Has tax code diplomacy replaced gunboat diplomacy?

Teddy Roosevelt was noted for pursuing a policy based on the phrase, "speak softly, and carry a big stick."

Back in the early 20th century, that stick tended to be the use of the military. Today, there are those in Washington who might argue that such gunboat diplomacy has been replaced by more subtle tactics, with the Foreign Account Tax Compliance Act serving as one example.

Under this scenario, it is the Internal Revenue Service that has a hand on the proverbial trigger, and Russia seems to be the immediate target in the FATCA sights. The objective, according to observers, is to use FATCA enforcement to punish Russia for its illegal actions in eastern Ukraine.

FATCA, as we have noted often in recent posts, is the law passed in 2010 with the aim of curbing suspected tax evasion through foreign bank accounts. The measure is due to become fully effective in July of this year. As a result of the measure, some taxpayers may have found themselves facing potential tax controversies. To meet such challenges, consulting experienced legal counsel is recommended.

In the matter we are writing about here, what's being brought to bear is the lack of an information-sharing agreement with Russia. Talks that had been underway to get one in place by the July deadline were suspended by the U.S. in March.

Lacking such a deal, U.S. banks will be required by FATCA to start withholding a sum equal to 30 percent of any interest and dividend payments that might be made to Russian banks for purchases of U.S. securities. Private investors using non-compliant Russian financial firms to manage trades will also be subject to the withholding.

Analysts say the financial punch delivered by FATCA enforcement for lack of an agreement could be even more significant than economic sanctions limited to certain Russian individuals and banks.

Source: The Washington Post, "AP ENTERPRISE: US to unleash IRS on Russian banks," Stephen Ohlemacher, The Associated Press, May 5, 2014

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