* Long-expected pact spares Canadian banks tax penalties
* Enforcement of new U.S. tax law set to begin on July 1
* Challenge by two bankers' groups to U.S. law persists
By Louise Egan and Patrick Temple-West
OTTAWA/WASHINGTON, Feb 5 (Reuters) - Canada and the United States on Wednesday unveiled a tax information-sharing pact, advancing the Obama administration's fight against tax dodgers, although challenges remained to implementing a U.S. international tax transparency law.
Set to take effect on July 1, President Barack Obama's Foreign Account Tax Compliance Act (FATCA) will require foreign banks to share information about Americans' accounts worth more than $50,000 with the Internal Revenue Service, the U.S. tax agency.
The enactment of FATCA in 2010, after a scandal involving Americans hiding money in Swiss bank accounts, has resulted in a web of bilateral tax deals between the United States and 22 other countries, with Canada and Hungary the latest signatories.
"The agreements announced today clearly demonstrate the considerable international support behind FATCA," Robert Stack, the U.S. Treasury Department's deputy assistant secretary for international tax affairs, said in a statement.
But a court challenge by two banking industry groups to some key FATCA-related rules also churned forward on Wednesday.
The Texas Bankers Association and the Florida Bankers Association said they are appealing the dismissal of a lawsuit they brought last year challenging rules meant to help the United States implement FATCA.
In addition to the bankers' legal threat, a political assault on the law gained traction last week when the Republican National Committee called for FATCA's repeal, siding with big banks, libertarians and American expatriates opposed to the law.
Critics say FATCA is government overreach that will jeopardize personal financial privacy, while supporters say it is needed to combat widening offshore tax avoidance.
ANOTHER DELAY SOUGHT
Other banking associations have called for FATCA to be delayed by six months, arguing that the government has not provided enough guidance about how to comply with it.
Since it was signed into law by Obama, FATCA has been delayed twice as authorities have struggled to finish drafting the various rules and forms that the banks say they need to comply. Foreign banks that do not comply could effectively be frozen out of U.S. capital markets.
IRS Commissioner John Koskinen, speaking to reporters on Wednesday, said he met with Treasury officials on Tuesday about still-awaited final FATCA regulations. "They're going to come out soon, but I can't tell you date," Koskinen said.
Like earlier pacts, the U.S.-Canadian deal is a so-called intergovernmental agreement. It aims to address Canadian government concerns that FATCA might violate domestic privacy laws and burden financial institutions, a senior Canadian finance official told reporters in a briefing session.
Under the agreement, Canadian tax authorities will collect information from the country's banks and share it with the IRS under an existing bilateral tax treaty.
"Canada engaged in lengthy negotiations with the U.S. government to address our concerns, and as a result, significant exemptions and other relief were obtained," Canadian Finance Minister Jim Flaherty said in a statement.
CANADA DEAL ADDRESSES CONCERNS
The Canadian agreement narrows the scope of information required to be collected from account holders in Canada, officials said.
Some smaller Canadian financial institutions will be exempt, as well as certain registered savings vehicles such as Canadian registered retirement savings plans.
It is estimated that about 1 million U.S. citizens reside in Canada, although there is no data available on how many would be affected by the new agreement.
Banks will start collecting information in July and the Canada Revenue Service will begin reporting to the IRS in 2015. The agreement will not require changes to Canadian laws, but will need Parliament's approval.
The Canadian agreement might prompt other countries to finish similar FATCA deals with the United States, former U.S. officials said, with Treasury trying to sign as many pacts as possible within the next five months.
"People were getting worried about why it was taking so long" to conclude the deal with Canada, a major U.S. economic partner, said Manal Corwin, a former Treasury tax official who is now a principal at Big Four accounting firm KPMG LLP.
Signing with Canada is "a really critical development," she said.