[Federal Register Volume 61, Number 78 (Monday, April 22, 1996)]
[Proposed Rules]
[Pages 17614-17667]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-8936]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1, 31, 35a, 301, 502, 503, 509, 513, 514, 516, 517,
520, and 521
[INTL-O62-90; INTL-0032-93; INTL-52-86; INTL-52-94]
RINS 1545-AO27; 1545-AR90; 1545-AL99; 1545-AT00
General Revision of Regulations Relating to Withholding of Tax on
Certain U.S. Source Income Paid to Foreign Persons and Related
Collection, Refunds, and Credits; Revision of Information Reporting and
Backup Withholding Regulations; and Removal of Regulations Under Part
35a and of Certain Regulations Under Income Tax Treaties
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and withdrawal of notice of
proposed rulemaking.
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SUMMARY: This document contains proposed regulations relating to the
withholding of income tax under sections 1441 and 1442 on certain U.S.
source income paid to foreign persons, the related tax deposit and
reporting requirements under section 1461, and the related collection,
refunds, and credits of withheld tax under sections 1461 through 1463
and section 6402. Additionally, this document contains proposed
regulations relating to the statutory exemption under sections 871(h)
and 881(c) for portfolio interest. This document proposes to remove
certain temporary employment tax regulations under the Interest and
Dividend Compliance Act of 1983 and to amend existing regulations under
sections 6041A and 6050N. This document also proposes changes to
proposed regulations contained in project number INTL-52-86, published
on February 29, 1988 (53 FR 5991) under sections 6041, 6042, 6045, and
6049. This document proposes related changes to the regulations under
sections 163(f), 165(j), 3401, 3406, 6114, and 6413 and proposes
further changes to the proposed regulations under section 6109
contained in project number IL-0024-94 published on June 8, 1995 (60 FR
30211). This document proposes to remove certain regulations under
income tax treaties. The IRS and Treasury have reviewed current
withholding and reporting procedures applicable to cross-border flows
of income and have concluded that changes are necessary in view of the
substantial growth in such flows over
[[Page 17615]]
the past 15 years. This document also removes proposed regulations
published on July 12, 1976 (41 FR 28517) and September 10, 1984 (49 FR
355110), respectively.
DATES: Written comments and requests for a public hearing must be
received by July 22, 1996.
ADDRESSES: Send submissions to: CC:DOM:CORP:R ([INTL-0032-93]), room
5228, Internal Revenue Service, POB 7604, Ben Franklin Station,
Washington, DC 20044. In the alternative, submissions may be hand
delivered between the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R
([INTL-0032-93]), Courier's Desk, Internal Revenue Service, 1111
Constitution Avenue NW., Washington, DC.
FOR FURTHER INFORMATION CONTACT: Philip Garlett, telephone (202) 622-
3880 (not a toll-free number), for questions on proposed regulations
under sections 1441, 1442, 1461, 1462, 1463, 3401, 6402, and 6413;
Gwendolyn A. Stanley, telephone (202) 622-3860 (not a toll-free number)
for questions on payments to partnerships; Carl Cooper, telephone (202)
622-3840 (not a toll-free number) for questions on proposed regulations
under sections 163(f), 165(j), 871(h) and 881(c) and on withholding
agreements; Teresa Burridge Hughes, telephone (202) 622-3880 (not a
toll-free number), for questions on proposed regulations under sections
6041 through 6049, 6050N; Teresa Burridge Hughes, telephone (202) 622-
3880 and Renay France, telephone (202) 622-4910, for questions on
proposed regulations under section 3406; Elissa Shendalman (202) 622-
3870 on proposed regulations under section 6045 and 6049 relating to
the reporting of payments made in a currency other than the U.S. dollar
or transactions subject to section 988; Lilo Hester, telephone (202)
874-1490 (not a toll-free number), for questions on proposed
regulations under section 6109; David F. Bergkuist, telephone (202)
622-3860 (not a toll-free number), for questions on proposed
regulations under section 6114.
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collections of information contained in this notice of proposed
rulemaking have been submitted to the Office of Management and Budget
for review in accordance with the Paperwork Reduction Act of 1995 (44
U.S.C. 3507).
Comments on the collection of information should be sent to the
Office of Management and Budget, Attn: Desk Officer for the Department
of the Treasury, Office of Information and Regulatory Affairs,
Washington, DC 20503, with copies to the Internal Revenue Service,
Attn: IRS Reports Clearance Officer, T:FP, Washington, DC 20224.
Comments on the collections of information should be received by June
21, 1996.
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless the collection of
information displays a valid control number.
The collections of information relating to foreign persons that
receive payments subject to withholding under sections 1441 or 1442 of
the Internal Revenue Code are in Secs. 1.1441-1(e), 1.1441-4(a)(2),
1.1441-4(b) (1) and (2), 1.1441-4(c), (d) and (e), 1.1441-5(a)(2)(ii),
1.1441-5(b), 1.1441-6(b) and (c), 1.1441-8(b), 1.1441-9(b), 1.1461-1(b)
and (c), 301.6114-1, and 301.6402-3(e), 31.3401(a)(6)-1(e). This
information is required by the IRS to identify and verify the status of
persons to whom payments of U.S. source income is made. This
information will be used to claim foreign person status and, in
appropriate cases, to claim residence in a country with which the
United States has an income tax treaty in effect, so that withholding
at a reduced rate of tax may be obtained at source. The likely
respondents and recordkeepers are individuals, state or local
governments, farms, business or other for-profit institutions, federal
agencies, nonprofit institutions, and small business or organizations.
Responses to this collection of information are mandatory.
Books or records relating to a collection of information must be
retained as long as their contents may become material in the
administration of any internal revenue law. Generally, tax returns and
tax return information are confidential, as required by 26 U.S.C. 6103.
The burden for the reporting requirement contained in Secs. 1.1441-
1(e)(2), 1.1441-4(a)(2), 1.1441-4(b)(2), 1.1441-4(c)(2), 1.1441-4(d),
1.1441-4(e)(1), (2) and (3), 1.1441-6(b), 1.1441-8(b), 1.1441-9(a)(2),
301.6114-1(b)(4), and 301.6402-3(e) will be reflected in the burden of
Form W-8, Form 8833, Form 8233, and the income tax return of a foreign
person filed for purposes of claiming a refund of tax.
The collection of information requirement for corporations
contained in Sec. 1.6049-4(c) will be reflected in the burden of Form
W-8.
The requirement for the recordkeeping requirement in Sec. 1.6049-
5(c)(1) (ii) and (iii) is in an existing regulation, appearing in TD
7966 that was approved under OMB number 1545-0112.
Background
This document contains proposed amendments to the Income Tax
Regulations (CFR parts 1, 31, 35a and 301) under sections 163(f),
165(j), 871, 881, 1441, 1442, 1461, 1462, 1463, 3401, 3406, 6041,
6041A, 6042, 6045, 6049, 6050N, 6109, 6114, 6402, and 6413 of the
Internal Revenue Code (Code). This document also proposes to remove
certain regulations under income tax treaties.
