News Accounts on IRS Hearing
December 5, 2002 Hearing
Worldwide Tax Daily
Bureau of National Affairs
Worldwide Tax Daily
December 5, 2002
By Chuck Gnaedinger and Sarah Kirkell
Witnesses Criticize New Proposed Regulations on Reporting Nonresident Aliens' Interest
Eleven witnesses at a 5 December U.S. Internal Revenue Service hearing criticized reproposed regulations on reporting requirements for deposit interest paid to
nonresident aliens and asked officials to withdraw the regulations.
Eleven witnesses at a 5 December U.S. Internal Revenue Service hearing criticized
reproposed regulations on reporting requirements for deposit interest paid to nonresident aliens and asked officials to withdraw the regulations.
After braving Washington's first big December snowstorm in many years to speak at the hearing, witnesses said the proposed rules would provide no direct aid to collecting
U.S. taxes and would impose enormous costs on U.S. financial institutions. Others who testified told the IRS and U.S. Treasury Department officials that the new regs could
cause a liquidity crisis in the U.S. financial system by driving away foreign investments and thus drive up the cost of doing business for U.S. companies and lead to more business failures.
The government officials, including Valerie Mark-Lippe, senior technical reviewer, and Alexandra Helou, attorney, both of Branch 2, IRS Office of the Associate Chief
Counsel (International), and Carl Dubert, deputy Treasury international tax counsel, said little at the hearing.
The Treasury Department on 30 July issued the regs (REG-133254- 02) to limit NRA interest reporting requirements to NRAs who are residents of Australia, Canada,
Denmark, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, or the United Kingdom. The current U.S. rule
is to report NRA interest only if the NRA is a resident of Canada. (For the full text of the proposed regs, see 2002 WTD 163-15 (Document link: Database 'Worldwide Tax Daily',
View '(Number') or Doc 2002-18379 (4 original pages) [PDF]; for related coverage, see Tax Notes Int'l, 5 Aug. 2002, p. 670, 2002 WTD 148-1 (Document link: Database
'Worldwide Tax Daily', View '(Number'), or Doc 2002-17774 (3 original pages) [PDF].)
In January 2001 -- just before former U.S. President Bill Clinton left office -- Treasury
issued proposed regs that would have required U.S. financial institutions to report bank deposit interest paid to NRAs who are residents of any foreign country. At a June 2001
IRS hearing on the original regs, witnesses criticized the regs for many of the same reasons voiced on 5 December: They carried substantial administrative burdens, were
unlikely to generate U.S. tax revenue, and would cause a capital flight that could destabilize financial markets. (For prior coverage, see Tax Notes Int'l, 2 July 2001, p. 11,
2001 WTD 123-14 (Document link: Database 'Worldwide Tax Daily', View '(Number'), or Doc 2001-17455 (1 original page) [PDF]; for the full text of the regs as originally
proposed (REG-126100-00), see 2001 WTD 17-37 (Document link: Database 'Worldwide Tax Daily', View '(Number') or Doc 2001-1779 (4 original pages) [PDF].)
A general comment made by some of the witnesses on 5 December was that most of the countries whose residents would have to report U.S. bank interest under the new
regs are EU countries. The witnesses concluded that the United States, by adopting the regs, would appear to support the EU call for participation by third countries in its
savings tax directive. The savings tax directive demands automatic information exchange on nonresident interest income among EU member states and six non-EU
countries (including Switzerland and the United States) that would need to agree to the directive for it to take effect. The witnesses don't want the United States to support the high-tax EU state model.
Grover Norquist, president of Americans for Tax Reform, called on the U.S. government to support "healthy tax competition" and not to help the European Union's
fight against "harmful tax competition." Norquist suggested that by not supporting the EU fight against harmful tax competition, the United States would encourage EU member
states to end their harmful "tax and spend policies" and lower their tax rates.
Lawrence R. Uhlick, executive director and general counsel of the Institute for
International Bankers, said his organization is "not opposed . . . to sensible, properly conceived reporting requirements." However, he said that many NRAs deposit money in
U.S. financial institutions precisely because they expect the deposits to be maintained with confidentiality, and the reporting requirements of the new proposed regs could in
fact drive foreign investment dollars out of the United States to other jurisdictions.
