US Administration Battles Treasury Over Information-Exchange

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

04 September 2002

Warfare continues within the US government over the question of information-sharing.

On your left, in William Jefferson Clinton colours, are 1960's tax-and-spend, Colbertian bureaucrats who eagerly welcomed (and probably helped to design) the European Union's Savings Tax Directive, which would ensure that all countries around the world tell investors' home tax authorities about income they receive, so that it can be taxed accordingly. This illiberal, pen-pushers' nightmare would move the world a noticeable step towards 1984. These gentlepersons, mostly secreted within the Treasury Department in offices well away from the open air, were happy to reissue recently a domestic regulation requiring just such information exchange for foreign investors in the US, as a covert signal to the EU not to give up on its already tattered Savings Directive.

On your right, in the colours of Ronald Reagan, is President Bush's administration, including his political appointees to the left-leaning Treasury, who have more or less consistently denied the EU's information-sharing plans, and who hope to can the newly resurgent Treasury worms-i'-the-bud before they can do any real damage.

The Centre for Freedom and Prosperity is making this fight one of its key challenges for the fall. Says the Centre:

'The IRS’s new regulation is old garbage in a new wrapper. The only difference between the new regulation and the original regulation is that the new regulation targets 15 specific countries. But even this difference is meaningless since the IRS is already hinting that the rest of the world’s countries will be added to the list within two or three years. CFP was a leader in killing the Clinton regulation and we will work just as hard over the next few months to knock-off its mutant sibling.

'We are determined to win, especially since the EU bureaucrats will try to mischaracterize the IRS regulation as a sign of support for the Savings Tax Directive (by claiming it is an “equivalent measure”). The EU is making this claim, even though Kenneth Dam, Deputy U.S. Treasury Secretary, sent a letter July 31 to the European Union and stated: “There is no linkage with the EU Savings Directive and our actions should not be considered to anticipate the outcome of the technical discussions regarding the proposed EU Savings Directive that we agreed in May should continue. Indeed, any suggestion that our action here anticipates eventual support for the proposed EU Savings Directive could adversely affect the technical-level discussions.”

'While we think it is good that Mr. Dam made these comments and denied linkage, we notice that the Treasury Department bureaucrats who drafted the letter made it appear that the United States was still considering the Savings Tax Directive.'

Under the new proposed regulations, interest on bank deposits would be reported to the IRS for nonresident alien individuals who are residents of certain specified countries. The specified countries are Australia, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, and the United Kingdom. Existing regulations require similar reporting with respect to residents of Canada

Under the proposal announced in July, the Treasury would issue reports to the 16 foreign governments on interest that residents of their countries earned on bank accounts in the US. The list excludes Latin American countries.

Treasury spokeswoman Tara Bradshaw said the US has bilateral tax treaties with the 16 countries on the list, and that exchange of interest data is reciprocal. "This is consistent with our commitment to strengthening our information-exchange relationships with our treaty partners, relationships which are a valuable tool in ensuring full and fair enforcement of the US tax laws," she said.

It seemed ironic that the Treasury made its announcement just one day after a senior Treasury official had seemed to commit Treasury Secretary Paul O'Neill against the EU's information-sharing directive, saying that taxpayer confidentiality was paramount. The bank deposit interest regulations go a long way towards what the EU wanted, although the exclusion of Switzerland, Lichtenstein and many other offshore banking centres from the scheme seems to make sure that foreign deposits in US banks will head for the exit at high speed.

This is a point made by Bill Thomas, Chairman of the House Ways and Means Committee, in a letter he wrote to Paul O'Neill.

Wrote Mr Thomas: "As I expressed on the floor of the House of Representatives on July 25, 2001, I am concerned that the proposed regulation could cause significant flight of capital out of the United States. Furthermore, I am concerned that this significant change in tax policy would hinder our efforts to reform the tax code to promote greater efficiency and growth. Finally, there are questions as to whether this proposed regulation contradicts Congressional intent."

Bill Thomas said he might hold hearings in the Ways and Means Committee. But the power of Congress to halt the Treasury's action is currently at the mercy of the electors in this fall's congressional elections - if there is a swing towards the Democrats in the House, by November it may be only the President who could do anything about the IRS proposals.

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