US Non-Resident Reporting Rule Slammed

by Mike Godfrey, Tax-News.com, Washington

18 April 2011

The Coalition for Tax Competition (CTC), which is constituted by fifteen free market and taxpayer advocacy organizations, including the Center for Freedom and Prosperity, has written to the United States Treasury Secretary, Timothy Geithner, to urge the immediate withdrawal of a proposed rule on the reporting to the Internal Revenue Service (IRS) of interest paid to non-residents by US banks.

A notice on the proposed rule, for which a public hearing is to be held on April 28, was published in January this year. Currently, under regulations established in 2002, banks and other financial institutions are required to report the interest paid on deposits maintained by their US offices with respect to Canadian account holders. The proposed rule would extend the reporting requirement to all non-resident aliens.

In its letter, the CTC points out that the enforcement of the rule by the IRS “would undermine American banks and the US financial system" and that the rule would be imposed on banks “even though Congress repeatedly has chosen not to tax that income as part of a strategy to attract capital to the US economy”.

The letter reiterates that the “proposed regulation is not required to administer US law. Interest income paid to non-resident aliens is not subject to tax. Other regulations and forms already ensure that citizens and/or resident aliens are not able to falsely claim non-resident alien status to benefit from this preferential tax status”.

In addition, the letter adds that “the proposed regulation is not required by tax treaties. The IRS has openly admitted in the past that it wants to collect this data in order to provide the information to nations that have signed tax treaties with America. Tax treaties, however, only require the exchanging of information that is collected for purposes of domestic law enforcement. There is no obligation to impose additional regulatory burdens solely for the purpose of enforcing other nation's laws”.

"This initiative is an abuse of the regulatory process that seeks to overturn the law rather than to enforce it,” it concludes. “Moreover, it will undermine our economy's performance by causing capital to flee the American banking system. This will have a negative impact on homeowners, consumers, and businesses".

The letter points out that: "On several occasions, lawmakers have visited the issue of how to treat the interest income earned by non-resident aliens. In every case, the desire to attract capital to the American economy led legislators to decide not to tax the income and not to require that the income be reported to foreign tax authorities".

"The last time the IRS proposed this regulation, they held two hearings and were unable to find a single supporter," said Andrew Quinlan, President of the Center for Freedom and Prosperity. "Congress was overwhelmingly against it then, and we are seeing a similar groundswell of opposition again this year. Driving capital out of the US is simply not good fiscal policy."

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