Keep Their Money In Our Economy

Ten witnesses Dec. 5 urged the Internal Revenue Service to withdraw or re-evaluate proposed regulations (REG-133254-02) that would require U.S. banks to report interest paid on accounts held by nonresident aliens from 16 countries.

Of the 10 witnesses at the IRS hearing, nine private-sector interest groups told IRS the rules would drive foreign investment out of the United States, would create burdens for U.S. financial institutions, and run contrary to congressional efforts to attract capital to the U.S. economy.

The 10th witness, Russell Orban, assistant chief counsel for the Small Business Administration’s Office of Advocacy, said the rules are likely to be a substantial burden to smaller banks and should fall under the jurisdiction of the federal Regulatory Flexibility Act (RFA).

“It is clear that many [small businesses and groups] will be dramatically impacted by the proposal,” Orban testified at the hearing. “We believe that RFA does apply in this case and that IRS should be required to do an initial regulatory flexibility analysis on the impact of this proposed rule.”

Lawrence Uhlick, executive director and general counsel for the Institute of International Bankers, New York, said he believes that if the rules are finalized in their current form, it would “fundamentally alter relationships with foreign depositors” and almost certainly would lead to capital flight from the United States.

“The withdrawal of even a portion of these funds could have an impact on the liquidity of U.S. banks and credit,” Uhlick said.

Opposition Builds

Despite the fact that the administration cut back an earlier proposal (REG-12600-00) that would have required reporting for banks in 150 countries, private-sector witnesses at the hearing argued that the changes were merely “cosmetic” and that little prevents IRS from adding more countries to the list over time. Proposed in July, REG-133254-02 would require U.S. banks to report interest paid on accounts held by nonresident aliens from Australia, Denmark, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, and the United Kingdom (147 DTR G-9, L-20, 7/31/02). Interest reporting already is required for residents of Canada, for a total of 16 countries.

Opponents of the rules focused their criticism around two major arguments: that the rules do not accurately reflect congressional intent and that they are a violation of taxpayer privacy that will drive foreign investors out of the U.S. economy.

Grover Norquist, president of Americans for Tax Reform, Washington, D.C., said he believes the rules will alienate both current and prospective foreign depositors. He also argued that the proposed regulations are inconsistent with current law.

Lawrence Hunter, chief economist for Empower America, Washington, D.C., also contended the regulations exceed IRS’s legal authority. “The information this regulation would mandate be collected is not needed to enforce U.S. law, nor could one reasonably expect any direct improvement in tax law enforcement if the regulation were adopted,” he said.

In addition, Hunter said the rules directly contradict “conscious choices” made by Congress to encourage foreign investment.

More Arguments

Andrew Quinlan, executive director of the Center for Freedom and Prosperity, Washington, D.C., added his voice to these arguments, saying he believes IRS is abusing its regulatory authority. Quinlan pointed to opposition from several members of Congress, including House Small Business Committee Chairman Donald Manzullo (R-Ill.), and said there is virtually no support for the proposal in the taxpayer community. He argued that since Congress does not tax the deposits of foreign investors, there is no need to collect information about the deposits.

Testifying on behalf of National Small Business United in Washington, D.C., Dan Mastromarco contended that the rules are “not interpretive” and that IRS “has crossed the line into policymaking.”

Mastromarco said he believed the rule would turn small businesses into tax collectors for foreign deposits. He called it a “blatant violation of the Regulatory Flexibility Act.”

Stephen Entin, president and executive director of the Institute for Research on the Economics of Taxation, Washington, D.C., said he believes the rules will be of little use in enforcing U.S. tax law and ineffectual in generating information to exchange in agreements with other countries.

“It would result in the collection of little or no revenue,” Entin said, adding he believes the impact on the U.S. economy could reduce the gross domestic product by as much as $80 billion annually.

Timothy Bergan, a senior vice president with the Conference of State Bank Supervisors, Washington, D.C.; Wayne Brough, chief economist for Citizens for a Sound Economy Foundation, Washington, D.C.; and David Burton, representing the Southeastern Legal Foundation, Atlanta, also testified at the hearing.