New FATCA disclosure rules for interest paid to foreign clients

19 April 2012

The USA Internal Revenue Service (IRS) has published the final version of regulations setting out the reporting obligations of USA banks when they pay interest to non-resident foreigners.

The obligations are linked to the Foreign Account Tax Compliance Act (FATCA), which comes into force in January 2013. Although FATCA itself only obliges foreign banks to inform the IRS about the activities of American clients, the USA government has recognised that FATCA will not work unless USA banks operate a similar disclosure regime in reverse.

Thus the new regulation – TD 9584 (Guidance on Reporting Interest Paid to Non-resident Aliens) – forces USA banks to report to the IRS all interest payments they make to “non-resident aliens”, even though these payments are not taxable in the USA. The IRS will then pass this information to the appropriate foreign tax authorities so that they can tax their citizens accordingly.

In this way the USA will encourage foreign governments’ cooperation with FATCA. It has already received undertakings from the five largest European economies (Germany, France, Italy, Spain and the UK) that they will force their financial institutions to operate such reciprocal reporting schemes. Canada is believed to be negotiating a similar deal.

As a safeguard, the IRS has promised it will not pass on any information to jurisdictions with whom it does not already have a tax information exchange agreement.

The bank disclosures required by these regulations will also enhance USA tax compliance, says the IRS. This is because USA taxpayers with USA deposits will find it harder to falsely claim to be non-residents.

But the new rule will probably encourage the flight of non-USA capital from USA banks, said Pasadena tax lawyer Phil Hodgen TEP. He already advises non-resident clients to bank outside the USA.




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