Dollars being counted. The US government has passed a new law to catch tax evaders in foreign countries. Photo/FILE
NATION MEDIA GROUP
Kenyan banks have taken initial steps to
comply with a new US government regulation that requires them to
disclose account details of American citizens.
The
rule, which is set to come into effect in June next year, requires banks
to disclose account details to the US taxman, the Internal Revenue
Service (IRS).
Banks that fail to comply with the law risk paying cash penalties to the US government.
The
US embassy in Nairobi said there are about 20,000 American citizens
resident in Kenya, but declined to give further details regarding their
tax, work or residence status.
“We as (the Kenya
Bankers Association) KBA have already decided we will form a working
group composed of banking institutions to study the implications of the
law,” said Habil Olaka, chief executive of the industry lobby KBA.
He
said KBA had been in contact with the Treasury, the Central Bank of
Kenya (CBK) and the Kenya Revenue Authority (KRA) to discuss the extent
to which the law is applicable locally or could be complied with.
The
US government recently passed the law which requires financial
institutions both at home and abroad to disclose account details of
their citizens to assist in assessing whether they pay all taxes,
claiming it was losing $100 billion annually through evasion.
Tax
experts say that the new Foreign Account Tax Compliance Act (FATCA)
affects both American and non-American financial institutions.
It imposes new costs in terms of personnel and systems for Kenyan banks that have to adjust their systems to be in compliance.
It imposes new costs in terms of personnel and systems for Kenyan banks that have to adjust their systems to be in compliance.
“The
reason for the new law is that the US government believes it is losing a
lot of tax revenues through evasion. It is trying to close loopholes
and one of these is keeping tabs on details of bank accounts of its
citizens abroad,” said Mr Richard Njoroge, a partner at financial
advisory firm PricewaterhouseCoopers (PwC).
Failure to
meet the FATCA requirements comes with penalties as US-based financial
institutions will be required to retain or withhold as much as 30 per
cent of cash that might be due to a defaulting bank.
Withholdable
cash under FATCA includes dividends, interest payments, rents,
salaries, annuities, proceeds from sale of properties in the US, and any
US-sourced income.
Incomes from trade-related transactions such as imports and exports are however not withholdable under FATCA, said Mr Njoroge.
“An
institution in the US is to deduct 30 per cent of the cash destined to a
Kenya-based bank that has not met the requirements. That will affect
correspondent banking because banks in the US might deal only with
complaint Kenyan banks,” said Mr Njoroge.
Correspondent
banking involves prior arrangements between Kenyan banks and foreign
ones to receive or accept deposits or ensure payments for transactions
on behalf of each other when they are located in different
jurisdictions.
Mr Njoroge said many Kenyan banking
institutions may be unaware that they face the June 30, 2014 deadline to
submit the account details of American citizens who keep money with
them.
“The US government wants to be sure that tax
declarations reflect the real tax liabilities of its citizens who are
living abroad. It wants to see the complete picture of their citizens’
incomes and account behaviour because they believe banks hold this
information,” said Mr Njoroge.
Mr Olaka said that there
was a possibility that the deadline for compliance would be extended as
many jurisdictions may be unable to meet it, since it is rather close.
“We
have discussed this and we are taking it up with the Treasury and the
central bank to see whether we can come up with some concerted effort as
an industry rather than each bank acting on its own. We as yet don’t
know how much or what it will cost us,” said Mr Olaka in an interview.
Tax collection body
The Business Daily
had sought to know from the US embassy the applicability of the FATCA
to Kenya, whether the embassy or the US government had been in contact
or discussion with the authorities about implementation of the law and
how the associated costs would be paid.
We also
enquired whether the embassy knew of the number of accounts US citizens
hold in Kenya, as well as their estimate of the amount of tax US
citizens may be evading.
Mr Njoroge said that financial
institutions foreign to the US are supposed to register with IRS which
is the country’s tax collection body.
“Banks have
become so transnational that it is difficult not to have US citizens as
customers. This is a ‘big brother’ unilaterally imposing laws that only
the US can. But costs of imposing this law could outstrip whatever tax
the US government gets,” said Mr Njoroge.
girungu@ke.nationmedia.com. This articles first appeared on Businessdailyafrica.com
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