Many nonresident customers of US banks are wondering whether now is the time to withdraw their deposits. Some have already begun to move their money in response to a proposed IRS rule that would require that account information be disclosed to the US government and potentially shared with other taxing jurisdictions outside the US. The rule could be finalized as early as the end of March 2012.

The proposed rule was first published in February of 2011, and has caused nonresident customers to reconsider their US banking relationships. Interest income on nonresident depository accounts used for personal purposes is not taxed in the US. That policy decision to forgo taxation on foreigners has resulted in many US banks being the preferred banking institutions for many nonresidents. But that status has been compromised by the proposed rule. Nonresidents are already moving their money in anticipation that their private banking relationships will be compromised.

On February 20, 2012, the Mexican taxing authority, SAT, announced that it entered into a formal information sharing agreement with the IRS. In essence, the agreement provides to the SAT direct access to information about US depository accounts owned by Mexican taxpayers. If the proposed rule comes into effect, then the information from US banks will be shared directly with the Mexican government.

Senator John Cornyn of Texas has been actively opposed to the proposed rule, joining Senator Kay Bailey Hutchison in writing a letter protesting it. He also co-sponsored legislation aimed to block the rule change.

It's not just Texas banks that are concerned. At a public hearing in May of last year, representatives from the American Bankers Association and the Florida Bankers Association made it clear that implementation of the rule could cripple the US banking industry.

That's because foreign investors have placed $3.6 trillion in passive investments in US banks and brokerages, according to US Department of Commerce statistics. If the rule goes into effect those investments could leave the country.

The mechanics of the rule are relatively straightforward. If a nonresident owns a US bank account that earns over $10 in interest in a year, then his/her US bank would be required to report the account information and personal contact information to the IRS. In addition, the bank would be required to furnish the information reported to the US government either in person or by mail to the last known address of the nonresident customer.

For customers in Mexico, where the mail is insecure, this last requirement is viewed as an invitation for blackmail, kidnapping, or violence. Many banking customers from Mexico elect to use electronic statements and other forms of secured communications when handling their US investments.

According to the IRS, the rationale behind gathering nonresident bank account information, even if it's not taxed, is that it will be used in trade. The IRS plans to trade nonresidents' US account information with foreign taxing jurisdictions in exchange for the names of US tax evaders. This is part of it's initiative to create an "information exchange network."

While it is questionable whether this policy would be effective (both because foreign taxing jurisdictions do not have the ability to gather information as effectively as the IRS, and because nonresidents may just move their money outside the US, denying the IRS the pool of information), we have seen nonresident clients take the pre-emptive step of moving their Texas banking relationships to other countries. If the rule becomes effective, then this trend will probably accelerate.

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