CUNA Regulatory Comment Call


August 6, 2002

Revised IRS Proposed Guidance on Reporting of Deposit Interest Paid to Nonresident Aliens

EXECUTIVE SUMMARY

BRIEF DESCRIPTION OF THE PROPOSAL

Nonresident Aliens Who Are Covered Under This Proposed Reporting Requirement

Under current IRS rules, a financial institution is required to furnish directly or through a middleman (such as a trustee) an IRS Form 1042-S (Foreign Person’s U.S. Source Income Subject to Withholding) -- instead of an IRS Form 1099-INT (Interest Income) -- for interest paid on deposits maintained at the financial institution’s office within the U.S. to nonresident alien individuals who are residents of Canada. The 2001 proposal would have extended this requirement to all nonresident aliens.

Under this new proposal, interest reporting would apply only to nonresident aliens who reside in one of 16 specific countries: Australia, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, and the United Kingdom. If the IRS and the Treasury determine that this list of countries should be modified in the future, regulations providing such modification will be proposed and comments will be requested on those proposed regulations.

Method of Furnishing IRS Form 1042-S to Recipients

As in the 2001 proposal, this new proposal clarifies that the requirement to furnish directly or through a middleman (such as a trustee) an IRS Form 1042-S may be met by providing a copy of the form either in person or to the recipient’s last known address.

Joint Account Holders

Under the 2001 proposal, if any joint account holder is a U.S. non-exempt recipient, the payor (financial institution) or middleman would have to report the entire payment to that person. In the case where all joint account holders are foreign persons, then the payor or middleman would have been required to report the payment to the nonresident alien individual who is a resident of a country with which the U.S. has an income tax treaty or tax information exchange agreement (TIEA) . If more than one of the joint account holders is a foreign person and a resident of country with which the U.S. has an income tax treaty or a TIEA, then the payor or middleman would have been required to report the payment to the person who is the primary account holder. The payor or middleman, however, would have been required to furnish an IRS Form 1042-S to any account holder who requests it.

The revised proposal retains the requirement that the entire payment be reported to a U.S. non-exempt recipient if there is a U.S. non- exempt recipient that is a joint account holder. However, under the new proposal, if all joint accountholders have certified their status as foreign persons (by furnishing a valid IRS Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding), reporting is only required to "any one of the joint accountholders who is a resident of one of the listed countries." That individual is referred to as the selected account holder. So for example, if a joint account is held by five persons living in Canada, the new proposal would require a report for only one of the five persons (rather than for all five). And in another example, if a joint account is held by five persons from Mexico, the new proposal would require no report at all -- because Mexico is not on the list of 16 specified countries. In a final example, if one of the joint account holders is from Germany, one is from Italy, and the rest are from countries not specified on the list, then the proposal would require a report to either the German or the Italian.

However, if any joint account holder, including the selected account holder, requests its own Form 1042-S and provides information regarding the correct amount to be reported to him, then the payor or middleman must furnish a Form 1042-S to that account holder and make a corresponding reduction to the amount reported to the selected account holder. If the selected account holder makes such a request, then the payor or middleman must report the corrected amount to the selected account holder and report the remaining amount to any other joint account holder that is a resident of one of the specified countries.

Canadian “Actual Knowledge” Test

According to current regulations, interest paid with respect to a deposit maintained at an office within the U.S. to Canadian residents must be reported. In such instances, the agency expects the payor or middleman to rely on actual knowledge of residence address in Canada or the permanent address found on IRS Form W-8BEN to make the determination of whether the nonresident alien individual resides in Canada. Like the 2001 proposal, the revised proposal would eliminate this “actual knowledge” requirement.

Deposit interest amounts paid to a nonresident alien individual who is a resident of one of the countries for which reporting is required are generally not subject to backup withholding under Internal Revenue Code Section 3406. (See 26 C.F.R. §31.3406(g)-1(d), Exception for Payments to Certain Payees and Certain Other Payments.) If, however, the payor or middleman does not have a valid IRS Form W-8BEN or IRS Form W-9 (Request for Taxpayer Identification Number and Certification), then the payor or middleman must report the payment on a Form 1099 as made to a U.S. non-exempt recipient in accordance with the IRS presumption rules. The presumption rules can be found in Internal Revenue Code Section 1.1441-1, Requirement for the Deduction and Withholding of Tax on Payments to Foreign Persons, (see 26 C.F.R. §1.1441-1(b)(3) (iii)) and in Internal Revenue Code Section 1.6049-5, Interest and Original Issue Discount Subject to Reporting After December 31, 1982 (see 26 C.F.R. §1.6049-5(d)(2). Such payment is subject to backup withholding under Internal Revenue Code Section 3406. (See 26 U.S.C. 3406; 26 C.F.R. §31.3406, especially 26 C.F.R. §31.3406(a)-1, Backup Withholding Requirement on Reportable Payments.)

QUESTIONS REGARDING THE PROPOSAL

  1. Would account segregation for purposes of reporting deposit interest to nonresident aliens from the 16 countries on the list pose a significant burden to your credit union in terms of time or cost?

    Yes ______ No ______

    If yes, can you quantify or describe this burden? Would it be significantly less burdensome than the 2001 proposal requirement to report for all nonresident aliens?













  2. In a related question, would the requirement to report deposit interest for aliens from any of the 16 specified countries result in information system or other significant operational difficulties or costs (such as obtaining or retrieving joint accountholder contact information)?

    Yes ______ No ______

    If so, please explain.













  3. If this proposal becomes a final regulation, do you expect your institution will have a significant increase in the number of nonresident alien members to whom it must furnish IRS Form 1042-S?

    Yes ______ No ______

    Please explain.













  4. Under the new proposal, if all joint account holders have certified their status as foreign persons, reporting is only required to "any one of the joint accountholders who is a resident of one of the listed countries." That individual is referred to as the selected account holder. Does your credit union foresee any difficulties in complying with the new proposal’s requirement?

    Yes ______ No ______

    If yes, please explain.













  5. These new provisions would apply to payments made after December 31 of the year in which the final regulations are published in the Federal Register. Therefore, if the rule change is adopted this year, it will be effective December 31, 2002. Would that be sufficient time to comply?

    Yes ______ No ______

    Why or why not?













  6. Other comments?













Eric Richard • General Counsel • (202) 508-6742 • erichard@cuna.com
Mary Mitchell Dunn • SVP & Associate General Counsel • (202) 508-6736 • mdunn@cuna.com
Jeffrey Bloch • Assistant General Counsel • (202) 508-6732 • jbloch@cuna.com
Catherine Orr • Senior Regulatory Counsel • (202) 508-6743 • corr@cuna.com