RPC Reg Spotlight August 1, 2012

 

Regulatory Action in the Spotlight:

 

IRS regulation on reporting interest paid to nonresident aliens

 

Adverse Effects:

 

  • Increases regulatory burden on U.S. financial institutions
  • Dissuades foreign investment in U.S. banks

 

Response of the Obama Administration:

 

On April 19, 2012, the Internal Revenue Service (IRS) unveiled a final rule (RIN: 1545-BJ01) regarding “the reporting requirements for interest that relates to deposits maintained at U.S. offices of certain financial institutions and is paid to certain nonresident alien individuals.”  These regulations are set to affect commercial banks, savings institutions, credit unions, securities brokerages, and insurance companies that pay interest of $10 or more on deposits.  In an explanation for the need for the rule, the IRS argues the regulation is essential as:

 

It ensures that the IRS can, in appropriate circumstances, exchange information relating to tax enforcement with other jurisdictions. In order to ensure that U.S. taxpayers cannot evade U.S. tax by hiding income and assets offshore, the United States must be able to obtain information from other countries regarding income earned and assets held in those countries by U.S. taxpayers. Under present law, the measures available to assist the United States 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.

 

 

Impact on the United States:

 

Compliance with this regulation could very well result in a flight of capital investment in U.S. banks.  As the American Action Forum (AAF) points out, despite the Treasury assertion that a very small percentage of America’s deposits are held by nonresidents, according to a 2011 Bureau of Economic Analysis report that “small percentage” amounts to $3.7 trillion.  Furthermore, in the same article by AAF, Sam Batkins notes that, “The Florida Office of Financial Regulation surveyed 16 banks chartered in that state and found that an average of 41 percent of their deposits were from nonresident aliens, with one bank reporting the number at 92 percent. Our fractional-reserve banking system means that one dollar of deposits supports multiples of that in loans; a withdrawal of $200-300 billion in deposits would diminish lending in the ballpark of $1.5 to $2 trillion.”

 

As the American Bankers Association stated, “deposits are an important source of funding that supports economic growth. This is especially true in states that have large concentrations of these deposits, including Florida, California, New York, and Texas. The flight of substantial deposits will significantly reduce funds available for lending and investment purposes, which will hurt, not help, the economic recovery. The negative impacts from the new rule will reverberate across the U.S.”

 

 

In Closing:

 

By forcing U.S. banks to comply, it is easy to envision a ripple effect that would result in the withdrawal of foreign investment in U.S. banks and a commensurate tightening of credit for U.S. citizens.  All of this would result in weaker financial institutions at the very time the American economy is struggling to recover.  With so many economists worried about a double-dip recession, now is not the time for the Obama administration to add yet another barrier to growth. 

 

 

Relevant Legislation:

 

On October 27, 2011, the Subcommittee on Financial Institutions and Consumer Credit held a hearing entitled “Proposed Regulations to Require Reporting of Nonresident Alien Deposit Interest Income.”   In a statement delivered to the Subcommittee, Senator Marco Rubio said, “Foreign deposits play an immensely important role in Florida’s economy, and I am deeply concerned that the IRS’s proposal will cause these deposits to flee to other nations at a time when unemployment remains high and our financial sector continues to struggle. I urge the IRS to permanently withdraw this ill-advised mandate and to work toward maintaining a pro-growth, pro-investment economic climate.”

 

In attempting to stop this harmful regulation from taking effect, Rep. Bill Posey (FL-15) offered an amendment to H.R. 4078, the Regulatory Freeze for Jobs Act of 2012.  In a “Dear Colleague” letter urging support for the amendment, co-signed by Rep. Posey, Rep. Rubén Hinojosa (TX-15), and Rep. Mario Diaz-Balart (FL-21), it was noted that, “in March 2011, the entire Florida delegation – both Republicans and Democrats – sent a letter to the President asking him to withdraw the regulation.  Months later, a broader coalition of Members, including the Chairman of the House Financial Services Committee, sent a similar letter to Treasury and the Internal Revenue Service.”  The amendment passed on July 26, 2012 by a bipartisan vote of 251-165.