April 16, 2012: Final Regulations on Reporting of Deposit Interest Paid to Nonresident Aliens
On Tuesday, April 16, the IRS released final regulations (TD 9584) requiring certain U.S. financial institutions to report bank deposit interest paid to nonresident aliens in certain countries; expanding the current requirement to only report bank deposit interest paid to Canadian citizens. Along with the final regulations, the IRS released Revenue Procedure 2012-24 listing 78 countries with which the U.S. has bilateral agreements in place.
Although the IRS will only require reporting for residents of the countries listed in Revenue Procedure 2012-24, the regulations allow U.S. financial institutions to report bank deposit interest paid to all nonresident aliens regardless of country of residence to help reduce compliance burdens. The IRS also indicated that the Revenue Procedure will be periodically updated with new countries and U.S. financial institutions will be required to include the new counties in their reporting if the country is listed in the Revenue Procedure as of December 31 of the year prior to the payment being paid.
The rationale behind the new requirement is two-fold – first, the new regulations will help the IRS negotiate intergovernmental cooperation of FATCA implementation  by allowing reciprocity to foreign governments so that they will allow the information exchange under FATCA, and second, the new regulations will enhance U.S. tax compliance by increasing the difficulty for U.S. taxpayers with U.S. deposits to falsely claim to be non-U.S. residents and evade taxation.
The main intersection with this new regulation and FATCA is that the U.S. can now incentivize foreign governments to enter into agreements with the U.S. to provide the FATCA reporting information from FFIs within its jurisdiction and/or allow FFI’s to directly report the FATCA information to the IRS without local law restrictions. This is crucial given the IRS’s interest in entering into Joint Agreements with foreign governments for FATCA reporting. As noted in the preamble to the regulations, this new reporting requirement will give foreign governments information about interest payments made to their residents in exchange for the reporting information the U.S. is trying to obtain through FATCA.
U.S. financial institutions should consider whether to report all payments to nonresident aliens rather than constantly updating the list of reportable countries to reduce compliance risk and cost. Moreover, U.S. financial institutions should begin to assess the changes required in their internal reporting systems and procedures (or changes to third party provider procedures) and begin to plan for any required system and process updates (or coordinate changes with third party providers).