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Mr. FRANK of Massachusetts. Madam Chair, I yield myself 3 minutes.
This is an effort to exempt companies under $250 million. Now the JOBS Act, which was recently passed with broad support, said that a start-up company for its first 5 years would be exempt from this. This now would do away with that 5-year restriction without having had the kind of committee consideration that it seems to me it ought to have. It does it in this way, and I differ with my colleague from Pennsylvania when he says that it doesn't change the law. If it didn't change the law, they wouldn't offer it. He's not up here at 9 p.m. just to get exercise. It changes the law in a very significant way and sets a very bad precedent.
The underlying legislation to which this would be an amendment requires a cost-benefit analysis. This cooks the books. This is not content to let it be an unbiased cost-benefit analysis; but it says, it instructs the SEC to take into account the heavy burdens--and let me get the exact words--the large burden of such regulation. In other words, it's an effort to tip the scales of the very cost-benefit analysis.
And we know that, by the way, as to intent because the original version of this amendment was just a straight exemption of 250. But for parliamentary reasons, because that's not this committee's jurisdiction, it had to be redone. So if the gentleman really wanted to just exempt everybody under 250 from Sarbanes Oxley forever, as opposed to a 5-year exemption for a start-up, he had to amend it.
So he amended it in a way, as I said, that unfortunately impugns the integrity of the cost-benefit analysis because it puts a thumb on the scales. It says, oh, the cost-benefit analysis here should take into account the large burden. Well, it is already supposed to do it. Adding this is an instruction to the SEC essentially to find that they should be exempt.
We have had a rash of Chinese companies buying small American companies and converting them and people investing in them and getting taken. And the problem is that Chinese accounting is very opaque. What this bill would do is to prevent the United States authorities from applying Sarbanes Oxley to protect those investors.
I don't doubt that there is a very good company--I agree there is a very good company in his district, although he says it is above the limit. But you can't legislate for just one good company. This is part of this nostalgia for a time when we had no regulation.
Sarbanes Oxley has improved the integrity of our capital markets. It has improved the confidence of investors. We did exempt small start-ups, so for the first 5 years as a start-up, up to $250 million, they didn't have to do this. This says, in effect, by instructing the SEC to find that the cost outweighs the benefit no matter what, this gives a permanent exemption de facto for companies up to 250, which would include people who might be scamming, in the case of the Chinese companies. And as I said, it sets a bad precedent.
If we are going to have cost-benefit analysis, and I think that can be overdone, let's have it in an honest and open way. Let's not put the thumb in the scales, as this does, by instructing the SEC, in effect, to find that the cost always outweighs it.
I reserve the balance of my time.
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Mr. FRANK of Massachusetts. I guess I am in a position of being disagreeable to some of my friends on the committee. The gentleman from Tennessee cited the company that's about to go public, but they're already exempted.
The jobs bill that we passed and was signed into law exempts start-ups for the first 5 years until they go public, so this has no relevance to the start-ups.
It has relevance to companies that have been in existence for more than 5 years as public companies. Again, we have got an exemption already for the first 5 years. And it says, in effect, don't give us this unbiased cost-benefit analysis. We'll tell you what cost-benefit analysis does.
And as to IPOs, I will insert into the Record an article by Mr. Davidoff in the The New York Times talking about the advantages we have in IPOs these days; how the soccer team from England came here to do an IPO because our corporate governance laws are more favorable to them in allowing different classes of stock.
I'm sorry to see this continuing repudiation of the legacy of George W. Bush. I know he's not going to come to the convention. But, gee, everything's being torn down. George Bush signed Sarbanes Oxley. Oxley, by the way, is Mike Oxley, my predecessor as chairman of our committee. George Bush was very proud of Sarbanes Oxley. It's an accounting requirement, and what this does is to take another chunk out of that regulation.
Now, maybe we hear different people. My friends say the American people are crying out for an end of regulation. Every indication I have of public opinion is that people are tired of irresponsibility by a few, not everybody, but they are tired of people being scammed. And, in fact, the notion that what we need in the financial area is less regulation is an odd one. It comes from people, I guess, who just slept through the last few years, didn't see the crisis we had because Sarbanes Oxley, of course, itself came about after Enron.
