U.S. Banks Must Report Interest on Deposits by Nonresident Aliens

The Internal Revenue Service (IRS) has released final regulations requiring reporting of interest paid on deposits maintained at U.S. offices of certain financial institutions by nonresident alien individuals beginning on January 1, 2013. The regulations require reporting only for interest paid to a resident of a country with which the U.S. has an exchange of information agreement in effect. In addition, the rules seek to reassure stakeholders that strict confidentiality will be maintained not only by the U.S. but also by the foreign jurisdiction receiving the information.

Background of the rules

The focus by the IRS on reporting of interest on deposits of nonresident aliens is not new, as the proposed regulations date back to 2001 and subsequently 2002. The 2002 proposed regulations would have required reporting of interest paid to such individuals who were residents of certain designated countries including Canada and fifteen others. In January 2011, new proposed regulations were released and the final regulations adopt the 2011 proposals with certain revisions. One such revision is the requirement to report only where the interest is paid to residents of a country with which the U.S. has an information exchange agreement in effect.

Observation: The IRS has now issued Revenue Procedure 2012-24 listing the current countries whose residents are covered by the new regulations. 

Basic approach of the rules

The new regulations clarify that, for purposes of determining country of residence, the reporting institution can rely on the permanent address provided on a valid IRS Form W-8BEN (Certificate of Foreign Status of Beneficial Owner for U.S. Tax Withholding) unless the institution knows or has reason to know that the W-8BEN is incorrect or unreliable for purposes of establishing the country of residence.

Objective of the rules

The U.S. does not impose its income, gift or estate taxes on most non-business bank deposit interest or accounts of foreign persons, so this measure is likely not aimed primarily at enforcing U.S. federal taxes. 

However, the IRS is in process of finalizing regulations under the U.S. Foreign Account Tax Compliance Act (FATCA) which, inter alia, will require foreign financial institutions and others to provide U.S. taxpayer information.

The success of this approach may hinge in part on the ability of the U.S. to exchange financial account information with other countries’ governments, so providing a U.S. mechanism for obtaining such information for other countries may assist enforcement efforts under FATCA and similar legislation.

Observation: We generally anticipate enhanced bilateral and/or multilateral information exchanges among nations to improve local tax enforcement, in light of continuing increases in international investment. 

EisnerAmper 

This publication is intended to provide general information to our friends.  It does not constitute accounting, tax, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.