Explanation of Provisions
A. Current Rules
These proposed regulations deal with the withholding of tax under
section 1441, 1442, or 1443 on amounts paid to foreign persons,
procedures for claiming foreign status to avoid backup withholding
under section 3406 on certain payments, and the reporting to the IRS of
payments to foreign persons. Reporting to the IRS may be required under
sections 6011 and 1461 or under the reporting provisions of chapter 61
of the Code, such as sections 6041, 6041A, 6042, 6044, 6045, 6049,
6050H, and 6050N, (the 1099 reporting provisions).
1. U.S. Income Tax on U.S. Source Income of Foreign Persons
Under sections 871(a) and 881(a) of the Code, non-resident alien
individuals and foreign corporations are subject to a 30 percent tax on
most items of income they receive from sources within the United States
that are not effectively connected with the conduct of a trade or
business in the United States. Income taxable under these provisions
includes interest, dividends, royalties, compensation, and other fixed
or determinable annual or periodical income. The tax liability imposed
under section 871(a) and 881(a) is generally collected by way of
withholding at source under section 1441(a) (for payments to non-
resident alien individuals and foreign partnerships) or under section
1442(a) (for payments to foreign corporations). Special withholding
provisions apply under section 1443 to payments of certain income to
foreign tax-exempt entities.
The 30 percent rate is often reduced under the Code or an income
tax treaty. Under current regulations, a withholding agent may
generally rely on a statement furnished by, or on behalf of, the
beneficial owner certifying entitlement to a reduced rate. For example,
the portfolio interest exception under section 871(h) and 881(c) is
conditioned upon the beneficial owner
[[Page 17616]]
of the interest providing a statement of foreign status to the U.S.
withholding agent, which can be provided on a Form W-8. See
Sec. 35a.9999-5(b), A-9. If a reduction is claimed under an income tax
treaty, the withholding agent may generally rely on a Form 1001
provided by, or on behalf of, the beneficial owner claiming residence
in a treaty country. For dividends, however, no certification is
required and the withholding agent may generally rely on the address of
the payee in the treaty country. The procedural requirements for
claiming a reduced rate of withholding may vary depending upon the type
of income, the taxpayer, or whether a treaty is involved.
A withholding agent is generally required to file an annual income
tax return on Form 1042 to report amounts upon which a tax was actually
withheld under chapter 3 of the Code or would have been required to be
withheld but for an exemption under the Code, the regulations, or an
income tax treaty. An information return on a Form 1042-S must be
attached to the Form 1042 and report each recipient's name and address,
amounts paid, and taxes withheld, if any. Section 1.1461-2(b) and (c).
2. Backup Withholding
Under chapter 61 of the Code and section 3406, a reportable
payment, as defined in section 3406(b), is subject to backup
withholding at the rate of 31 percent unless the payor receives a
taxpayer identifying number (TIN), generally on a Form W-9, and, for
reportable interest and dividends, a certification that the payee is
not subject to notified payee underreporting. The payor of a reportable
payment is also generally required to file Form 1099 with the IRS
showing the name, address, and TIN of the payee; the amount of the
payment; and the amount that was withheld, if any. The payor must also
provide a copy of Form 1099 to the payee, who must report the payment
on an income tax return to the extent the payment constitutes gross
income. A payor that fails to obtain a TIN or other required
information or to backup withhold when required under section 3406 may
also be liable under section 3403 for the amount that should have been
withheld. Information reporting by payors is critical to a matching
system that allows the IRS to match information provided by payors with
income reported on a payee's return.
The information reporting provisions of chapter 61 provide guidance
to help payors determine when payments are made to a foreign person
and, therefore, exempt from 1099 reporting and backup withholding.
Generally, depending upon the type of payment involved, a payor may
rely on a certification of foreign status made on Form W-8, Form 1001,
Form 4224, or on documentary evidence. Therefore, even though an amount
is exempt from withholding under chapter 3 of the Code if earned by a
foreign person (e.g., gain from the sale of securities), a payor must
nevertheless comply with specified certification procedures in order to
avoid being subject to backup withholding. Only amounts subject to
reporting under the 1099 reporting provisions can be subject to backup
withholding under section 3406. Therefore, payments to foreign persons
that are exempt from reporting are also exempt from backup withholding.
B. Need for Reform
The IRS and Treasury have reviewed the current withholding and
reporting procedures applicable to cross-border flows of income and
have concluded that changes are necessary in view of the substantial
growth in such flows over the past 15 years. The IRS and Treasury have
concluded that allowing the benefit of the reduced rate at source
continues to be desirable. A system that reduces withholding at source
permits an investor to receive its full income without the
administrative costs and delays that can occur when applying for a
refund of withheld taxes. This advantage, however, is necessarily
accompanied by the need to rely, in part, on withholding agents.
Withholding agents perform an important compliance function as
recipients of the necessary documentation substantiating claims of
foreign status and of reduced rates of withholding and as providers of
information to the IRS.
One of the important objectives of the proposed revisions is to
eliminate unnecessary burdens that the lack of standardization and
coordination of current procedures imposes on withholding agents. For
example, under current rules, different forms must be used for
different purposes; different standards of proof apply for establishing
foreign status for purposes of the 1099 reporting provisions (and the
related backup withholding provisions) and of the Chapter 3 withholding
provisions. Also, the revisions seek to facilitate compliance by
clarifying many of the uncertainties under current procedures (e.g.,
the scope of due diligence standards imposed on withholding agents).
This proposal also addresses the important issue of payments to
intermediaries (nominees, agents, etc.) and whether, in the case of
interest, dividends, and gross proceeds from publicly traded or widely
held obligations or stocks, intermediaries should certify status on
behalf of beneficial owners and, if so, how.
Under current rules, nominee procedures work differently for
different types of income. For example, a U.S. broker redeeming a
short-term obligation held by a foreign financial institution as an
agent may exempt the payment from 1099 reporting and backup withholding
and grant the exemption from the 30 percent tax under section 871(a)
without having to obtain certificates or documentation. If the foreign
financial institution makes a payment to another person offshore then
no certification or documentation is required. On the other hand if,
for example, the foreign financial institution, remitted the amount to
a person in the United States through a U.S. office, it might have to
obtain a Form W-8 or a Form W-9. In contrast, interest on registered
obligations may not qualify as portfolio interest under sections 871(h)
and 881(c) unless the U.S. withholding agent receives a statement that
the beneficial owner of the obligation is not a U.S. person (see
section 871(h)(2)(B)(ii)). Current regulations implement this condition
by requiring that a beneficial owner certification be passed up through
a chain of intermediaries to the U.S. withholding agent. These
procedures have proved difficult to implement in a number of cases and
these proposed regulations offer alternative procedures. The proposed
revisions, therefore, respond to the concerns expressed by various
representatives of the financial community regarding the cost of
complying with current procedures and potential harm to the
competitiveness of U.S. financial institutions in handling investment
transactions in the United States and abroad.
