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November 14, 2002
Internal Revenue Service
CC:DOM:ITA:RU (REG-133254-02)
Room 5226
P.O. Box 7604
Ben Franklin Station
Washington, D.C. 20044
Re: Reporting of Deposit Interest Paid to Nonresident Aliens (67 FR
50386)
Dear Sir or Madam:
The Conference of State Bank Supervisors (CSBS) is pleased to have the
opportunity to comment on the Internal Revenue Service’s (IRS)
modified proposed regulations governing the reporting requirements for
interest on deposits maintained at the U.S. offices of financial
institutions and paid to nonresident alien individuals.[1] CSBS is the national organization of
state officials responsible for chartering, regulating and supervising
the nation’s nearly 7,000 state-chartered commercial and savings
banks and more than 500 state-licensed foreign banking organizations. In
preparing our comments, we consulted with the CSBS International Bankers
Advisory Board, a group of international bank regulators and
international bankers similar to the groups utilized by the Federal
Reserve Board and the Federal Deposit Insurance Corporation.
In our letter dated February 27, 2001 (copy attached) we submitted
comments on the original proposed regulations published on January 17,
2001 (66 FR 3925). We applaud the modification of the original proposed
regulations as an effort to improve the proposed regulations. However,
the underlying concerns expressed in our original letter continue to
exist.
As an initial matter, we note that deposit interest paid to nonresident
aliens is not taxable under U.S. tax law. Accordingly, reporting this
deposit interest is not necessary to collect taxes on it or otherwise
prevent tax evasion or avoidance. Consequently, we believe the threshold
for imposing a reporting requirement should be quite high and the
justification for doing so exacting.
As our original comment letter indicated, we believe that a rigorous
analysis of the advantages and disadvantages of the proposed regulations
should be conducted. The modified proposed regulations appear to address
this important concern in a somewhat summary fashion, stating that the
IRS and Treasury believe that the proposed regulations “will
facilitate the goals of improving compliance with U.S. tax laws and
permitting appropriate information exchange without imposing an undue
administrative burden on U.S. banks.” However, the proposed
regulations do not describe how they will improve compliance with the
U.S. tax laws or what constitutes appropriate information exchange.
Similarly, the proposed regulations do not address why there is not an
undue administrative burden on U.S. banks,[2] or whether the additional costs imposed on the banking
industry exceed the benefits to the IRS.
Nonetheless, the administrative burden on U.S. banks is not the only
foreseeable disadvantage of the proposed regulations. Another, perhaps
more important, consequence is the likely flow of deposits out of the
U.S. banking system. The amount of nonresident alien deposits in the
U.S. banking system has been estimated to range from hundreds of
billions of dollars to about $1 trillion. Even at the low end of the
range, the magnitude is substantial, both in terms of the U.S. banking
system and the economy as a whole. As a stable source of funds, banks
use these deposits to support their commercial lending activities. A
significant shift of these deposits to other countries, whether for tax
or tax privacy reasons, could thus affect banks’ commercial
lending, particularly when economic growth once again increases demand
for commercial loans. Moreover, such a shift could have a negative
impact on the liquidity of the U.S. banking system, and thus its safety
and soundness.
Consequently, we remain concerned that the proposed regulations will
likely have negative consequences for the U.S. banking system in
general, and the state banking system specifically. Legitimate deposits
of nonresident alien individuals generally represent a stable source of
funds for state-chartered banks and state-licensed foreign banking
organizations because of the favorable economic and political
environment in the United States. Imposing a reporting requirement on
income that currently is not taxable could erode this favorable
environment. Thus, to the extent the proposed regulations deprive these
institutions of a stable source of funds, the regulations likely will
impose direct costs on state-licensed banks and the banking system in
the United States. Accordingly, absent a rigorous analysis demonstrating
clearly that the benefits of the proposed regulations outweigh the
costs, in particular the effect on the liquidity of the U.S. banking
system, we respectfully suggest that the proposed regulations be
withdrawn in their entirety.
Thank you for this opportunity to comment. If you have any questions
please contact me or Tim Bergan, Senior Vice President, International at
202-296-2840 or tbergan@csbs.org.
Sincerely,
Neil Milner, CAE
President & CEO
Conference of State Bank Supervisors
1155 Connecticut Avenue, N.W.
Fifth Floor
Washington, D.C. 20036-4306
cc: Honorable Paul H. O’Neill
________________________________________
[1] 67 Fed. Reg. 50386, (Aug. 2, 2002).
[2] 67 Fed. Reg. at 50387.
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