WASHINGTON Financial services industry officials such as Lawrence Uhlick are trying to convince the Bush administration that a holdover regulatory proposal could push billions of dollars of foreign deposits out of the United States.
In the final days of the Clinton administration, the Treasury Department drafted a rule that would require U.S. banks to report interest earned on accounts held by nonresident foreigners to the Internal Revenue Service. These accounts are, and would remain, exempt from U.S. taxes, but other governments have asked the IRS to pass that information on to the account holders home countries so they can catch tax evaders.
The rule would result in a huge outflow of deposits from the banking system in the U.S. to the many other financial centers around the world that do not impose such reporting requirements, said Mr. Uhlick, executive director and general counsel of the Institute of International Bankers.
Nonresident foreigners hold a large portion of the more than $1.5 trillion of foreign deposits in U.S. banks, he told the IRS during a hearing on the proposed rule last month.
If these depositors cashed out and took their money to countries with less restrictive regulations, the U.S. economy would suffer, he warned. The amount of funds at issue is substantial, and the withdrawal of even a portion of these funds from the U.S. banking system could have an adverse impact on the liquidity of U.S. banking institutions and on the availability of credit.
The proposal would contradict congressional policy dating to the 1920s of not taxing such accounts in order to encourage foreigners to deposit their money here, Mr. Uhlick said.
As a practical matter, the proposed nonresident alien deposit interest information reporting requirements would be tantamount to the imposition of a tax on such payments and, like a tax, would only encourage [foreigners] to withdraw their funds from U.S. banking organizations, he said.
Mr. Uhlick is not alone in his warnings.
Marcos Pereira, the immediate past president of the Florida International Bankers Association, said banks in states such as Florida, Texas, and New York rely heavily on foreign business. Theres a legitimate concern about liquidity and safety and soundness at these banks if the proposal rule is enacted, he said.
The protests have extended beyond bankers and their advocates. The Conference of State Bank Supervisors and Florida Gov. Jeb Bush have written Treasury Secretary Paul ONeill asking him to revise the proposed rule.
They have also asked the Treasury to figure out how much the reporting requirements would cost banks, and how badly it would it hurt competition.
We respectfully request that a rigorous analysis of the advantages and disadvantages of the proposed regulations be conducted to ensure that the likely benefits clearly outweigh the costs, wrote Neil Milner, the president of the supervisors group.
Mr. Uhlick argued that if one of the goals of the rule is to foster more information sharing between the taxing units of different countries, the opposite could actually happen.
The increased movement to less restrictive jurisdictions would decrease the incentive of those jurisdictions to agree to additional reporting requirements and diminish the prospects that such jurisdictions would engage in more extensive exchanges of information, he said.
Treasury officials have said they are reviewing the proposal, but they have given no indication of which way they are leaning.