Uhlick also said the proposed regs could have "the opposite result of their intended
purpose of encouraging greater transparency" by giving an incentive to other jurisdictions to resist openness; the jurisdictions that enjoy the inflow of new NRA
funds more than ever will want to resist the effort to make the global banking system more transparent.
Russell Orban, assistant chief counsel for the Office of Advocacy of the Small
Business Administration, said section 612 of the Regulatory Flexibility Act (RFA) requires the Office of Advocacy to monitor agency compliance with the act. "We
believe the RFA does apply in this case and that the IRS should be required to do an initial regulatory flexibility analysis on the impact of this proposal," Orban said. He
stressed that the Office of Advocacy is an independent entity, and his views may not necessarily reflect the views of the SBA or the administration.
The key for deciding if an initial regulatory flexibility analysis is required is if the regs
equate to "interpretative rules" requiring information collection, "unless the IRS certifies that the proposed regulation will not have a significant economic impact on a
substantial number" of small businesses. Orban insisted that many small businesses "will be dramatically impacted" by the new regs.
The administrative burden of the regs is a "foreseeable disadvantage," Tim Bergan, the Conference of State Bank Supervisors (CSBS) senior vice president for international,
said. The CSBS has called for a careful study of the advantages and disadvantages of the regs. He said the CSBS is "particularly concerned" that no analysis has been
presented on how the disadvantages of the regs could be "tangibly offset with improved compliance with U.S. tax law."
Andrew Quinlan, president of the Center for Freedom and Prosperity, said his organization opposes the IRS's "misguided regulation" and quoted several U.S.
lawmakers who say the regs may chase foreign investors out of the United States and into London, Zürich, and Hong Kong. If the regs caused NRAs to remove US $1 trillion
from U.S. financial institutions, Quinlan said, that would drastically reduce the liquid capital available to Americans for car loans, home mortgages, and small business expansion.
Quinlan repeated the argument that the proposed regs would be an abuse of IRS regulatory authority because it is designed to aid foreign tax enforcement while doing
nothing to enforce U.S. tax laws. The proposed regs thwart the intent of Congress, which has continued to create laws encouraging foreign investment by excluding from U.S. taxes bank deposit interest paid to NRAs.
Lawrence A. Hunter, chief economist for Empower America, also opposed the proposed regs, saying the interest that would be subject to reporting is not taxable
under U.S. law. The IRS has suggested that the regs would facilitate information exchange with other countries, thereby increasing the United States' ability to collect
taxes on U.S. residents' interest income. However, like the EU savings tax directive, the success of which depends entirely on agreements with third countries, whether the regs
achieve their objective depends on the ability to enter into reciprocal agreements with other countries, Hunter said. Because the Bush administration has already refused to
support the savings tax directive and the OECD Harmful Tax Competition Initiative, there is little reason to think that other information sharing arrangements will be realized, he said.
The only thing the regs would do is drive investors out of the United States and into other countries known for their bank stability and privacy, Hunter said. The regs would
have no chance to increase U.S. taxation of own residents' investments in the 16 countries that the regs cover and, therefore, would "significantly harm the U.S. economy
without producing any compensatory benefits," he concluded.
The new regs would be "a serious and blatant violation of the Regulatory and
Flexibility Act," Dan R. Mastromarco said, representing the National Small Business United. Deeming the regs the "U.S. Anti-Savings Directive," he said, "The rulemaking
could be the poster child for small business groups that care about the efficacy of . . . procedural protection."
Bureau of National Affairs
Friday December 6, 2002 Page G-7
Tax, Budget & Accounting
Witnesses Urge IRS Officials to Withdraw
Nonresident Alien Interest Reporting Rules
Ten witnesses Dec. 5 urged the Internal Revenue Service to withdraw or re-evaluate proposed regulations (REG-133254-02) that would require U.S. banks to report interest
paid on accounts held by nonresident aliens from 16 countries.
