On January 6, 2011, the IRS issued proposed regulations that would require financial institutions to report annually to the IRS bank deposit interest payments made to all non-resident aliens (NRAs). These regulations were finalized on April 17, 2012 and made effective for interest payments made to NRAs starting January 1, 2013.
The regulations could not have come at a worse time – financial institutions are currently in the process of implementing the costly and burdensome procedures that are required in order to comply with the new FATCA rules, the new section 6050W and Cost Basis reporting provisions that became effective at the beginning of this year. Adding these regulations will further strain banks' information technology staff and budgets, for the sole purpose of providing information to the IRS, especially when there is the risk that many banks will lose billions of dollars in deposit funds due to the resulting loss of many of their NRA customers.
In April 1996, the IRS issued similar rules that apply only with respect to Canadian citizens. In January 2001, the IRS proposed similar rules that would be applicable to all NRAs. The 2001 proposed regulations were withdrawn in August 2002 after much opposition from the industry and from some members of Congress. The IRS received letters from members of Congress as well as other industry groups requesting that the regulations be withdrawn/repealed. The ABA continues to support such a request. We understand the government's need to increase transparency and to eliminate cross-border tax evasion. However, we continue to believe that the regulations are not advisable and will have a significant negative impact on U.S. banks, including the risk of flight of foreign capital at a time when such capital is very much needed. There is no indication that the IRS conducted any cost-benefit analysis regarding this rule. Such an analysis would show that there are several legitimate reasons why NRAs place money in U.S. banks. These include; concerns and fears about crime/security in their home country; lack of trust in their governments or financial institutions in their home country; and their view of the U.S. as a reliable place to keep their money. Further, a proper cost-benefit study would show that the cost of compliance for many community banks significantly outweighs any illusory benefits that the IRS believes it will derive, because these banks would be forced to incur significant costs to implement a provision that will not collect any new taxes for the U.S., but instead, further damage a financial system that is recovering from an economic downturn. Besides, there is no indication whatsoever that the regulations will ensure that each foreign country will have enough information to tax deposit interest paid to its citizens.
The ABA is actively involved in both legislative and regulatory efforts that support the repeal of the regulations.