Wednesday, April 18, 2012

New Regs Require U.S. Bank Reporting of Interest Paid to Nonresident Aliens (4/18/12)

The IRS has issued final regulations requiring reporting of bank deposit interest paid to nonresident aliens.  The regulations are here.

A Tax Notes article today makes the following key points (Marie Sapirie, Final Regs Require Reporting on Nonresident Alien Deposit Interest, 2012 TNT 75-1 (4/18/12)):

1.   The regs  permit the IRS to offer a "quid pro quo" to foreign countries from whom the IRS desires cooperation in obtaining similar information relevant for U.S. tax purposes.  The article notes:
"These regs were expected and necessary to implement the intergovernmental agreements as part of FATCA. Based on the joint statement released with the FATCA regulations, reciprocity from the U.S. was going to be required," said Carol P. Tello of Sutherland Asbill & Brennan LLP. * * * * 
The preamble to the final regulations reasons that foreign countries are unlikely to want to hand over information on Americans with accounts in their countries if those countries don't stand to get anything in return. Other countries are "keenly interested in addressing offshore tax evasion by their own residents and need tax information from other jurisdictions," according the preamble.
2.  The banks and their mouthpieces cry foul because, they claim, this puts U.S. banks at a competitive disadvantage to banks in foreign countries who want to facilitate tax evasion.  Thus, one claims:
The problem for U.S. banks is that until all countries are on the same page regarding information collection, protection, and exchange, the rule that U.S. banks must report information on interest earned by NRAs puts those institutions at a competitive disadvantage to institutions in other countries where the banks are stable, there is no tax on interest income, and information sharing does not occur, said Mark J. Scheer of Gunster, Yoakley & Stewart PA. 
"At the end of the day, [the reporting requirement] doesn't affect anything other than where the depositor puts his money," Scheer said. That is because the United States does not collect any tax on interest earned by NRAs.
This notion is, apparently, that the United States banks can compete only if they engage in the same inappropriate behavior foreign competitor banks do.  Competition fueled by greed, thus, is the key moral value they claim.  That is strange.  I suppose on the same notion, we should not have the FCPA because our competitors pay bribes and kickbacks.  The better notion, adopted in this regulation initiative, is that gambits to erode the various countries' tax bases should be discouraged and mutual sharing of information to prevent such erosion is a good thing.

3.   The regulations contemplate sufficient flexibility to address the concern that foreign countries receiving the information from U.S. banks might use the information for nontax purposes.  At a minimum, an information sharing agreement is required; such agreements address limited use of the information shared.  The IRS is not compelled to provide the information.    Contemporaneously with the regulations, the IRS issued Rev. Proc. 2012-24, 2012-20 IRB 1, link to be posted later, listing the countries having the necessary information sharing agreement.  The Rev. Proc. provides for automatic sharing with Canada.

JAT Comment:  Needless to say, the report notes, the Republican nay sayers are not happy with anything the administration does, particularly when it affects a powerful Republican constituency -- big banks who want to attract low-cost foreign deposits.  Economically, the cost of foreign deposits are less when a big incentive for the depositors is to hide the money from their Governments.  That is why the Swiss did not pay much for the deposits of U.S. persons wanting to hide their money there.


  1. Jack,

    I agree with you that we, Americans, should not engage in competition fueled by greed. We can compete quite effectively by scrupulously following the requirements of applicable federal, state and local laws.

    Moreover, as a matter of principle, following the requirements of the law should be a minimum standard. To be certain, "best practices" requires much more than mere obedience. It requires abiding and unwavering observation of guiding principles.

    On another note, I have very serious concerns about the IRS sharing tax compliance/return information with representatives of foreign governments. Such official conduct appears to run afoul of the spirit of confidentiality set forth in 26 USC Section 6103, and could potentially put Americans at a serious risk of harm both at home and abroad. Accordingly, the Service should seriously reconsider its nebulous information-sharing notions before putting our men, women and children in harm's way.

    1. Great that you feel that way. Hence FATCA and FBAR etc through which foreign governments share information with representatives of the US are also a problem ,correct ? as the issue is the access of foreign governments to US taxpayers data, those who , ahem..., happen to live in those countries.

