United States: US Treasury Department Issues Final "Bank Deposit" Interest Reporting Regulations

New Rules Will Require Financial Institutions to Report to the Internal Revenue Service (IRS) Interest in Excess of $10 Paid on US Bank and Similar Accounts to Any Individual Who Resides in a Country With Which the United States Exchanges Tax Information

On April 17, 2012, the US Treasury Department released final regulations and a revenue procedure setting forth the requirements for US offices of certain financial institutions to report on the interest earned by nonresident individuals. Although the regulations, and the multiple sets of proposed regulations that preceded them, are often referred to as the "bank deposit" interest regulations, the preamble to the regulations notes that they will affect commercial banks, savings institutions, credit unions, securities brokerages, and insurance companies that pay interest on deposits. The new reporting rules apply to interest paid on or after January 1, 2013.

If reportable interest aggregating $10 or more is paid to a nonresident individual, the final regulations generally require the payor to make an information return on Form 1042-S for the calendar year in which the interest is paid. Reportable interest is generally interest paid on a deposit maintained at an office within the United States, and that is paid to an individual who is a resident of a country identified by IRS guidance (published by December 31 of the calendar year preceding the year in which the interest is paid) as a country with which the United States has in effect a reciprocal tax information exchange program. "Deposits," for these purposes, is defined under Internal Revenue Code section 871(i)(2)(A), to include deposits with persons carrying on a banking business, deposits with certain savings institutions, and certain amounts held by insurance companies under agreements to pay interest. Prior to the issuance of the final regulations, only payments to residents of Canada were subject to reporting on such interest.

Previous proposed regulations in this area have been controversial, with opponents expressing concerns about confidentiality and possible misuse of the reported information and the burden on financial institutions, among other things. In response to concerns about the possibility of the reported information falling into the wrong hands, the preamble notes that information reported pursuant to the regulations will be exchanged only with foreign governments with which the United States has an agreement providing for such exchange and only if certain safeguards and requirements are met by the foreign country. In response to concerns about the burden of reporting, the final regulations provide that financial institutions may elect simply to report to the IRS on all nonresident individual account holders rather than seek to distinguish residents of listed countries from others.

In conjunction with the issuance of the final regulations, the IRS issued a revenue procedure that lists all of the countries with which the United States has a reciprocal information exchange program and the residents of which are therefore subject to reporting under the final regulations. The current list (effective for interest paid in 2013) consists of the following countries:

Note that the list does not include every jurisdiction with which the United States has a tax information exchange agreement, such as the Cayman Islands. The revenue procedure also identifies the countries with which automatic exchange of interest reporting is appropriate. Canada is the only country currently listed, but the list will expand if the Treasury Department is able to reach agreement with other countries regarding reporting under FATCA.

Unlike the proposed regulations, the final regulations do not require financial institutions to include in the information statement provided to the nonresident individual a statement informing the individual that the information may be furnished to the government of the country in which the recipient resides. In addition, the final regulations clarify that a payor or middleman may rely on the permanent residence address provided on a valid Form W-8BEN for purposes of determining the country of residence of a nonresident individual unless the payor or middleman knows or has reason to know that such documentation of the country of residence is unreliable or incorrect.

Conclusion

Although these are final regulations, they may not be the last word. Because the new reporting rules apply to interest paid after January 1, 2013, actual reporting will not occur until 2014. Since the proposed regulations were controversial and engendered opposition from some Members of Congress on a variety of grounds, there may be legislative attempts to delay or overturn the final regulations before then. Still, the Treasury Department, by describing the final regulations in their preamble as "essential to the US Government's efforts to combat offshore tax evasion," has laid down a marker that any efforts to prevent or delay the reporting regulations will be characterized as an attempt to weaken that fight.

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