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U.S. issues final tax anti-evasion rules, enforcement ahead

By Patrick Temple-West

WASHINGTON (Reuters) - Non-U.S. pension funds and mutual funds were spared the full brunt of new U.S. information-reporting rules on overseas accounts meant to catch Americans who dodge U.S. taxes by keeping their assets offshore.

Chiefly targeting banks, the Foreign Account Tax Compliance Act (FATCA) rules, published by the U.S. Treasury on Thursday, require foreign financial institutions with $50,000 of any American taxpayer's assets to report the holdings to the U.S. Internal Revenue Service.

The Treasury rejected a request by businesses, banks and foreign investment funds to delay a January 2014 start date for big penalties imposed on individuals and financial firms that do not comply with the law.

The announcement completes the rule-writing process for FATCA, a law that Congress passed in March 2010 after a Swiss bank scandal revealed that U.S. taxpayers had hidden millions of dollars overseas from the IRS.

Certain retirement funds, life insurance and other "low-risk" financial products held abroad that are not considered vehicles for dodging taxes are exempted from reporting their U.S. account holders' information to the IRS. Financial firms and foreign governments had been calling for these exemptions.

The law, the first of its kind globally, has been decried by companies and U.S.-ally countries as unilateral, over-reaching and a breach of privacy. U.S. law requires that Americans pay taxes on their global income, not just domestic.

Treasury officials are hoping to sign up more than 50 countries with FATCA agreements and kick-start a dragnet of tax enforcement.

"The real story here is that looks like it is going to become a global model," Manal Corwin, deputy assistant Treasury secretary for international tax affairs, told Reuters in an interview.

Companies affected by the new rules, including BlackRock , Western Union and Prudential , may spend more than $100 million each to comply with the law. Some firms are asking Treasury for additional time to prepare.

Financial institutions that refuse to comply with the law will be effectively shut out of U.S. securities markets.

The businesses must report to the IRS - in English - account holders' names, addresses, account balances plus dividends and interest. The first reports are due in 2015.

The roughly 500 pages of final rules, which were initially proposed in February 2012, give breathing room to some asset managers, such as mutual funds, for how they need to report investors' information.

Treasury has not started registering financial firms, but it must do so by July 15, 2013. The final rules said firms must register by October 25, 2013, to avoid next year's penalties.

The rules also incorporate the government-to-government agreements Treasury has been signing with countries to get their local firms compliant with the law. Norway became the seventh country to forge an agreement, Treasury said on Thursday.

GOVERNMENT PACTS

Soon after Congress passed FATCA, Treasury officials surmised the law could not be broadly implemented as intended. Too many foreign firms would be breaking domestic laws by reporting client information to the IRS.

The government agreements offer a workaround. The United Kingdom, Mexico, Denmark, Ireland, Switzerland and Spain are finalizing FATCA agreements.

Though the pacts help firms comply with FATCA, they have added new headaches for some international companies.

"FATCA's scope is being expanded because Treasury is trying to close every hole," said Harris Horowitz, the global head of tax at BlackRock, which has more than 50 people working on FATCA implementation.

With the government agreements, FATCA "has turned more onerous," he said, speaking before the rules were published.

Responding to the criticism, Corwin said the government agreements do not impose more burdens, but rather make it easier for banks to comply.

Some of the agreements include a reciprocal information-sharing provision, under which the IRS will deliver taxpayer information to a foreign government about its citizens living in the United States.

This reciprocal provision has raised privacy concerns, specifically with the Mexico agreement, signed in November.

Corwin said Treasury and IRS vetted the Mexican tax-collecting agency and checked with other U.S. agencies that share sensitive information with Mexico before signing the deal.

Foreign financial firms may be spared FATCA penalties next year if their native governments are on the verge of completing FATCA legislation, Corwin said.

Firms have been waiting for the final rules to finish their preparations, said Ellen Zimiles, a managing director for consulting firm Navigant. Firms may still get relief on the penalty start date as the deadline approaches, she said.

"It's always a little game of chicken" between Treasury and businesses, Zimiles said.

(Editing by Howard Goller, Steve Orlofsky, M.D. Golan, Gary Hill)

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