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Financial institutions in the UK are threatening to withdraw their services to American clients if the United States Congress approves proposed changes to reporting and withholding rules for tax purposes.
Banks and wealth managers are warning that it will no longer be cost effective for them to service US clients if tough new reporting rules, part of the Obama administration’s intended crackdown on international tax avoidance, are incorporated into the US Qualified Intermediary (QI) program.
Under the proposals, announced by the US Treasury earlier this month, foreign financial institutions that have dealings with the United States will be required to sign an agreement with the US Internal Revenue Service (IRS) to become a Qualified Intermediary and share the same information about their US customers as is currently required of US financial institutions, “or else face the presumption that they may be facilitating tax evasion and have taxes withheld on payments to their customers.”
Proposed changes to the QI program were put out to consultation by the IRS last October, but have yet to be incorporated into US tax law. Under the reforms, financial institutions that are QIs would have to provide early notification of material failure of internal controls, improve evaluation of risk of circumvention of US taxation by US persons, and include audit oversight by a US auditor.
“This is an important program, and we cannot tolerate anyone abusing or skirting the requirements,” said IRS Commissioner Doug Shulman. “This proposal lays out a strong set of actions in our ongoing effort to strengthen the Qualified Intermediary program.”
The international tax crackdown has been included in Obama’s maiden budget for fiscal year 2010. Although non-binding, Congress is expected to take up many aspects of the proposals in the near future.
However, institutions in the UK fear that the new rules will be difficult to comply with and could land firms in hot water with the IRS if not followed correctly. In response to the suggested amendments to the QI tax rules, the Association of Private Client Investment Managers and Stockbrokers in the UK has called on the IRS to ensure that changes are “proportionate and cost-effective.”
“The QI regime continues to be an administratively burdensome and costly regime to APCIMS member firms, particularly as they have very few, if any, US clients,” said Andy Thompson, Director of Operations at APCIMS.
APCIMS made reference to one firm that has costs of GBP215,000 (USD343,000) of which audit represents just under 25% compared to reportable income of USD175,000 (USD5,000 tax deducted) for calendar year 2007.
The association believes that amendments to the process which will require the involvement of American auditors will be “costly and unnecessary” and may constitute a breach of the Data Protection Act in the UK.
“There is no need for UK firms to endure the increased costs through having to use US external auditors. IRS already have appropriate powers as all of the big UK audit firms are registered with the Public Company Accounting Oversight Board (PCAOB),” Thompson continued. “PCAOB has broad investigative and disciplinary authority over registered public accounting firms and utilizing this provision will meet the IRS’s aims of accuracy and accountability in the QI audit process.
“Ultimately we believe the burden should fall on the audit firms rather than QIs themselves,” he argued.
According to the UK’s Daily Telegraph, APCIMS has been joined by the British Bankers Association in its opposition to the US proposals. Both organizations discussed the matter with European counterparts earlier this month, and a delegation will be sent to Washington in June to urge the US Treasury Department to reconsider the plans.A comprehensive report in our Intelligence Report series, examining in depth the situation of offshore transparency and secrecy in a number of the most prominent jurisdictions, is available in the Lowtax Library at http://www.lowtaxlibrary.com/asp/subs_reports.asp and a description of the report can be seen at http://www.lowtaxlibrary.com/asp/description_report2.asp
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