Ken Guenther
Independent Community
Bankers of America
Washington Office
One Thomas Circle, NW, Suite 400
Washington, DC 20005

July 30, 2001

The Honorable Mark A. Weinberger
Assistant Secretary for Tax Policy
Department of Treasury
1500 Pennsylvania Avenue, NW
Room 1334
Washington, D.C. 20220

Dear Assistant Secretary Weinberger:

On behalf of the 5,300 members of the Independent Community Bankers of America, we urge you not to allow onerous and punitive new regulations to be adopted that would require reporting of interest paid on deposits of all nonresident alien bank customers. The Internal Revenue Service's proposal for new reporting requirements for nonresident alien deposits would require financial institutions to perform costly new paperwork and procedures that would also result in the flight of core bank deposits from non-resident aliens. (Re: 26 CFR parts 1 and 31: Guidance on Reporting Interest Paid to Nonresident Aliens.) The ICBA opposes this proposal as an unnecessary and costly burden that would impair both financial institutions and their customers.

Since nonresident alien interest payments on U.S. deposits are not subject to tax in the U.S.,the Internal Revenue Service would not further any U.S. financial interest in requiring these new reporting requirements. Therefore, there is no direct benefit evident from this proposed costly new compliance burden, nor is it necessary for the proper functioning of the IRS, since nonresident alien depositors are exempt from U.S. tax on their interest income from U.S. banks.Code § 871(i). Neither U.S. treaties nor international norms require mandated collection and dissemination of information not directly necessary to U.S. tax administration.

New reporting requirements on legal foreign deposits would act to discourage nonresident aliens from depositing their assets in U.S. financial institutions. Foreign deposits under U.S.management are largely a function of the confidentially, privacy, and stability of the U.S. banking system. The additional government intrusion of this proposal is likely to encourage the withdrawal of existing deposits to be moved to countries that give greater weight to depositors' privacy and confidentiality. Such withdrawals, particularly in small and mid sized banks in border states would reduce funds needed to lend in those communities. Additionally, a loss of foreign deposits by financial institutions with substantial foreign deposits could diminish the stability of the banks themselves. Specifically, ICBA is concerned with the anticipated negative impact these new reporting requirements would have in California, Florida, and Texas, where banks attract and hold substantial foreign deposits.

Moreover, producing the new reports required by the proposal would entail substantial compliance costs for financial institutions, costs that would far outweigh any stated benefit. New information collection and reporting systems would need to be set up and would require significant capital investment in forms, hardware, software, personnel and employee training, and mailing costs. These compliance costs would be material for many of ICBA's small community bank members.

Banks already abide by strict documentation requirements to ensure that persons claiming exemptions from U.S. tax in fact qualify for their tax-exempt status. Treasury Reg. §§ 1.6049-5(b)(12), 1.1441-1(e). Currently, bank compliance with these regulations for nonresident aliens are open to audit and inspection by the Internal Revenue Service and bank regulators at any time.Therefore, oversight methods already exist to verify possible tax avoidance (such as through false claims of alien status), making this proposal redundant and unnecessary.

In conclusion, the ICBA believes that the new costly reporting requirements proposed would not improve the financial interest of the U.S. nor cost-effectively enhance the ability of the IRS to perform its revenue collection function. Rather, new nonresident alien interest reporting requirements would add material compliance costs and would jeopardize beneficial foreign investment and deposits to the detriment of U.S. financial institutions and the customers and communities they serve. Therefore, the 5,300 members of the ICBA strongly objects to these proposed new regulations and urges that they be withdrawn.

Thank you for your attention to this important issue. If you have any questions, please contact Paul Merski, ICBA's Chief Economist and Director of Federal Tax Policy at 202-659-8111 or paul_merski@icba.org.

Sincerely,

Ken Guenther
President
Independent Community Bankers of America
 

CC:

Mr. Patrick Brown
ttorney Advisor for Tax Policy
Department of Treasury

Ms. K. Philippa Malmgren
Special Assistant to the President for Economic Policy
National Economic Council
White House Office of Policy Development

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