  2. Umm, bank interest paid to NRAs is exempt under Code Section 871(i). It also is exempt if paid to foreign residents under the treaty articles. So what is the damage to the US if such interest is not reported? Oh, yeah, I forgot, we're on a mission.

    1. The US / IRS desires that type of information from foreign banks even if the interest or other passive income is not taxed in the bank's country. The treaty obligations are reciprocal. So, it is perhaps an example in the real world of the command in Luke 6:38:

      Give, and it will be given to you. A good measure, pressed down, shaken together and running over, will be poured into your lap. For with the measure you use, it will be measured to you.

      Jack Townsend

  3. DATCA is what I call this... The domestic version of FATCA as a way of creating a bargining chip to force FATCA compliance on FFIs around the world. Coop their governments! Got 5 Big EU countries so far on the promise or reciprocity. Good strategy when you think about without debating the merits of what is being done.

    I first become aware that this was the route things were going when I heard about the opposition on Accounting Today, of all places.

    Since then there has been dueling editorials in Miami Herald between Ruben and the Treasury.

    There has also been the letter of opposition to Obama by the entire Florida delegation

    and there is others, that I won't bother with. They include Ron Paul, the Weekly Standard, a group of conservative "freedom foundations" etc. No opposition on the left of the spectrum that I have seen. Maybe there is some, in an ACLU like community, but just haven't found it yet.

    In none of that opposition that I have read, not even the Dem Congressmen(from Florida) who probably voted for the HIRE act that created FATCA, draw the connection to DATCA. If they want to stop DATCA, it is simple. Kill FATCA! Instead they focus on a too a narrow self interested position. I understand that, and some of their arguments about compliance cost, capital flow and bank risk are valid. However, no one worries about that when Congress imposes the same problems and costs unilaterally on the world. Now, if I read the new regulations that have come out, the IRS and the Administration is ignoring their pleas.

    To me, the BIGGER picture is this...

    FATCA begets DATCA begets GATCA, or a Global Tax data exchange. You can argue endless on the merits for and against, but the disturbing thing for me, is that it is happening without any real public discussion or awareness by the US population as a whole about what is occurring. So it goes.

  4. Has anyone else read the 20 page DATCA regulations? I am curious as to any take aways or thoughts you might have.

    I think I see one BIG loop hole that you could drive a Mexican NAFTA Mack Truck through. To simple me, it seems that this might not represent the a great reciprocity deal that the IRS is holding out to the EU countries. Correct me if I am wrong, as I am really curious

    The IRS wants all account data for all US persons holding accounts in the reciprocal country period. Resident or not! The IRS is offering up interest information on non residents deposits only if interest is more than $10 a year.

    So, first of all that is not apples to apples reciprocity to me. Non resident to Non resident data exchange would be. This is NOT that.

    Secondly, if a Mexican, lets say, had money in a Texas bank, but did not want the Mexican government to know about it for whatever reason, couldn't he just put the funds into a NON interest bearing account. Rates are so low now, what little interest lost might not matter, if secrecy is the bigger concern? The Bank would have no obligation to report anything to the IRS. And of course, the Mexican government would not get income information. Additionally, there would not be any accompanying (FBAR like) account information that is similar to what the IRS is wanting on all US persons non resident or resident in the EU countries.

    Am I missing something? This doesn't seem like reciprocity to me. Is this more in the category of as faux reciprocity as Moby pointed out elsewhere?

    Maybe I am not smart enough to understand all the legalese and references to other statutes and maybe the 5 nation EU FATCA pact only wants interest data and not account data. You think? Nah, me either.

    1. Reciprocity is only useful if citizens of both the US and Country X are putting significant amounts of money in the other country's banks.

      There is plenty of Latin American money in US banks, but I doubt many in the US would feel safe putting their money in banks of most Latin American countries (other than modest amounts for Americans living in that country.) So there is little incentive for the US to have reciprocal data sharing with such countries.

      The US would love to get data from small tax havens, since there might be a good chunk of US money there, but there is little incentive for those countries to have reciprocity, since their own residents likely have little money in the US because (1) those countries have low tax rates and (2) those countries have a small population, so 1% of their citizens is less than 1% of US citizens.

      Though this proposal exposes hypocrisy, I wouldn't hold my breath waiting for it to be passed, in light of the self interest of US banks. Not only does the status quo benefit the banks, but whatever profits these banks make get taxed by the US.

