Opposition to the rule
Opponents to the rule have several concerns, including:
► Confidentiality issues. The efforts behind FATCA and its implementing regulations have been debated in Washington D.C. for the past decade. (The IRS initially proposed this regulation at the end of the Clinton administration in 2001, and then again in 2002 under the Bush administration.)
Opponents are concerned financial institutions could exchange the information with countries without confidentiality laws or countries that would use the information for purposes other than to enforce tax laws. Opponents argue these concerns will lead to withdrawal of deposits from U.S. depository institutions, particularly from those that serve a high number of foreign investors.
In the rule, the IRS notes several safeguards it has taken to ensure any information shared with foreign governments won’t be used improperly.
For example, the U.S. government says it won’t enter into any exchange agreement unless the Treasury and IRS are satisfied the foreign government has strict confidentiality protections. And even when an agreement exists, the IRS won’t be required to share information if there are concerns regarding the use of the information or if any other factors make the exchange inappropriate.
► Regulatory burden. Opponents also are concerned the rule will impose new administrative burdens on U.S. financial institutions, particularly those in states with a larger percentage of nonresident aliens.
The Treasury Department and the IRS disagree, saying the impact will be insignificant. They argue that under existing laws all U.S. financial institutions already have the responsibility to report on depositors who are U.S. citizens, U.S. resident aliens, and Canadian nonresident aliens, so the reporting systems and procedures are in place.
And all nonresident alien accountholders already must complete a Form W-8BEN (Certificate of Foreign Status of Beneficial Owner for U.S. Tax Withholding), declaring their non-U.S. status and their foreign country of residence.
Because financial institutions can use their existing W-8BEN information to fill out Form 1042-S, the IRS argues the information collection requirements in the rule build on existing collection systems financial institutions use, so the time spent complying with the requirement is minimal.
The IRS also notes financial institutions can choose to report interest payments on all of the nonresident alien depositors, so they don’t have to determine whether a depositor is from one of the countries listed in the IRS Revenue Procedure.
This means even residents from nonsharing countries can become subject to the new reporting requirements.
NEXT: Form 1042-S