Lebanon FATCA Note: Is the “Switzerland of Middle East” in the Crosshair of FATCA?

This Lebanon FATCA update is intended to provide a broad analysis of the impact of the U.S. Foreign Account Tax Compliance Act (“FATCA”) on the numerous U.S. accountholders in Lebanon.

Lebanon FATCA: Background Information

The Lebanese banking secrecy rules, commonly known as the “1956 Law”, have earned the country the unofficial title of the “Switzerland of the Middle East”. It is estimated that as many as 100,000 U.S. taxpayers took advantage of the 1956 law and opened foreign bank and financial accounts in Lebanon.

Lebanon FATCA: Foreign Account Tax Compliance Act Threatens the 1956 Law

The UBS case in 2008 became a crucial turning point in global tax compliance, because, for the first time, the US was able to leverage its economic might to break through the wall of bank secrecy in the country which, until recently, was synonymous with bank secrecy.

Encouraged by the crucial success over UBS in 2008, the IRS and U.S. Congress took an unprecedented step in international tax compliance with the passage of FATCA in 2010. FATCA is not just another law, but a new global standard for the international tax transparency which endangered all U.S. taxpayers with undisclosed foreign accounts.

One of the unique aspects of FATCA is that it requires foreign financial institutions (“FFIs”) to report directly or indirectly to the IRS all bank and financial accounts held by their U.S. customers. In essence, it turned foreign banks into the agents of the IRS compliance effort.

While FATCA requires legislative adjustments in many countries, in Lebanon, FATCA ran counter to the spirit and letter of the 1956 Law.

Lebanon FATCA: Initial and Subsequent Reaction in Lebanon

At first, the reaction of the Lebanese banks was very negative with even talk of accepting the 30% tax withholding requirement imposed by FATCA. As late as the first quarter of 2012, Lebanon was considered as one of the potentially most vexatious non-compliant countries.

By April of 2012, however, the attitude of the Lebanese banks and Lebanese financial authorities began to change rapidly. In February of 2013, the head of Lebanon’s banking association stated that the Lebanese banks will cooperate with FATCA.

At the present time, all major Lebanese Banks (such as Bank Audi, Blom Bank, Bank of Beirut and so on) are in the process of implementing FATCA regulations. Given the another unprecedented step by the U.S. government – voluntary disclosure program for banks in Switzerland – it is expected that the Lebanese Banks (as the example of Bank of Beirut demonstrated) will strive to implement FATCA as fast as posssible.

Lebanon FATCA: What Does FATCA Compliance Mean for U.S. Taxpayers with Undisclosed Accounts in Lebanon

The move of the Lebanese banks toward FATCA compliance has profound consequences for all U.S. taxpayers with undisclosed bank and financial accounts in Lebanon even though the exact impact is not likely to be felt in the same way by all U.S. accoundholders (due to the individual circumstances of each U.S. taxpayer).

At this point, these U.S. taxpayers with Lebanese accounts should understand that their account information is likely to be reported by the Lebanese banks to the IRS within a fairly short time (it is hard to state it exactly and some of the account information may have already been disclosed, but I would expect the Lebanon FATCA compliance to be firmly implemented by the end of 2014 or early 2015). This development is likely to have two major effects on U.S. taxpayers. First, the U.S. accountholders whose information will be disclosed to the IRS are not going to be able to enter the OVDP (unless there is a specific exception or a chance in the OVDP rules), which is the official IRS voluntary disclosure program for offshore accounts.

Second, once the IRS follows up on the information that it receives from the Lebanese banks (i.e. opens up an investigation), these taxpayers are likely to suffer from the imposition of the draconian FBAR willful penalties. Criminal penalties, including jail time, are also possible. See this article for a more detailed explanation of the FBAR penalties.

Thus, the implementation of FATCA in Lebanon means the end of 1956 Law and Lebanese Bank Secrecy for U.S. taxpayers. It also means that the U.S. taxpayers with undisclosed Lebanese accounts are currently in a very dangerous position and may face heavy penalties.

Lebanon FATCA: U.S. Taxpayers with Undisclosed Accounts in Lebanon Should Explore their Voluntary Disclosure Options As Soon As Possible

With the implementation of FATCA in Lebanon, U.S. taxpayers have to act fast if they want to reduce or avoid IRS penalties. This is why they should consult an experienced international tax attorney who specializes in offshore voluntary disclosures as soon as possible.

Contact Sherayzen Law Office for Professional Legal and Tax Help With the Voluntary Disclosure of Lebanese Bank and Financial Accounts

If you have undisclosed bank or financial accounts in Lebanon, contact the offshore voluntary disclosure experts of Sherayzen Law Office now. Our experienced international tax law firm will thoroughly analyze your case, advise on the available voluntary disclosure options, prepare all necessary tax forms and legal documents, and professionally represent your interests through the IRS voluntary disclosure process.