The Government wants to override privacy laws to supply the US Government with private details about Americans living in New Zealand.
As part of a global tax-dodging crackdown, the US is forcing banks and other financial institutions to hand over the private financial details of US "persons" and companies based overseas.
From July this year, Kiwi banks and insurers will be required to provide US tax authorities with American customers' contact details, bank account numbers and transaction history.
The move is already deeply unpopular among banks and expat Americans overseas, some of whom have accused the US of "fiscal imperialism".
In New Zealand, it has left banks stuck between defying the US and breaking domestic privacy laws that protect all New Zealand residents, including Americans.
But now the Government is stepping in with plans to "override" privacy laws to help banks meet the US demands and reduce costs.
Talks between the two countries are continuing but a bill has been introduced that would sidestep privacy protections for Americans living in New Zealand.
An Inland Revenue report made public last week reveals plans for the department to collect private details of Americans from banks and then pass them on to US tax authorities.
Officials estimate handling the information will cost the department up to $8.5 million over five years.
Without the changes, officials said our banks would be breaching customers' privacy by passing on the information, and potentially their human rights.
But if the banks refused to provide the US with details about American clients, they would be punished by having a third of their US investment withheld by tax authorities.
Not changing the law would have "a significant impact on the New Zealand economy", officials said.
Karen Scott-Howman, of the New Zealand Bankers' Association, said the US's demands had left the industry "stuck between a rock and a hard place".
"It is just nightmarish, nobody is pleased with it."
The cost of ignoring the US demands was "unthinkable", she said.
And while it was expected only a small number of customers would be referred to IRD and eventually to US authorities, it required sifting through every customer, to check for any US connection.
"It is a total pain in the neck," she said.
The move comes amid continuing criticism of New Zealand's participation in Trans Pacific Partnership Agreement talks, aimed at securing a wider-reaching free trade deal with the US and other countries.
Critics say the secretive talks could restrict New Zealand's ability to make its own laws on everything from the environment to employment.
Council of Trade Unions economist Bill Rosenberg said the US's tax reporting requirements were another example of US interests dictating New Zealand law.
"There is clearly a breach of privacy here."
But Revenue Minister Todd McClay said the changes would not affect most New Zealanders, only the few considered "US taxpayers".
The US already had similar agreements with Britain, Germany and France, he said.
"The Government is not doing any more than assisting these financial institutions to meet their obligations."
The bill that contains the proposed changes is being considered by the finance and expenditure select committee. Submissions close tomorrow.
- © Fairfax NZ News
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