The U.S. will require banks to report interest payments to nonresident aliens starting in 2013 in a setback for banks and Republican lawmakers who say the plan will drive away investments.
The regulations, adopted yesterday, are part of the government’s efforts to work with other countries on tax evasion. The Treasury Department and the Internal Revenue Service say the U.S. should ask its banks to report information just as it is requiring overseas banks to provide information on U.S. account holders.
“As if our tax code weren’t already broken enough, the Obama administration has added another regulation that will have disastrous consequences for Florida,” Senator Marco Rubio, a Florida Republican, said in a statement. “By requiring banks to report interest earned by foreign investors, the administration has unilaterally handed down a job-destroying mandate that would encourage billions of dollars to flee Florida’s economy.”
Florida and Texas lawmakers, along with banks, have criticized the rules, maintaining they will discourage investment in the U.S. and could provide financial information about dissidents to repressive regimes.
Rubio and Representative Bill Posey, also a Florida Republican, have introduced bills that would block the regulations.
“Deeply troubling is the administration’s refusal to conduct a simple economic impact study to analyze the loss these deposits will have on the U.S. economy and specific financial institutions that are heavily dependent on foreign deposits,” Posey said in a statement yesterday.
Emily McMahon, the Treasury Department’s acting assistant secretary for tax policy, said in a letter to the Miami Herald in March, provided today by her office, that nonresidents have multiple reasons for keeping money in the U.S.
Those, she wrote, include “the strength and stability of our financial institutions and the quality of our regulatory supervision.”
The Florida Office of Financial Regulation estimated that banks in the state have between $15 billion and $20 billion in deposits held by nonresident aliens.
Groups that opposed the regulation included the American Bankers Association and the Credit Union National Association. Banks opposed to the rules include East West Bancorp Inc. and BBVA Compass Bancshares Inc.
Similar Rule in 2001
In its waning days in office in 2001, the Clinton administration Treasury Department proposed a similar regulation that the Bush administration then narrowed. The Obama administration revived the broader proposal last year.
Under a law passed by Congress in 2010, the U.S. requires foreign banks to track and report payments to U.S. account holders, who are liable for U.S. taxes on their worldwide income. This regulation serves as a companion to that requirement.
“A jurisdiction’s willingness to share information with the IRS to combat offshore tax evasion by U.S. taxpayers depends, in large part, on the ability of the IRS to exchange information that will assist that jurisdiction in combating offshore tax evasion by its own residents,” the regulations say.
The regulations say the U.S. will share information only with countries with which it has an agreement to do so. According to an IRS list, those countries and jurisdictions include China, France, Germany, Israel, Japan, Mexico, Switzerland, the U.K. and Venezuela.
Agreement With Canada
The U.S. has an automatic exchange agreement with just one country, Canada.
In the regulations released yesterday, the IRS wrote that it will exchange information only with countries that protect confidentiality and use the data solely for tax purposes.
“These regulations should not significantly impact the investment and savings decisions of the vast majority of nonresidents who are aware of and understand these safeguards and existing law and practice,” the IRS and Treasury wrote.
In a statement, the Treasury Department said it doesn’t exchange information with Venezuela and has no plans to do so.
The Posey bill is H.R. 2568. The Rubio bill is S. 1506.