The Obama administration says U.S. banks should disclose to the IRS bank accounts owned by foreigners, resurrecting a Clinton-era proposal that was opposed by banking groups and Republicans.
The Internal Revenue Service proposed regulations Jan. 7 that would pave the way for the U.S. for the first time to routinely share information with other governments about their citizens’ deposits in U.S. financial institutions.
The move is designed to help governments around the world pierce bank secrecy, the agency said. It follows a successful three-year effort by the U.S. to pressure Switzerland and its biggest bank, UBS AG, to reveal the U.S. owners of undeclared accounts held offshore.
“There is a growing global consensus regarding the importance of cooperative information exchange for tax purposes that has developed,” the agency said in a notice in the Jan. 7 Federal Register announcing the proposal.
The IRS proposal comes on the eve of the issuance of separate regulations that will require foreign banks to identify U.S. customers to the IRS and withhold 30 percent of U.S. interest and dividend payments from account holders who provide inadequate information to determine their U.S. status.
Jon Sambur, a lawyer at Mayer Brown in Washington, said the rules issued this month affecting U.S. banks were a surprise and may be aimed at assuaging foreign governments.
“This is not something that was broadcast to happen,” Sambur said. “The timing of it seems to be an effort by the U.S. to show some goodwill to foreign jurisdictions.”
The U.S. doesn’t tax interest earned in U.S. banks by foreigners who reside abroad, and the accounts aren’t required to be reported to the IRS, except for residents of Canada. That makes it difficult for the IRS to provide information about an account to a comparable agency in a foreign government.
The new proposal is nearly identical to one promulgated by President Bill Clinton’s Treasury Department on Jan. 17, 2001, three days before he left office.
That proposal was opposed by former House Ways and Means Committee Chairman Bill Thomas, a California Republican, and by groups including the California Bankers Association, the Florida Bankers Association, and the Conference of State Bank Supervisors, which warned of a flight of capital from U.S. banks if the rules were adopted.
Opposing the Rules
Andrew Quinlan, president of the Center for Freedom and Prosperity, which lobbied against the 2001 rule, said his group would again lead efforts to oppose it.
“The regulation is designed to accumulate information that can be provided to foreign governments, which means the regulation puts the interests of overseas tax collectors above U.S. law and before the interests of the American economy,” Quinlan said on his Web site.
The Commerce Department says non-U.S. citizens have $10.6 trillion passively invested in the U.S. economy, including about $3.6 trillion held by banks and securities brokers. A 2004 study by George Mason University in Fairfax, Virginia, concluded the proposed Clinton rules would have led to a loss of $88 billion in capital from U.S. banks.
Scott Talbott, senior vice president for government affairs at the Financial Services Roundtable, a Washington group representing large banks such as Bank of America Corp. and Wells Fargo & Co., said his group shares concerns about capital flight. “We’re concerned about it because it will create a competitive disadvantage for U.S. banks,” he said of the Obama administration’s proposed regulation.
The Clinton rule was shelved in July 2002 by the administration of President George W. Bush, which replaced it with a more limited proposal requiring banks to report interest paid to residents of 13 European countries, Australia, and New Zealand.
Pamela Olson, a partner at Skadden Arps in Washington who served in the Treasury Department in 2002, said the Bush administration had decided to scale back the proposed Clinton rule because the IRS had no use for the account information as the accounts aren’t taxable.
“At that point in time it seemed clear to us that there wasn’t a reason to gather information” that would not be used to share with other governments with which the U.S. didn’t already have information exchange agreements, she said. “There was no reason to scare people needlessly.”
The narrower rules didn’t become final. The U.S. shares account information on an automated basis only with Canada.
The Obama administration came under pressure from Mexico in 2009, weeks after the president’s inauguration and during the banking crisis, to put in place an identical arrangement between the two countries. A letter from then-Finance Minister Agustin Carstens said an accord would help the government collect revenue to fight organized crime and drug cartels.
Carstens, now governor of Mexico’s central bank, didn’t immediately respond to a request for comment.
The rules issued Jan.7 by the Obama administration would become effective at the end of the year in which they are made final. The agency has requested written comments by April 7 and scheduled a public hearing at the IRS National Headquarters for April 28.
© Copyright 2024 Bloomberg News. All rights reserved.