Taxing time for US expats

The Life: As the US Government continues its hunt for tax evaders, one of its rules is forcing banks and financial institutions within the UAE to take new action.

Virginia La Torre Jeker is a US tax specialist based in Dubai. Satish Kumar / The National

The US government is more aggressively hunting down tax evaders, which may be making some Americans living in the UAE nervous. But a recent rule also means banks and other financial institutions in the Emirates will soon have to examine whether they will provide extensive information on American customers or risk certain penalties.

Last year, the US government enacted a rule with a yawn-inducing name, the Foreign Account Tax Compliance Act, or Facta.

The rule requires banks and financial institutions around the world to report the transactions of their US account holders.

They must also report certain information about their American customers directly to the Internal Revenue Service (IRS), the US tax authority. This information includes a customer's tax ID number, name and address, as well as other details.

If banks and financial institutions don't share this kind of information, they could suffer a withholding tax on future business and even lose certain partners, experts warn.

"It's going to be a rude awakening for some companies to see how their business will be affected," says Virginia La Torre Jeker, a US tax specialist based in Dubai.

Here is what companies here need to know:

Which businesses might be affected by this rule?

Any financial institution - including those that accept deposits, such as banks. Brokerage firms and other companies that are in the business of investing, reinvesting and trading securities or commodities also fall under the rule.

"Whether it's banking, funds, trusts - you name it - all of these structures will be essentially forced to open up and give details of US investors," says Ali Kazimi, a tax specialist with Deloitte who is moving to the company's office in the UAE.

What deadline should companies keep in mind?

Foreign banks and other financial institutions have been asked to enter into an agreement with the IRS by June 30, 2013.

They will then be obligated to undertake certain steps when getting identification of all of their account holders, regardless of which country they hail from. Each year, the banks will then have to report certain information about their American customers.

But how does a US law have jurisdiction over here?

It doesn't, directly. But if a bank based in the UAE has a relationship with a bank from the US, there's a good chance that money such as deposits or interest from the US may enter the Emirates.

If banks here want to continue these kinds of relationships, of which there are many, they will need to enter into the agreements or risk being dropped by their US counterparts.

In other words, says Mr Kazimi, there is commercial pressure. "It'll be hard to find a financial institution that does not have a nexus with the US," he says.

What is the penalty for not signing the agreement?

"If you don't enter into the agreement, you'll have 30 per cent deducted from many payments coming in from the US and potentially other banks," says John Belsey, the managing director for Deloitte's international tax practice in the Middle East. This 30 per cent withholding penalty would hit foreign financial institutions that fail to identify US accounts, their owners and their assets to the IRS. It would also affect those that do not provide identifying details of American customers, such as their tax ID number, name and address.

"The only way to get around it is for foreign banks to enter into an agreement with the US that says 'I promise to give you information [on account holders']," says Mr Kazimi.