Yesterday, the Treasury Department released Final Regulations (TD 9584) regarding the reporting of interest relating to deposits maintained at U.S. offices of certain financial institutions and paid to nonresident alien individuals.
The Final Regulations will affect commercial banks, savings institutions, credit unions, securities brokerages, and insurance companies that pay interest on deposits. The effective date of the Final Regulations is April 19, 2012 and they will apply to payments of interest made on or after January 1, 2013.
With some minor revisions noted below, the Final Regulations are substantially the same as those first proposed on January 7, 2011. Treasury provides three (3) reasons for adopting the regulations in final form:
- In order to ensure that U.S. taxpayers cannot evade U.S. tax by hiding income and assets offshore, the U.S. must be able to obtain information from other countries regarding income earned in those countries by U.S. taxpayers. The measures available to assist the U.S. in obtaining this information include both treaty relationships and statutory provisions. The effectiveness of these measures depends significantly, however, on the United States’ ability to reciprocate.
- The recent enactment of the Foreign Account Tax Compliance Act (FATCA), which will require overseas financial institutions to identify U.S. accounts and report information (including interest payments) about those accounts to the IRS, requires the cooperation of foreign governments in order to overcome legal impediments to reporting by their resident financial institutions. The new interest reporting regulations will facilitate intergovernmental cooperation on FATCA by enabling the IRS to reciprocate by exchanging information with foreign governments.
- Reporting required by the regulations will directly enhance U.S. tax compliance by making it more difficult for U.S. taxpayers with U.S. deposits to falsely claim to be nonresidents.
The Final Regulations revise the 2011 proposed regulations to require reporting only in the case of interest paid to a nonresident alien individual resident in a country with which the United States has in effect an information exchange agreement. This list of countries which have these agreements will be published annually by the Internal Revenue Service in a revenue procedure. Along with the issuance of the Final Regulations, the IRS issued Rev. Proc. 2012-24, containing the current list of countries which the United States maintains information exchange agreements that are consistent with the reporting requirements under the Final Regulations.
In addition, the Final Regulations note that the only country which the United States currently engages in the automatic exchange of interest reporting information is Canada. The Final Regulations provide that the IRS will not enter into a new automatic exchange relationships unless it has reviewed the country’s policies and practices and has determined that such an exchange relationship is appropriate and only when the other jurisdiction is willing and able to reciprocate effectively. The annual revenue procedure will also contain the list of countries where automatic exchanges will take place.
Banks and other payors are only required to report interest on deposits maintained at an office within the United States and paid to a nonresident alien individual who is a resident of a country identified in the Revenue Procedure as of December 31 of the prior calendar year. The Final Regulations, however, address the potential burden associated with determining which depositors reside in a particular country by allowing the payor to elect to report interest payments to all nonresident alien individuals.
The Final Regulations eliminate the requirement in the 2011 proposed regulations that financial institutions include in the information statement provided to nonresident alien individuals a statement informing the individual that the information may be furnished to the government of the country where the recipient resides. In addition, these Final Regulations clarify that a payor may rely on the permanent residence address provided on a valid Form W-8BEN, “Beneficial Owners Certificate of Foreign Status for U.S. Tax Withholding”, for purposes of determining the country of residence of a nonresident alien (unless the payor or middleman knows or has reason to know that such documentation of the country of residence is unreliable or incorrect).
In providing its summary and comments to the proposed rules, Treasury does an effective job at dismissing as largely irrelevant all of the comments made by various commentators and financial industry groups. Instead, Treasury observes that nearly all U.S. banks and other financial institutions have automated systems in place and the information requirements in the Final Regulations merely build on reporting and information collection systems familiar to and currently used. As a result, Treasury observes:
The amount of time required to complete the Form 1042 and Form 1042-S is minimal, and the statement that is required to be collected is brief. Accordingly, it should not be a significant burden to adapt those systems to report with respect to depositors who are resident in other countries with which the United States has an information exchange agreement. Therefore, a regulatory flexibility analysis is not required.
Copies of the Final Regulations, which will be published in the Federal Register, along with a copy of Rev. Proc. 2012-24 can be obtained by clicking on the following links:
This publication is for general information only. It is not legal advice, and legal counsel should be contacted before any action is taken that might be influenced by this publication.
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