US Treasury Warms Over Clinton-Era Bank Interest Tax Rules

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

01 August 2002

Yesterday the US Treasury Department withdrew regulations originally proposed in January 2001 that would have required reporting to the IRS for bank deposit interest paid to all nonresident alien individuals and issued new proposed regulations that will require reporting on a more limited basis. Such interest is exempt from US tax, but foreign governments want the IRS to pass along interest data so the money can be taxed abroad. Currently, the IRS gives that information only to Canada.

Under the new proposed regulations, interest on bank deposits would be reported to the IRS only 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 on Tuesday, the Treasury would issue reports to the 16 foreign governments on interest that residents of their countries earned on bank accounts in the U.S. The list excludes Latin American countries.

Bankers in Florida were delighted by the change, since they fully expected to lose business from Latin American countries if the original proposals had been adopted. Florida banks alone hold about $10 billion of Latin American money.

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.

Others were not so pleased, and 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 Wasy and Means Committee, in a letter he wrote just a week ago 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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