Of the 10 witnesses at the IRS hearing, nine private-sector interest groups told IRS the
rules would drive foreign investment out of the United States, would create burdens for U.S. financial institutions, and run contrary to congressional efforts to attract capital to the U.S. economy.
The 10th witness, Russell Orban, assistant chief counsel for the Small Business Administration's Office of Advocacy, said the rules are likely to be a substantial burden
to smaller banks and should fall under the jurisdiction of the federal Regulatory Flexibility Act (RFA).
"It is clear that many [small businesses and groups] will be dramatically impacted by the
proposal," Orban testified at the hearing. "We believe that RFA does apply in this case and that IRS should be required to do an initial regulatory flexibility analysis on the
impact of this proposed rule."
Lawrence Uhlick, executive director and general counsel for the Institute of International
Bankers, New York, said he believes that if the rules are finalized in their current form, it would "fundamentally alter relationships with foreign depositors" and almost certainly
would lead to capital flight from the United States.
"The withdrawal of even a portion of these funds could have an impact on the liquidity of U.S. banks and credit," Uhlick said.
Despite the fact that the administration cut back an earlier proposal (REG-12600-00) that would have required reporting for banks in 150 countries, private-sector witnesses at the
hearing argued that the changes were merely "cosmetic" and that little prevents IRS from adding more countries to the list over time. Proposed in July, REG-133254-02 would
require U.S. banks to report interest paid on accounts held by nonresident aliens from Australia, Denmark, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands,
New Zealand, Norway, Portugal, Spain, Sweden, and the United Kingdom (147 DTR G-9, L-20, 7/31/02). Interest reporting already is required for residents of Canada, for a total of 16 countries.
Opponents of the rules focused their criticism around two major arguments: that the rules do not accurately reflect congressional intent and that they are a violation of
taxpayer privacy that will drive foreign investors out of the U.S. economy.
Grover Norquist, president of Americans for Tax Reform, Washington, D.C., said he
believes the rules will alienate both current and prospective foreign depositors. He also argued that the proposed regulations are inconsistent with current law.
Lawrence Hunter, chief economist for Empower America, Washington, D.C., also contended the regulations exceed IRS's legal authority. "The information this regulation
would mandate be collected is not needed to enforce U.S. law, nor could one reasonably expect any direct improvement in tax law enforcement if the regulation were adopted," he said.
In addition, Hunter said the rules directly contradict "conscious choices" made by Congress to encourage foreign investment.
Andrew Quinlan, executive director of the Center for Freedom and Prosperity, Washington, D.C., added his voice to these arguments, saying he believes IRS is
abusing its regulatory authority. Quinlan pointed to opposition from several members of Congress, including House Small Business Committee Chairman Donald Manzullo
(R-Ill.), and said there is virtually no support for the proposal in the taxpayer community. He argued that since Congress does not tax the deposits of foreign investors, there is
no need to collect information about the deposits.
Testifying on behalf of National Small Business United in Washington, D.C., Dan
Mastromarco contended that the rules are "not interpretive" and that IRS "has crossed the line into policymaking."
Mastromarco said he believed the rule would turn small businesses into tax collectors for foreign deposits. He called it a "blatant violation of the Regulatory Flexibility Act."
Stephen Entin, president and executive director of the Institute for Research on the Economics of Taxation, Washington, D.C., said he believes the rules will be of little use
in enforcing U.S. tax law and ineffectual in generating information to exchange in agreements with other countries.
"It would result in the collection of little or no revenue," Entin said, adding he believes the impact on the U.S. economy could reduce the gross domestic product by as much as $80 billion annually.
Timothy Bergan, a senior vice president with the Conference of State Bank Supervisors, Washington, D.C.; Wayne Brough, chief economist for Citizens for a Sound Economy
Foundation, Washington, D.C.; and David Burton, representing the Southeastern Legal Foundation, Atlanta, also testified at the hearing.
A transcript of the hearing will be in BNA TaxCore.
By Alison Bennett
Copyright © 2002 by The Bureau of National Affairs, Inc., Washington D.C.