Interest Reporting Proposal Will Damage US Banking Sector Says Lawmaker

by Mike Godfrey, Tax-News.com, Washington

28 January 2004

The IRS's proposed interest reporting regulations will cause untold harm to the American banking industry and harm the nation’s overall competitiveness, warned Chairman of the House of Representatives Small Business Committee Don Manzullo, who urged the IRS to drop the measure.

The proposed regulation would require US banks to report to the IRS the amount of bank deposit interest paid to foreign depositors. However, the IRS has been sharply criticised, with opponents of the measure arguing that it would be collecting this information more for the benefit of foreign tax collectors than for the US government.

“This week marks the dark, three-year anniversary of an Internal Revenue Service attempt to require American financial institutions to conduct special reporting of interest paid to nonresident aliens,” Manzullo told the Center for Freedom and Prosperity.

“The Treasury Department reports that foreigners have placed more than $2 trillion in American financial institutions,” he continued. “Only a portion of this money is directly affected by the IRS regulation, but it is foolish to push a proposal that jeopardizes US competitiveness as capital quickly evaporates from our banks and will instead be deposited in other foreign banks if this rule becomes law.”

"As Chairman of the Small Business Committee, I call on the IRS to withdraw this burdensome regulation and bury it before it sucks out capital needed for growing this economy," concluded Manzullo.

The regulation has attracted fierce criticism from many economic liberals, and the Center for Freedom and Prosperity itself was moved to write to Treasury Secretary John Snow urging the Bush administration to drop the measure.

“For more than 80 years, Congress has sought to attract capital to the US economy by neither taxing nonresident alien bank deposit interest nor requiring the reporting of such income,” observed the CFP's letter, continuing:

“The IRS does not have the right to unilaterally change this law, so the regulation is a clear violation of congressional intent."

Meanwhile, Veronique de Rugy of the Cato Institute foresaw an additional concern for the government arising from the law:

"The proposed regulation would help foreign governments double-tax income that is earned in America, which is completely inconsistent with the Administration's tax reform agenda," she noted.

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