These proposed regulations are also responsive to the Congressional
mandate in section 342 of the Tax Equity and Fiscal Responsibility Act
of 1982 (TEFRA) that Treasury consider a range of options for replacing
the address/self-certification method of administering income tax
treaty benefits. Since 1982, the IRS and Treasury have studied several
options for improving the withholding tax procedures, including a
system of certification of residence in a treaty country and refund
systems. At hearings held in February of 1985 on proposed regulations
issued in 1984 under section 1441, comments from the public and several
U.S. treaty partners made it apparent that certification requirements,
[[Page 17617]]
as proposed, would create too many administrative problems for payments
made through nominees. The proposed revisions take these comments into
account and propose to rely on procedures essentially identical to the
procedures proposed for portfolio interest on registered obligations.
The streamlining of current procedures and the implementation of
workable nominee certification procedures represent a substantial
simplification and reduction of burden. The IRS and Treasury expect
that this, in turn, should result in greater compliance and improve the
ability by withholding agents and the IRS to detect abusive claims
under U.S. income tax treaties or under the Code.
C. Summary of Proposal
1. Changes Affecting Portfolio-Type Investments
The proposed regulations under section 1441 and related Code
provisions would substantially revise some aspects of the current
system for withholding on, and reporting of, amounts paid to foreign
persons. Current certification procedures (i.e., Forms W-8, 1001, 4224,
etc.,) would be unified and reliance standards would be clarified in an
effort to streamline the processing of cross-border payments,
particularly by banks and other financial institutions. Most forms (W-
8, 1001, 4224, 8709) are proposed to be combined into a single form
(Form W-8). In addition, taxpayer identifying numbers are not required
to be stated on withholding certificates, with certain limited
exceptions that do not affect market-based transactions. These changes
are important steps toward reducing the burden on withholding agents
and assisting taxpayer compliance.
The address rule for claiming tax treaty benefits for dividends is
proposed to be eliminated. Instead, dividends would be made subject to
the same beneficial owner and intermediary certification procedures as
are proposed for portfolio interest on registered obligations. It is
also proposed to apply the same procedures to bank deposit interest (as
described in section 871(i)(2)(A)). On the other hand, the documentary
evidence procedures currently in effect for bank deposit interest on
accounts held with foreign branches would be continued and would be
applied as well to offshore payments of dividends on publicly traded
stocks and portfolio interest on registered obligations. Therefore,
documentary evidence would become the general rule for dividends and
interest earned on accounts held with foreign branches. These proposed
changes illustrate the effort by the IRS and Treasury to eliminate
unnecessary procedural differences in order to reduce the burden on
withholding agents.
The proposal does not generally affect other important classes of
investment transactions. Thus, current portfolio interest rules for
bearer obligations (including commercial paper), convertible
obligations, pass-through certificates, as well as rules for broker
proceeds and short term obligations would be retained. In order to
further simplify compliance, the regulations under section 165(j)
(Sec. 1.165-12) are proposed to be revised to eliminate the
requirements that, in connection with delivery of bearer obligations,
holders receive statements and send confirmations. Provisions regarding
foreign-targeted registered obligations are to be retained. However,
because these special procedures have been rarely used, comments are
solicited on their usefulness and whether they should be retained.
Foreign intermediary procedures as currently applicable to
portfolio interest (which are proposed to become applicable to
dividends and bank deposit interest as well) are substantially revised
by providing several options, allowing different taxpayers to comply in
different ways. These options recognize that it is appropriate to adapt
withholding requirements to accommodate different types of transactions
and should provide substantial relief from current requirements.
In order to allow sufficient time for transition, the regulations
are proposed to be generally effective for payments made after 1997. In
addition, withholding agents would be allowed to continue to rely on
existing certificates after that date until their validity expires as
determined under current rules. Comments are solicited on whether these
proposed effective dates leave adequate time to implement necessary
system changes.
The regulations proposed in 1988 regarding the reporting by U.S.
banks of bank deposit interest paid to Canadian residents are
finalized, effective for payments made on or after January 1, 1997 with
respect to Forms W-8 furnished on or after that date. See the Rules and
Regulations section of this issue of the Federal Register.
2. Intermediary Procedures Options for Portfolio Interest, Dividends on
Publicly Traded Stock, and Bank Deposit Interest
The proposed regulations offer intermediary certification options
designed to simplify compliance by withholding agents. These procedures
would be mostly relevant to portfolio interest on registered
obligations, dividends on publicly traded stocks (eliminating the
address rule), and interest paid on bank deposits (as described in
section 871(i)(2)(A)). First, for portfolio interest on registered
obligations, the current certification procedures would be retained, as
an option and are not reproposed. See Sec. 35a.9999-5(b), A-9. These
rules will be included in final regulations in proposed Sec. 1.871-
14(c)(2)(iii) and, accordingly, that section of the proposed
regulations is reserved. Preserving the existing regulations is
designed to accommodate those taxpayers and withholding agents for whom
the current rules work appropriately.
The regulations propose to add two new procedures. First, a
withholding agent would be allowed to rely on an intermediary Form W-8
furnished on behalf of one or more beneficial owners (or other
intermediaries) without having to obtain beneficial owner documentation
if the intermediary has entered into a withholding agreement with the
IRS and, thus, is a ``qualified intermediary.'' In a chain of
intermediaries, an intermediary would be allowed to rely on the
intermediary Form W-8 of another qualified intermediary. If the other
intermediary is not qualified, the qualified intermediary would
generally be required to obtain beneficial owner documentation from the
other non-qualified intermediary. The qualified intermediary would then
pass such documentation up the chain or rely on such documentation when
issuing its intermediary Form W-8.
Under the withholding agreement procedure, a qualified intermediary
would agree with the IRS to obtain such documentation or certifications
as the agreement would specify. It is contemplated that institutions
that are subject to bona fide ``know-your-customer'' procedures under
their domestic laws will generally be permitted to rely on such
procedures. The withholding agreement will generally include provisions
for beneficial owner information to be reported or made available to
the IRS and for the IRS to audit such information. In appropriate
cases, the reporting and audit may be limited to
[[Page 17618]]
the beneficial ownership information pertaining to U.S. source income
(other than gross proceeds) of U.S. customers or to an audit of the
reports prepared by, and the methodology employed by, the approved
external auditors of the qualified intermediary.
The regulations propose a second intermediary procedure permitting
a foreign agent of a U.S. withholding agent to act on behalf of the
withholding agent. While the U.S. withholding agent would remain liable
for the acts (or failures to act) of its agent, the proposed procedure
streamlines the withholding process as the foreign agent would collect
the appropriate documentation on behalf of the U.S. withholding agent
and report beneficial owner information to the IRS without having to
furnish the documentation to the U.S. withholding agent. The
documentation requirements under this procedure would be the same as
those normally applicable to withholding agents.
Lastly, the proposed regulations provide that the U.S. competent
authority may agree to special withholding procedures with a foreign
competent authority under an income tax treaty. The United States
intends to consult with its tax treaty partners before implementing
changes that would affect its relationship with its treaty partners.
3. Use of Taxpayer Identifying Number
A taxpayer identifying number (TIN) is not required to be shown on
withholding documents provided for income on portfolio-type
investments.
A TIN continues to be required for claims of effectively connected
income. A TIN would also be required to support claims of benefits
under an income tax treaty (other than dividends on publicly traded
stocks). Therefore, for example, payments of dividends on non-publicly
traded stocks, royalties, or related party interest would require a TIN
to be shown on the withholding certificate in order for a withholding
agent to rely on a claim of a reduced rate under a tax treaty.
