Some banks in South Florida are hearing from foreign account holders concered about as a proposed IRS rule that would raise taxes on their accounts.
Right now, the interest collected non-resident U.S. bank and credit union accounts (called NRA’s for short) are not taxed. But the US Treasury is trying to change all that. In January of 2011, Obama’s IRS proposed a new rule that would require banks to report the interest paid to these accounts. The rule has not yet been officially adopted.
But its prospect has some NRA holders worried.
Bankers argue that the United States financial system has benefited greatly from deposits of foreigners over the last 90 years. Advocates supporting the tax-free nature of these accounts say these deposits are lent by banks in their local communities to small businesses to help create jobs. A
ccording to the Commerce Department, $10.6 trillion is invested in the American economy including approximately $3.6 trillion reported by U.S. banks and securities brokers.
One of the states that has a lot of these NRAs is Florida. Alex Sanchez, President and CEO of the Florida Bankers Association which represents most banks in Florida has been going around the state talking to his members on this uncertainty.
AS: We have both sides of the aisle joining together to speak out against this legislation. Right now we do not know when this is going to be adopted.
I have spoken with the Obama administration and they are not offering any information on the status of this IRS proposal. I just spoke with a South Florida bank board and 40 percent of their deposits are non-resident alien. Their clients are mostly from South America and they are not trying to avoid taxes. They are worried about kidnappings. If their governments knew how much money they had their family member’s safety could be in jeopardy.
The Obama administration wants to collect and exchange their information with their homeland governments. For safe democratic countries like United Kingdom, Switzerland and others, it’s not a problem. But these account holders hail from Bolivia. Mexico, Venezuela, and other South American counties. It doesn’t make sense. Mexico alone is a huge kidnapping and extortion country. We have $60-100b in NRA accounts in Florida alone.
The Fed estimates one trillion in NRA deposits in the United States.
LL: What’s the unintended consequence if this regulation is enforced?
AS: The price we would pay is liquidity issues in the banks and it could create more bank failures. I have asked the Obama Administration for the past year to do a cost benefit analysis and to study how these South American countries would enforce privacy laws and thus far I have not received a reply to this request. It makes you suspicious and wonder what is going on. The irony is the President is trying to concentrate on job creation now, and this proposal if adopted would remove billions in capital that could be used for job creation.
LL: Which states have the most to lose?
AS: For us in Florida most of our NRA’s are from Venezuela, Brazil and Mexico and other Central and South American countries. In California its Asia, Texas it’s Mexico. Another concern is if people withdraw their monies from U.S. banks and close their FDIC bank accounts, they may also divest themselves from their real estate holdings. For instance, the Brazilians have helped the Florida’s housing market recover substantially
LL: Any other concerns?
AS: Besides the NRA concern banks are also talking about the regulatory burden with Dodd Frank. The average community bank usually employs about 37 workers. For this size community bank to employ ten compliance staff and only four lenders shows the system is getting out of whack.
Banks are in the business of lending and yet you have more people making sure the t’s are crossed and i’s are dotted than people actually lending. That’s the concern community bankers. While community banks have only 11 percent of the market share, they do make 40% of the business loans.
According to the NFIB in their November survey, 92% of their members said their credit needs are being met. Competition is fierce. Banks make their money by lending and they are all trying to find that good buyer. We are not seeing as many defaults on loans which is good.
People want banks to be their partners. Banks are not partners, they lend money.
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A Senior Talent Producer at CNBC, and author of "Thriving in the New Economy:Lessons from Today's Top Business Minds."