IRS Issues Final Regulations on Reporting of U.S. Deposit Interest Paid to Certain Nonresident Aliens
Authors: Jeffrey A. Mannisto | Matthew A. Portnoff
On April 17, 2012, the Internal Revenue Service ("IRS") issued final regulations (T.D. 9584) (the "Final Regulations") under Section 6049 of the Internal Revenue Code of 1986, outlining new rules requiring U.S. financial institutions ("Payors") to report interest paid on deposits maintained at U.S. offices of certain financial institutions to nonresident alien individuals ("NRAs") of $10 or more per year after January 1, 2013.
The Final Regulations are part of the IRS's ongoing information exchange initiative to (1) detect and deter global tax evasion, (2) improve voluntary compliance by U.S. taxpayers (e.g., by making it more difficult to avoid reporting through false claims of foreign status) and (3) facilitate the exchange of tax information with foreign governments. The Final Regulations generally will apply to NRAs resident in countries with which the United States has in effect an information exchange agreement, which countries are listed in Revenue Procedure 2012-24 ("Rev. Proc. 2012-24"), issued contemporaneously with the Final Regulations.
The Final Regulations require annual reporting only in the case of interest paid on U.S. deposits above the threshold amount to NRAs in countries with which the United States has in effect an information exchange agreement. This is a material modification of the 2011 proposed regulations which provided that payments of interest on deposits of Payors anywhere in the world aggregating $10 or more and paid to all NRAs would be subject to information reporting.
If reporting obligations arise under the Final Regulations, the Payor will be required to file Form 1042-S, "Foreign Person's U.S. Source Income Subject to Withholding," for the calendar year in which interest is paid to a NRA. The Payor also must send a copy of Form 1042-S to the NRA, together with a statement explaining that it is furnishing the information to the IRS. It should be noted that the Final Regulations clarify that Payors are only required to report interest on deposits maintained within the United States and paid to NRAs who are residents of countries identified in Rev. Proc. 2012-24 in the prior calendar year. The Final Regulations also provide that for any year for which Form 1042-S is required, a Payor may elect to report interest payments to all NRAs.
The identification of a country as having an information exchange agreement with the United States does not necessarily mean that the information collected by the IRS will be reported to the foreign jurisdiction. Rev. Proc. 2012-24 includes a secondary list identifying those countries with which the Treasury Department and IRS have determined that it is appropriate to have an automatic exchange relationship for the information collected. This determination will be made by the Treasury Department and IRS only after further assessment of a country's confidentiality laws and practices and the extent to which the country is willing and able to reciprocate.
The Final Regulations eliminate a requirement found in the 2011 proposed regulations for Payors to include in the information statement provided to the NRA notice that the information may be furnished to the government of the country where the NRA resides. The Final Regulations further clarify that a Payor or intermediary may rely on the permanent residence address provided on a valid IRS Form W-8BEN, "Beneficial Owners Certificate of Foreign Status for U.S. Tax Withholding," for purposes of determining the country of residence of a NRA to whom reportable interest is paid unless such Payor or intermediary knows or has reason to know that the documentation of the country of residence is unreliable or incorrect.
The Final Regulations further the IRS's ongoing efforts to facilitate intergovernmental cooperation and reciprocation of information exchange. Such efforts may significantly improve U.S. and foreign tax administration in the long term, but at an immediate cost to Payors, which are now required to report U.S. deposit interest paid to NRAs resident in countries with U.S. information exchange agreements in place. Although the IRS believes the Final Regulations may be implemented without substantial cost based on existing automated reporting systems, Payors necessarily will be burdened by having to determine the country of residence of NRAs unless they elect to report U.S. deposit interest payments for all NRAs. By electing the latter, a significant number of foreign-owned U.S. deposits are likely to be transferred to offshore jurisdictions before the end of the year.
If you have any questions or would like more information concerning the Final Regulations, please do not hesitate to contact us.