Swiss Bank Tax Evasion Row Heightens and US Expats Ask: What Next

Early in February 14, US prosecutors announced a criminal indictment against Switzerland’s oldest bank, Wegelin and Co, alleging that the institution had been proactively helping US expatriates to evade US taxes.

The first indictment of a Swiss bank has since ricocheted throughout the country’s financial system and now banks are taking actions that are leaving expatriates in Switzerland high and dry with no access to a local bank account.

Understanding FACTA

The US Foreign Account Tax Compliance Act (FATCA) was included as an element of the 2010 HIRE Act and outlines the requirement for foreign financial institutions to pass data to the IRS that outlines the holdings of U.S. taxpayers. Last Wednesday, the Internal Revenue Service and the Treasury Department released a set of proposed regulations for the implementation of FATCA and outlined a step-by-step process for the identification of overseas accounts of U.S. citizens, the reporting measures required and the withholding requirements for foreign financial institutions (FFIs).

“FATCA strengthens U.S. efforts to combat offshore noncompliance,” said IRS Commissioner Doug Shulman in a statement. “In doing so, we understand it creates a significant undertaking for financial institutions. Today’s proposed regulations reflect our commitment to take into account the implementation challenges of affected financial institutions while allowing for a smooth and timely roll-out of the law.”

In essence, the FACTA regulations will place a significant burden on foreign financial institutions to identify and report American account holders within their banks. Those that fail to do so may face a 30% withholding tax on American investments.

One of the biggest issues with the implementation of FACTA concerns the fact that the foreign banks that are being impacted by the requirements are now facing significant costs if they choose to adhere to their regulations and many of them are now opting to exit the market completely in order to avoid judicial pressure and further scrutiny. For many of the banks in the U.S., Americans constitute just a small part of their wealth management business and losing them from the portfolio won’t put Swiss banks out of business. USB, for example, have opted to close the accounts of any U.S. expatriates and have placed a complete embargo on the opening of any further accounts. While, they will allow U.S. citizens to operate an account with UBS in the USA, under USA license, this will no longer offer expatriates in the country access to a local bank.

U.S. Citizen’s Bank Accounts Closed

Rumors coming out of Switzerland this week indicate that many Swiss banks are now following similar actions to UBS in a bid to evade the onerous reporting requirements of FACTA and to avoid any clash with domestic privacy laws.

U.S. citizens have reportedly recently received written letters informing them that their accounts will shortly be closed and that they now need to transfer their existing funds to a new account at a different bank within two weeks… if they can find one.

The US expatriates’ problems do not stop there. Banks taking this action are likely to share information about the outgoing wires with the IRS and this may provide them with the information they need to gain further information about U.S. citizens who hold overseas deposits. It is advisable that U.S. citizens living in Switzerland who have failed to follow the FBAR reporting requirements now take advantage of the FBAR amnesty.

Will FACTA drive US citizens away?

American’s attending town hall meetings in Switzerland have made no bones about the fact that they object to the FATCA rules. Many of them disagree with the concept of taxation based on citizenship, a principle that is currently limited to the United States, and they argue that as expatriates living overseas they are forced to bear a heavier burden that their U.S. based counterparts. In addition to this, many resent the high fees associated with the tax return process.

We’re hearing that, in response to the law, more and more U.S expatriates are opting to completely renounce their U.S. citizenship so that they can avoid further scrutiny from the IRS and, perhaps more importantly, benefit from a single-tax income. Those opting to do so are free from the reporting requirements that impact the FFIs and can hold bank accounts freely. As of yet, no firm figures appear to have emerged as to the numbers involved, but according to Jackie Bugnion, director of American Citizens Abroad, there are delays up to mid-2013 to get an appointment at the U.S. consulate in Switzerland to renounce citizenship.

If you’re looking for further information about renouncing your U.S citizenship, please see our free guide to relinquishing citizenship.