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Saturday, April 21, 2012


Back in the 1990’s, presidential candidate Ross Perot urged voters to listen for the “giant sucking sound” of American jobs heading south to Mexico should NAFTA be ratified. Interestingly,  a giant sucking sound was reportedly heard in downtown Miami earlier this week as nonresidents sucked their deposits out of U.S. banks in response to the latest information reporting requirements imposed by the IRS.

In T.D. 9584, the Treasury Department finalized regulations that have been kicking around since  2002. Under the final regulations, interest paid on U.S. bank deposits of nonresident alien individuals who reside in most countries that have an exchange of information treaty or agreement with the U.S. will have that interest income reported to the IRS. While the U.S. only automatically shares that information with one country (Canada), the information is now only one step away from being released to the home country governments of these depositors upon request.

The reporting commences for interest paid on January 1, 1013, and thereafter. Banks will report to the IRS on Form 1042-S, and can rely on residence information provided to the bank on Form W-8BEN by the depositor.

Not all countries with an exchange of information agreement will have their residents subjected to this reporting. Only those who Treasury further finds to have adequate confidentiality laws and practices will be subject to this. Rev.Proc 2012- 24 provides a listing of the applicable countries.

Note that the reporting only applies to nonresident alien INDIVIDUALS, and not foreign corporations or other entities.

Residents of countries not on the information sharing agreement list are presently breathing easy. However, the Treasury Decision notes that banks can elect to report interest payments on ALL of their nonresident alien individual depositors if they want, so as to save them the trouble of figuring out which depositors are subject to reporting! Thus, residents of non-sharing countries can get caught up in this reporting. If reporting is an issue for such depositors, then they should seek assurances from their bank that such voluntary reporting is not occurring.

Let’s talk policy for a moment. Capital, and the jobs, economic growth and prosperity that accompany capital, flow to where it is treated best. For many years, the U.S. has recognized that not taxing bank deposit interest of nonresidents, and not reporting such interest income to their home countries, has incentivized depositors to put their money into U.S. banks and branches. For both legitimate reasons (e.g., concerns about kidnappings and home country violence, general privacy concerns, and fear of oppressive or corrupt governments), and non-legitimate reasons (e.g., home country tax evasion), there are significant deposits that are here only because of lack of taxation and lack of reporting. With one Treasury Decision, the Treasury Department has reversed this policy for the sake of being able to garner reciprocal disclosures from foreign governments for U.S. persons keeping money abroad. At some point, the benefits of increasing U.S. tax revenues by forcing the disclosure of every last dollar abroad by every nefarious tax evader will be outweighed by the lost capital and opportunity costs, and compliance costs, of an oppressive reporting and compliance regime. Between the egregious FATCA reporting regime that is presently being phased in, and this type of reporting, that line has likely been crossed.

This new reporting has created quite a stir in areas with significant foreign deposits, such as South Florida. Concerns are rampant about the pending withdrawal of deposits due to this reporting. Per an article this week in the Fort Lauderdale Sun-Sentinel, Senator Marco Rubio has introduced legislation to override the new Regulations – most efforts to curtail the regulatory state fail, but perhaps Senator Rubio can rally enough support to quash this reporting before the deposits are all whooshed away.

TD 9584. Guidance on Reporting Interest Paid to Nonresident
& Rev.Proc. 2012-24.

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