Information Reporting - Interest Paid to Nonresident Alien Individuals on Bank Deposits: IRS Issues Proposed Regulations on Interest or Original Issue Discount (“OID”) Paid to Nonresident Alien Individuals on Bank Deposits

Sullivan & Cromwell LLP - January 7, 2011

On Friday, January 7, 2011, the IRS published proposed regulations (the “Proposed Regulations”) that, if finalized in their current form, would require banks to report annually to the Internal Revenue Service the amount of interest and OID earned by nonresident alien individuals on their bank deposits located in the U.S. While banks are already required to report the amount of interest earned on the bank deposits of individuals that are U.S. citizens or residents, the only nonresident alien individuals currently subject to such reporting are residents of Canada. The Proposed Regulations would expand that rule to apply to all nonresident aliens. The proposed rules are intended to strengthen the exchange of information programs the U.S. has with other countries as well as increase taxpayer compliance by making it more difficult for U.S. individuals to avoid information reporting (e.g., by claiming to be a nonresident alien). Interest paid on deposits of nonresident aliens will continue to be free from withholding, unless, as is currently the case, the nonresident alien fails to provide the proper forms or other identifying documentation required to establish their status as a nonresident alien (generally a Form W-8BEN).

The Final Regulations are proposed to be effective for payments made after December 31 of the year in which the regulations are finalized. Comments have been requested on the Proposed Regulations and a public hearing is scheduled for April 28, 2011.