In the case of an individual, a TIN would generally be an IRS
individual taxpayer identifying number (ITIN) issued by the IRS to a
nonresident alien individual who is not otherwise eligible for a Social
Security Number. In the case of a non-individual, a TIN would be an
Employer Identification Number (EIN). Over time, the IRS will issue
EIN's to foreign persons that begin with the two digits ``98'' to
permit instant recognition of foreign status. See regulations proposed
under section 6109 contained in project number INTL-0024-94, published
on June 8, 1995 (60 FR 302111), describing the types of taxpayer
identifying numbers issued to nonresident alien individuals and the
manner in which a number can be obtained. Further revisions to the
regulations under section 6109 are proposed in order to require the
statement of a TIN in appropriate cases.
4. Other Proposed Changes
The regulations propose to clarify the extent of due diligence
expected from certain withholding agents, such as banks and other
financial institutions. Thus, for payments of portfolio-type income,
the withholding agent's due diligence would be limited to an
examination of the address stated on the withholding certificate. If
the address on the certificate were a U.S. address or did not match the
address information in its records, the withholding agent would have to
seek further proof of a claim of foreign status. This change would not
affect the current requirement that a withholding agent cannot ignore
what it actually knows when determining the extent to which it may rely
on a withholding certificate. However, in the case of financial
institutions, knowledge would be limited to information that can be
associated with the account under the same procedures as apply for
purposes of the backup withholding provisions.
As a further burden reduction, the regulations propose to eliminate
the requirement to attach withholding certificates to Forms 1042 and
1042-S. The current reporting requirements are otherwise unchanged
except for clarification of how these requirements apply in the case of
payments to intermediaries. Therefore, even though certification
procedures are proposed to be modified for bank deposit interest, such
interest continues to be exempt from reporting (except for certain
interest on bank deposits paid to Canadian residents).
The period of validity of a certificate of foreign status (Form W-
8) is limited to three years as under current law. However, a Form W-8
stating a beneficial owner's TIN is proposed to be valid indefinitely
if it relates to income required to be reported to the IRS (or if the
TIN is actually reported even though not otherwise required). The
validity period for certificates used to claim a reduced rate for
effectively connected income is proposed to be extended from one year
to three years.
The regulations propose new procedures dealing with payments to
foreign partnerships. These procedures generally would allow looking
through to the partners and reliance on a certification provided for
each partner. Alternatively, in order to facilitate certification for
partnerships with many partners or for tiered partnerships, the
regulations would also allow a foreign partnership to be a qualified
intermediary under an agreement with the IRS. In that case, the
partnership would be allowed to furnish an intermediary certificate for
the partnership. The partnership would be required to withhold under
section 1441 in the same manner as a domestic partnership. In addition,
the regulations would clarify the manner in which a foreign entity and
its interest holders can determine entitlement to benefits under an
income tax treaty with a particular country based upon the principles
in effect under the laws of that country.
The proposed regulations also address the practical difficulties
that exist under current rules due to the lack of clear guidelines on
determining the status of a payee as a U.S. or a foreign person in the
absence of documentation. While some guidelines exist in limited cases
(e.g., Sec. 35a.9999-5(b) A-10), guidance is incomplete. The proposed
regulations offer a comprehensive and uniform set of presumptions to
assist withholding agents with these determinations.
5. Changes to Reporting Rules Under Chapter 61 of the Internal Revenue
Code
On February 29, 1988, the IRS and Treasury published in project
number INTL-52-86 (53 FR 5991) proposed amendments to the 1099
information reporting regulations (the 1988 proposed regulations)
modifying the reporting requirements and the procedures for presenting
a claim of foreign status. The provisions in the 1988 proposed
regulations concerning information reporting of bank deposit interest
paid to persons resident in Canada are finalized. See Sec. 1.6049-
5(e)(2) of the 1988 proposed regulations and the Rules and Regulations
section of this issue of the Federal Register. The 1988 proposed
regulations are not otherwise amended. In order to standardize
procedures, changes are proposed to the procedures for certifying
foreign status that were proposed in 1988 so as to conform them to
those proposed under section 1441. The IRS and Treasury are considering
finalizing the 1988 proposed regulations at the same time that the
proposed regulations under section 1441 are finalized.
Proposed Effective Dates
Unless otherwise provided in the regulations, the regulations are
proposed to be effective for payments made after December 31, 1997. The
[[Page 17619]]
regulations contain a number of transition rules designed to phase out
currently outstanding withholding certificates (e.g., Forms W-8 and
1001)
Section-by-Section Analysis
Section 1.163-5 Denial of Interest Deduction on Certain Obligations
Issued After December 31, 1982, Unless Issued in Registered Form
Section 1.163-5(c) contains foreign targeting procedures applicable
to certain obligations issued in bearer form. Section 1.163-
5(c)(2)(i)(B)(5) would be revised to modify the cross-reference to the
documentary evidence rules since the Q&A regulations under part 35a are
proposed to be eliminated
Section 1.165-12 Denial of Deduction for Losses on Registration-
Required Obligations Not in Registered Form
Section 165(j)(1) and 1.165-12(a) deny a loss deduction to a holder
of a registration-required obligation that is not in registered form
unless the holder meets certain exceptions. Under Sec. 1.165-12(c)(1)
(iii) and (iv), the loss disallowance rule does not apply to a holder
that delivers a registration-required obligation that is in bearer form
and that is offered or sold in the United States if the holder delivers
the obligation to a financial institution, and the financial
institution provides a statement that it is a financial institution
within the meaning of Sec. 1.165-12(c)(1)(v), it is purchasing the
obligation for its own account, the account of another financial
institution, or an exempt organization, that will comply with section
165(j)(3) (A), (B), or (C). The loss disallowance rule also does not
apply if a holder delivers a registration-required obligation in bearer
form that is offered or sold outside the United States if it is
delivered to a financial institution and the holder gives the financial
institution a confirmation stating that any U.S. taxpayer that holds
the obligation in bearer form and that is not exempt under section
165(j)(3) (A), (B), or (C) will be denied a deduction for any loss or
capital gain treatment with respect to the obligation. A holder may
deliver a registration-required obligation in bearer form that is
offered and sold outside the United States to a person other than a
financial institution only if the holder has documentary evidence, as
described in
Section 35a.9999-4T, A-5 That the Person Is Not a U.S. Person
These proposed regulations would revise Sec. 1.165-12(c)(1)(iv) to
eliminate the requirement that the holder receive a statement from a
financial institution for bearer obligations offered or sold in the
United States. The proposed regulations would also eliminate the
requirement that the holder deliver a confirmation to a financial
institution for obligations offered or sold outside the United States.
These changes are proposed to reduce the documentation burden
associated with secondary market transactions. The documentary evidence
requirement for delivery outside the United States to a foreign person
other than a financial institution is retained. The proposed
regulations would clarify that the holder may receive such evidence
electronically
Section 1.871-14 Rules for Portfolio Interest
Under sections 871(h) and 881(c), interest that qualifies as
portfolio interest is generally exempt from tax and is exempt from
withholding at source under section 1441(b)(9). Section 1.871-14
proposes procedures governing whether interest (including original
issue discount) qualifies as portfolio interest described in section
871(h)(2). Section 1.1441-2(d) provides the exemption from withholding.
