International Bankers' Group Seeks Withdrawal of Proposed Regs on Reporting Nonresident Alien Interest

The Institute of International Bankers appreciates this opportunity to comment on the proposed regulations that would impose reporting requirements for interest paid on deposits maintained by any nonresident alien (NRA) individuals at the U.S. offices of certain financial institutions. The Institute represents the interests of internationally headquartered financial institutions that conduct banking, securities and insurance operations in the United States. The proposed regulations would directly affect our members' U.S. banking operations that are conducted through U.S. branches and U.S. depository institution subsidiaries.

U.S. banks and U.S. branches of international banks are already required to report deposit interest earned by U.S. persons. As interest earned by NRAs on U.S. bank deposits is exempt from U.S. withholding tax, the proposed NRA reporting requirements are not necessary to ensure compliance with U.S. law. Rather, they are intended to strengthen the United States' exchange of information program and be responsive to tax treaty partners requesting information regarding NRAs' interest income from U.S. bank deposits.

Many NRA individuals maintain deposits in the United States with the expectation that their banking relationships will be kept confidential. Unilaterally imposing information reporting requirements with respect to interest paid on deposits, as is contemplated by the proposal, would significantly change the U.S. banking environment for these individuals in ways that we believe would strongly encourage many of them to withdraw their funds, transferring them to the many jurisdictions that do not impose these requirements. Estimates of the amount NRAs have on deposit in the United States vary, but it is evident that for a significant number of institutions, particularly those located in Florida, Texas, California and New York, these deposits provide a key source of their funding.¹ The outflow of these funds that we anticipate would result from the proposed regulation would be most harmful to those domestic and foreign depository institutions, as well as their local communities, that rely heavily on NRA deposits to fund their small business lending and investment activities and, we believe, more generally, to the U.S. economy.

Such a result would be contrary to the policy underlying the deposit interest exemption from U.S. withholding tax -- namely, encouraging foreign investors to deposit funds in U.S. banking operations and thereby provide additional liquidity to the U.S. banking system. Understanding that a withholding tax on deposit interest earned by NRAs would result in those deposits being withdrawn from U.S. banks and U.S. branches of international banks, Congress made permanent the withholding tax exemption for deposit interest in 1976. During this session, Congress was greatly influenced by data regarding the potentially devastating effect that the withdrawal of NRA deposits would have had on such money centers as Miami, where it was estimated that as much as one-third of deposits belonged to NRAs.² Recent surveys indicate that that the percentage of NRA deposits held by both domestic and international banks operating in Florida has grown substantially since.³

We also believe the policy will have a deleterious impact on those international banking institutions that wish to expand their existing private banking services for NRAs or establish such operations de novo. Deposit products form the core of these private banking services. If the Service's proposal is adopted, as proposed, the ensuing potential adverse consequences would create strong incentives for these institutions to forego their business expansion plans and the accompanying addition of U.S. jobs to support these efforts.

Finally, the Institute would also like to address the very important issue of customer safety and security. Many NRAs who deposit their funds in U.S. banks and U.S. branches of international banks rely on the safety and security of the U.S., its economy and its stable government that enforces meaningful restrictions on the release of personal information by governmental employees. These NRA depositors are sometimes from countries with unstable governments or changing political regimes where laws regarding the security of personal information are lax or not enforced. While we recognize the proposed regulations would only require reporting of interest paid on NRA deposits, it would be disingenuous to infer that a nefarious government official intent on obtaining information regarding an NRA's account balance would therefore be unable to access that information. NRAs deposit their funds in the U.S. specifically to protect their personal information from the risk of breach in their home countries where the unauthorized disclosure of this financial information is often used to target kidnappings for ransom or assassinations. This is a grim reality in many countries that should not be minimized.

The stated purpose for this proposed reporting requirement is to allow the U.S. Treasury to provide this information to its treaty partners upon request. In light of the serious adverse consequences that could result from this proposal, we urge the withdrawal of the proposed regulation and consideration of other alternatives to providing this information to those treaty partners who may request it. Should the Internal Revenue Service (IRA) determine to move forward with this proposal, notwithstanding the concerns raised in this letter and by others, we would urge the IRS both to announce publicly that it has put in place a process that ensures that NRA information will NOT be exchanged with those countries that do not meet strict standards of confidentiality and, in fact, to do so.

²See 122 Congressional Record S12503 (July 26, 1976).

³See supra note 1.