Bermuda’s financial services sector could be hit hard by a US effort to combat tax evasion by Americans with investments in offshore accounts.Tax experts with PWC Bermuda said yesterday that most financial institutions in Bermuda will need to make major changes to their business practices over the next several years.The Foreign Account Tax Compliance Act (FATCA) will next year require foreign financial institutions to report directly to the Internal Revenue Service (IRS) information about financial accounts held by US taxpayers, or by foreign entities in which US taxpayers hold a substantial ownership interest.Some tax advisers characterise the regulations as “know your client on steroids” essentially requiringfinancial institutions to identify their US account holders, name names and even to withhold tax when Americans don’t comply.The US Treasury and IRS recently issued their proposed regulations regarding FATCA and PWC experts say the US appears to be trying to address industry concerns..“The proposed regulations will clarify the far-reaching impact that FATCA will have on foreign financial institutions with US assets or clients, including those located here in Bermuda,” said Rick Irvine, PWC Bermuda’s Tax Leader.“Companies in the financial services industry such as banks, hedge funds, private equity funds, broker-dealers, clearing organisations, trust companies and insurance companies, will soon be compelled to gather certain financial information and report it to the IRS.”Mr Irvine said that in issuing these proposed regulations, the US Government appeared to have listened to global stakeholder comments and made an effort to address their concerns to minimise the additional compliance costs imposed on financial services institutions.“They have further grandfathered certain financial obligations from FATCA compliance and extended the overall exemption period until 1 January, 2013,” Mr Irvine said.“Additional changes include simplified due diligence procedures and reporting requirements for certain individuals and entities, and extended transition periods for reporting financial account information to the IRS.”Paul Eldridge, managing director, Tax Services, PWC Bermuda, added: “Despite these changes, most financial institutions in Bermuda will need to make significant changes to their business practices over the next several years, including adapting their people, process, technology and internal governance systems to handle the increase of due diligence procedures and ultimately comply with FATCA regulations.”In a significant announcement relating to FATCA, a joint statement was also released by the governments of the United States, France, Germany, Italy, Spain and the UK, stating that they are exploring a common approach to FATCA implementation through domestic reporting and reciprocal automatic information exchange.“At this time, Bermuda is among a number of global financial services centres that are not included as a party to the joint statement,” Mr Irvine said.“That’s not to say that other countries won’t be added to such an agreement at a later date.”Mr Irvine pointed out that once the FATCA withholding rules come into effect, if an institution fails to comply, they will be subject to a 30 percent withholding tax on any US source income and gross security sale proceeds made to its proprietary account.In addition, accountholders who don’t provide the non-US financial institution (FFI) with FATCA-required documentation would be deemed “recalcitrant”.The FFI would then be obligated to deduct a 30 percent withholding tax on any withholdable payment credited to their accounts.“It’s important for financial institutions to realise that FATCA is more than just a tax issue,“ Mr Eldridge said.“It involves governance, compliance and process changes that will impact their entire business.“By planning the work and starting now, businesses can minimise the disruption to their operations as the deadline approaches.”