For interest on bearer obligations, the existing provisions in
Sec. 35a.9999-5(a), A-1 (dealing with portfolio interest on bearer
obligations) and in Sec. 35a.9999-5(c) (dealing with convertible
obligations) will be incorporated in Sec. 1.871-14(b) without
substantive changes and are not reproposed. These rules will be
restated in proposed Sec. 1.871-14 (b)(1) and (b)(2) that are currently
shown as reserved
For interest on registered obligations, section 871(h)(2)(B)(ii)
provides that such interest qualifies as portfolio interest only if the
U.S. withholding agent receives a statement that the beneficial owner
is not a United States person. Paragraph (c)(2)(i) provides that the
statement requirement would be satisfied if the beneficial owner
furnishes the type of documents described in proposed Sec. 1.1441-
1(e)(1)(i) for a withholding agent to rely on a claim of foreign
status. Thus, in the case of a payment to a beneficial owner, the
beneficial owner must provide a beneficial owner withholding
certificate described in proposed Sec. 1.1441-1(e)(2) or, if the
payment is made on an account held at a foreign branch, documentary
evidence may be substituted (see paragraph (c)(2)(ii)). The ability to
use documentary evidence on foreign branch accounts is a significant
change from current law and one that intends to reduce the burden on
transactions outside the United States. Further, as under current
regulations, the withholding certificate would not have to state a
taxpayer identifying number (although one may be provided, if desired).
See Sec. 35a.9999-5(b), A-9.
In the case of a payment to a foreign person that acts as an
intermediary (e.g., an agent, representative, nominee, etc.), the
proposed procedures under section 1441 would require either that the
intermediary furnish an intermediary withholding certificate or, if the
intermediary acts as the agent of the withholding agent, that the
intermediary be an authorized foreign agent. Under proposed
Sec. 1.1441-1(e)(3)(iv) or proposed Sec. 1.871-14(c)(2)(iii), the
certificate could be, as under current rules, a certificate to which
the beneficial owner documentation is attached (see Sec. 35a.9999-5(b),
A-9). Alternatively, under proposed Sec. 1.1441-1(e)(3)(ii), it could
be a certificate by which the intermediary certifies for the beneficial
owner (or other intermediaries) without being required to attach
beneficial owner documentation. The latter certificate could be issued
only by a qualified intermediary, i.e., a person that has an agreement
with the IRS. The qualified intermediary certificate would be issued
based upon certifications or documentation obtained by the qualified
intermediary. The same standards would apply to these documents as are
proposed to be applied to documents that a U.S. withholding agent is
required to obtain when paying directly to a beneficial owner.
Therefore, a taxpayer identifying number is not required to be shown on
a beneficial owner withholding certificate provided to the qualified
intermediary. Alternatively, the qualified intermediary could rely on
documentary evidence for accounts held at foreign branches. In
addition, different procedures may apply under the terms of a qualified
intermediary's agreement with the IRS.
Where a withholding agent acts through an authorized foreign agent,
certificates received by the agent would be deemed to be received by
the withholding agent. In that case, no certificate would be required
from the authorized agent. See proposed Sec. 1.1441-7(c)(2) for the
description of an authorized foreign agent and proposed Sec. 1.1461-1
(b)(2)(iii) and (c)(4)(iii) for the filing of returns by the
withholding agent and its authorized foreign agent. Paragraph
(c)(2)(iv) specifies that other procedures may apply under a competent
authority agreement with a country with which the United States has an
income tax treaty.
[[Page 17620]]
The regulations clarify the consequences of a late-received Form W-
8 or other documentation. Paragraph (c)(3) provides that the
withholding certificate may be received by the withholding agent at any
time before expiration of the beneficial owner's period of limitation
for claiming a refund of tax with respect to the interest. The
applicable period is described in section 6511(a). Under this rule, a
foreign person would be allowed, for example, to provide the required
certificate to a U.S. withholding agent (or its authorized foreign
agent) at any time prior to filing an income tax return and still be
able to qualify the interest as portfolio interest. However, a
withholding agent that does not hold a valid certificate (or other
valid documentation) when paying the interest would be required to
withhold. Failure to do so would make the withholding agent liable for
the tax if the required certification or documentation procedures are
not complied with prior to the expiration of the beneficial owner's
period of limitation. If a withholding agent fails to withhold although
it does not hold a valid certificate, but the documentation procedures
are ultimately complied with, a withholding agent would be liable for
interest pursuant to section 1463 even though there is no underlying
tax liability.
In addition, the withholding agent may be subject to penalties for
failure to withhold tax. See proposed Sec. 1.1441-1(f)(5).
Paragraphs (d) and (e) are reserved. Paragraph (d) will reflect the
rules in Sec. 35a.9999-5(e), regarding pass-through certificates.
Paragraph (e) will reflect the rules in 35a.9999-5(b) A-12 through A-15
regarding foreign-targeted registered obligations. These rules are not
reproposed. Under Sec. 1.871-14(g), the rules contained in proposed
regulation Sec. 1.871-14 are proposed to be effective for payments of
interest after December 31, 1997. However, withholding agents may
continue to rely on valid Forms W-8 that they hold on the date that is
60 days after the regulations become final until the forms expire under
the rules as in effect on April 22, 1996.
Section 1.1441-1 Requirement for the Withholding of Tax on Payments to
Foreign Persons
This section states the general rules concerning withholding on
payments to foreign persons. Paragraph (a) provides the general purpose
and scope of the section. Paragraph (b) states the general rule that a
withholding agent must withhold 30 percent of the gross amount of
income subject to withholding if paid to a foreign person unless the
beneficial owner of the income is a U.S. person or is a foreign person
entitled to a reduced rate of tax. A withholding agent may grant a
reduced rate at source in the case of a payment to a foreign person
only if, before payment, it can associate the appropriate documentation
with the payment. Therefore, actual knowledge that the beneficial owner
is a foreign person would not excuse the obligation to obtain
appropriate documentation. A withholding agent failing to act in
accordance with these rules may ultimately be relieved from the
liability for the tax under section 1461, but would, in any event, be
liable for interest, and possibly, penalties. See paragraph (f)(5). For
this purpose, payment to a foreign person includes a payment to a U.S.
person if the withholding agent has actual knowledge or reason to know
that the U.S. person is acting as the agent of a foreign person. These
rules restate current law. See Secs. 1.1441-1 and 1.1441-7(a)(1) of the
existing regulations.
Paragraph (c) defines terms, including payee and beneficial owner.