So I would align myself with President Bush. I think he got this one right. I think Mike Oxley got this one right. Yes, for start-ups and for people about to go public, they have a $250 million exemption. But to give a permanent exemption to companies at $250 million and above is a mistake. And don't, please, start monkeying with cost-benefit analysis.
I yield back the balance of my time.
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Mr. FRANK of Massachusetts. I thank the gentleman for yielding.
The gentleman says the SEC wasn't on the Madoff thing for many years. That's true. I have to say that, while I supported the Bush administration on Sarbanes Oxley, I am critical of their administration of the SEC. For almost all of that time, we had an SEC that was not inclined to enforce. And I do not think the current SEC, under a very good chairman, Mary Schapiro, with a much more vigorous approach ought to be taxed for the failures that were ideologically driven by the previous SEC.
So I don't think it is valid to say, well, because they didn't catch Madoff--the SEC during the Bush administration reflected an unfortunate philosophy of non-regulation, of ceding to the company more autonomy than they should have, and it is not a good basis on which to legislate going forward.
I thank the gentleman for yielding.
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Mr. FRANK of Massachusetts. First of all, a large percentage of the people in this room would be too; but, secondly, the fact is that the gentleman from Florida is who started pointing fingers. When I talked about who was in charge of the SEC, all of a sudden he is above any criticism. But he's the one who impugned the SEC. He's the one who said that the SEC sat and did nothing under Madoff. So, if you're going to accuse the agency, then it becomes relevant as to who was running it. I didn't raise the issue of who was to blame and who was at fault. I was simply responding to my committee colleague from Florida.
I thank the gentleman.
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Mr. FRANK of Massachusetts. Madam Chair, I yield myself 2 minutes.
I understand that the banks in America don't like this because they would like to continue to be a place where people can come from other countries or send their money from other countries and not have it reported back home. The problem is that in America, we suffer a much greater loss right now from Americans who evade their taxes. Most Americans don't. But taxes being parked in the Cayman Islands, which was just mentioned and elsewhere, are a problem. We passed in 2010 a bill to try and get money owed to the United States paid to the United States. That requires the cooperation of other governments.
Members are aware of the negotiations with Switzerland and other tax havens. What this says is: we the United States want you to help us collect taxes owed to us, but we won't do the same. It is the tax evaders' bill of rights. The gentleman from Florida says they're law abiding citizens. Most of them probably are. How does he know they all are? Why do people in the Cayman Islands want to put money in American banks? Maybe they are perfectly good reasons. Maybe they want to come visit their money some day.
The fact is that people who send money to other countries include people who evade taxes. What this says to the United States is we basically are going to have to abandon the effort to collect taxes owed to us in foreign countries because we are telling the foreign countries we will not cooperate with them. We have tax treaties that we're pursuing. This basically aborts that.
Americans who want to send their money elsewhere and not pay taxes, they like this idea. With regard to the American banks, people have said they'll send their money elsewhere. The notion that we should compete in a race to the bottom, the notion that we should match other countries in an absence of rules is a philosophy that gets us in trouble. I believe that if we work hard, we will get a number of countries that will work with us on this. That's the essential point.
If Members favor a vigorous effort by the United States Government to recover taxes owed to us from elsewhere, they should reject this amendment.
I reserve the balance of my time.
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Mr. FRANK of Massachusetts. In fact, we suffer more from taxes evaded in the U.S., I believe, than the money we have here. The point, however, is--and I will submit the comments from the Department of the Treasury--we will not be sending this to countries with which we don't have a tax treaty. There are strong statutory and regulatory requirements that prevent this information from being sent to countries that abuse it.
Maybe Members think that's not strong enough. If the gentleman from Florida would like to submit legislation to strengthen those statutory requirements to make it clear that some countries qualify and some don't--for example, I'm informed Venezuela today would not qualify for obvious reasons, because of the brutal, corrupt nature of that government.
So the question is, because some governments would abuse it, should we protect every tax evader who wants to use the United States as a haven from having their money reported, at the price of not getting cooperation ourselves? That doesn't mean everybody puts their money here as a tax evader. If you're not a tax evader, then there's no problem with having this reported. As far as the Pentagon being hacked, yeah, people have been hacked. If the IRS was going to be hacked, a lot more would have happened.
