Information regarding nonresident alien deposits in the United States could be provided to foreign governments as of January 2013, raising concern among non-U.S. residents holding deposits in the United States.

As part of the U.S. Department of the Treasury's (Treasury's) efforts to prevent tax evasion, on April 19 the Internal Revenue Service (IRS) issued final regulations (the New Rules) requiring the U.S. offices of financial institutions (such as commercial banks, savings institutions, credit unions, securities brokerages, and insurance companies) to report to the IRS deposit interest payments made to nonresident alien individuals.^[1] The New Rules are effective as of April 19, 2012, but only apply to interest payments made on or after January 1, 2013.^[2] The measure was taken by the IRS, in part, to enable the United States, through reciprocity, to obtain information on interest paid to U.S. taxpayers abroad, which, according to the IRS, often goes unreported.^[3]

The information collected by the IRS under the New Rules may be shared with countries that have an existing tax convention, agreement, or bilateral treaty with the United States regarding the exchange of tax information (collectively, information exchange agreements). In connection with the New Rules, the IRS has issued a list of the countries with which the United States has information exchange agreements:^[4]

In most cases, the IRS has some discretion in determining whether sharing information conforms to the applicable information exchange agreement. Canada is the only country that will receive the information automatically, without the need for a specific request. At this time, little guidance has been provided by U.S. tax officials regarding circumstances under which it will deny a request for information under the New Rules. It has been reported that U.S. officials have indicated a reluctance to share information with certain countries (e.g., Venezuela), but no such country-specific exclusions have been set forth.^[5]

While the New Rules will facilitate the IRS's collection of information regarding nonresident aliens' accounts in the United States, information exchange agreements usually carve out some protections for the dissemination of tax-related information. The information generally (i) will be provided only upon request of the recipient country (except in the case of Canada); (ii) must be protected by the confidentiality and secrecy laws of the recipient country; and (iii) may only be provided to authorities of the recipient country involved in the assessment, collection, and enforcement of taxes (and used for those purposes).^[6]

In addition, specific restrictions with respect to the exchange of tax information may apply under information exchange agreements between the United States and other countries. For example, with respect to Article 27 (Exchange of Information) of the U.S.-Venezuela Treaty to Prevent Double Taxation and Fiscal Evasion (the Convention), the technical explanation issued by the IRS on January 1, 2000, sets forth the following:

[T]he obligations undertaken in paragraph 1 [of Article 27 of the Convention] to exchange information do not require a Contracting State to carry out administrative measures that are at variance with the laws or administrative practice of either State. Nor is a Contracting State required to supply information not obtainable under the laws or administrative practice of either State, or to disclose trade secrets or other information, the disclosure of which would be contrary to public policy. Thus, a requesting State may be denied information from the other State if the information would be obtained pursuant to procedures or measures that are broader than those available in the requesting State.^[7]

In this example, the laws of Venezuela could be instrumental in denying a request made by Venezuelan authorities under the Convention. Further, the Guidance on Reporting explains that the IRS is not compelled to exchange information, including information collected pursuant to the Revised Regulations, if there is concern regarding the use of the information or if other factors exist that would make exchange inappropriate.^[8] It is unclear to what extent this language may be used to deny requests from countries where U.S. authorities believe that shared information may not be adequately protected by foreign authorities.

Concerns with and Implications of the New Rules

In letters to Congress and the IRS, the American Bankers Association (ABA) expressed concerns about the impact of the New Rules.^[9]  Specifically, the ABA is concerned that the New Rules leave too much uncertainty with respect to the protection and confidentiality of sensitive financial information by recipient countries, and that as a consequence, foreign investors will move their money to offshore accounts in order to avoid having their information shared with foreign authorities. There could be a sizeable impact in states like Florida and Texas, which have historically received a steady flow of deposits from Latin American investors. Wealthy individuals in some countries, including Mexico and Venezuela, often hold deposits in the United States, not to evade local taxes, but to protect their financial information and to avoid kidnappings for ransom, which have become commonplace in some areas. The ABA fears that billions in deposits may be removed from U.S. offices of financial institutions and that some regional banks may be particularly hard hit.^[10] More transparency in delineating between countries with which the IRS intends to regularly and consistently share information collected under the New Rules, and those with which it will not, could potentially avoid the transfer of U.S. deposits to offshore jurisdictions. It's unclear when and if the IRS will address these concerns.

_{[1]. The New Rules were implemented through revisions to U.S. Treasury Regulations sections 1.6049-4(b)(5) and 1.6049-8 [hereinafter Revised Regulations], and were accompanied by a preamble to the Revised Regulations titled Guidance on Reporting Interest Paid to Nonresident Aliens, 77 Fed. Reg. 23,391 (April 19, 2012) (to be codified at 26 C.F.R. pts. 1 and 31) [hereinafter Guidance on Reporting].}

_{[2]. On July 26, 2012, the House of Representatives passed a bill that included an amendment that could delay the January 1, 2013, operating date for the New Rules. The amendment (H. Amdt. 1469), offered by Representative Bill Posey (R-Fla), was added to the Red Tape Reduction and Small Business Job Creation Act, H.R. 4078, availablehere. The bill would prevent federal agencies from imposing new major regulations until the average of monthly unemployment rates for any quarter beginning after the date of enactment of the law is less than or equal to 6%, and it classifies the final New Rules as a significant regulatory action.}

_{[3]. As previously reported by Morgan Lewis, the Treasury released proposed regulations on February 8, 2012 implementing the Foreign Account Tax Compliance Act (FATCA). In general, FATCA seeks to prevent tax evasion by identifying U.S. taxpayers who hold accounts with non-U.S. financial institutions, such as banks, offshore investment funds, and other entities. FATCA reporting is generally only applicable with respect to U.S. taxpayers. This includes reporting on nonresident U.S. taxpayers. Our LawFlashes discussing FATCA are available here.}

_{[4]. See Rev. Proc. 2012-24.}

_{[5]. Kevin Wack, Banks Push Back on New Tax Rules for Foreign Accounts, American Banker, May 2, 2012, at 12.}

_{[6]. Guidance on Reporting, supra note 1.}

_{[7]. Department of the Treasury Technical Explanation, Tax Convention with Venezuela, Art. 27, Exchange of Information, p. 2, available here.}

_{[8]. Guidance on Reporting, supra note 1.}

_{[9]. Letter from Francisca Mordi, Vice Pres., Am. Bankers Ass'n, to the Internal Revenue Serv. (Apr. 2, 2011), available here; Letter from Frank Keating, President and CEO, Am. Bankers Ass'n, to the Hon. Mario Diaz-Balart, Vice Chairman of the House Appropriations Fin. Servs. Subcomm., U.S. House of Representatives (March 28, 2012), availablehere; Transcript of Internal Revenue Serv. Hearing on Guidance (REG-146097-09) on Reporting Interest Paid to Nonresident Aliens (May 18, 2011), available here.}

_{[10]. Jared Janes, Foreign Deposits Could Leave Valley Banks under New IRS Regulation, The Monitor, April 28, 2012, available here.}