Paragraph (c)(3) defines a payee as the person to whom the payment is
made. This definition has significance for purposes of coordinating the
section 1441 withholding provisions with the 1099 reporting and backup
withholding rules under chapter 61 of the Code and section 3406,
respectively (the 1099 reporting and backup withholding provisions
determine consequences of payments based on payees; in contrast, the
section 1441 withholding provisions determine consequences of payments
based on beneficial owner). In the case of a payment to a foreign
partnership, paragraph (c)(3)(ii) provides that the partners, and not
the partnership, are considered to be the payees. However, a foreign
partnership could be considered a payee if it certified to the
withholding agent that it is a qualified intermediary (see paragraph
(e)(5) regarding qualified intermediaries) or if it certified that the
income is effectively connected with a U.S. trade or business (in which
case, the partnership must itself withhold the tax required under
section 1446). The provisions specify how these rules would apply on a
look-through basis to tiered partnership structures.
Under paragraph (c)(6), a beneficial owner is defined as the person
who, under U.S. tax principles, would be required to include the amount
paid in gross income. Therefore, under these principles, partners, and
not partnerships, are the beneficial owners (unless the partner is
itself a partnership, in which case, one looks through to the partners
of the highest tier foreign partnership). Therefore, the identification
of a beneficial owner is influenced by the classification of the entity
to which the payment is made. This proposed rule revises Sec. 1.1441-
3(f) of the existing regulations that, in effect, treats a partnership
as a beneficial owner for purposes of the withholding provisions. This
provision has created difficulties for partners of a foreign
partnership who wish to claim the benefit of a reduced rate at source
based on their status, but may not do so because the entity does not
qualify for the reduced rate. The proposed regulations would alleviate
these difficulties by permitting beneficial owner information to be
passed to the withholding agent or by permitting the partnership to be
a qualified intermediary.
The IRS and Treasury are aware that some large investment
partnerships hold significant amounts of U.S. portfolio type
investments. The IRS and Treasury understand that generally these
entities are treated as corporations under the provisions of section
7704(c)(3) and the regulations under that section. Therefore, the
proposed revisions requiring beneficial owner documentation for
partners would not adversely affect these entities. The IRS and
Treasury solicit comments on this point.
Generally, the determination of the classification of an entity,
including an entity organized in a foreign country, is made under U.S.
tax rules. Because U.S. and foreign laws may differ on classification
principles, the U.S. tax classification of an entity as a partnership
or a corporation may differ from the tax treatment of that entity under
the laws of a foreign country. Therefore, in the case of income paid to
a foreign entity, the entity might be considered the beneficial owner
under U.S. tax principles (because it is classified as an association
taxable as a corporation under U.S. tax principles), but, if foreign
tax principles are applied, its interest holders, rather than the
entity, might be considered the beneficial owners. This dual
characterization may give rise to difficulties in the application of
income tax treaties. In order to alleviate these difficulties,
paragraph (c)(6)(ii)(B) proposes that foreign tax principles, rather
than U.S. tax principles, apply to identify the beneficial owner of
income for which a claim of a reduced rate of withholding is made based
upon a tax treaty. Under this proposed rule, when a benefit is claimed
under a tax treaty with a particular country, the tax principles that
govern the determination
[[Page 17621]]
of who the beneficial owner is for purposes of obtaining benefits under
that treaty would be the principles in effect under the laws of that
country. This clarification is intended to address the significant
uncertainties resulting from the current lack of guidance on these
issues. The IRS and Treasury intend to consult with treaty partners in
order to promote uniformity in this area. Paragraph (c)(6)(iii)
provides that the beneficial owner rules in the proposed regulations
would not apply to trusts. Until further guidance is provided, the
rules in the current regulations would continue to apply trusts. See
Sec. 1.1441-3 (f) and (g) of the existing regulations.
While different procedures would apply depending upon whether a
payment is made to a corporation or a partnership, a withholding agent
would not be required to determine the classification of an entity when
making a payment to a foreign person. Rather, a withholding agent would
be allowed to rely on the classification claimed by the entity, unless
it had actual knowledge or reason to know otherwise.
Paragraph (d) deals with procedures that would enable a withholding
agent to determine the circumstances in which it could consider that
the payment is made to a U.S. person and is, therefore, exempt from
section 1441 withholding. This paragraph replaces Sec. 1.1441-5 of the
existing regulations and proposes to replace Form 1078 with Form W-9,
consistent with the manner in which a U.S. payee must generally provide
a taxpayer identifying number under section 3406. In the case of a
payment to an exempt recipient or a payment of scholarship, grant,
pension, or annuities, for which no Form W-9 is required under section
3406, a person also would be permitted to use a Form W-9 to establish
its U.S. status. The regulations specify the information that must be
stated on such a certificate, which parallels that required under
Sec. 31.3406(h)-3(e)(2) in order for a payor to reasonably rely on a
Form W-9. If no, or insufficient, documentation is provided, the
presumptions in Sec. 1.1441-1(f) would apply to determine whether the
beneficial owner should be treated as a foreign or U.S. person.
In the case of a payment to a foreign person acting as an
intermediary (e.g., agent, representative, or nominee) for a U.S.
person, paragraph (d)(3) provides that the intermediary may transmit a
Form W-9 for the U.S. person to claim U.S. status and avoid section
1441 withholding. If the U.S. person is not an exempt recipient, the
withholding agent would then have to comply with the 1099 reporting
requirements under chapter 61 of the Code, because, under these rules,
the U.S. person would be treated as a payee. Similarly, as a result of
the payee rules set forth in paragraph (c)(3)(ii) dealing with payments
to foreign partnerships, a withholding agent may treat a payment to a
foreign partnership as a payment made to a U.S. person to the extent of
the U.S. partner's distributive share of that payment. Similarly, the
withholding agent would have to comply with the 1099 reporting
requirements.
Paragraph (e) describes the conditions for a withholding agent to
rely upon a beneficial owner's claim of foreign status. Paragraph
(e)(1) provides that a withholding agent may rely upon a claim of
foreign status if, prior to making the payment, the withholding agent
(1) Holds a beneficial owner withholding certificate or an intermediary
withholding certificate, (2) complies with on-line confirmation
procedures when prescribed by the IRS, and (3) has not received a
notification from the IRS that the withholding certificate is incorrect
or unreliable. The withholding agent's reliance on the withholding
certificate is subject to the withholding agent's actual knowledge or
reason to know otherwise. See standards of knowledge in proposed
Sec. 1.1441-7(b).
Paragraph (e)(2) sets forth the requirements for a beneficial owner
withholding certificate. Generally, a withholding certificate would be
a Form W-8 or, in the case of certain compensation for personal
services, a Form 8233 (or an acceptable substitute) that is signed
under penalties of perjury by the beneficial owner and contains certain
required information. The certificate serves as a representation that
the beneficial owner is not a U.S. person and that the conditions for
claiming a reduced rate of withholding tax are satisfied. These
conditions may vary depending upon the nature of the income or the type
of exemption claimed.
Required information on a beneficial owner Form W-8 would include
the beneficial owner's name, permanent residence address, the type of
income to be received, and the basis for any reduced rate claimed.
Generally, the Form W-8 would not be required to state the beneficial
owner's taxpayer identifying number (``TIN''), except in limited cases
(see paragraph (e)(4)(vii), below).
Paragraph (e)(3) sets forth the requirements for an intermediary
withholding certificate. Intermediary withholding certificates may be
provided by one of three types of persons: (1) A qualified
intermediary, (2) a foreign partnership, or (3) an agent, nominee, or
other representative that is not a qualified intermediary.
