WASHINGTON (AP) — The United States is planning to use an anti-tax-evasion law to punish Russia for its actions in Ukraine, a tactic that could prove to be more costly than sanctions.
The law was passed in 2010, long before the crisis in Ukraine. But it could become a powerful economic weapon.
Beginning in July, federal law requires U.S. banks to start withholding a 30 percent tax on certain payments to financial institutions in other countries unless those foreign banks have agreements in place to share information about U.S. account holders with the Internal Revenue Service. The withholding applies mainly to investment income.
Russia and dozens of other countries have been negotiating information-sharing agreements with the U.S. in an effort to spare their banks from such harsh penalties.
But after Russia annexed Crimea and was seen as stoking separatist movements in eastern Ukraine, the Treasury Department quietly suspended negotiations in March. With the July 1 deadline approaching, Russian banks are now concerned that the price of investing in the United States is about to go up.
“It’s a huge deal,” said Mark E. Matthews, a former IRS deputy commissioner. “It would throw enormous uncertainty into the Russian banking community.”
The new law means Russian banks that buy U.S. securities after July 1 could forfeit 30 percent of the interest and dividend payments.
The withholding applies to stocks and bonds, including U.S. Treasurys. Some previously owned securities would be exempt from the withholding, but in general, previously owned stocks would not.
Private investors who use Russian financial institutions to facilitate trades also face the withholding penalty. Those private investors could later apply to the IRS for refunds, but the inconvenience would be enormous.
“It’s a big problem for them,” said Matthews, who is a lawyer at Caplin & Drysdale, a tax firm based in Washington. “It decreases their competitiveness, and they may have capital flight elsewhere.”