U.S Banks Upset with IRS over TIEA-Compliance.

(U.S Congressman Charles Boustany)

Obliged by new global rules on transparency and tax information exchange, the US government has signed seventy-four tax information exchange agreements (TIEAs) which compels its Internal Revenue Service (IRS) to provide tax-payer information, including information related to bank accounts when requested to do so by its treaty partners.

To honour these bilateral commitments enforceable under public international law and on pain of sanction by the 107 members of the OECD Global Forum the U.S Treasury Department has announced its intention to extend the existing reporting rules on interest-bearing deposit accounts held by Canadians to all such accounts held by non-resident aliens.

Demonstrating that it is not only Swiss banks who fear that increased information sharing on its account holders will make them anti-competitive; US financial institutions are also concerned that the new reporting obligations will lead to an exodus of foreign-capital, threatening their viability.

In support of the banks, House of Representatives’ Republican Oversight Subcommittee Chairman Charles Boustany (Louisiana) believes that the regulation could drive foreign investment out of the economy and burden banks with unnecessary reporting requirements, in turn hurting individuals and small businesses”.

Boustany Argues Banks Over-burdened

In a letter to Treasury Secretary Timothy Geithner, he also pointed out that, “rather than continuing to request specific deposit interest information when it is needed, the Department is now burdening banks with new reporting requirements regardless of whether the information is requested by a foreign government”.

In defence of the expanded reporting requirements due to take effect from January 1, 2013 both the U.S Treasury Department and the IRS, stated that the regulations “should not significantly impact the investment and savings decisions of the vast majority of non-residents who are aware of and understand these safeguards and existing law and practice.”

Further, the government also expects that the increased reporting for U.S offices of commercial banks, savings institutions, credit unions, securities brokerages and insurance companies will directly enhance US tax compliance by making it more difficult for US taxpayers with US deposits to falsely claim to be non-residents in order to avoid US taxation on their deposit interest income.

The Big Issue

The big issue for US banks and why for them increased transparency is an anathema to their business-model and reduces their competitiveness especially in relation to their foreign counterparts without similar reporting requirements is client confidentiality.

(For why ‘Big Oil’ fears increased reporting see https://franhendy.com/2012/06/09/compliance-fatigue-hits-cfos-could-ofcs-be-next/)

To this point the U.S has re-emphasized that information will only be exchanged with foreign governments with which the US has a treaty providing for the exchange of information in accordance with global standards all of which require that exchanged information be treated and protected as secret by the foreign government and prohibit the use of that information for any purpose other than the purpose of administering, collecting, and enforcing the taxes covered by the agreement.

Absent such an arrangement it was confirmed that the IRS remains statutorily barred from sharing information with another country.

Whether this satisfies US banks remains doubtful but certainly the caveat by the IRS that it will not honour its treaty obligations if in their view their requested party has insufficient confidentiality safeguards is alarming as it calls into question the role of the OECD Global Forum Peer Review process of which the US and all of its TIEA partners are engaged and which provides an independent judgement on this issue rather than leave this up to the opinion of countries who might be pressured by a domestic-anti-exchange, pro-competitiveness lobby.


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