Information required from a qualified intermediary on a Form W-8
would include similar information as that required for the beneficial
owner Form W-8 except that the information would relate to the
intermediary. In addition, the Form W-8 would have to state a TIN and
certify that the issuer is a qualified intermediary and has obtained
the appropriate certificates or documentation with respect to the
account holders covered by the Form W-8. A foreign partnership that is
not a withholding agent (because it is not a qualified intermediary or
acting for the account of others) would have to provide the same
information about itself, and attach the partners' withholding
certificates. In addition, the partnership would be required to state
an EIN on the withholding certificate. See proposed Sec. 1.1441-5(b)
for the certificates required to be attached in the case of tiered
partnerships. See also, proposed Sec. 1.1461-1(c)(4)(v) for Form 1042-S
filing requirements for the withholding agent.
An agent, nominee, or representative furnishing an intermediary
certificate would have to provide information about itself, state an
EIN for the intermediary (or an SSN or ITIN in the case of an
individual) and certify that it is not acting for its own account and
is using the Form W-8 to transmit beneficial owner certification for
the payment to which the Form W-8 relates. These procedures are
essentially similar to those in effect for portfolio interest on
registered obligations under Sec. 1.9999-5(b), A9 and that are proposed
to be retained in proposed Sec. 1.871-14(c)(2)(iii).
Paragraph (e)(4)(i) requires that, in the case of joint owners,
each owner provide a withholding certificate. This rule would parallel
the requirements for backup withholding purposes. See Sec. 31.3406(h)-
2(a).
Paragraph (e)(4)(ii)(A) provides the general rule that a
withholding certificate would be valid for a period of three years or
until the circumstances of the beneficial owner changed, making an item
of information on the certificate incorrect. However, under paragraph
(e)(4)(ii)(B), a withholding certificate that includes a TIN would be
valid indefinitely if the income (or, under special procedures, the
TIN) with which the certificate is associated were reported to the IRS.
For example, a bank may rely on a claim of foreign status by an account
holder if it holds a Form W-8 for the account holder even without a
TIN. In that case, the certificate would be valid for a period of three
years only.
[[Page 17622]]
If, however, the account holder were to state a TIN on the form and the
bank adopted procedures by which it reports the TIN to the IRS as
provided in proposed Sec. 1.1461-1(d), the certificate would be valid
indefinitely until a change in circumstances of the account holder made
the information on the form incorrect.
Second, certificates furnished to claim a reduced rate of
withholding on income that is effectively connected with the conduct of
a trade or business within the United States would also be limited to
three years in all circumstances. This is a change from existing
regulations under Sec. 1.1441-4(a)(2) that require that a new
certificate be filed each year. This change would relieve the burden
associated with annual renewal of these certificates and simplify
compliance by providing uniform validity period rules. The 3-year
period of validity for this certificate would extend from the date it
is signed to the last day of the third succeeding calendar year. This
change would insure a full 3-year validity period in all cases (and up
to four years where the certificate is furnished at the beginning of
the calendar year).
Under paragraph (e)(4)(iii), withholding certificates must be
retained for as long as they are relevant for the determination of the
withholding agent's liability under proposed Sec. 1.1461-1. This rule
would replace the 4-year retention period under current law and conform
the rules under section 1441 to the retention period required for Forms
W-9 under section 3406. This change is necessary because the Form W-8,
like Form W-9, is proposed to be made valid indefinitely in certain
circumstances. Paragraph (e)(4)(iv) anticipates the possibility that,
in the future, a withholding agent may rely on electronically
transmitted information otherwise required to be stated on a
withholding certificate.
Paragraph (e)(4)(v) provides for on-line confirmation procedures
for TIN's required to be stated on withholding certificates in order to
verify their correctness and the claim that it belongs to a foreign
person. Such procedures are being developed by the IRS and, when the
system becomes operational, the IRS may require certain categories of
withholding agents handling large volumes of payments to foreign
persons (such as certain teaching institutions) to perform on-line
confirmation of such TIN's. These procedures would be similar to those
currently in use under section 3406 in order to notify payors of an
incorrect TIN.
Paragraph (e)(4)(vi) defines an acceptable substitute form. As
under section 3406, these regulations would permit the use of
substitute forms provided the information furnished is the same as is
required under the regulations and is certified to be correct under
penalties of perjury. See Sec. 31.3406(h)-3(c)(1).
Paragraph (e)(4)(vii) provides all of the circumstances in which a
taxpayer is required to furnish a TIN on a withholding certificate for
purposes of the regulations under sections 1441, 1442, and 1443.
Taxpayers would be required to furnish a TIN when claiming the benefit
of a reduced rate under an income tax treaty (other than with respect
to dividends on publicly traded stocks) or because income is
effectively connected with a U.S. trade or business. In addition,
intermediaries, partnerships, foreign organizations claiming to be tax-
exempt under section 501(c), and private foundations would be required
to furnish a TIN. A TIN would be an IRS Individual Taxpayer
Identification Number (ITIN), a Social Security Number (SSN), or an
Employer Identification Number (EIN). A nonresident alien individual
not eligible for a social security number would be able to obtain an
ITIN from the IRS. See proposed regulations under section 6109
describing procedures for obtaining an ITIN.
Paragraph (e)(5)(i) provides that a qualified intermediary may
furnish a single intermediary withholding certificate to a withholding
agent on behalf of beneficial owners, other intermediaries, and U.S.
payees. The qualified intermediary would have to obtain certification
or documentation from these persons on whose behalf the intermediary
withholding certificate is provided. Generally, the certification and
documentation would be the same as that which a withholding agent is
required to obtain, subject to such modifications as the intermediary's
agreement with the IRS would provide. It is anticipated that the terms
of the agreement would be flexible enough to accommodate the individual
circumstances of a particular qualified intermediary, including any
locally applicable know-your-customer rules or practices. Therefore,
the agreement might acknowledge certain documentary evidence procedures
already in place and not require additional documentation. Paragraph
(e)(5)(ii) provides that a qualified intermediary is a foreign person
that is a party to a withholding agreement with the IRS and is a
clearing organization as defined in Sec. 1.163-5(c)(2)(i)(D)(8), a
financial institution as defined in Sec. 1.165-12(c)(1)(iv), a
partnership, or any other person acceptable within the discretion of
the IRS. A qualified intermediary would be able to either assume
primary responsibility for withholding and reporting to the IRS (if so
permitted under its agreement with the IRS) or leave that
responsibility to the withholding agent. A qualified intermediary that
assumes primary withholding responsibility would present an
intermediary withholding certificate to the withholding agent or
another qualified intermediary representing that it will withhold all
appropriate amounts and comply with all applicable reporting
requirements. The withholding agent or other qualified intermediary
would be allowed to rely on such a certificate and not withhold.
However, the withholding agent would have to file Forms 1042 and 1042-S
under section 1461 to report the payment to the qualified intermediary
and the qualified intermediary's EIN. See proposed Sec. 1.1461-
1(b)(2)(ii) and (c)(4)(ii).
