US Chamber Of Commerce Attacks Treasury Over Interest Reporting

by Glen Shapiro, LawAndTax-News.com, New York

04 September 2003

Yet another major US organisation has urged the Treasury to withdraw its misconceived 'interest reporting' regulation, which would have banks report non-residents' interest receipts to their home tax authorities. The Chamber of Commerce is just the latest of hundreds of organisations that have protested the regulation, and wrote to Treasury Secretary John Snow as follows:

The Honorable John W. Snow
Secretary of the Treasury
Department of the Treasury
Room 3419
1500 Pennsylvania Avenue
Washington, D.C. 20220

Dear Secretary Snow:

On behalf of the US Chamber of Commerce, the world's largest business federation, representing more than three million businesses and professional organizations of every size, sector and region, I am writing to urge you to withdraw the proposed regulation (133254-02) that requires American banks to report the interest they pay on the deposits of nonresident aliens.

The proposed regulation, which would not improve the safety or soundness of the US banking system, places an undue burden on banks. The IRS estimates financial institutions would each spend approximately 500 man-hours annually on compliance and other stakeholders have argued the hours would be considerably higher. The waste of resources would reduce the profitability of US banks.

Furthermore, failure to withdraw the regulations would lead to a reallocation of deposits out of the US banking system thus reducing profits and decreasing credit flows to bank borrowers. The reduced credit flows will fall disproportionately on small businesses, which rely on banks for funding.

In conclusion, we believe that there is little or no benefit to be gained by these proposed regulations and the resulting negative consequences of reduced profitability and credit availability. Therefore, we urge you to withdraw this proposed regulation.

Sincerely,

R. Bruce Josten
[Executive Vice President, Government Affairs]

The US Treasury has been pushing to finalize the Internal Revenue Service regulation that will require domestic banks to report the interest earned by non-resident aliens to the tax authority in the country in which they are domiciled.

The unpopular proposal has been heavily criticized by the banking industry, as well as by conservative politicians and free market think tanks, who fear a mass exodus of foreign money invested in the country. Many observers have also expressed bemusement at the keenness of the government to push through a regulation that is a holdover from the Clinton government.

Another body opposed to the measure is the Federal Deposit Insurance Corp. FDIC chairman Donald Powell wrote a letter to the Treasury earlier this year complaining that the proposal would especially harm "smaller institutions whose survival is dependent on stable sources of deposits."

A true measure of the opposition to the proposal which exists in the United States can be seen in the fact that some thirty members of the House and eighteen Senators have added their names to letters opposing the regulations; more than thirty think tanks, including the CATO Institute, the Heritage Foundation, and the Center for Freedom and Prosperity have expressed opposition; and of the 217 public comments made during the Treasury's 90 day consultation period, only one supported the measure.

It is estimated that there is over $1 trillion invested in US banks by overseas residents, and around $200 billion of this is likely to be caught by the new reporting rules.

In a critique of the IRS proposal earlier this year, Veronique de Rugy of the Cato Institute cited Federal Reserve data showing that "more than $40 billion was taken out of savings accounts in the first quarter of 2001 after the Clinton Administration first unveiled the proposed regulation."

"One can only imagine what will happen if the regulation is actually implemented," Ms de Rugy concluded.

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