    2. Jack, you said "the cost of foreign deposits are less when a big incentive for the depositors is to hide the money from their Governments. That is why the Swiss did not pay much for the deposits of U.S. persons wanting to hide their money there."

      That may be the case for small savings accounts, but a Swiss bank can also purchase corporate bonds, government bonds from various countries, CDs from foreign banks. The yield on such investments is wholly outside the control of the Swiss banks, and the only profit to the bank is from buy/sell commissions or custody fees.

    3. My point, though, is that one way or another the Swiss are getting a premium for their services because the key service that attracts the non-Swiss is secrecy -- and in the case of U.S. depositors / investors using Swiss services is hiding the money. Depositors / investors can get the same quality services elsewhere at lesser cost. But, then, what they thought they were buying and paying for was secrecy.

      That is why almost everyone I am representing who have outed their Swiss accounts have chosen to place the money elsewhere now that they no longer have secrecy.

      Jack Townsend

    4. I won't dispute that for most of them secrecy would have been the main factor, but for anyone wanting to invest in a savings account or CDs denominated in euro, swiss francs, pounds, or other currencies, it is simply not possible to have such an account at virtually any US bank. Ditto for any foreign stocks and mutual funds that are not SEC registered.

      There may be some US banks offering saving accounts or CDs in foreign currencies, but I don't know of any.

      Of course, someone whose Swiss account only held US dollars would be hard-pressed to claim that foreign currency diversification was a motive.

    5. Still, the Swiss charge a premium for services (including secrecy). If the investment is not available in US, it can be obtained in some country other than Switzerland for a cheaper cost for the service. Why would the Swiss get the business?

      Jack Townsend

    6. I believe anyone paying high fees (I consider 1% to 1.5% of capital, or $10,000 to $15,000 on a $1 million account to be high) is paying for more than secrecy, either 1) monkey business such as bankers visiting clients in the US, setting up entities or other misconduct cited in indictments) or 2) portfolio management (a legitimate function) or 3) is too unsophisticated to shop around.
      Swiss bank fees are reasonable for those who do not fall into the above categories, for example:

      Bank A, non interest bearing US dollar account, total fees $90/year.

      Bank B, savings account in Swiss francs, account yielding 0.75% annually for past 3 years (while US banks were paying around 0.05% -- thank you Mr. Bernanke -- and the franc appreciated by 25% vs. US dollar) total fees $200/year.

      Bank C, investment account holding mutual funds, total fees 0.12% per year (would be $600 on 500K account, $1,200 on $1 million) Fee is for holding securities and collecting dividends, fees would be higher if there were purchases/sales. This is for mutual funds not issued by this bank, so they are not earning additional fees.

      Perhaps lower fees can be found next door in France, Germany or Italy, (I don't know whether swiss franc accounts are available in those countries, obviously euro accounts would be) but the train fare alone would wipe out the savings in bank fees.

  5. This is a paraphrased/re-post from what I wrote over at IBS. What really incenses me is how DATCA (read: domestic FATCA) is faux reciprocity.

    Under FACTA, if an American citizen living in NZ has bank accounts in both USA and NZ, then the IRS gets income information remitted directly from his NZ and USA banks. Under DATCA the NZ govt gets information remitted from the NZ bank for that person (as currently), but would have to go begging directly to the US govt for information on that specific person’s USA accounts. The administrative burden on the NZ govt is as much as before, and the USA govt will probably just tell them to go fly a kite to “protect the privacy of its citizens”. So there is no net gain for a non-US govt.

    DATCA would only be reciprocal if ALL USA banks had to identify tax-obligations of ALL it’s customers (US citizens included) in relation to ALL other countries and then remit that information DIRECTLY to the tax authority in each customer’s country-of-tax-obligation. Can you imagine the uproar in the US!?

    Reciprocity? No. Hypocrisy? Yep. B#llsh&t? Most definitely.

    Furthermore, the US wants to maintain control over DATCA-gathered information to ensure it is not used for "non tax uses" by foreign govts. But you can be damned sure that information remitted from foreign banks to the IRS under FATCA will be used to further the application of FBAR sanctions, both civil and criminal. FBARs are a classic non-tax use (title 31), so again US govt is knee deep in its own hypocrisy.


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