Many nonresident customers of US banks are wondering whether now
is the time to withdraw their deposits. Some have already begun to
move their money in response to a proposed IRS rule that would
require that account information be disclosed to the US government
and potentially shared with other taxing jurisdictions outside the
US. The rule could be finalized as early as the end of March
The proposed rule was first published in February of 2011, and has
caused nonresident customers to reconsider their US banking
relationships. Interest income on nonresident depository accounts
used for personal purposes is not taxed in the US. That policy
decision to forgo taxation on foreigners has resulted in many US
banks being the preferred banking institutions for many
nonresidents. But that status has been compromised by the proposed
rule. Nonresidents are already moving their money in anticipation
that their private banking relationships will be compromised.
On February 20, 2012, the Mexican taxing authority, SAT, announced
that it entered into a formal information sharing agreement with
the IRS. In essence, the agreement provides to the SAT direct
access to information about US depository accounts owned by Mexican
taxpayers. If the proposed rule comes into effect, then the
information from US banks will be shared directly with the Mexican
Senator John Cornyn of Texas has been actively opposed to the
proposed rule, joining Senator Kay Bailey Hutchison in writing a
letter protesting it. He also co-sponsored legislation aimed to
block the rule change.
It's not just Texas banks that are concerned. At a public
hearing in May of last year, representatives from the American
Bankers Association and the Florida Bankers Association made it
clear that implementation of the rule could cripple the US banking
That's because foreign investors have placed $3.6 trillion in
passive investments in US banks and brokerages, according to US
Department of Commerce statistics. If the rule goes into effect
those investments could leave the country.
The mechanics of the rule are relatively straightforward. If a
nonresident owns a US bank account that earns over $10 in interest
in a year, then his/her US bank would be required to report the
account information and personal contact information to the IRS. In
addition, the bank would be required to furnish the information
reported to the US government either in person or by mail to the
last known address of the nonresident customer.
For customers in Mexico, where the mail is insecure, this last
requirement is viewed as an invitation for blackmail, kidnapping,
or violence. Many banking customers from Mexico elect to use
electronic statements and other forms of secured communications
when handling their US investments.
According to the IRS, the rationale behind gathering nonresident
bank account information, even if it's not taxed, is that it
will be used in trade. The IRS plans to trade nonresidents' US
account information with foreign taxing jurisdictions in exchange
for the names of US tax evaders. This is part of it's
initiative to create an "information exchange
While it is questionable whether this policy would be effective
(both because foreign taxing jurisdictions do not have the ability
to gather information as effectively as the IRS, and because
nonresidents may just move their money outside the US, denying the
IRS the pool of information), we have seen nonresident clients take
the pre-emptive step of moving their Texas banking relationships to
other countries. If the rule becomes effective, then this trend
will probably accelerate.
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