US Treasury To Review Proposed Information Exchange Rules

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

03 July 2001

While international attention has been focussed on the battle that has been raging between offshore jurisdictions and the multilateral organisations over 'unfair tax competition' and 'money-laundering', a related and perhaps equally significant battle is being fought out in the US between the IRS and the Treasury Department on the one side and the banking industry and right-wing lobbyists on the other side.

This is the proposed requirement that US banks should inform foreign nations about interest payments made to their nationals. The EU has made similar proposals, in relation to its own Member states, as part of the compromise that attempted to settle the withholding tax saga last year, but they are not likely to survive the EU's complex legislative process. The IRS on the other hand has got close to installing similar rules in the US without needing to employ the legislative process at all. But now, after pressure from lobbyists, and a hearing at which speaker after speaker condemned the proposed rule, the Treasury has agreed to review its ideas.

The draft regulations would require US banks to report interest earned on accounts held by non-resident foreigners. Such accounts are exempt from US tax, but foreign governments want the Internal Revenue Service to collect and pass along data on interest so it can be taxed abroad. This proposal, which came to light only in the tail-end of the Clinton administration, and was clearly part of the international drive against tax evasion in which previous Treasury secretary was a prime mover and wholehearted participant, has infuriated bankers in Miami and other US money centers that depend heavily on foreign deposits. They say the rule will cause huge withdrawals from US banks by depositors in Latin America and elsewhere worried about financial information being reported to their home
governments.

Says Daniel Mitchell, the McKenna senior fellow in political economy at the Heritage Foundation: 'America has become a magnet for savings and investment from around the globe. In part, this is because our free-market economy rewards those who want to create wealth. But it also is because the United States is a tax haven. Foreigners who put their money to work in our country pay very little tax, either to the IRS or to any other government.

'This low-tax policy has yielded enormous benefits for our economy. Foreigners have between $7 trillion and $10 trillion invested in the United States. This translates into seed money for small business, venture capital for high-tech start-ups, and financing for our manufacturing sector. Perhaps more importantly, this investment has boosted worker productivity, helping push wages and salaries to all-time highs.

'But this could all be severely harmed by the IRS' latest regulations, which foreign investors believe will result in a loss of financial privacy and in higher taxes. As a result, they will likely shift money to other countries. And there will be many options. In a competitive global economy, dozens of nations are hungry for new investment and would be happy to profit from our self-inflicted mistake.'

Now some prominent republicans are beginnign to sit up and take notice. Lawrence Lindsey, head of President Bush's National Economic Council, said: "It's an issue of a lot of concern." He said he had asked Assistant
Treasury Secretary Mark Weinberger and advised him to "have a look at this" and "get the rule right."

Governor Jeb Bush sent a letter last month to Treasury Secretary Paul O'Neill arguing the regulation "would place U.S. banks at a competitive disadvantage relative to banks in the Caribbean and Europe ... and would seriously hamper the ability of U.S. banks to continue to attract foreign deposits."

Now the Treasury Department has asked Florida bankers to submit information about the rule's financial impact. Rep. Dave Weldon, a Florida Republican, says Treasury Department officials told him the agency "may scale the rule back." Treasury Department spokeswoman Tara Bradshaw said, "We're reviewing it," adding, "We have no idea how we'll come down on it."

Robert Brookes, president of Miami's Eagle Bank, said the rule could prompt withdrawals of $15 billion to $20 billion by Latin American depositors in Miami alone. At least some of the money is deposited in the U.S. to avoid taxes at home, bankers concede, but the majority of depositors are attracted by the security and privacy of the
U.S. banking system.

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