Dubai: A long-standing fight between the US government's tax agency and US expatriates has come to a head and may soon drag foreign banks into the fray.

Two years ago, the US passed the Foreign Account Tax Compliance Act (FATCA) that requires foreign banks and financial institutions to disclose the nationality of their account-holders or investors, allowing the Internal Revenue Service (IRS) — the US government agency responsible for tax collection and tax law enforcement — to uncover US citizens who are not registered with the IRS and avoiding tax payments.

The Act will be implemented in January 2013 and any banks or institutions that do not comply will face a 30 per cent withholding tax on US source income, including dividends and interest paid on US securities, gross proceeds from the sale of US securities and substitute dividends.

For UAE banks, the disclosure and reporting process means incurring a cost of millions of dirhams or bearing a 30 per cent withholding tax, according to tax experts.

"All UAE banks need to understand exactly who the tax could apply to and need to have systems and staff ready to collect all that information on behalf of all their account-holders. They are going to need to be ready," said John Belsey, who leads Deloitte's international tax practice, told Gulf News on the sidelines of Deloitte's fifth Middle East tax seminar yesterday.

This is the single biggest tax issue for UAE banks, said Nauman Ahmad, Middle East Tax Leader for Deloitte.

It will also affect pension funds, insurance companies and all institutions that invest money on behalf of the client, tax experts said.

"I think this is a very important issue. Taxation is not just about local taxation; these days a lot of GCC companies are looking outwards and making investments abroad and you need to be concerned about international taxation so you can't look at it from the narrow angle of the GCC taxation," Ahmad said. "The GCC has a lot of multinationals and local businesses that are investing abroad… they have to look out for these taxes abroad," he added.

Limited treaties

One problem is that the UAE has a limited network of double tax treaties — an agreement designed to protect against the risk of an individual or a corporate entity being taxed twice where the same income is taxable in two states — so companies have to pay both corporate and withholding taxes, Belsey said.

"One could argue that it would be easier for the UAE to negotiate tax treaties with these countries if they had a corporate tax system because they could have something for both parties to exchange," he said.

There is no clarity on the tax payments if some of the banks' shareholders are US citizens, tax experts said.

Banks and financial institutions need to start planning now for the act that will be implemented in 2013, said Ahmad.

The act was passed in 2009 but banks are only now beginning to understand its implications, said Belsey.

"It's balancing scare-mongering and equally waiting for the guidelines to come out," he said.