IRS Issues Final Non-Resident Reporting Rule

By Editorial 18 April, 2012

The Treasury Department has issued the final regulations on the reporting to the Internal Revenue Service (IRS) of interest paid to non-residents by United States banks from January 1, 2013.

The regulations, which will, the guidance says, affect the US offices of commercial banks, savings institutions, credit unions, securities brokerages and insurance companies, extend the current rule, established in 2002, requiring the reporting of interest paid on deposits with respect to Canadian account holders, to all non-resident aliens.

Within its announcement of the final regulations, the Treasury and the IRS have attempted to confront some of the questions and opposition that the reporting rule has previously raised in Congress and the US financial sector, in that it has been forecast that it would signal a withdrawal of foreign funds out of US banks.

In the Treasury’s opinion, the regulations are essential to the US government’s efforts to combat offshore tax evasion. They will ensure that “the IRS can, in appropriate circumstances, exchange information relating to tax enforcement with other jurisdictions”.

“In order to ensure that US taxpayers cannot evade US tax by hiding income and assets offshore, the US must be able to obtain information from other countries regarding income earned and assets held in those countries by US taxpayers,” it adds. “Under present law, the measures available to assist the US in obtaining this information include both treaty relationships and statutory provisions. The effectiveness of these measures depends significantly, however, on the US ability to reciprocate.”

It points out that the US network of tax information exchange agreements (TIEAs) depends on the IRS’s ability, when appropriate, to cooperate with its TIEA partners, as will the Foreign Account Tax Compliance Act (FATCA) stipulations that require overseas financial institutions to identify US accounts and report information (including interest payments) about those accounts to the IRS.

In many cases, the Treasury reiterates, the implementation of FATCA will also require the cooperation of foreign governments in order to overcome legal impediments to reporting by their resident financial institutions. The new regulations will therefore facilitate that intergovernmental cooperation on FATCA implementation.

The IRS is also expecting that the reporting of information required by the new regulations will directly enhance US tax compliance by making it more difficult for US taxpayers with US deposits to falsely claim to be non-residents in order to avoid US taxation on their deposit interest income.

However, given the above, the Treasury took some time within the guidance to try and assuage concerns that the information required to be reported under those regulations might be misused. Deposit interest information will not be shared with a country that does not have laws in place to protect the confidentiality of the information exchanged or that would use the information for purposes other than the enforcement of its tax laws, the Treasury stressed.

It is re-emphasized that information will only be exchanged with foreign governments with which the US has a TIEA, all of which require that exchanged information be treated and protected as secret by the foreign government and prohibit the use of that information for any purpose other than the purpose of administering, collecting, and enforcing the taxes covered by the agreement. Absent a TIEA, it was confirmed that the IRS remains statutorily barred from sharing return information with another country.

Both the Treasury Department and the IRS, therefore, believe that the regulations “should not significantly impact the investment and savings decisions of the vast majority of non-residents who are aware of and understand these safeguards and existing law and practice.”

Nevertheless, it should expect that the issue of the new reporting rule will still elicit strong concerns in Congress regarding the effect it will have on US financial institutions, as many banks that hold significant non-resident funds remain convinced that it will indeed lead to a flight of non-US capital and could threaten their viability.

Tags: Expatriates | Compliance | Tax | Investment | Tax Information Exchange Agreement (TIEA) | Tax Compliance | Law | Banking | Financial Services | Internal Revenue Service (IRS) | Enforcement | Tax Authority | Offshore | Agreements | Legislation | Offshore Banking | United States | Regulation | Services |


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