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CFP Testifies To IRS Against Interest-Reporting Rules, New York

06 December 2002

Andrew Quinlan, President of the Center for Freedom and Prosperity, which has led the fight against proposed IRS regulations under which US banks would be obliged to report interest payments to non-resident aliens, gave testimony yesterday to a hearing on the regulations. This is what Mr Quinlan said:

Thank you for the opportunity to share my views with you. I am Andrew Quinlan and I am the President of the Center for Freedom and Prosperity. We are an Alexandria, Virginia-based, 501(c)(4) citizen organization that lobbies Congress and the Administration on tax competition, financial privacy and fiscal sovereignty.

I also coordinate the activities of the Coalition for Tax Competition, which is made up of more than three-dozen free-market public policy organizations, including taxpayer groups, senior citizen and family organizations, civil liberties activists, and industry and business advocates.

I stand here today commenting for the second time on a proposed regulation that is not in the best interest of the United States. More than 530 days ago, the IRS held a public hearing on the first version of this Regulation (Reg-126100-00). As many of the speakers today will highlight, the new version of the rule is virtually the same as the first, except for the number of targeted countries.

Before I go into my remarks on the regulation, I would like to make a few very important points. At the public hearing held on July 21, 2001, 100 percent of the speakers were against the proposed regulation. At today’s hearing, from looking at the scheduled presenters, once again every participant will speak out against the proposed rule. The same is true for the written comments. In 2001, the IRS received very few positive comments, in fact, I was told that it was less than one-percent. The same is true this year. Last night, I read through all the public comments the IRS released to one of my colleagues last week. After going through the 200-plus comments, I finally found one who sent an e-mail in support of proposed regulation.

Moreover, it is safe to say that since January 17, 2000, three days before President Clinton left office, and the date the first version of the two regulations was proposed, the sum of the total support for the regulation had “grown” to less than five taxpayers.

With that being said, I would like to touch on several of the key reasons why the Center for Freedom and Prosperity and the Coalition for Tax Competition oppose this misguided regulation.

First, I plan on punctuating my remarks with several comments from elected officials from the House of Representatives. Unlike the government officials who proposed this regulation, these elected officials have to answer to the American taxpayers on a regular basis. This public hearing, and the three-month comment period that ended November 14th, are the only avenues that hard working Americans have to protest regulations proposed by un-elected government officials at the Internal Revenue Service.

I. IRS Abuses its Regulatory Authority
Executive branch agencies and departments are supposed to issue regulations that implement the laws enacted by Congress. More specifically, the IRS is supposed to promulgate regulations that help enforce U.S. tax law. And since the United States government does not tax bank deposit interest paid to nonresident aliens, there is no need to collect this information. Indeed, the IRS even admits that the purpose of the proposed regulation is to help foreign governments tax U.S.-source income.

Representative Pete Sessions of Texas:

“This proposal is an abuse of the regulatory process. The IRS is supposed to promulgate regulations to help enforce the laws approved by Congress and signed by the President. But this regulation overturns existing law and clearly flouts Congress' goal of attracting capital to the U.S. economy. Moreover, the IRS failed to perform a legally required cost/benefit analysis. Indeed, the Service actually had the nerve to claim that this rule is an interpretive regulation and thus exempt from important parts of the law governing regulatory review.”

Georgia Congressman Jack Kingston:

“. . . the IRS is supposed to enforce the law, not create new law to satisfy an ideological agenda. To help attract capital to the U.S. economy, Congress has chosen not to tax foreign-owned bank accounts and not to require the reporting of interest income paid to these accounts. It is therefore quite disturbing that the IRS is trying to unilaterally overturn this policy – particularly since the agency openly admits that it is pursing this policy to help foreign governments tax U.S.-source income.

