State Banking System Advocate Comments on Proposed Regs on Reporting Nonresident Alien Interest

The Conference of State Bank Supervisors (CSBS) appreciates the opportunity to comment on the Notice of Proposed Rulemaking regarding the Guidance on Reporting Interest Paid to Nonresident Aliens, RIN 1545-BJ01. CSBS represents the state banking regulators from all fifty states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, Guam, and the Northern Mariana Islands. These bank regulators currently supervise over 5,500 institutions of all sizes, including most of the small community banks in the United States. As the leading advocate for the state banking system, CSBS actively monitors federal policies that may affect the safety and soundness of these institutions.

Overview

The Notice of Proposed Rulemaking's (NPR) request for information regarding the economic impact of this rule on small depositories and financial services providers highlights the key challenge with the proposed rule's broad mandate. Though we understand the importance of developing and maintaining cooperative information exchanges with other countries, CSBS is concerned that the proposed rule's unintended consequences could adversely affect local banking sectors and local economies across the country.

Before moving forward with this proposal, more work needs to be done to better understand the consequences of such a broad reporting requirement, especially one that lacks specificity regarding the possible uses of the information obtained. We request that the IRS, in consultation with relevant state and federal banking regulators, perform an analysis of the expected reduction in deposits held in U.S. banks as a result of implementing this rule, including worst-case, expected-case and best-case scenarios.

Discussion

Many non-resident aliens (NRA) deposit funds in American banks to protect their assets from political instability and the volatility associated with other currencies. U.S. law provides depositors with assurances that such assets will not be nationalized or used against them in a punitive manner -- a significant concern for foreign nationals from countries where political and legal conditions lead to concerns over personal safety. Additionally, the U.S. dollar provides a historically unparalleled store of value. While many countries can provide financial safety, the U.S. banking system offers non-resident aliens the stability of denominating their assets in U.S. dollars.

Under the proposed rule, non-resident alien depositors would be informed that their interest income "may be" reported to their resident country. Requiring banks to report non-resident alien interest income to the IRS without definitively explaining how the information will be used could cause foreign nationals to doubt the benefits of holding deposits in American banks. Without clear understanding, this uncertainty may lead to deposit withdrawals, removing a source of stable deposits, and, potentially causing liquidity concerns for institutions with significant NRA deposits.

The NPR states that the rule will not have a significant impact on a substantial number of small entities because "[t]he depository accounts . . . tend to be with larger financial institutions operating in the United States, and therefore the number of small entities that will be required to undertake this collection of information is expected to be limited." Though the regulatory burden associated with reporting on Form 1042 and 1042-S may be small, the potential financial impact resulting from reallocated deposits could disproportionally affect community banks in areas with large non-resident alien populations. As the repercussions of the recent financial crisis continue to be felt, community banks are operating in a challenging business environment. Non-resident alien deposits serve as a stable source of funds for community-based institutions throughout the country, giving banks and their customers the liquidity needed to support local economies.

Conclusion

As regulators, our members appreciate and understand the importance of government-to-government information sharing to accomplish policy goals. And, we recognize that recent international tax issues clearly indicate the need for strong information agreements that encourage reciprocity and usability. However, this functionality should be built with a clear understanding of the financial and economic consequences and in such a manner that provides affected individuals with certainty about the full ramifications. Without addressing these prerequisites, there is a greater chance that the reporting of interest paid to non-resident aliens could deprive community banks of a source for stable deposit funds, especially for community banks in areas with large NRA populations.

We appreciate the opportunity to comment, and would be glad to coordinate any efforts to obtain information about state-chartered institutions to inform an analysis of the proper approach to implementing your tax policy goals.