U.S. MILLIONAIRES TOLD GO AWAY AS TAX EVASION RULE LOOMS

Bloomberg

Go away, American millionaires.

That's what some of the world's largest wealth-management firms are saying ahead of Washington's implementation of the Foreign Account Tax Compliance Act, known as Fatca, which seeks to prevent tax evasion by Americans with offshore accounts.  HSBC Holdings Plc (HSBA), Deutsche Bank AG, Bank of Singapore Ltd. and DBS Group Holdings Ltd. (DBS) all say they have turned away business.

"I don't open U.S. accounts, period," said Su Shan Tan, head of private banking at Singapore-based DBS, Southeast Asia's largest lender, who described regulatory attitudes toward U.S. clients as "Draconian."

The 2010 law, to be phased in starting Jan. 1, 2013, requires financial institutions based outside the U.S. to obtain and report information about income and interest payments accrued to the accounts of American clients. It means additional compliance costs for banks and fewer investment options and advisers for all U.S. citizens living abroad, which could affect their ability to generate returns.

"In the long run, if Americans have less and less opportunities to invest overseas, it would be a disadvantage," Marc Faber, the fund manager and publisher of the Gloom, Boom and Doom report, said last month in Singapore.

Bank Transparency

The government needs to be tougher on offshore tax crimes than it has been, said U.S. Representative Richard Neal, a Massachusetts Democrat and one of the original sponsors of the legislation.  Fatca, introduced after Zurich-based UBS AG (UBS) said in 2009 that it aided tax evasion by Americans and agreed to pay $780 million to avoid prosecution, is already helping to improve banking transparency, he said.

"People should know, and the IRS should know, what money is being held offshore and for what purpose," Neal said. "I don't think there's anything unreasonable about that."

'Too Complex'

Investments in products offered by third parties that non- U.S. citizens can purchase through UBS or other banks also may be restricted.

"Most of the hedge funds I know in Asia won't take American clients," said Faber.

Bank of Singapore, the private-banking arm of Oversea- Chinese Banking Corp. (OCBC), ranked strongest in the world for the last two years by Bloomberg Markets magazine, has turned away millions of dollars from Americans because it doesn't want to deal with the regulatory hassle, according to Chief Executive Officer Renato de Guzman. The bank had $32 billion under management as of the beginning of the year.

Rejecting Americans

At industry meetings he attends in Singapore, not accepting U.S. clients is "quite a prevailing sentiment," de Guzman said.  There are 18 private banks operating in Singapore, including units run by UBS, Credit Suisse Group AG, Deutsche Bank (DBK) and HSBC, he said.

"We have enough business in Asia, so we don't want to make our lives too difficult," de Guzman said.

HSBC, Deutsche Bank
HSBC decided last July that it would no longer offer wealth-management services to Americans from locations outside their home country after tax authorities stepped up a probe of the London-based bank's U.S. clients.

Deutsche Bank said it terminated securities accounts held abroad by people with U.S. residency as of mid-2011.  The action didn't include checking or savings accounts and didn't affect citizens living outside the U.S.  The Frankfurt-based bank said "only a small number of customers" were affected.

Collateral Damage

"Bank accounts, investment accounts, mortgages and insurance policies are being refused to American clients, and those with accounts are seeing them closed or have been threatened with closure," Marylouise Serrato, executive director of American Citizens Abroad, a Geneva-based organization, wrote in an e-mail.

U.S. citizens who live in countries that aren't served by U.S. banks may find themselves unable to bank at all, and implementation of the law in its current form could cause collateral damage to American businesses abroad, she said.

"Americans either will not be allowed to enter into international partnerships or live and work overseas, and will be replaced by foreign nationals who do not have these limitations," Serrato wrote.  "The extensive reporting requirements of Fatca will be destructive to those who wish to do business internationally as well as to those Americans who are legitimately living and working overseas."

'Turned Away'
That view is shared by Richard L. Weisman, Hong Kong-based head of law firm Baker & McKenzie LLP's global tax practice.

"U.S. expatriates already face severe U.S. tax rules related to their non-U.S. income and investments," Weisman said. "Fatca will increase the extent to which they are turned away by non-U.S. financial institutions."

Before Fatca, U.S. citizens in Bangkok or Manila could find investment opportunities through non-U.S. banks such as HSBC. Now their only option is to fly to cities where U.S. firms operate.

Limited Choices

If Americans choose to bank with a non-U.S. firm such as HSBC, their investment choices are limited.  At the HSBC branch in the bank's Asia regional headquarters in Hong Kong, Americans can hold only savings deposits.  They're prohibited from opening accounts to trade local stocks or buy products available to non- U.S. customers, including 45 equity funds investing in China or other geographies and industries.  There's only one comparable emerging-markets equity option available on HSBC's U.S.-based investors' website.

Financial institutions that choose not to accept American customers still must determine whether new or existing clients are so-called U.S. persons in order to comply with Fatca, according to Michael Brevetta, director of U.S. tax consulting at PricewaterhouseCoopers LLP in Singapore.

The definition includes citizens, green-card holders and non-Americans deemed U.S. residents by being present in the country for at least 183 days over a three-year period, which makes them subject to U.S. tax on their worldwide income, according to the IRS.

Compliance Costs

The compliance costs for banks, asset managers and insurance companies "could stretch into the billions of dollars," Brevetta said. Private-banking firms in Hong Kong and Singapore already have operating costs between 88 percent and 90 percent of their revenue, compared with 70 percent at Swiss banks, PricewaterhouseCoopers estimated in a September report.

Penalties for not complying will be stiff. Non-U.S. firms that don't make required disclosures will be subject to 30 percent withholding of certain dividends, interest or proceeds from the sale of assets they or their customers receive from U.S. sources, according to Baker & McKenzie's Weisman, who has conducted workshops and seminars on the proposed rules for current and potential clients in Hong Kong and Singapore.

"Overwhelmingly, financial institutions outside the U.S. don't like it, for obvious reasons," Weisman said, calling the withholding tax a "stick" the U.S. is wielding.  "The U.S. is outsourcing a tax-compliance function, which is enormously expensive."

Renouncing Citizenship
Americans who don't comply with Fatca are deemed "recalcitrant," and income they receive from U.S. sources also is subject to a 30 percent withholding tax, said Jason Choi, a Singapore-based tax lawyer with Latham & Watkins LLP.

Renouncing citizenship is an option chosen by increasing numbers of Americans. A record 1,780 gave up their U.S. passports last year compared with 235 in 2008, the IRS reported.

'Pain for Americans'

Still, the limitations create complications that act as an investment deterrent, said Philip Marcovici, a retired U.S. tax lawyer who advises wealthy families and governments.

"It's a pain for Americans to invest in markets outside of the U.S.," he said.