By Keith Gercken and Danica Dodds

Summary

On April 17, 2012 the Treasury Department and the Internal Revenue Service issued final regulations requiring information reporting by a broad range of banks and other financial institutions of interest paid to certain nonresident alien individuals on funds held in U.S. accounts. These reporting requirements are generally applicable for payments of interest made on or after January 1, 2013, and are intended to enhance the ability of the IRS to effectively exchange tax information with foreign revenue authorities under the existing network of tax information exchange agreements, thereby bolstering its ability to combat offshore tax evasion by U.S. taxpayers.

General Rules

In general, the rules are only applicable to interest payments that are

• Made with respect to deposits maintained at offices of banks and other financial institutions that are located in the United States;
• Made to non-resident individuals (i.e., and not interest payments made to companies, partnerships or other legal entities); and
• Made to non-resident individuals that reside in certain countries with which the U.S. has entered into certain tax information and exchange agreements (listed below).

Determining Residency

In order to determine the non-resident alien’s country of residence, a financial institution may rely on the permanent residence address provided on Form W-8BEN, unless it knows or has reason to know that such documentation is not reliable.

Alternatively, financial institutions subject to this reporting requirement are given the option to report interest payments made to all non-resident individuals regardless of country of residence. According to the IRS, this election is intended to make it easier for financial institutions to comply with the new reporting requirements – presumably because they would not need to make any individual determinations regarding whether a depositor resides in one of the listed countries.

Reporting

The paying financial institution is required to file a Form 1042-S with the IRS for each calendar year in which the interest is paid.

Automatic Information Exchange

With the exception of Canada, the information collected under this regime will not automatically be reported to the depositor’s home jurisdiction. While this information may be provided to tax authorities in other jurisdictions upon request, the IRS is not compelled to exchange information if it believes that there is concern regarding the use of the information or other factors exist that would make the exchange inappropriate – for example, if the IRS believes that the foreign jurisdiction may not comply with its obligations of confidentiality under the applicable tax information and exchange agreement, or if the information may be used for some non-tax related purpose. Several other countries are currently discussing an automatic exchange of information with the U.S. so the number of countries with which the U.S. automatically exchanges information is likely to increase.

Applicable Countries (subject to change)

Contact

For further information, please contact Keith Gercken at (415) 774-3207 or Danica Dodds at (310) 228-2274.

Disclaimer

This update has been prepared by Sheppard, Mullin, Richter & Hampton LLP for informational purposes only and does not constitute advertising, a solicitation, or legal advice, is not promised or guaranteed to be correct or complete and may or may not reflect the most current legal developments. Sheppard, Mullin, Richter & Hampton LLP expressly disclaims all liability in respect to actions taken or not taken based on the contents of this update.