Comment Letter to IRS re: Non-Resident Alien Deposits

May 31, 2001
America’s Community Bankers Letter to IRS
Interest Paid on Deposits to Non-Resident Aliens


May 31, 2001

Ms. Kate Y. Hwa
Office of Associate Chief Counsel (International)
Internal Revenue Service
Room 5226
1111 Constitution Avenue, NW
P.O. Box 7604
Ben Franklin Station
Washington, DC 20044

Attn: CC: M&SP:RU (REG-126100-00)

Re: Guidance on Reporting of Deposit Interest Paid to Nonresident Aliens
66 FR 3925 (January 17, 2001)

Dear Ms. Hwa:

America’s Community Bankers (ACB)1 is very concerned about the likely immediate impact on the U.S. banking industry of proposed Treasury regulations (REG-126100-00), amending Treas. Regs. §§1.6049-4(b)(5)(i) and 1.6049-6(e)(4)(i), and (ii). We believe that these proposed regulations, if issued in final form, could trigger massive withdrawals of foreign deposits from U.S. banks.

The proposed regulations would extend to all nonresident aliens the requirement that payments of deposit interest made by U.S. banks must be reported to the IRS on Form 1042-S. Currently, only Canadian nationals are subject to 1042-S reporting of their U.S. deposit interest. Although it is not clear, the proposed regulations appear to provide that, although U.S. banks would be required to file a Form 1042-S with the IRS for every nonresident alien to whom they pay deposit interest, the information reported would actually be shared only with treaty partners and, possibly, only with those treaty partners that request it. It is one thing to share such information on the wealth of its citizens with the Canadian government; it is quite another to share that information with countries where the rule of law may be less well established – a group that includes some of our treaty partners. Nonresident aliens from unstable or repressive nations that have tax treaties with the United States could have a well-founded fear regarding IRS information sharing. As a result of IRS sharing of information, their wealth could be expropriated, and they – or their families – could be threatened with criminal prosecution, violence, or kidnapping from their home countries.

The fact that the IRS would not necessarily share the 1042-S information it may gather on them with their home county, or that the proposal itself may never even be adopted as a final regulation, are apt to be meaningless distinctions for many nonresident aliens. Given the stakes for many nonresident aliens, once they become aware of a formal IRS proposal to begin identifying information on their wealth for sharing with their home countries, it is very likely that they will consider transfer of their U.S. bank accounts to Swiss or Spanish institutions.

The proposed regulations do not identify any offsetting benefits sufficient to justify the likely irreparable harm that will be inflicted on U.S. banks as the result of expanding deposit interest reporting from Canadians to all nonresident aliens. The preamble to the proposed regulations provides that several treaty partners have requested such information, but the only reason given for gathering sharing it is “encouraging voluntary compliance and furthering transparency” by other countries. We do not believe that many countries will be moved by our example to be as transparent as the United States is proposing to be. (We believe that the proposed regulations are unlikely to have an impact on the problem of money laundering where the ultimate purpose is usually to return the funds to a foreign country.) The proposed regulations would contravene an explicit congressional policy of encouraging foreigners to deposit funds in U.S. banks, which is expressed in the exemption of deposit interest payments from 30% withholding and information reporting.2

If fear does not drive foreign customers away, an administrative burden, indirectly created by the proposed regulations, may do so. Where the non-resident alien depositor has executed a W-8 upon the opening of a deposit account because the interest payments are not reportable, the issue of whether a TIN is required does not exist. Consequently, when a nonresident alien depositor does not have a taxpayer identification number, a bank, typically, will not require him or her to go through the cumbersome process of filing a Form W-7 to apply for an “individual taxpayer identification number” (“ITIN”).

In order to claim treaty benefits, for example, an ITIN is required to be furnished on the Form W-8, but it is not certain whether an ITIN is required, as a general matter, for reporting distributions to a nonresident alien. The IRS, in a reversal of its original position at the time that the concept of the ITIN was developed, is now apparently indicating that an ITIN is required to report distributions to foreigners. If reporting does become required for all nonresident aliens, the banks may feel compelled to require an ITIN on new W-8s and to require existing customers to file W-7s. Unless the nonresident alien resides in a major foreign city where IRS assistance may be available, filing the W-7 may be too difficult and it will certainly be a drawn out process. As a result, most nonresident aliens would be dissuaded from opening a U.S. bank account and would likely move existing ones.

This proposed rule would also unfairly benefit multi-national banks at the expense of community banks. The requirement that a 1042-S be filed with respect to a nonresident alien does not exist if the account is opened at a foreign branch of a U.S. bank using the “qualified intermediary” procedure. ACB urges you to withdraw the proposed regulations. Otherwise, there is a high likelihood of immediate and irreparable harm to U.S. banks.

Sincerely,

Robert R. Davis
Managing Director,
Government Relations


Footnotes

1 America’s Community Bankers represents the nation’s community banks of all charter types and sizes. ACB members pursue progressive, entrepreneurial and service-oriented strategies in providing financial services to benefit their customers and communities.

2 The withholding exemption is currently codified in §§871(i)(2) and 1441(c)(10), enacted in the Tax Reform Act of 1986. In addition, these amendments merely changed the means by which deposit interest was exempted from 30% withholding. Deposit interest had been previously exempt from withholding because it was treated as foreign source income under former §§861(a)(1)(A) and (c). The exemption from information reporting for deposit interest payments is codified in §§ 6049(b)(2)(C) and (b)(5)(B)(iv).

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