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U.S. Banks Must Report Interest on Deposits by Nonresident Aliens – Update for Payments After January 1, 2015

 On December 16, 2014, the IRS released Revenue Procedure 2014-64 to update the list of countries and jurisdictions with which the United States has in effect an agreement that requires the reporting of deposit interest paid to U.S. nonresident alien individuals.

This guidance is effective for interest paid on or after January 1, 2015, and will be used by U.S. financial institutions making payments of deposit interest to nonresident alien individuals in excess of $10 maintained at one of their offices within the U.S.

There are two separate lists for this purpose: one for those countries that have an income tax treaty or bilateral agreement with the U.S.; the other for those countries that maintain an automatic exchange of information with the IRS.

The IRS added 7 additional jurisdictions to the list of those with which the U.S. has agreements to exchange of information for purposes of reporting bank interest paid to nonresident aliens. These jurisdictions are:

Brazil
Cayman Islands
Colombia
Croatia
Curacao
Hong Kong and
Mauritius

The guidance also updates the list of jurisdictions with which automatic exchange of information is appropriate. The previous list, issued in 2012, included only Canada. The new list contains 18 jurisdictions:

Australia Guernsey Mauritius
Canada Ireland Mexico
Denmark Isle of Man Netherlands
Finland Italy Norway
France Jersey Spain
Germany Malta     United Kingdom


Reporting under the Final Regulations has been required for all payments made on or after January 1, 2013 (see our article of April 30, 2012).  U.S. Financial Institutions report bank deposit interest paid to a nonresident alien individual on Forms 1042 and 1042-S, which are the forms used generally to report payments of  various U.S. source  income to nonresident aliens.

Note:Under the current statute, the IRS has the authority to release only interest income information. New legislation would be required in order for the IRS to release information on other U.S. income earned by nonresidents, such as dividends, proceeds of sales, and other payments.

 Background

Under Code Section 871(i)(2), nonresident alien individuals are exempt from U.S. taxation on the receipt of non-effectively connected interest income from amounts deposited within certain domestic financial institutions, including banks, savings institutions, and amounts held by insurance companies (“Bank Deposit Interest Income”). Additionally, under Treasury Regulations Section 1.6049-8(a), these domestic financial institutions are not required to report the amount of Bank Deposit Interest Income earned by nonresident alien individuals, with the exception of amounts paid to Canadian residents (and amounts paid to U.S. tax residents). This exemption from tax and reporting has been a part of the Internal Revenue Code for over 50 years. See former Code Section 861(a)(1)(A) (12/31/1954). At that time it was understood that Congress’ intent was to provide an incentive for nonresident alien individuals to bank in the United States. Other types of interest, such as portfolio bond interest and interest generated from a money market account, and dividends, paid to nonresident alien individuals have long been reported to the IRS.

On April 17, 2012, the Treasury issued final regulations that require U.S. financial institutions to annually report Bank Deposit Interest Income of all nonresident individuals to the IRS (“2012 Final Regulations”).

The preamble to the 2012 final regulations lists two reasons for the extended scope of reports. First, since the proposed regulations were released, there is a growing global consensus regarding the importance of cooperative information exchange for tax purposes that has developed. Second, requiring routine reporting to the IRS of all U.S. bank deposit interest paid to any nonresident alien individual will further strengthen the United States exchange of information program, consistent with adequate provisions for reciprocity, usability and confidentiality in respect of this information.

Note:IRS noted that the 2014 revenue procedure will be updated in the future as deemed appropriate and will continue to enforce the concept that the IRS is not required to exchange information with another country or jurisdiction if there are concerns about confidentiality, safeguarding of data exchanged, the use of the information or other factors that would make the exchange of information inappropriate.

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