New rule harms business - subject of testimony

December 5, 2002

WASHINGTON, DC: Following extensive written comments filed earlier, the Southeastern Legal Foundation today presented oral testimony calling on the Internal Revenue Service (IRS) to withdraw a proposed rule that would require U.S. financial institutions to report the identity of foreign recipients of interest, the amount of that interest, and to provide foreign officials with this information - a new rule that would cost American financial institutions and markets billions in capital.

"Southeastern Legal is charged with the specific responsibility to help individuals and businesses stymied by excessive government regulation and to free Americans from unreasonable and unconstitutional government constraints," said Phil Kent, SLF president. "This rulemaking would circumvent regulatory processes, attempts to convert American financial institutions into tax collectors for European governments and does nothing to enforce U.S. law."

The highly controversial proposed IRS rule that is the subject of SLF testimony is the second iteration of withholding rules issued at the 11th hour prior to the change in U.S. administrations. Under it, for the first time U.S. financial institutions would be required to report bank-deposit interest paid to Europeans who are non-residents of the U.S., even though the U.S. does not tax the interest and has no need to know that information. Congress decided not to tax interest payments made to foreigners in order to attract foreign capital. The policy has attracted about $1 trillion to the U.S.

Specifically, the proposal would require payors of interest to all U.S. non-resident aliens to file Form 1042-S, which requires the reporting of the payee's name and address, tax numbers, and the amount paid. This requirement would exist if the IRS intends to collect this information in a central repository, so that it can be made available to unspecified authorities in the enumerated foreign nations to assist them in enforcing extraterritorial taxes on savings in the U.S.

According to David R. Burton, an attorney and witness for the SLF at the hearings, "This proposal if implemented is virtually certain to cause hundreds of billions of dollars to leave the U.S. and would have a substantial negative impact on the dollar, U.S. interest rates, and our capital markets. Adopting such a hugely counterproductive policy - a policy utterly unnecessary to enforce U.S. tax laws - would be folly."

"The only reason to adopt this regulation is to enable the U.S. government to participate in information sharing arrangements contemplated under the European Savings Tax Directive and the OECD Harmful Tax Competition Initiative," said Burton. "Both of these proposals are designed to increase taxes throughout the industrialized world and punish nations, including a long list of low tax nations, that do not have European levels of taxation. The Europeans want to quash tax competition, pure and simple. But tax competition is good for the U.S. because we have a smaller government and lower taxes and attract capital from throughout the world."

Founded in 1976, the Southeastern Legal Foundation is an Atlanta-based constitutional public interest law firm and policy center which advocates limited government, individual economic freedom, and the free enterprise system in the courts of law and public opinion. SLF's mission is to engage in litigation and public policy advocacy in support of these principles, with many landmark victories in the U.S. Supreme Court.

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