Senator Don Nickles, whose name has been mentioned as a possible successor as Senate Majority Leader should Trent Lott not survive his current problems, is the second incoming Senate Chairman to raised serious issues with the proposed IRS regulation. Future Judiciary Committee Chairman Orrin Hatch of Utah has "deep concerns" with the rule. In the last few weeks, more than twenty Members of Congress have asked for the proposed regulations to be withdrawn.

Senator Nickles text:

December 18, 2002

The Honorable Paul A. O'Neill
Secretary of Treasury
U.S. Department of Treasury
15th and Pennsylvania avenues
Washington, D.C. 20005

Dear Secretary O'Neill:

I am writing to ask the Department of Treasury to postpone finalization of a proposed IRS regulation which would require US financial institutions to report interest income they pay to non-resident alien account holders until such time as the Subcommittee on Oversight has considered the many consequences of the proposed changes.

As you know, the proposed rulemaking would require U.S. financial institutions to report interest paid to non-resident aliens of certain enumerated nations. While the ostensible rationale of the rule is to enforce U.S. tax law, since no U.S. taxes will be collected by this rule, the real motive seems to be to assist Europe in the collection of foreign taxes on savings invested in the United States.

This rulemaking raises many serious policy issues properly reserved to Congress. For example, the rule appears to effectively reject long-standing U.S. policy to attract capital to our shores. It also appears to reject by bureaucratic fiat a recently announced Administration policy against the proposed EU Savings Directive. The U.S. has endeavored, through exemptions provided for portfolio interest and on interest paid with respect to U.S. bank deposits, to attract foreign capital investment. In addition to deviating from U.S. economic policy, the proposed rule does not appear to be based on the need to collect U.S. taxes since the U.S. does not tax interest paid to non-resident aliens.

In addition to these economic considerations, my Subcommittee would like to explore the compliance and interpretation of the Service of the recent changes to the Regulatory Flexibility Act (RFA). The RFA requires the Service to consider the impact of the rule on small firms or to certify that it has no such impact. It is hard to understand how the Service could exempt themselves from the purview of the RFA in this rulemaking when the RFA applies specifically to collection of information requirements.

Therefore, I respectfully request the Treasury Department exercise its authority to postpone this rule until such time as these policy implications have been fully explored.

Sincerely,

DON NICKLES
U.S. Senator

DN/lm