The fact is that the security of tax returns in America is one of the best things about our government. Administrations of both parties from time immemorial have protected the security of tax returns. We have a very good record as a government. We shouldn't just denigrate it with no basis in protecting the integrity of tax returns. People have filed tax returns and have had great privacy in them. This is the central point, because some of the banks would like to get this money and not care whether people are tax evaders or not.
The gentleman says we can do it case by case. That's an impossible task, case by case to decide. Then the IRS becomes more intrusive. Do you want to do a frisk of each individual to decide whether he or she has his returns done? Case by case is the way you destroy privacy.
Here's the fundamental point. We are making efforts to collect taxes owed to us by people who have hidden the money elsewhere, and we know that's been a problem. This would make it impossible to do that with any efficiency. As I said, there are very clear statements of policy against sending this information to Venezuela, against sending it to other places where it wouldn't be secure. This is the question: Are we going to allow American standards, in trying to impose taxes that are legitimately owed here, to be eroded by other countries?
The gentleman mentioned the Cayman Islands. I don't want the Cayman Islands to set the standard for American tax collection. The gentleman mentioned that the Cayman Islanders are sending money here. I don't want the Cayman Islanders and their desire to get shelter to be setting the standard for American tax collection practices, for the need of America to do the right thing.
Those people who are lawfully investing money will not be frightened by this, and America's ability to get taxes owed to us would be destroyed by this amendment.
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 31
Guidance on Reporting Interest Paid to Nonresident Aliens
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains final regulations regarding the reporting requirements for interest that relates to deposits maintained at U.S. offices of certain financial institutions and is paid to certain nonresident alien individuals. These regulations will affect commercial banks, savings institutions, credit unions, securities brokerages, and insurance companies that pay interest on deposits.
On January 7, 2011, the Treasury Department and the IRS published a notice of proposed rulemaking (REG 146097-09) (the 2011 proposed regulations) in the Federal Register (76 FR 1105, corrected by 76 FR 2852, 76 FR 20595, and 76 FR 22064) under section 6049 of the Internal Revenue Code (Code). The 2011 proposed regulations withdrew proposed regulations that had been issued on August 2, 2002 (67 FR 50386) (the 2002 proposed regulations). The 2002 proposed regulations would have required reporting of interest payments to nonresident alien individuals that are residents of certain specified countries. The 2011 proposed regulations provide that payments of interest aggregating $10 or more on a deposit maintained at a U.S. office of a financial institution and paid to any nonresident alien individual are subject to information reporting.
Written comments were received by the Treasury Department and the IRS response to the 2011 proposed regulations. A public hearing on the 2011 proposed regulations was held on May 18, 2011, at which further comments were received. All comments were considered and are available for public inspection at http://www.regulations.gov or upon request. After consideration of the written comments and the comments provided at the public hearing, the 2011 proposed regulations are adopted as revised by this Treasury decision.
Explanation and Summary of Comments
Objectives of This Regulatory Action
The reporting required by these regulations is essential to the U.S. Government's efforts to combat offshore tax evasion for several reasons. First it ensures that the IRS can, in appropriate circumstances, exchange information relating to tax enforcement with other jurisdictions. In order to ensure that U.S. taxpayers cannot evade U.S. tax by hiding income and assets offshore, the United States must be able to obtain information from other countries regarding income earned and assets held in those countries by U.S. taxpayers. Under present law, the measures available to assist the United States in obtaining this information include both treaty relationships and statutory provisions. The effectiveness of these measures depends significantly, however, on the United States' ability to reciprocate.
The United States has constructed an expansive network of international agreements, including income tax or other conventions and bilateral agreements relating to the exchange of tax information (collectively referred to as information exchange agreements), which provide for the exchange of information related to tax enforcement under appropriate circumstances. These information exchange relationships are based on cooperation and reciprocity. A jurisdiction's willingness to share information with the IRS to combat offshore tax evasion by U.S. taxpayers depends, in large part, on the ability of the IRS to exchange information that will assist that jurisdiction in combating offshore tax evasion by its own residents. These regulations, by requiring reporting of deposit interest to the IRS, will ensure that the IRS is in a position to exchange such information reciprocally with a treaty partner when it is appropriate to do so.
