Foreign Banks Win New Delay in Tax Evasion Rule

Foreign banks on Friday won yet another delay in a sweeping Treasury Department law intended to end tax evasion by Americans and will now have until next July to begin complying with the requirements, the Internal Revenue Service said.

The unusually broad law, the Foreign Account Tax Compliance Act, or Fatca, requires foreign financial institutions, including banks and mutual funds, to either collect and disclose data on American clients with accounts holding at least $50,000, or to withhold 30 percent of the dividend, interest and other payments due those clients and to send that money to the I.R.S.

The latest unexpected rollback of the deadline, an extension of six months to July 1, 2014, underscores a struggle by the Treasury Department to enforce the new rules. The law was approved in 2010 amid heightened scrutiny of offshore private banking services sold to wealthy Americans, and it was originally scheduled  to go into effect last January. But in late 2012, facing heavy criticism, the government delayed its rollout until January 2014.

Foreign banks have argued that the regulation will cost too much to carry out and is too broad, particularly regarding cross-border payments on swaps and other derivatives. Many European financial trade groups have derided it as an imperialistic push by the United States to impose its own tax laws on the rest of the world. The United States taxes its citizens and residents on their worldwide income, regardless of where they live.

Kenneth Kies, a lobbyist in Washington, D.C., said that the extension “underscores what has been obvious â€" that this is an enormously complex and burdensome regime to deal with,” adding, “People just aren’t ready.”

Foreign financial institutions that do not comply with the law could face past-due tax bills and penalties of 40 percent of the amounts in question.

The Treasury Department, which oversees the I.R.S., has taken a two-pronged approach with the law. In some cases, it has signed broad agreements with countries that they, rather than individual banks, will collect and turn over data. Agreements have been signed with Britain, Ireland, Mexico and Spain, and dozens more are in the works, including some with offshore tax havens.

Robert Stack, the Treasury deputy assistant secretary for international tax affairs, said in a statement on the latest extension, “We are providing an additional six months to complete intergovernmental agreements with countries and jurisdictions across the globe.”

Critics of the law say that it is unclear how many other governments, including China’s, are actually willing to sign agreements. The Treasury Department “is behind where it expected to be,” said James G. Jatras, a lawyer and lobbyist against the law. “Why else would they need another six months to push everybody into the intergovernmental agreements?”

James Hines, a corporate taxation professor at the University of Michigan, said some foreign governments were refusing to cooperate with the new rules. “It puts the Treasury in a tough position,” he said. “It’s not clear how many delays they can have before Fatca starts to get undermined.”