a comment with the IRS for the Cayman Islands last year on the new tax law. He said the Caymans want to help the U.S. government figure out how best to apply it.

 “They, like others, have concerns about what exemptions will be granted to investment funds and other structures that they believe do not present a high risk for U.S. tax evasion,” Yancey said.

 Others are also looking for exemptions. Veritas Pension Insurance Co., a Finnish company, filed an April 12 comment to the IRS asking for an exemption to FATCA that could work for it and other Finnish pension providers.

 The passage of the tax law came on the heels of the scandal that swirled around Switzerland’s largest bank, UBS, after it helped thousands of Americans evade U.S. taxes by setting up Swiss bank accounts for them. In February 2009, the bank agreed to pay $780 million in fines to settle U.S. criminal and civil charges. 

 Public interest groups are keeping an eye on the law as it moves through the regulatory process.

 Citizens for Tax Justice lobbied for the law last Congress. The group is part of the Financial Accountability and Corporate Transparency, or FACT, coalition, which launched last month to fight tax haven abuse and help bring down the federal deficit.

 Wilkins said that the Treasury Department loses up to $100 billion each year in owed taxes due to offshore accounts.

 “I hope they are not able to get through regulatory means what they couldn’t get through legislation. The Treasury should enforce the law,” Wilkins said.


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