Bermuda banks with US clients face being required to share information with US tax authorities or be presumed to be aiding tax evasion and face punitive consequences.

US President Barack Obama yesterday unveiled plans to require all foreign financial institutions that have dealings with the US to sign an agreement with the Internal Revenue Service (IRS), making them a "qualified intermediary" (QI).

This agreement would require the banks to share as much information about their US customers as US financial institutions do.

At a White House press conference yesterday, Mr. Obama vowed to "detect and pursue" US tax evaders. "If financial institutions won't cooperate with us, we will assume that they are sheltering money in tax havens and act accordingly," the President added.

The Obama Administration's release on the proposals said banks that don't cooperate will have taxes withheld on payments to their US clients. In addition the US "would shut down loopholes that allow QIs to claim they are complying with the law, even as they help wealthy US citizens avoid paying their fair share of taxes".

None of the four Bermuda banks this newspaper contacted yesterday — HSBC Bank of Bermuda, Butterfield Bank, Capital G Bank or the Bermuda Commercial Bank — gave any comment on the proposal by press time last night.

President Obama promised to overhaul "a broke tax code" that allows "a small number of individuals and companies to abuse overseas tax havens to avoid paying any taxes at all".

And US Treasury Secretary Timothy Geithner, who joined Mr. Obama for the announcement, said the proposals would end "indefensible tax breaks and loopholes which allow some companies and some well-off citizens to evade the rules that the rest of America lives by".

The proposals signal changes in the rule that allows international corporations to defer the payment of taxes on foreign earnings held in offshore subsidiaries. A report published by the Government Accountability Office (GAO) in January showed that the 100 largest US corporations have a combined total of 229 subsidiaries in Bermuda.

Several industrial giants who were domiciled in Bermuda primarily for tax reasons — including Tyco International, Tyco Electronics, Foster Wheeler, Ingersoll-Rand Covidien and Weatherford International — have already left or announced plans to leave the Island for either Switzerland or Ireland. Experts believed their main reason for moving was to improve their chances of escaping the worst effects of a tax clampdown by the Obama Administration.

Yesterday's statement made one mention of the Island: "Nearly one third of foreign profits reported by US companies in 2003 came from just three small, low-tax countries: Bermuda, the Netherlands and Ireland."

Mr. Obama did not specifically mention the insurance industry. However, the printed statement made clear that the plan was aimed at reducing the amount of taxes lost to tax havens "through unintended loopholes in the law that allow companies to legally avoid paying billions in taxes".

Mr. Obama's Democratic Party colleagues, Rep. Richard Neal and Sen. Max Baucus, have already tabled proposed legislation in their respective parts of Congress to attempt to close a "loophole" used by Bermuda insurance groups. It allows Bermuda companies to cut their US tax bill by ceding insurance premiums earned by their US subsidiaries to affiliates of the Bermuda parent in the form of reinsurance agreements.

A study sponsored by non-US insurers and released last week showed that enactment of the proposed changes would backfire on US consumers, raising their collective insurance bill by about $12 billion.