In a letter to Representative Bill Posey (R-FL) and other Congressmen, Treasury Assistant Secretary for Tax Policy Michael Mundaca addressed concerns raised by Rep. Posey and others concerning recent proposed regs that would require U.S. banks to report to IRS interest paid on deposits held by nonresident aliens. Mundaca outlined the U.S. government's efforts to combat cross-border tax evasion and stressed that the success of such efforts is largely dependent on international cooperation, which in turn is secured by ensuring that the U.S. has information to exchange when appropriate.
Background. Under the regs currently in effect (Reg. §1.6049-8(a)), reporting of U.S. bank deposit interest is required only if the interest is paid to a U.S. person or a nonresident alien individual who is a resident of Canada. In 2002, IRS issued proposed regs that would require reporting only on interest payments to nonresident alien individuals that are residents of certain designated countries or, at the option of the payor, on interest payments to all nonresident alien recipients of bank deposit interest.
In 2010, as part of the Hiring Incentives to Restore Employment Act (HIRE Act, P.L. 111-147), Congress enacted a number of provisions to combat offshore tax evasion known as the Foreign Account Tax Compliance Act (FATCA). These provisions require overseas financial institutions to identify U.S. account holders and report information directly to the U.S.
Recent proposed regs. In 2011, IRS issued new proposed regs that would extend the information reporting requirement to include bank deposit interest paid to nonresident alien individuals who are residents of any foreign country. It also withdrew the 2002 proposed regs.
Rep. Posey's letter to the President. In a letter dated March 2, 2011, Rep. Posey, together with 24 other members of Congress, asserted that the proposed regs could harm U.S. financial markets and compromise the personal safety of nonresident alien depositors from countries with unstable governments. Rep. Posey set out a number of specific concerns, addressed below, and urged the President to maintain existing policy and permanently withdraw the proposed regs.
Mundaca's response. In his response, dated March 31, 2011, Mundaca first explained the rationale underlying the proposed regs. He stated that combatting tax evasion was a priority of both the Administration and Congress, and that combatting tax evasion through the use of offshore accounts and institutions requires significant international cooperation. He stated that recent agreements now allow U.S. greater access to bank information from jurisdictions including Switzerland, Luxembourg, and Panama.
Mundaca noted that implementing FATCA requires the cooperation of foreign governments. The proposed regs put the U.S. in a better position to trade information, thus securing the cooperation of these governments and strengthening these inherently reciprocal information exchange relationships.
Mundaca then addressed the specific concerns raised in Rep. Posey's letter:
... Misuse of information. Posey alleged that the proposed regs could compromise the security of nonresident alien depositors from foreign countries with unstable governments or political environments, in that the bank information could be leaked to criminal groups and result in kidnappings or other terrorist actions against them or their family. In response, Mundaca stated that information will be exchanged with another government only if an exchange agreement is in effect and if IRS is satisfied that the requesting country meets strict standards of confidentiality regarding the use of the information. He further stressed that the proposed regs only concern interest—not account balances or other transactions—that the nonresident depositor is likely already required to report as part of his home country tax filing obligations.
... Economic harm and negative impact on U.S. financial institutions. Posey alleged that nonresident aliens have deposited an estimated $3 trillion in U.S. financial institutions, in part due to the U.S. privacy laws, and that finalizing the proposed regs could cause a substantial amount of these funds to be withdrawn from the U.S. economy. Mundaca countered that Treasury Department data indicated that the amount of deposits by nonresident aliens with U.S. financial institutions was substantially less than $458 billion, and he noted further that the proposed regs only allow IRS to exchange information with jurisdictions with which the U.S. has an information exchange relationship. Mundaca also stated that when similar rules were proposed regarding U.S. accounts of Canadian residents, and similar concerns were raised about capital flight and economic impact, these concerns were ultimately unfounded.
... Congressional intent. Posey stated that the proposed regulation “flagrantly violates the intent of Congress” since lawmakers have refrained from taxing the deposit interest paid to nonresident aliens in order to attract capital and keep it in the U.S. economy. Mundaca noted, however, that while Congress declined to tax bank deposit interest of nonresident aliens, it expressed granted IRS the authority to require information reporting on interest payments that aren't subject to U.S. taxes.
References: For reporting interest to nonresident alien individuals, see FTC 2d/FIN ¶S-3012.3; United States Tax Reporter ¶60,494.05; TaxDesk ¶811,517; TG ¶60106.