II. Proposed Regulation Flouts Existing Law and Congressional Intent
On several occasions, the U.S. Congress has examined the tax treatment of indirect foreign investment in the American economy. In every instance, the desire to attract capital has led lawmakers to decide not to tax bank deposit interest paid to nonresident aliens. Congress also has repeatedly decided not to require the reporting of this income. The proposed IRS regulation, however, seeks to overturn the outcome of this democratic process. This undermines the rule-of-law and makes a mockery of the President’s effort to rein in regulatory abuses.

House Way and Means Vice Chairman Phil Crane:
"The Internal Revenue Service is supposed to enforce the tax laws approved by Congress. It is with some dismay, therefore, that I see that the Service has issued a regulation designed to overturn existing Congressional intent. On many occasions, Congress has visited this issue, and in every instance has chosen not to tax this income and not to require its reporting. The goal, clearly seen in legislative discussion, is to attract capital to the American economy where it will be used to create jobs and boost growth."

House Small Business Committee Chairman Don Manzullo:
"I find it troubling that you chose to reissue an old proposal that Congress has already determined to be bad for America and in conflict with Congressional intent. Congress has discussed this issue on many occasions in the past, an in every instance has chosen not to require the reporting of this income paid to nonresident aliens. In April of 2002, I joined nearly 50 of my colleagues in opposition to this regulation the last time you proposed it. The letter urged the President to permanently withdraw the proposed IRS regulation."

U.S. Representative Ron Paul of Texas:
“These cosmetic changes [changing the included countries from all to 15 additional] in no way alter the regulation's destructive nature. This proposed regulation contradicts the long-standing desire of Congress to ensure that tax policies will attract low-cost funds to America's financial system. Instead of attracting capitol into the financial system, this regulation could drive billions of capitol out of the US economy.”

Missouri Congressman Todd Akin:
“I am particularly distressed that the IRS is abusing the regulatory process by blatantly ignoring the will of Congress. Existing law -- and legislative history -- clearly shows that lawmakers did not wish this income to be taxed or reported. Yet the IRS wants to overturn the outcome of the democratic process.

III. Proposed Regulation Chases Foreign Investment out of the U.S.
The current tax and privacy rules for foreign investors have been a huge success, attracting about one trillion dollars to U.S. financial institutions. This money helps finance car loans, home mortgages, and small business expansion in America. But if the IRS regulation is approved, foreigners will shift a substantial share of their funds to London, Hong Kong, and other jurisdictions that protect the interests of investors – and therefore protect their own national interests.

House Way and Means Vice Chairman Phil Crane:
“If this regulation is implemented, it will drive hundreds of billions of dollars of capital out of the American economy – with no increase in revenue to the U.S. Treasury -- putting further downward pressure on financial markets.”

Georgia Congressman Jack Kingston:
“This proposed rule is a misallocation of IRS resources, and it will impose significant costs on banks if it is implemented. But these paperwork costs will be trivial compared to the loss of international competitiveness since banks in London, Zurich, and Hong Kong will be delighted to accept deposits that will flee America if this regulation is finalized.”

U.S. Representative Ron Paul of Texas:
“If this regulation is not withdrawn, it will create uncertainty among international investors. Many of them will react by placing their funds in foreign institutions, thus undermining the competitiveness of US banks. This regulation is particularly ill-timed given the recent downturn in the US economy.”

IV. Proposed Regulation Hurts America’s Competitiveness
Financial institutions from around the world compete for liquid capital. American banks traditionally have been successful in this environment, attracting about one trillion dollars. But this profitable source of deposits will become very unstable if banks are forced to put foreign tax law above U.S. tax law. Money will flow out of America, making it more difficult for U.S. banks to meet the challenge of foreign competition and also limit ability to loan funds to small businesses, families and farmers..

House Small Business Committee Chairman Don Manzullo:

“This regulation would significantly harm the competitiveness of America's financial institutions, which would directly harm millions of America's borrowers. . . As Chairman of the House Small Business Committee, I am concerned that U.S. small businesses, typically those most in need of financial backing, will have their access to growth capital evaporate during these difficult economic times. This hardly seems the ideal time to promulgate a regulation that will drive more capital out of the American economy."

