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Tax Alert: Final Regulations Regarding Interest Paid to Non-Resident Aliens Released


On April 19, 2012, the United States Treasury Department released Final Regulations (TD 9584) regarding the reporting of interest paid to non-resident alien individuals ("NRAs") by U.S. offices of certain financial institutions.

Who's Impacted?

The Final Regulations are applicable to commercial banks, savings institutions, credit unions, securities brokerages, and insurance companies that pay interest on deposits and will apply to payments of interest made on or after January 1, 2013.

Prior Rule

Previously, no reporting was required (or tax imposed) on interest paid to NRAs on U.S. deposits provided such interest was not effectively connected with the conduct of a U.S. trade or business ("ECI"). Accordingly, U.S. offices of banks were generally not required to report interest on U.S. deposits paid to NRAs.

New Rule

Newly issued Treas. Reg. §§ 1.6049-4(b)(5) and 1.6049-8(a) now require payors of interest from a U.S. deposit account to report interest paid to an NRA if the interest amount in aggregate is $10 or more. It is important to note that such interest is still not subject to U.S. Federal income tax unless it is ECI.

The Final Regulations revise the 2011 Proposed Regulations to require reporting by certain financial institutions only in the case of interest paid to an NRA resident in a country with which the U.S. has in effect an information exchange agreement. The list of countries which have these agreements will be published annually by the IRS in a revenue procedure. The IRS has issued Rev. Proc. 2012-24 containing the current list of countries with which the U.S. maintains information exchange agreements that are consistent with the reporting requirements under the Final Regulations.

The payor is required to report the interest payment on IRS Form 1042-S for the calendar year in which the interest is paid. Form 1042-S, along with Forms 1042 and 1042-T, is generally filed by March 15th of the calendar year following the year of payment. In addition, copies of Form 1042-S are required to be provided to the payment recipient.

IRS Justification

The Foreign Account Tax Compliance Act ("FATCA"), which was recently enacted, will require foreign financial institutions to identify accounts owned by U.S. individuals and report information about those accounts to the IRS. On February 8, 2012, the U.S. Treasury and the governments of France, Germany, Italy, Spain, and the U.K. released a joint statement on an intergovernmental approach to the implementation of FATCA and to improving international tax compliance. The new reporting requirements for interest paid to NRAs will facilitate intergovernmental cooperation on FATCA implementation by enabling the IRS to reciprocate, when it is appropriate, by exchanging information with foreign governments for tax administration purposes.

Lastly, the NRA interest reporting requirements will enhance U.S. tax compliance by making it more difficult for U.S. taxpayers with U.S. deposits to falsely claim to be non-residents to avoid U.S. tax on their deposit interest.

For more information regarding these regulations, please contact James Wall, J.H. Cohn principal and director of the International Tax Practice, at jwall@jhcohn.com or 646-254-746; Chris White, CPA, partner, at cwhite@jhcohn.com or 818-205-2614; Gary Lubowiecki, CPA, senior manager, at glubowiecki@jhcohn.com or 973-364-7823; or Sean Dokko at sdokko@jhcohn.com or 973-364-7823.

Circular 230 Notice: In compliance with U.S. Treasury Regulations, the information included herein (or in any attachment) is not intended or written to be used, and it cannot be used, by any taxpayer for the purpose of i) avoiding penalties the IRS and others may impose on the taxpayer or ii) promoting, marketing, or recommending to another party any tax related matters.

This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and J.H. Cohn LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

Published date: 5/7/2012

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