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IRS Hears Opposition To Reporting Rule

May 2011 - Tax & Private Client. Legal Developments by Hassans.

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The United States Internal Revenue Service (IRS) has held a hearing at which it heard testimony urging immediate withdrawal of a proposed rule on the reporting of interest paid to non-residents by US banks.

A notice on the proposed rule was published in January this year. Currently, under regulations established in 2002, banks and other financial institutions are required to report the interest paid on deposits maintained by their US offices with respect to Canadian account holders. The proposed rule would extend the reporting requirement to all non-resident aliens.

Members of the Coalition for Tax Competition (CTC), which is constituted by fifteen free market and taxpayer advocacy organizations, including the Center for Freedom and Prosperity (CF&P), testified against the proposed rule. At the hearing, opponents greatly outnumbered supporters of the reporting requirement.

Andrew Quinlan, CF&P?s President, testified that, ?on several occasions, the US Congress has examined the tax treatment of indirect foreign investment in the American economy. In every instance, the desire to attract capital has led lawmakers to decide not to tax bank deposit interest paid to non-resident aliens. Congress also has repeatedly decided not to require the reporting of this income.?

?The proposed IRS regulation, however, seeks to overturn the outcome of this democratic process," he continued. ?This undermines the rule-of-law and makes a mockery of the President?s effort to rein in regulatory abuses.?

The CF&P has previously pointed out that the IRS has admitted in the past that it wants to collect this data in order to provide the information to nations that have signed tax information exchange agreements with the US. It said, however, that tax treaties only require the exchanging of information that is collected for purposes of domestic law enforcement. There is no obligation to impose additional regulatory burdens solely for the purpose of enforcing other nation's laws.

It has now repeated that: ?Now, as part of a global effort to undermine tax competition, the IRS is unilaterally asserting the right to demand information that it does not need, solely for the purpose of sharing it with other governments. For the many foreign depositors who rely on American financial privacy to protect them from being targeted... this regulation poses a direct threat to their safety and human rights. Should it pass, they will take their capital elsewhere.?

John Berlau, from the Competitive Enterprise Institute, said: "These deposits enable banks and credit unions to make more loans to consumers, homeowners, and small businesses ? generating economic activity that produces billions in state and federal tax revenues. But this rule threatens to bring much of this economic activity to a screeching halt, and may even take some financial institutions ? particularly smaller ones ? under?.

In his testimony, Stephen Entin, from the Institution for Research on the Economics of Taxation, added that: ?The proposed regulation may be good for foreign governments, but would not be good for the US economy. There would be no gain for US tax enforcement.?

?Weaker investment in the US would reduce US jobs and tax revenue beyond any possible reduction of tax evasion affecting money owed to the US. My conclusion is that the proposed regulation... would provide no benefit to the US Treasury, either in terms of administrative advantages or additional revenue. As such, it should not be adopted.?

In addition, while it has been claimed that the proposed rule would reduce the likelihood of US citizens and/or resident aliens falsely claiming non-resident alien status to benefit from the preferential tax status, other regulations exist to counter such claims.

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