House Way and Means Vice Chairman Phil Crane:
"…[I]t will make it harder for consumer, homebuyers, and small business owners to obtain loans. This surely will happen if investors decide that America's financial system no longer has a necessary level of personal privacy. Money that would have been put to work in America instead will be deposited in Switzerland, Hong Kong, and many other financial centers around the world.

Missouri Congressman Todd Akin:
“Such a scheme would contravene existing law and harm the competitiveness of American financial institutions. More importantly, it would put downward pressure on U.S. markets, threatening the well being of small investors. In addition, millions of American borrowers -- including homebuyers and small businesses -- would be adversely affected as capital leaves the U.S. economy.”

Ways and Means Member and Florida Congressman Mark Foley:
Deposits from overseas are a critical source of funds for United States financial institutions and these monies benefit the American economy. This is one of the reasons why I am greatly troubled by the Internal Revenue Service's recent proposal to require the reporting of interest paid to nonresident aliens. This information is not needed to enforce U.S. tax law. Indeed, Congress specifically has exempted this income from tax and chosen not to require reporting in order to make America more attractive destination for global capital.

46 Members of Congress – April 5, 2002 Letter to President Bush
This proposal may be good news for high-tax governments, but it is contrary to American economic interest. The jobs of American workers and the competitiveness of U.S. companies should be our top priorities. This regulation works against both. It will put Americans out of work and it will force dollars out of U.S. financial institutions and into foreign financial institutions.

V. IRS: Divide-and-Conquer
The current regulation is a slightly modified version of a rule proposed in the waning days of the prior Administration. The original Clinton-era proposal sought the reporting of deposit interest paid to all nonresident aliens, but lobbying from some banking associations led to the withdrawal of that proposal and the release of the current version, which seeks to collect information from 15 nations. This bait-and-switch gimmick may or may not fool the banking industry, but it does not make the proposal any less unpalatable – particularly since it is abundantly clear that the IRS fully intends to extend the regulation to all nations if the current proposal survives.

Ways and Means Member and Florida Congressman Mark Foley:
“I realize that the Service already has withdrawn this regulation one time, but the decision to only apply the reporting requirement to citizens of 15 specific countries is not an acceptable compromise. First, it is obvious that the IRS intends to add other nations to the list in the near future. This will be harmful to Florida banks because of our competitiveness for Latin American investors. Second, the IRS should never overturn existing laws, and Congress has spoken clearly on this issue a number of times. I would hope that the IRS would never pursue an agenda that puts the interests of foreign governments ahead of the interests of homebuyers, small businesses and other Americans who benefit from a larger capital stock.”

Missouri Congressman Todd Akin:
“Finally, let me be clear that the "new and improved" version of the regulation is just as flawed as the initial proposal. The IRS's decision to temporarily exempt certain deposits from the reporting requirement is a transparent effort to divide-and-conquer, one that assumes that lawmakers, and the banking industry, are too foolish to realize the depositors from all nations will be added to the list in a couple of years.”

VI. The Proposed Regulation Violates the Treasury Department’s Position on Information-Sharing
Last but not least, it is worth noting that this regulation is contrary to the Administration’s position on the treatment of confidential taxpayer information. On several occasions, Secretary Paul O’Neill and other Treasury officials have stated that the United States government does not support automatic information sharing. Instead, the Secretary stated, information should only be provided on a case-by-case basis in response to specific requests – and with full respect for due process legal protections and individual privacy rights. The IRS’s proposed regulation unambiguously violates this commitment since any information collected automatically would be forwarded to foreign governments. To add insult to injury, it is increasingly obvious that this aspect of the regulation was deliberately misrepresented during meetings that led to the introduction of the proposed rule.

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