Treasury finalizes controversial nonresident alien US bank deposit reporting regulations

International Tax Compliance Alert


The US Treasury Department has finalized proposed regulations regarding the reporting of interest on deposits maintained at US offices of certain financial institutions1 and paid to nonresident alien individuals (NRAs), effective for payments made on or after January 1, 2013 (which payments are reportable to the US Internal Revenue Service in 2014). 


Until the Final Regulations, announced on April 18, become effective, only interest paid to US non-exempt recipients (on Form 1099-INT), such as US individuals, and interest paid to Canadian nonresident alien individuals (on Form 1042-S) is reportable by US banks and other financial institutions.


The promulgation of these regulations represents an important development in US efforts to curb US tax evasion and in the area of international tax enforcement generally. 


In this alert, we provide background related to this issue, explain why the proposed regulations were finalized at this time and summarize the content of the Final Regulations.




Bank deposit interest paid to NRAs, although US source income, is neither subject to US federal withholding tax nor federal income taxation unless effectively connected with the conduct of a US trade or business or attributable to a permanent establishment. The issue of whether such interest should be reportable has had a long and contentious history. The IRS originally proposed regulations requiring deposit interest reporting in 2002 (which were withdrawn and re-proposed in 2011). There has been strong opposition from the financial community and certain members of Congress to these proposals.


Opponents of the deposit interest reporting proposal expressed concern that the information required to be reported under these regulations might be misused; that is, deposit interest information may be shared with a country that does not have laws in place to protect the confidentiality of the information exchanged or that would use the information for purposes other than the enforcement of its tax laws. This concern would jeopardize foreign deposits in US financial institutions, particularly in Florida, California, New York and Texas, because many NRAs would withdraw their deposits and close their US accounts rather than risk having their personal accounts and investments reported to the IRS and shared with their home governments. The resulting outflow of deposits from these financial institutions would significantly reduce an important source of funding that supports economic growth, job creation and would hinder the US economic recovery. Additionally, a flight of capital could undermine the ability of many institutions to comply with the enhanced capital and liquidity requirements currently being negotiated through the Basel III process or mandated through the Dodd-Frank Wall Street Reform and Consumer Protection Act.


Why the Treasury Department had to act at this time


The US Treasury Department has been under great pressure to finalize these regulations because of the Foreign Account Tax Compliance Act's reporting and withholding provisions (FATCA), which become effective January 1, 2013, subject to various transitional rules. Under these provisions, foreign financial institutions (FFIs) are required, among other undertakings, to identify and report information with respect to financial accounts of specified US persons or suffer a new 30 percent US withholding tax on US source payments and gross proceeds from US investments in stocks and securities.


In order to mitigate local law data protection and other privacy conflict of law provisions with the requirements of FATCA, which could result in subjecting FFIs that comply with FATCA to regulatory sanctions, civil suits or criminal sanctions, the United States entered into a Joint Statement with France, Germany, Italy, Spain and the United Kingdom (hereinafter, FATCA Partner jurisdictions) regarding an Intergovernmental Approach (IGA) to Improving International Tax Compliance and Implementing FATCA.


Under this landmark approach, foreign jurisdictions that adopt the IGA approach and become a FATCA Partner would be required to amend their internal legislation to require local FFIs to report the information otherwise required to be reported under FATCA to the FATCA Partner, which, in turn, would automatically transmit that information under an exchange of information provision of a bilateral income tax treaty, tax information exchange agreement, or through unilateral action to the United States, rather than having the FFI enter into an agreement with the IRS to collect and report the information and perform the other undertakings required under FATCA.


An underpinning of an IGA is reciprocity with respect to the exchange of information between the FATCA Partner and the United States. That is, the implementation of FATCA through an IGA will require the cooperation of foreign governments who become FATCA Partners. Similar to the United States, these foreign governments also will be interested in addressing offshore tax evasion by their own residents and would expect to receive tax information from the United States, to support their compliance efforts.


