Internal Revenue Service Public Hearing:
Proposed Regulation to Require Reporting of
Deposit Interest Paid to Nonresident Aliens
Andrew F. Quinlan
Center for Freedom and Prosperity
Thursday, June 21, 2001
Thank you for the opportunity to share my views with you. I am Andrew Quinlan and I am the President for the Center for Freedom and Prosperity. We are an Alexandria, Virginia-based, 501(c)(4) organization
that lobbies Congress and the Administration on tax competition, financial privacy and fiscal sovereignty.
I also coordinate the activities of the Coalition for Tax Competition, which is made up of dozens of free-market groups, which includes taxpayer groups, family groups and business groups.
Unlike many of my colleagues here to testify today, I am not a Ph.D. economist, a tax lawyer or a banker. I am just a regular U.S. citizen who would like to share the views of many of my group's supporters.
In fact, the Center for Freedom and Prosperity views this initiative as a part of the international assault on tax competition, financial privacy and fiscal sovereignty.
As such, we are opposing this regulation with the same intensity that we are bringing to the battle against the OECD and EU anti-tax competition and information exchange initiatives. The Center has helped to encourage more than 60 members of Congress to write letters to the Bush administration opposing the OECD's attack on tax competition. In addition, the Coalition for Tax Competition has helped to encourage more than two-dozen of the country's most influential citizens groups to also write letters to the Administration. If you are interested, all of these letters can be found on our web page at www.freedomandprosperity.org.
U.S. banks and financial institutions benefit greatly from the deposits of nonresident aliens. These deposits, in turn, help every American by helping to create jobs, finance small business loans and improve the
general welfare of all. For decades, United States lawmakers have understood the importance of attracting capital to America, which is why Congress has chosen not to tax the interest paid on bank deposits of
nonresident aliens and, the further step, of not reporting this deposit income to their home governments.
Unfortunately, despite the clear intent of Congress, the Internal Revenue Service is seeking to require the reporting of bank deposit interest paid to nonresident aliens. This information, according to the proposed
regulation, would then be turned over to foreign tax collectors.
Many here today will testify on the threat of capital fleeing America.
This is not an idle threat. In these days of push button banking, it would be illogical to keep your savings deposited in U.S. banks if your home country can find out. Especially since most of our trading partners do not report their foreign investors to other countries. This regulation must be stopped.
I believe that there are five important questions that need to be answered.
1) Does the regulation usurp the intent of Congress and has Congress spoken on the matter?
2) Will the regulation harm the U.S. economy and is it cost effective?
3) Is the IRS regulation bad tax policy and is it right for the U.S.?
4) Will the regulation make U.S. financial institutions less competitive?
5) Will countries that receive the information abuse it?
These questions and more will be answered in great detail today. I would like to spend the majority of my comments on the first question. Does the regulation usurp the intent of Congress?
Since 1921, the U.S. has not taxed nonresident alien individuals and foreign corporations on their interest income from bank deposits. This has been the explicit will of Congress.
In fact, in the last 35 years this issue has been debated extensively in Congress. The following is a short excerpt from a paper written by tax attorney Marshall J. Langer that appears on the Center for Freedom and Prosperity's web page. Mr. Langer revisits past legislative history on the issue:
"Congress debated the wisdom of retaining the tax exemption on bank deposit interest on several occasions during the 1960s and 1970s, with varied results. . ."
"In 1966, Congress decided to impose tax on bank deposit interest paid to foreign persons, but, for balance of payments reasons, Congress postponed the effective date of such tax until the end of 1972. The effective
date was postponed on two other occasions, the last of which was due to expire at the end of 1976."
"During 1975 and 1976, Congress debated whether to extend the deposit exemption for three more years or to make it permanent. The House of Representatives voted to make the deposit interest exemption permanent.
The bill was debated on the floor of the Senate in July 1976. . . During the debate, Senator Dick Stone of Florida stated that in gateway cities like Miami, deposits from Latin Americans amount to as much as
one-third of all bank deposits. Senator Brock of Tennessee stated that no U.S. financial institution could survive the loss of one-third of its deposits in a short period of months. The Senate voted to extend the
exemption for three years, but the conference report followed the House bill, and the 1976 Tax Reform Act made the exemption permanent. No one in Congress seems to have even looked at the provision since 1976."
What Mr. Langer's comments and the legislative history illustrates is that many lawmakers felt that taxing such bank deposit interest could result in massive capital flight away from U.S. banks to foreign
Marshal Langer further points out that, "Most other countries, including major U.S. trading partners, similarly exempt bank deposit interest paid to foreign persons. Collecting information concerning such deposit
interest and passing it on to other countries will almost certainly have the same effect as imposing tax on the interest."
Forcing U.S. banks to become informers and pseudo-tax collectors for other countries is a matter that should be determined by Congress, not by the IRS. What the IRS is doing is a shameless assault on the regulatory
I would like to briefly touch on the last four questions I mentioned.
1) Will the regulation harm the U.S. economy and is it cost effective?
As I alluded to earlier, it will put a substantial portion of the reported $1.7 trillion of foreign deposits at risk. Much of it will flee to our trading partners that don't have similar regulations. I believe
that it would be financial suicide for the United States to unilaterally exchange information with other countries.
2) Is the IRS regulation bad tax policy and is it right for the U.S.?
As my colleague, Dan Mitchell will discuss in greater detail, we believe that income that is saved and invested should not be double-taxed. So from a strict policy position the regulation is wrong. But if
it is decided that a tax must be levied, it is the sole responsibility of Congress, not the IRS. And to take it one step further, if the interest income is to be eventually taxed, we believe it should be taxed
by the jurisdiction where the income is generated.
3) Will the regulation make U.S. financial institutions less competitive?
I'll leave this to my colleagues to discuss.
Many of them submitted written comments that I believe are right on point. But I would like to stress that it is obvious that American businesses and financial institutions will be disadvantaged. Whenever you require one segment of an industry to meet extraordinary regulations, their competitors all over the world will fill the void and capture a larger market share.
4) The final question, will countries that receive the information abuse it?
This may me the most striking.
If you have traveled around the world you will realize that there is really only one America. To expect the same kind of standards from less stable countries that do not have a long history of respecting civil rights and civil liberties is a mistake. Mothers and fathers from all over the world send their life savings to the U.S. for their children's future. America's Community Bankers said it best when they wrote, "As a result of IRS sharing of information, their wealth could be expropriated, and they - or their families - could be threatened with criminal prosecution, violence, or kidnapping from their home countries."
As you can see there are many reasons why this regulation should not go forward.
Thank you for the opportunity to speak here today.
I would like to close by saying that the United States is a beacon to the rest of the world. Many countries will emulate what we do. Many foreigners invest in the U.S. because we are stable, free and fair. We benefit from this investment. This regulation being discussed is just another attempt to weaken the U.S. position in the world. I'm confident the authors of this regulation had the best intentions when they drafted it. But like the Qualified Intermediary regulation, however, we will end up hurting the U.S. by chasing away investors and giving other countries the excuse to force the U.S. to become adjunct tax collectors for them. If we don't watch out, since the U.S. is the world's largest beneficiary of tax competition, we will become the biggest losers.