House Financial Services Chairman Writes Treasury Against Interest Rules

by Mike Godfrey, Tax-News.com, New York

21 January 2003

Over the last few months a veritable stream of members of Congress have attacked the IRS's proposed rules requiring banks to report interest paid to non-resident aliens. Usually their objections have centred on the anti-competitive nature of the rules, which would severely harm the ability of US banks to compete in the global market for deposit business; but a significant minority of complainants have focused on the additional bureaucracy the rules would entail.

Last week saw 29 members of the House of Representatives write to President George W. Bush which expressed their fear that: "This burdensome new proposal . . . . will only harm financial markets by driving capital out of the American economy . . . . and could severely undermine the pro-growth provision of your tax package.'

Now the Chairman of the House Committee on Financial Services, Michael Oxley, has written to Deputy Treasury Secretary Kenneth Dam saying that the new rules could impose significant new regulatory burdens on financial institutions and asking for them to be deferred pending a thorough review by the incoming Treasury Secretary John Snow.

Here is the text of Chairman Oxley's letter:

January 16, 2003

The Honorable Kenneth W. Dam
Deputy Secretary
Department of the Treasury
1500 Pennsylvania Avenue, N.W.
Washington, D.C. 20220

Dear Deputy Secretary Dam:

As you know, the Internal Revenue Service (IRS) has proposed a regulation that would require U.S. depository institutions to report interest income paid to nonresident alien depositors who reside in 15 specified countries (Reg 133254-02).

The proposal, which originated in the previous administration, has caused concerns that the U.S. is reversing its long-standing policy of encouraging citizens of other countries to deposit their funds in the U.S. banking system. Moreover, because interest income earned on non-resident alien deposits is exempt from U.S. taxation, it is not readily apparent what enforcement or tax collection objective is served by requiring this income to be reported to the IRS.

From a process standpoint, I believe that it would be ill-advised for Treasury to issue a final rule on this important issue prior to Secretary-Designate Snow's confirmation. Implementation of such a far-reaching change in U.S. tax policy - which seems likely to impose significant new regulatory burdens on the U.S. depository institutions - should at the very least await a thorough review by incoming Secretary.

Thank you for your consideration of my views on this issue.

Sincerely,

Michael G. Oxley
Chairman

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