According to David Schwartz, Executive Director of the Florida International Bankers Association, the new IRS rule on foreign depositors has caused millions of dollars to be repatriated out of Florida. The places of choice are tax havens like Panama and the Cayman Islands. Schwartz said, “Since April 19 [when the regulation was passed], we’ve heard that several hundred million dollars have left Florida for foreign jurisdictions. Customers have said ‘we’re aware of what’s going on, and we prefer to take our money overseas.’”
The new regulation in question requires all US banks to divulge information on foreign account holders to the IRS who in turn will share the information with the respective governments in their account holders’ home countries. It goes into effect beginning next year. Understandably, many of these foreign investors would rather keep their banking activities private so they have not taken the new rule lightly. All this means a flood of money out of Florida’s banking system.
A survey by the Florida Office of Financial Regulation (OFR) last year found that South Florida banks hold more than $14 million in deposits by foreigners, amounting to 41% of total deposits in Florida-chartered banks plus 90% of total deposits in foreign-owned financial institutions. Besides this amount, foreigners also have money in nationally chartered or federally regulated institutions. The Florida OFR survey shows that 11 out of 16 of South Florida’s banks could be in dire straits should there be a significant outflow of foreign funds. Among South Florida’s 22 state-regulated foreign institutions, 16 of them report that foreigners’ deposits amount to 90% or more of their total funds.
Besides affecting Florida’s banks, the ripple effect could adversely affect other areas also. If the banks suffer, there will be less money for loans. Even a 20% drop in foreigners’ deposits would precipitate a $25 billion decrease in funds for loans. Richard Dailey, President and CEO of Apollo Bank said, “I don’t see why we would want to make any of these offshore depositors nervous, because they bring tremendous value to us. We use that money to make loans, and they buy real estate and make other investments here.” Apollo Bank has about 40% of its accounts held by foreigners.
Ultimately, the American taxpayer will have to foot the bill. This is because the Federal Deposit Insurance Corporation, a federal agency funded by taxpayers, insures $250,000 for each account in a financial institution.
On the other hand, some quarters do not feel the jitters over the potential massive loss of foreign funds from South Florida. Some experts believe the soundness of the American banking system can withstand such losses. Furthermore, they believe that the greater transparency will augur well for the banking industry and governments worldwide. The Tax Justice Network produced a report lately that shows governments around the globe lose up to $280 billion in uncollected income tax annually.
Hence if governments of various countries all adopt some measure of transparency, there will be fewer places for tax evaders to deposit their money. This would also apply to foreigners who wish to take their money out of the US.
Supporters of the new regulation believe this move has been long coming and is needed for the IRS to obtain information on accounts held by American nationals in other countries. Ken Thomas, an economist and banking expert said, “The IRS is not just doing something because they want to penalize banks. They don’t want to waste their time and resources saying that the bankers are the bad guys. They must believe that there’s a significant amount of lost revenue to pass something as controversial as this. The banking lobby is very strong.”
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Law Offices of Darrin T. Mish, P.A.: Tax Attorney