M E M O R A N D U M
May 7, 2012
The U.S. is hoping to turn FATCA into a multilateral tax reporting regime, and has already announced that five partner agreements are being negotiated; an additional country, Ireland, has also stated that it is negotiating with the U.S., and upwards of 40 other countries are rumored to be in talks. To give potential partners even more incentive to reach agreement, on April 17, 2012, the U.S. Treasury and the IRS published final regulations implementing reporting rules for USBDI paid to individuals who are nonresident aliens (“NRAs”). For almost all countries, the information collected under the new regulations will be the first opportunity to learn whether their own citizens are earning USBDI (and possibly evading home-country taxes).
Under the international standard for transparency and exchange of information, which is reflected in the Organisation for Economic Cooperation and Development (OECD) Model Agreement on Exchange of Information on Tax Matters, the OECD Model Tax Convention, and the United Nations Model Double Tax Convention between Developed and Developing Countries, exchange of tax information cannot be limited by domestic bank secrecy laws or the absence of a specific domestic tax interest in the information to be exchanged. Accordingly, under this global standard a country cannot refuse to share tax information based on domestic laws that do not require banks to share the information. In addition, under the global standard, a country cannot opt out of information exchange based on the fact that the country does not itself need the information to enforce its own tax rules. Thus, even countries that do not impose income taxes, and therefore do not have tax enforcement concerns, have entered into information exchange agreements to provide information about the accounts of nonresidents.
Thus, even though the U.S. does not impose withholding tax on bank deposit interest earned by NRAs, Treasury believes tax reporting is still necessary.
Effective with payments made during 2013, the regulations require a payor of more than $10 of interest in a calendar year to an NRA to file a Form 1042-S, provided the account holder resides in a country with a tax information exchange agreement (“TIEA”) with the U.S. Simultaneously with the USBDI regulations, Treasury and the IRS released Revenue Procedure 2012-24, which provides a list of more than 70 countries with whom the U.S. has TIEAs.
Banks can, if they so choose, report on interest paid to all NRAs, rather than trying to distinguish between residents of countries with and without TIEAs. It may well be easier to provide Forms 1042-S to all NRAs, given that the list of TIEAs is likely to grow because of FATCA and banks would need to monitor developments and update their systems every time a new country is added to the list.
The USBDI regulations were finalized despite widespread opposition from U.S. banks and certain members of Congress. Commenters suggested that the information provided by the IRS could be abused by foreign governments or fall into the wrong hands. The IRS noted that it is permitted to share the information only through a TIEA, and that it vets TIEA countries to make sure that they handle information in an appropriate way. The IRS also can refuse to provide information that it believes would be abused, the preamble says. The preamble notes that only Canada receives information from the U.S. automatically (i.e., en masse, without a specific request) and that any new automatic information exchange agreement would require the other party to have appropriate policies and procedures in place.
U.S. banks should immediately review the capabilities of their Form 1042-S reporting systems to make sure that they can report bank deposit interest paid in 2013. The IRS did not accept banks’ arguments that reporting would be unduly burdensome in part because the IRS believed that the banks already had automated systems to do the reporting (it is already required for Canadians) and that the time to complete Form 1042-S is “minimal.” The IRS may not have understood that institutions that pay only bank deposit interest and do not have Canadian customers would have had no reason to have any Form 1042-S system in place. Even among those that do have such a system, the required changes and associated testing and client education will not be trivial.
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