Second, in 2010, Congress supplemented the established network of information exchange agreements by enacting, as part of the Hiring Incentives to Restore Employment Act of 2010 (Pub. L. 111-147), provisions commonly known as the Foreign Account Tax Compliance Act (FATCA) that require overseas financial institutions to identify U.S. accounts and report information (including interest payments) about those accounts to the IRS. In many cases, however, the implementation of FATCA will require the cooperation of foreign governments in order to overcome legal impediments to reporting by their resident financial institutions. Like the United States, those foreign governments are keenly interested in addressing offshore tax evasion by their own residents and need tax information from other jurisdictions, including the United States, to support their efforts. These regulations will facilitate intergovernmental cooperation on FATCA implementation by better enabling the IRS, in appropriate circumstances, to reciprocate by exchanging information with foreign governments for tax administration purposes.
Finally, the reporting of information required by these regulations will also directly enhance U.S. tax compliance by making it more difficult for U.S. taxpayers with U.S. deposits to falsely claim to be nonresidents in order to avoid U.S. taxation on their deposit interest income.
International Standard for Transparency and Information Exchange
Under the international standard for transparency and exchange of information, which is reflected in the Organisation for Economic Cooperation and Development (OECD) Model Agreement on Exchange of Information on Tax Matters, the OECD Model Tax Convention, and the United Nations Model Double Tax Convention between Developed and Developing Countries, exchange of tax information cannot be limited by domestic bank secrecy laws or the absence of a specific domestic tax interest in the information to be exchanged. Accordingly, under this global standard a country cannot refuse to share tax information based on domestic laws that do not require banks to share the information. In addition, under the global standard, a country cannot opt out of information exchange based on the fact that the country does not itself need the information to enforce its own tax rules. Thus, even countries that do not impose income taxes, and therefore do not have tax enforcement concerns, have entered into information exchange agreements to provide information about the accounts of nonresidents.
Comments Regarding Confidentiality and Improper Use of Information
Some comments on the 2011 proposed regulations expressed concerns that the information required to be reported under those regulations might be misused. For example, comments expressed concern that deposit interest information may be shared with a country that does not have laws in place to protect the confidentiality of the information exchanged or that would use the information for purposes other than the enforcement of its tax laws. These comments further suggested that these concerns could affect nonresident alien investors' decisions about the location of their deposits.
The Treasury Department and the IRS believe that the concerns raised by the comments are addressed by existing legal limitations and administrative safeguards governing tax information exchange. As discussed herein, information reported pursuant to these regulations will be exchanged only with foreign governments with which the United States has an agreement providing for the exchange and when certain additional requirements are satisfied. Even when such an agreement exists, the IRS is not compelled to exchange information, including information collected pursuant to these regulations, if there is concern regarding the use of the information or other factors exist that would make exchange inappropriate.
First, information reported pursuant to these regulations is return information under section 6103. Section 6103 imposes strict confidentiality rules with respect to all return information. Moreover, section 6103(k)(4) allows the IRS to exchange return information with a foreign government only to the extent provided in, and subject to the terms and conditions of an information exchange agreement. Thus, the IRS can share the information reported under these regulations only with foreign governments with which the United States has an information exchange agreement. Absent such an agreement, the IRS is statutorily barred from sharing return information with another country, and these regulations cannot and do not change that rule.
Second, consistent with established international standards, all of the information exchange agreements to which the United States is a party require that the information exchanged under the agreement be treated and protected as secret by the foreign government. In addition, information exchange agreements generally prohibit foreign governments from using any information exchanged under such an agreement for any purpose other than the purpose of administering, collection and enforcing the taxes covered by the agreement. Accordingly, under these agreements, neither country is permitted to release the information shared under the agreement or use it for any other law enforcement purposes.
Third, consistent with the international standard for information exchange and United States law, the United States will not enter into an information exchange agreement unless the Treasury Department and the IRS are satisfied that the foreign government has strict confidentiality protections. Specifically, prior to entering into an information exchange agreement with another jurisdiction, the Treasury Department and the IRS closely review the foreign jurisdiction's legal framework for maintaining the confidentiality of taxpayer information. In order to conclude an information exchange agreement with another country, the Treasury Department and the IRS must be satisfied that the foreign jurisdiction has the necessary legal safeguards in place to protect exchanged information and that adequate penalties apply to any breach of that confidentiality.
