The US Foreign Account Tax Compliance Act (FATCA) could be the deciding factor in the tug of war over whether The Crimea is part of Russia or Ukraine.
President Barak Obama and his European Union allies – especially Britain – are already threatening savage economic sanctions like booting Russia out of the G8 group of the world’s leading developed nations.
But FATCA could hold the real key to unlocking diplomacy to settle the dispute.
FATCA is the American law requiring foreign financial institutions to report details of the savings and investments of US taxpayers that total more than $50,000.
From July 1, 2014, foreign financial organisations like banks, investment houses and insurance companies have to send the reports to the Internal Revenue Service (IRS).
Red flag for Russia
Failure to comply by Russian financial organisations will lead to the US withholding 30% of every financial transaction passing through the dollar banking system and even exclusion from dealing with American financial institutions.
That would red flag Russia’s finance houses as a no-go zone for the 50 or so nations already signed up to FATCA – and the European Union and the Organisation of Economic Co-Operation and development have similar laws on the way.
The OECD has already suspended a membership application from Russia.
With the advent of FATCA, modern wars are likely to be fought on Wall Street and in the City of London rather than on a battlefield as powerful financial centres throttle economies rather than fire bullets.
Offshore companies under attack
In January, Russia’s Ministry of Finance indicated that the nation would sign up to FATCA, but this has been overtaken by the ministry publishing proposed tax law amendments relating to taxing foreign companies controlled by Russian taxpayers.
“We are onshoring the tax affairs of Russian residents so they cannot use offshore companies to understate their income in Russia,” said a spokesman. “We know taxpayers have many entities in tax havens or low-tax financial centres and now they will have to report their income in Russia.”
Failing to comply with the law comes with a 20% tax penalty plus a 20% tax on their income from overseas entities.
The ministry will announce more details about the FATCA-style law in a few days – no doubt in response to moves underway by the US and European Union to impose sanctions against Moscow.
Taken at face value, the Russian FATCA would affect companies like Premier League Football Club Chelsea, owned by Roman Abramovic.