Mountains of paperwork are expected to result, but Bermuda's two major banks are quickly instituting procedures that will protect the earnings of their clients who hold US securities.

New rules implemented by the Internal Revenue Service (IRS) seek to expose any US nationals trying to evade paying income tax. But in doing so, all those holding US securities will have to prove their nationality or face the IRS withholding as much as 30 percent of their interest and dividend earnings.

Both the Bank of Butterfield and the Bank of Bermuda revealed that they will be applying to the IRS for status as `qualified intermediaries' (QI). The QI designation will result from an agreement directly with the IRS.

"One of the main benefits to our non-US customers of Butterfield Trust becoming a Qualified Intermediary is that their personal information will remain confidential and will not be disclosed to the Internal Revenue Service,'' said a spokesperson from the Bank of Butterfield.

"The Bank of Bermuda will be looking to have its qualified intermediary status approved in Bermuda and all jurisdictions where it has a presence,'' said a Bank of Bermuda spokesperson.

And the Bank of Bermuda said the new rule will result in "a tremendous amount of extra work for all affected''.

"The new ruling surrounding the US Withholding Tax is one of the most significant changes to US tax law for many years,'' the bank said, "in terms of the impact it will have on organisations around the world.'' The Bank of Butterfield said the procedures it puts in place will "undoubtedly bring increased costs'' but added that the costs would be one-off and that on-going costs are not expected to be high.

"While the new rules will bring demands on the trust company in collecting new withholding tax forms from customers who own US securities, this is a process which is well underway and has proceeded very smoothly,'' said the Bank of Butterfield.

"We have received a very quick response from our clients who have had no difficulty in complying with the requirements. As a result, we anticipate being compliant well before the new procedures become operative on January 1 2001.''