On April 17, 2012, the IRS issued final regs that require information reporting for interest on deposits maintained at U.S. offices of certain financial institutions and paid to nonresident alien individuals resident in countries with which the U.S. has in effect an information exchange agreement (as listed in Rev. Proc. 2012-24, which has been issued contemporaneously with the final regs). The final regs are generally applicable to payments of interest made on or after January 1, 2013.
Background. In August of 2002, the IRS issued proposed regs that withdrew previous proposed regs (which would have provided that U.S. bank deposit interest paid to any nonresident alien individual must be reported annually to IRS) and replaced them with narrower proposed regs (the 2002 proposed regs).
Under the 2002 proposed regs, reporting would be required only on interest payments to nonresident alien individuals that are residents of certain designated countries or, at the option of the payor, on interest payments to all nonresident alien recipients of bank deposit interest. Under the regs currently in effect (Reg. § 1.6049-8(a)), reporting of U.S. bank deposit interest is required only if the interest is paid to a U.S. person or a nonresident alien individual who is a resident of Canada.
IRS has determined that since the 2002 proposed regs were released, significant agreements have been reached on international standards for the exchange of information, including the understanding that information exchange will not be limited by bank secrecy or the absence of a domestic tax interest. IRS has concluded that requiring routine reporting to IRS of all U.S. bank deposit interest paid to any nonresident alien individual will further strengthen the U.S. information exchange program and improve voluntary compliance by U.S. taxpayers (e.g., by making it more difficult to avoid reporting through false claims of foreign status).
In January of 2011, IRS issued proposed regs (“the 2011 proposed regs”) that would have provided that payments of interest aggregating $10 or more on a deposit maintained at a U.S. office of a financial institution and paid to any nonresident alien individual were subject to information reporting.
Final regs. The final regs revise the 2011 proposed regs to require reporting only in the case of interest paid to a nonresident alien individual resident in a country with which the U.S. has in effect an information exchange agreement under which the U.S. agrees to provide, as well as receive, information and under which the competent authority is the Secretary of the Treasury or his delegate. IRS published Rev Proc 2012-24 contemporaneously with the final regs specifically identifying these countries. Rev Proc 2012-24 will be updated as appropriate.
Under the final regs, with respect to any calendar year, payors will only be required to report interest on deposits maintained at an office within the U.S. and paid to a nonresident alien individual who is a resident of a country identified in Rev Proc 2012-24, as of December 31 of the prior calendar year as being a country with which the U.S. has in effect such an information exchange agreement.
Payors report the interest on Form 1042-S, “Foreign Person’s U.S. Source Income Subject to Withholding.” The final regs provide that for any year for which the information return is required, a payor may elect to report interest payments to all nonresident alien individuals.
In addition, the final regs eliminate the requirement in the 2011 proposed regs for financial institutions to include in the information statement provided to nonresident alien individuals a statement informing the individual that the information may be furnished to the government of the country where the recipient resides. The final regs also clarify that a payor or middleman may rely on the permanent residence address provided on a valid Form W-8BEN, Beneficial Owners Certificate of Foreign Status for U.S. Tax Withholding, for purposes of determining the country of residence of a nonresident alien to whom reportable interest is paid unless the payor or middleman knows or has reason to know that the documentation of the country of residence is unreliable or incorrect.
The final regs also modify Prop Reg § 31.3406(g)-1 to clarify that, consistent with the backup withholding rules generally, a payment of interest described in Reg. § 1.6049-8(a) isn’t subject to withholding under Code Sec. 3406 if the payor may treat the payee as a foreign person, without regard to whether the payor reported the interest (although a payor may be subject to penalties if it fails to report as required).
As under the prior regs requiring the reporting of interest paid to Canadian nonresident alien individuals, the final regs define interest subject to reporting to mean interest paid on deposits as defined under Code Sec. 871(i)(2)(A) (including deposits with persons carrying on a banking business, deposits with certain savings institutions, and certain amounts held by insurance companies under agreements to pay interest thereon).