On April 17, the Internal Revenue Service (IRS) issued final
regulations (T.D. 9584) regarding the reporting to the IRS of U.S.
bank deposit interest earned by nonresident aliens. These
regulations, which go into effect January 1, 2013, are consistent
with the recent trend by the IRS to gather more tax-related
information that it can exchange with other jurisdictions.
Nonresident alien individuals are generally not subject to U.S.
taxation on interest income from deposits maintained at U.S.
offices of certain financial institutions (U.S. bank deposit
interest) unless the interest is "effectively connected"
with the conduct of a U.S. trade or business. These financial
institutions include banks and certain savings institutions and
insurance companies.
The new regulations do not change the way the interest income of
nonresident alien individuals is taxed—they affect only
the reporting to the IRS of U.S. bank deposit interest earned by
these individuals. Whereas such interest was previously not
reported to the IRS, the new regulations now require U.S. financial
institutions to report annually to the IRS any U.S. bank deposit
interest earned by nonresident aliens beginning January 1,
2013.
The regulations apply only to nonresident alien individuals who are
residents of the 80 countries that have tax information sharing
agreements with the United States, as listed in Rev. Proc. 2012-24,
also issued on April 17.
The revenue procedure divides the listing into two categories. In
the first category are countries to which the United States is not
obligated to, but may, provide the information obtained as a result
of the new regulations. In evaluating whether to provide these
countries with such information, the IRS will evaluate the
requesting country's current practices with respect to
information confidentiality and then require the requesting country
both to explain how it intends to use that information and to
justify how that information is pertinent to the intended permitted
use.
In the second category is one
country—Canada—with which the United States has
already entered into an agreement to exchange deposit interest
information automatically. Though only Canada currently has an
automatic information exchange agreement in place, the U.S.
Treasury Department announced in February that it is currently
negotiating similar agreements with France, Germany, Italy, Spain
and the United Kingdom.
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