A man fumbles about in a Florida airport, trying to look inconspicuous, before security flags him and discovers he is a private banker for UBS that is smuggling diamonds in his toothpaste tube for a rich client. The ploy was part of a scheme by the global bank with Swiss ties to help wealthy American clients evade taxes, but the consequence is a law that threatens to affect every foreign institution that deals with an American client or expat.
‘‘Most banks in Thailand will comply with Fatca, but that doesn’t mean they won’t throw their American clients out,’’ says Mr Blaine, while Mrs Creveling suggests there will always be banks available to service American clients in Thailand. KOSOL NAKACHOL
The smuggler subsequently became a whistleblower against UBS, helping to end centuries of Swiss bank secrecy in the process after negotiations with the US government, but a US law passed in 2010 promises to have a much larger impact. The Foreign Account Tax Compliance Act (Fatca) requires US taxpayers holding foreign financial assets with an aggregate value exceeding US$50,000 to report the information on their annual tax return. But it also requires foreign financial institutions to report certain information to the US Internal Revenue Service (IRS) about financial accounts held by US taxpayers or by foreign entities in which US taxpayers hold a substantial ownership interest.
Thai financial institutions are only starting to realise how the law will affect them, which features a 30% withholding tax on payments to non-US persons or entities that do not comply with Fatca.
"In typical fashion, US lawmakers used a sledgehammer when a flyswatter would have done," said Eric Roose, a Tokyo lawyer and owner of the Firehouse eatery on Sukhumvit Soi 11.
Catching tax evaders who hide their money overseas is a worthy cause, he said, but Fatca casts such a wide net that innocent folks and businesses will also be affected by the costs.
But a wide net is needed if US authorities are to catch their real target, said Jonathan Blaine, an associate principal for taxes at KPMG Thailand.
"It's not an accident that Fatca sounds like 'fat cat'. This law is really about international crime, so you have to cover all the bases or they'll just find somewhere else to hide it," he said. "There will always be people who try to get around the rules."
As the regulations have not been finalised yet, many banks are reluctant to act and are still gathering information, said Mr Blaine. Kasikorn Asset Management and TMB Asset Management have both decided not to offer their mutual funds to Americans. While no Thai banks have shut their doors to Americans, expats in Europe and other parts of Asia have not been so lucky.
"I know an American physician who had been in Saudi Arabia for a long time who just had his account closed out in Singapore," said Doug Harrison, the owner of Bourbon Street Restaurant on Soi Ekamai. "This new law is a real pain in the neck. It's just too intrusive."
He plans to put all his assets in his Thai wife's name so he does not have to worry about Fatca, among other regulations, but every move comes with complications, notes Peggy Creveling, a chartered financial analyst who advises expats on wealth management.
Mr Blaine said the US estimates it loses $10 billion a year in unpaid taxes because of offshore accounts and is aiming for $1 billion in revenue over 10 years as a result of the law.
Several European governments have already reached an agreement with the US over an alternative reporting regime for Fatca information, something the Federation of Thai Capital Market Organizations wants the Thai government to follow as well. The US Treasury Department has created a template agreement it wants governments or foreign financial institutions to sign to show they are acting in good faith to try and follow the tenets of Fatca even though compliance may be burdensome.
In addition, an IRS amnesty programme for the repatriation of undeclared offshore assets has led to 33,000 filings and over $5 billion in back-taxes and penalties.
This shift towards compliance before Fatca even comes into effect in 2014 has not been without its critics, who charge the law is too costly a burden for foreign financial institutions in addition to an invasion of several countries' stances on privacy. Rather, it is a realisation that non-compliance for most large companies will be impossible and even more costly, said Mr Roose, who has given presentations about Fatca to foreign bankers.
Even if institutions were to shed their American clients and any US connections, any transaction that is cleared through the US or a US bank will still trigger the 30% withholding tax for non-compliant institutions, and no company can afford that, he added.
Many American expats are fed up, as the US already has the most stringent tax-reporting requirements for expats of any country before Fatca. The IRS allows up to $95,100 to be excluded from 2012 taxes for Americans living abroad, but the requirement to report investments and capital gains even for those making much less is costly and time-consuming. The US Treasury reported 1,800 people renounced their US citizenship in 2011, quite a leap from previous years. Financial leaders in Hong Kong, Europe and even Canada have called for limits or refusal to follow Fatca strictures, saying they make foreign banks an extension of the IRS.
Still, the American Chamber of Commerce in Thailand (AmCham), through a US-based lobbying arm for Asia-Pacific chambers, is trying to change some of the regulations before the law comes into effect. Fatca has already been delayed because the IRS realised institutions did not have enough time to prepare for compliance.
"Those members of our chamber who are aware of the law are concerned about it," said Judy Benn, AmCham's executive director. "Sometimes these laws are so complex they are very difficult to understand. There are huge reporting costs for banks, and those costs are going to be borne by someone."
"The amount for each institution to comply with the law is dependent on the size of the client base and the amount of information collected," said Mr Blaine. "I have heard it could cost some large institutions several millions of dollars. Large US banks have already spent millions of dollars, and regional players in Singapore have already spent a few million dollars. The hope is that onboarding catches any new accounts that require Fatca reporting."
Just the changes to the IT systems alone could cost millions if the institution is large enough, while the "resource sanitisation" of trying to determine which clients are American citizens or dual citizens or green-card holders will also be burdensome, said Mr Blaine.
"KPMG expects most banks in Thailand will comply with Fatca, but that doesn't mean they won't throw their American clients out," he said.
However, Mrs Creveling said: "We feel confident that there will always be banks available to service American clients in Thailand. It may be a matter of some large multinational banks segregating their American operations so that all American clients are funnelled through there."
Previously, if an American opened an account at a Thai bank, the IRS would never know about it. There was no reporting requirement before Fatca, just as diamonds are not tracked, allowing tax evaders to purchase them in one country and sell them in another.
Oddly enough, Fatca could have been an afterthought had the US election gone differently in November. "Romney was the poster boy for Fatca opponents, as he is perhaps the largest personal beneficiary of foreign tax-free accounts," said Mr Blaine. "Had he won, Fatca surely would have been repealed."
Somebody check his toothpaste.