AP ENTERPRISE: US to Use Tax Law on Russian Banks - ABC News

The United States is planning to use an anti-tax-evasion law to punish Russia for its actions in Ukraine, a tactic that could prove to be more costly than sanctions.

The law was passed in 2010, long before the crisis in Ukraine. But it could become a powerful economic weapon.

Beginning in July, federal law requires U.S. banks to start withholding a 30 percent tax on certain payments to financial institutions in other countries unless those foreign banks have agreements in place to share information about U.S. account holders with the Internal Revenue Service. The withholding applies mainly to investment income.

Russia and dozens of other countries have been negotiating information-sharing agreements with the U.S. in an effort to spare their banks from such harsh penalties.

But after Russia annexed Crimea and was seen as stoking separatist movements in eastern Ukraine, the Treasury Department quietly suspended negotiations in March. With the July 1 deadline approaching, Russian banks are now concerned that the price of investing in the United States is about to go up.

"It's a huge deal," said Mark E. Matthews, a former IRS deputy commissioner. "It would throw enormous uncertainty into the Russian banking community."

The new law means Russian banks that buy U.S. securities after July 1 could forfeit 30 percent of the interest and dividend payments. The withholding applies to stocks and bonds, including U.S. Treasurys. Some previously owned securities would be exempt from the withholding, but in general, previously owned stocks would not.

Private investors who use Russian financial institutions to facilitate trades also face the withholding penalty. Those private investors could later apply to the IRS for refunds, but the inconvenience would be enormous.

"It's a big problem for them," said Matthews, who is a lawyer at Caplin & Drysdale, a tax firm based in Washington. "It decreases their competitiveness, and they may have capital flight elsewhere."

The U.S. and Russia are significant trading partners, though not all transactions would be subject to withholding. Last year, the U.S. imported $27 billion in goods from Russia, which ranked 18th among importers to the U.S., according to the Census Bureau. The U.S. exported $11 billion in goods to Russia.

The withholding would expand in 2017, if there was still no information-sharing agreement. At that point, if investors sold stocks or bonds, U.S. banks would be required to withhold a 30 percent tax on the gross proceeds from those sales.

The law would also snag big global banks with subsidiaries that don't have agreements with the IRS to share information. At first the withholding could be limited to the subsidiaries. But eventually, if any part of a large global bank refused to comply with the information-sharing requirements, the entire bank would be penalized.

"That keeps an institution from deciding that it's going to register its entity in Germany but not register the entity it has in Switzerland," said Denise Hintzke of Deloitte Tax.

It would also provide a tremendous disincentive for large global banks to do business in countries where they can't share information with U.S. authorities.

More than 50 countries have reached agreements with the U.S. to share tax information about U.S. account holders. The list includes countries famous for bank secrecy, such as Switzerland and the Cayman Islands.

http://abcnews.go.com/Politics/wireStory/ap-enterprise-us-unleash-irs-russian-banks-23593797