Proposed interest reporting requirements on US banks with foreign clients are being floated again by the US government a decade after similar efforts were abandoned, drawing a sharp attack from Florida’s banking industry.

Proposed interest reporting requirements on US banks with foreign clients are being floated again by the US government a decade after similar efforts were abandoned, drawing a sharp attack from Florida’s banking industry.

The US Treasury Department and Internal Revenue Department issued in January a proposed rule (REG-146097-09), that would extend the information reporting requirement to include bank deposit interest paid to non-resident alien individuals who are residents of any foreign country. Earlier proposals, abandoned in 2002, applied to NRAs of only about a dozen nations.

NRA depositors are currently exempt from US taxes on their interest income from US banks.

Many NRA depositors in the US are based in Latin America, forming a significant chunk of the business handled in banks in states such as Florida. If the proposals become law, they could seriously compromise the privacy of individuals who have used US bank accounts to conceal their money from often oppressive and dangerous regimes at home, argued Alex Sanchez, chief executive and president of the Florida Bankers Association.

The stakes for Florida’s banks, for example, are high because a substantial amount of the $70 billion to $100 billion of deposits in this state’s banks originate from south of the border, Sanchez told this publication in a telephone call.

“People want to put money safe and sound in the US,” he said. One issue, for example, is that of kidnapping: some high net worth individuals have had good reason to fear using domestic banks lest their personal wealth details be handed on to criminals, Sanchez said.

In commentary from Mayer Brown, a US law firm, the issues of kidnapping, privacy and a risk of capital flight from the US were cited as reasons why previous attempts to impose reporting requirements on non-resident aliens using US banks have failed. However, the US government feels it should revisit the idea because there is a “growing global consensus” from countries about the need to co-operate on tax information exchange, in ways that are consistent with protecting confidentiality. The authorities also claim that collecting this data will help stamp out tax evasion.  

Ironies

The issue is ironic since the US, which has attracted inflows from Latin America due to the privacy of some of its banks, has recently targeted Switzerland for its centuries-old bank secrecy laws. In 2009, UBS, the largest Swiss bank, settled criminal and civil charges connected to encouraging wealthy US citizens to evade tax. The US has also brought out new legislation increasing the tax compliance requirements on US expats.

The FBA’s Sanchez fears that unless such legislation is reconsidered, the US could drive out tens of billions of non-resident aliens’ dollars from the US to friendlier locations around the world.

In a letter dated March 25, Sanchez urged the Treasury and IRS to reconsider the proposals: “Thee FBA is concerned that the proposed regulations will have a dramatic adverse impact on its members as well as banks throughout the United States. Given this adverse impact and that the proposed regulations would not significantly further the United States' financial interests, the FBA submits that the proposed regulations should be withdrawn."

“We believe this proposal is in conflict with a longstanding objective of the Department and the Congress: to encourage non-resident aliens to deposit their money in US banks so that those funds can, in turn, be used to foster growth and development in our country,” it continued.

“We are convinced that adoption of the proposal will place US banks at a competitive disadvantage relative to the banks of our trading partners and will result in significant withdrawals of foreign deposits from US banks,” Sanchez said.

He argued that NRA deposits have grown to account for more than half of the deposits at some of Florida banks.

“Moreover, NRA deposits are particularly valuable because they tend to be highly stable -- often certificates of deposit that roll over upon maturity. If the proposed regulations stimulate a sudden withdrawal of NRA deposits from US financial institutions, some FBA members may experience a liquidity crisis threatening their short-term stability. Even if the withdrawals are more gradual, many banks will experience a material decrease in their lending capacity, which will reduce their income and growth,” the letter said.

“Indeed, the US Treasury has declined to negotiate tax treaties with many countries because they lack sufficient safeguards for confidential information. Because these same countries often have significant criminal activity and political instability, the lack of confidentiality with respect to financial and tax information can lead to personally devastating results, such as kidnapping and/or assassination of high net-worth individuals,” it added.