On April 19, 2012, the U.S. Department of the Treasury issued final regulations that require reporting of interest on deposits maintained at the U.S. offices of certain financial institutions and paid to nonresident alien individuals who are residents in certain countries. These regulations are the latest development in the broader U.S. government effort to crack down on tax evasion by U.S. persons and on the foreign institutions that assist them.

The Treasury’s other recent efforts to combat offshore non-compliance have included the following:

  • the Foreign Account Tax Compliance Act (“FATCA”) and proposed FATCA regulations
  • three separate voluntary disclosure programs for undeclared offshore assets
  • new expanded reporting for foreign assets on Forms 8938 and 8621
  • revised regulations on reporting foreign bank accounts increased penalties for non-compliance
  • increased prosecution of foreign banks and professionals  

Expanding Treasury’s Reporting Regime

The Treasury regulations, which are effective for payments made on or after January 1, 2013, build on the current reporting regime, which applies only to Canadian residents. The Treasury regulations expand this regime to cover residents of all countries with which the U.S. has an income tax or other convention or bilateral agreement relating to the exchange of tax information (“Tax Information Exchange Agreement” or “TIEA”) in force. No reporting will be required for residents of countries with which the U.S. does not have a TIEA, although the payor financial institution may elect to report with respect to all nonresident alien individuals.

According to the Treasury, the objective of these regulations is to fight offshore evasion by U.S. taxpayers. The Treasury currently relies on a network of TIEAs and will soon rely on new FATCA intergovernmental agreements to obtain information regarding U.S. persons with foreign accounts. By collecting information about interest income of foreign nationals in the United States, the Treasury will be in the position to provide that information to foreign countries. In the preamble to the regulations, the Treasury states that the effectiveness of measures to fight offshore evasion depends on the United States’ ability to provide reciprocal information to foreign governments. Thus, the main purpose of obtaining this information about foreign nationals is for the Treasury to use it as a bargaining chip to entice foreign governments to share more information about U.S. taxpayers with offshore accounts. The regulations are also intended to make it more difficult for U.S. taxpayers with U.S. deposits to falsely claim to be nonresidents.

Key Observations

It is important to stress several observations regarding the new regulations:

  1. The regulations do not require reporting of account balances. Instead, they require reporting only of interest that is paid to certain nonresident alien individuals. Furthermore, the regulations do not require reporting with respect to non-interest-bearing accounts.
  2. The regulations require reporting only with respect to residents of certain countries with which the United States has entered into a TIEA. The payor, however, may elect to report interest payments to all nonresident alien individuals, and some financial institutions may choose to do that in an effort to simplify their compliance obligations.
  3. The regulations require reporting only for accounts held by individuals. Accounts held by foreign entities are not subject to any new reporting requirements.
  4. With the exception of Canada, the regulations do not currently require automatic reporting to foreign governments. Instead, the information is reported to the IRS, which stores the information and sends the information to the foreign governments only upon receiving a properly submitted request under the applicable TIEA. Under most current TIEAs, the foreign government cannot go on a “fishing expedition” and obtain all records relating to its citizens; instead, the foreign government is required to submit a detailed request which, among other things, specifies the identity of the taxpayer.  

Treasury Addresses Concerns

The Treasury attempted to address concerns that the reported information may be misused by a foreign government that does not protect the confidentiality of the information exchanged.

First, it stated that the information collected under the regulations will be provided only to the countries with which the United States has a TIEA. All of the TIEAs to which the United States is a party require that the information exchanged under the agreement be treated and protected as secret by the foreign government, and the TIEAs generally prohibit foreign governments from using any information obtained under the TIEA for any purpose other than the purpose of administering, collecting, and enforcing the taxes covered by the TIEA.

Second, before concluding a TIEA with a foreign country, the Treasury and the IRS will review the foreign jurisdiction’s legal framework for maintaining confidentiality of taxpayer information to make sure that the foreign country has the necessary legal safeguards in place to protect the confidentiality of the exchanged information.

Third, the Treasury stated that it reserves the right not to exchange the information with a foreign country if it determines that the country is not complying with its obligations under the agreement to protect the confidentiality of information and to use the information solely for collecting and enforcing taxes covered by the TIEA. It also will not exchange any information collected under the regulations with countries that do not impose tax on interest income.

In a corresponding Revenue Procedure 2012-24, the IRS announced that as of January 1, 2013, reporting on U.S. deposit interest will be required for residents of the following countries:

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U.S. financial institutions and foreign financial institutions with U.S. offices who maintain interest-bearing accounts for foreign individuals should all seek prompt and competent advice regarding the potential effect of the new regulations on them. Holland & Knight’s Taxation Practice has extensive knowledge and experience regarding the international impact and other aspects of U.S. tax law, including:

  • regulations with respect to reporting and withholding on payments to foreign persons
  • FATCA implications for financial institutions, withholding agents, U.S. account holders, insurance companies, investments funds and trustees
  • U.S. offshore voluntary disclosure, compliance and enforcement initiatives
  • U.S. tax planning for both U.S. and foreign companies and individuals