Finally, even if an information exchange agreement is in effect, the IRS will not exchange information on deposit interest or otherwise with a country if the IRS determines that the country is not complying with its obligations under the agreement to protect the confidentiality of information and to use the information solely for collecting and enforcing taxes covered by the agreement. The IRS also will not exchange any return information with a country that does not impose tax on the income being reported because the information could not be used for the enforcement of tax laws within that country.
In addition, the IRS has options regarding the appropriate form of exchange. For example, the IRS might exchange information with another jurisdiction only upon specific request. In the case of specific exchange requests, the IRS evaluates the requesting country's current practices with respect to information confidentiality. The IRS also requires the requesting country to explain the intended permitted use of the information and justify the relevance of that information to the permitted use. Alternatively, in appropriate circumstances, the IRS might exchange certain information on an automatic basis. The IRS currently exchanges deposit interest information on an automatic basis with only one jurisdiction (Canada). The IRS will not enter into a new automatic exchange relationship with a jurisdiction unless it has reviewed the country's policies and practices and has determined that such an exchange relationship is appropriate. Further, the IRS generally will not enter into an automatic exchange relationship with respect to the information collected under these regulations unless the other jurisdiction is willing and able to reciprocate effectively.
The Treasury Department and the IRS believe that the legal and administrative safeguards described in the preceding paragraphs regarding the use of information collected under these regulations should adequately address the concerns identified by the comments and, therefore, these regulations should not significantly impact the investment and savings decisions of the vast majority of nonresidents who are aware of and understand these safeguards and existing law and practice. Nevertheless, to enhance awareness and further address concerns, these final regulations revise the 2011 proposed regulations to require reporting only in the case of interest paid to a nonresident alien individual resident in a country with which the United States has in effect an information exchange agreement pursuant to which the United States agrees to provide, as well as receive, information and under which the competent authority is the Secretary of the Treasury or his delegate.
For this purpose, the Treasury Department and the IRS will publish a Revenue Procedure contemporaneously with these final regulations specifically identifying the countries with which the United States has in force such an information exchange agreement. The Revenue Procedure will be updated as appropriate. With respect to any calendar year, payors will only be required to report interest on deposits maintained at an office within the United States and paid to a nonresident alien individual who is a resident of a country identified in the Revenue Procedure as of December 31 of the prior calendar year as being a country with which the United States has in effect such an information exchange agreement. To address any potential burden associated with reporting on this basis, the final regulations provide that for any year for which the information return under §1.6049-4(b)(5) is required, a payor may elect to report interest payments to all nonresident alien individuals.
As previously discussed, the identification of a country as having an information exchange agreement with the United States does not necessarily mean that the information collected under these regulations will be reported to such foreign jurisdiction. As an additional measure to further increase awareness among concerned nonresidents regarding the IRS' use of information collected under these regulations, the Revenue Procedure also will include a second list identifying the countries with which the Treasury Department and the IRS have determined that it is appropriate to have an automatic exchange relationship with respect to the information collected under these regulations. This determination will be made only after further assessment of a country's confidentiality laws and practices and the extent to which the country is willing and able to reciprocate.
In addition, in response to comments, and given the information exchange practices described in the preceding paragraphs and the information that will be available in the Revenue Procedure, these final regulations eliminate the requirement in the 2011 proposed regulations for financial institutions to include in the information statement provided to nonresident alien individuals a statement informing the individual that the information may be furnished to the government of the country where the recipient resides. In addition, these final regulations clarify that a payor or middleman may rely on the permanent residence address provided on a valid Form W-8BEN, ``Beneficial Owners Certificate of Foreign Status for U.S. Tax Withholding'', for purposes of determining the country of residence of a nonresident alien to whom reportable interest is paid unless the payor or middleman knows or has reason to know that such documentation of the country of residence is unreliable or incorrect. The final regulations also modify §31.3406(g)-1 of the proposed regulations to clarify that, consistent with the backup withholding rules generally, a payment of interest described in §1.6049-8(a) is not subject to withholding under section 3406 if the payor may treat the payee as a foreign person, without regard to whether the payor reported such interest (although a payor may be subject to penalties if it fails to report as required). As under the prior regulations requiring the reporting of interest paid to Canadian nonresident alien individuals, the final regulations define interest subject to reporting to mean interest paid on deposits as defined under section 871(i)(2)(A) (including deposits with persons carrying on a banking business deposits with certain savings institutions, and certain amounts held by insurance companies under agreements to pay interest thereon).
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