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Russia Ready to Swap Tax Data with the USA

23.10.2013 17:33 / vedomosti.ru

Russia may sign a tax data exchange treaty with the USA by the end of the year, said Finance Minister Anton Siluanov. The draft is nearly identical to the standard FATCA (Foreign Account Tax Compliance Act) application agreement. The Act is designed to help US authorities track down tax avoiders in foreign jurisdictions.

Since 31 March 2015, financial institutions the world over are to file lists of their American clients to the IRS every year. By 1 July 2014 banks must comply with FATCA or face a 30% fine on any US payment. The alternative is to file the data to local tax authorities, who will forward it to their US counterparts. However, in order to facilitate this, the country has to sign a treaty with the USA. This route was taken by Denmark, Germany, Ireland, Japan, Mexico, Norway, Spain, Switzerland and Great Britain.

The USA-Russia treaty may be non-standard. The draft avoids mention of FATCA application in Russia, referring to data exchange for tax purposes instead, explains a federal official. The issue was political, say negotiators: “Why must Russia comply with US law?” Other countries also had the FATCA connection removed, claims the official.

Russia has crossed out all FATCA and US Treasury references from the draft, however the document is essentially a replica of the FATCA treaty with the same conditions, states Risk and Compliance Director at KPMG Dmitry Chistov.

Banks and other financial institutions will have to file client information with the Federal Tax Service. A client’s US origin is determined by one of seven criteria: place of residence, place of birth, address, standing orders for cash transfers to the USA etc. According to the draft, accounts worth over USD 50k are eligible for monitoring (or annuity insurance accounts worth over USD 250k). Accounts with a balance over USD 1mn will face tighter scrutiny, notes Partner at Paragon Advice Group Alexander Zakharov: e-data as well as paperwork filed in the recent five years will be analyzed. Each Russian bank will be required to keep records of account opening, full details on the company and its beneficiaries, a copy of beneficiary’s passport, says the draft. Many banks will find this too much, thinks Zakharov.

Russia is in no hurry to sign the treaty. Banks are already in panic: if the country fails to join the system by mid-2014, they will have to choose between breaching Russian law (Personal Data Act in particular) or paying the 30% fine. The fine will be deducted by either the US payer bank or a transit bank in a FATCA country, explains Chistov. Russian banks have already begun to run into problems, he says: European counterparts are reviewing their clearing agreements en masse.

Last week, the Russian Banks Association (ARB) raised the alarm — by demanding to hear Russia’s official standpoint in a letter to Deputy Finance Minister Sergey Shatalov. A federal official counters that they are barking up the wrong tree: the official position is up to the President or the Government — they must issue relevant directives. The foreign Ministry is yet to speak, acting on the memo sent there by Minfin, says the official. Vedomosti also received no reply to their Minfin query.

The final decision has not been made, the debate revolves around details, explains a federal official. The Foreign Ministry could have their foreign policy motives, but the Kremlin and the Government are generally willing to sign the treaty, claims the official.

Banks demand certainty, threatening that they will not be able to prepare for the new order. By July 1, they should change their account opening procedures, fix IT systems, prepare for reporting, says Chistov: “We must learn to identify Americans among clients”. Deputy CEO at Sberbank Bella Zlatkis urges to keep calm: “I get a feeling from Minfin talks that the FATCA issue will be resolved by the year-end”. Also, nothing is stopping banks from gradually adjusting to new realities, Zlatkis says, the software needs are already clear. Banks that are part of global groups will have it easy, they know very well how FATCA affects the business flow, says Raiffeisenbank CEO Sergey Monin. The important part is not having to choose between “compliance with IRS rules and Russian law”, he says.

Margarita Papchenkova, Sergey Titov

Taxation of financial transactionsProject Group №3