The Final Regulations will facilitate the IGAs by enabling the IRS, in appropriate circumstances, to reciprocate by exchanging information with FATCA Partners for tax administration purposes. The Final Regulations thus are a predictable supplement to the IGA because they give the Treasury Department the ability to offer a quid pro quo to FATCA Partner jurisdictions. Absent providing this type of information, it would have been difficult for the United States to reciprocate, which could have doomed the IGA approach to FATCA.


What the Final Regulations do


Under the Final Regulations, "reportable interest" is interest that relates to a deposit maintained at an office within the United States, and that is paid to a NRA who is a resident of a country (identified as of December 31 prior to the calendar year in which the interest is paid) with which the United States has in effect an income tax or other convention or a tax exchange information agreement.  Revenue Procedure 2012-24, issued concurrently with the Final Regulations and which will be updated as appropriate, has identified 80 countries currently so qualifying.  Canada is the only country currently qualifying for automatic exchange of NRA bank deposit information.  A financial institutions paying reportable interest aggregating $10 or more to a NRA is required to make an information return on Form 1042-S for the calendar year in which the interest is paid.


Final Regulations clarify that a payor will be able to rely upon the permanent residence address provided on a valid Form W-8BEN, "Beneficial Owners Certificate of Foreign Status for US Tax Withholding," in order to determine the country in which a NRA is a resident (unless such payor knows or has reason to know that such documentation is unreliable or incorrect). 


The Final Regulations further provide that for any year that a payor is required to report interest paid to a NRA, the payor may elect to report all interest relating to deposits maintained at a US office paid to any NRA, and not merely interest paid to NRA in countries subject to information exchange. This election was provided to ease administrative burdens relating to reporting.


The Final Regulations do not extend reporting of deposit interest paid to beneficial owners who are not individuals, such as foreign corporations or foreign trusts that are treated as the beneficial owners of such income. Thus, complex trusts that have US bank deposits would not be encompassed by these provisions, but simple trusts and so-called "grantor trusts" could be encompassed.


The preamble to the Final Regulations emphasizes that information reported pursuant to the Final Regulations is tax return information and confidential. The IRS can share the information reported under these regulations only with foreign governments with which the United States has an information exchange agreement and when certain additional requirements are satisfied. Absent such an agreement, the IRS is statutorily barred from sharing return information with another country, and the Final Regulations cannot and do not change that rule.  Even when such an agreement exists, the IRS emphasized that it is not compelled to exchange information, including information collected pursuant to the Final Regulations, if there is concern regarding the use of the information or other factors exist that would make exchange inappropriate. For example, the IRS will not exchange information on deposit interest (or otherwise) with a country if: (i) the IRS determines that the country is not complying with its obligations under the agreement to protect the confidentiality of information and to use the information solely for collecting and enforcing taxes covered by the agreement or (ii) the country does not impose tax on the income being reported.


Where an information exchange agreement exists, the IRS may exchange information on deposit interest (or otherwise) upon either specific requests or on an automatic basis. In the case of specific requests, the IRS requires the requesting country to explain the intended permitted use of the information and to justify the relevance of that information to the permitted use.   


The preamble to the Final Regulations further notes that the IRS will not enter into an exchange relationship with a jurisdiction unless it has reviewed the country's policies and practices and has determined that such an exchange relationship is appropriate and where the other jurisdiction is willing and able to reciprocate effectively.


The Final Regulations eliminate the requirement in the 2011 proposed regulations for financial institutions to include in the information statement provided to NRAs a statement informing the individual that the information may be furnished to the government of the country where the recipient resides.


Should you have any questions about the impact of the Final Regulations, FATCA, or other international tax compliance initiatives, please contact:


Michael Silva


Witold Jurewicz

DLA Piper has published numerous bulletins covering the latest developments in international tax compliance and enforcement. To read our library of these writings, please visit this page.

1 Financial institutions affected are commercial banks, savings institutions, credit unions, securities brokerages and insurance companies that pay interest on deposits.