A qualified intermediary that does not assume primary withholding
responsibility would present an intermediary withholding certificate to
a U.S. withholding agent or another qualified intermediary representing
that beneficial owners of U.S. income payments (other than gross
proceeds) are not U.S. persons and, if applicable, qualify for a
reduced rate of withholding. It is anticipated that a qualified
intermediary would establish separate accounts for income subject to
different withholding rates. A single intermediary withholding
certificate should serve as documentation for all these separate
accounts. In addition, the qualified intermediary would provide a Form
W-9 for each beneficial owner that is a U.S. person to whom payments of
income otherwise subject to withholding are made and for whom reporting
is required under chapter 61 of the Code.
A qualified intermediary would generally have to agree to be
subject to the same reporting requirements as apply to withholding
agents under proposed Sec. 1.1461-1(b) and (c), to allow periodic
inspection of its records, and to pay any amount of tax liability
determined to be due. The IRS intends to agree to arrangements with the
qualified intermediary so that, for example, inspection of records may
be minimized where the IRS otherwise gets sufficient access to
beneficial ownership information, through annual reporting of TIN's,
review of know-your-customer rules, and selection of appropriate
account information, or through an exchange of information program
under a tax treaty. In appropriate cases, the IRS may rely on audits
performed by an
[[Page 17623]]
institution's approved external auditors where, for example, under an
income tax treaty or local laws, the IRS would be given access to
appropriate auditor's records to verify compliance. Records may include
workpapers of, reports prepared by, and methodology employed by, the
approved external auditors.
A proposed revenue procedure providing guidance with respect to
withholding agreements has been published as Announcement 96-23
simultaneously with the publication of this document in the Federal
Register.
Paragraph (e)(5)(v) specifies that a foreign partnership that is a
qualified intermediary acting for its partners is a withholding agent
with respect to its partners' distributive shares of income paid to the
partnership. In that case, the partnership is subject to the same
withholding and reporting procedures as would apply to a domestic
partnership. Thus, any arrangement whereby the partnership would seek
to shift primary withholding responsibility to the withholding agent
under the provisions of paragraph (e)(5)(iv)(B) would not be
recognized.
Paragraph (f) contains a set of presumptions upon which a
withholding agent (for purposes of section 1441) and a payor (for
purposes of the 1099 reporting provisions) would rely to determine
whether to treat a person as U.S. or foreign if, at the time of
payment, the withholding agent or payor does not have actual knowledge
of the status of the person to whom the payment is made and lacks the
required documentation or knows or has reason to know that the
documentation it holds is incorrect or unreliable. A presumption under
this paragraph (f) could be rebutted by providing or correcting the
required documentation to the withholding agent or payor. Thus, these
presumptions would assist the payor in determining whether the income
paid is subject to the 1099 reporting and backup withholding regime (if
paid to a U.S. person that is not an exempt recipient) or to the
section 1441 withholding regime (if paid to a foreign person).
Presumptions of foreign status resulting from the application of
these provisions would, when applied for purposes of section 1441, only
affect whether the withholding agent should withhold 30 percent from
the payment on the ground that the payment may, under the provisions,
be treated as made to a foreign beneficial owner. However, the
presumptions could not operate to deem the payee as having established
proof of foreign status for purposes of claiming a reduced rate of tax
under the Code or an income tax treaty.
Paragraph (f)(2)(i) addresses reportable payments to a non-exempt
recipient (a non-exempt recipient is a person for whom the payor must
file a Form 1099; see proposed Sec. 1.6049-4(c)(1)(ii) for a list of
exempt recipients). Where a withholding agent lacks the required
documentation, it would presume that the payee is a U.S. individual.
Accordingly, the withholding agent would withhold 31 percent under
section 3406. Paragraph (f)(2)(ii) incorporates the concept of the 30-
day grace period under Sec. 31.3406(d)-3(a) for a payee to furnish a
Form W-9 to the payor. Because it may take longer to obtain the
required documentation from a foreign person than from a U.S. person,
the proposed regulations allow a withholding agent to treat a payee as
a beneficial owner that is a foreign person for up to 90 days from the
date the agent credits the payee's account (or until the end of the
calendar year if earlier) if the withholding agent has the name and a
foreign address for the account holder or a facsimile copy or an
electronic transmission of the information on a withholding
certificate. This special rule would defer the obligation to backup
withhold under section 3406 because there are sufficient indicia of
foreign status, but does not defer the obligation to withhold under
section 1441, if applicable. If the required documentation were
provided or corrected within the 90-day grace period, the amount
withheld may be refunded to the payee under the adjustment procedures
described in proposed Sec. 1.1461-2. The 90-day grace period would be
terminated if any part of the proceeds in the account that are subject
to the grace period were withdrawn (other than for purposes of
withholding an amount of tax). If the required documentation were not
provided or corrected by the expiration of the grace period, the payee
would be presumed to be a U.S. payee for purposes of section 3406 and
chapter 61 of the Code from the date the account was first credited.
A special rule for joint owners or payees is provided in paragraph
(f)(2)(iii) that would permit a withholding agent to presume that a
payment made to joint owners or payees for whom it does not hold the
required documentation is made to U.S. payees. The grace period would
apply to joint payees if each payee qualified for its application. If
any one of them withdrew any portion of the funds in the account, then
additional withholding under paragraph (f)(2)(ii)(A) would be required.
Paragraph (f)(2)(iv) addresses reportable payments to an exempt
recipient. In that case, the withholding agent could presume that the
payee is a foreign person if it knew the payee's TIN and the TIN began
with the two digits ``98.'' The withholding agent also could presume
that the payee is a foreign person if the payee had a foreign mailing
address or the payment were made outside of the United States (as
defined in proposed Sec. 1.6049-5(e)). In other cases, the withholding
agent could presume that the exempt recipient is a U.S. person. Thus,
for example, a U.S. withholding agent making a payment of interest on a
registered obligation to a corporation with an EIN beginning with the
digits ``98'' would not have to backup withhold under section 3406
(because the corporation is an exempt recipient). However, it should
withhold a 30 percent tax under section 1442 because the condition
under Sec. 1.871-14(c)(1)(iii) that a certificate of foreign status be
received by the U.S. withholding agent for the interest to qualify as
portfolio interest would not be satisfied. Thus, the withholding agent
should treat the interest as not qualified for the portfolio interest
exemption for purposes of section 1441(b)(9). Adjustments to the tax
may be made at a later time in accordance with proposed Sec. 1.1461-2
if the required documentation described in proposed Sec. 1.871-14(c)(2)
is later furnished. See proposed Secs. 1.871-14(c)(3) and 1.1441-
1(f)(5) for rules addressing late received documentation.
Paragraph (f)(3) contains special presumption provisions for
certain payments that are not subject to backup withholding:
scholarship and pension income. In the case of scholarship and grant
income, the withholding agent or payor may generally treat the payee as
a U.S. person unless it has U.S. visa information in its records
concerning the payee. For pension and annuities, the payment would be
presumed to be made to a U.S. person if the payor had the payee's
Social Security number and the payment were made either to a U.S.
mailing address or to a mailing address in a foreign country with which
the United States has an income tax treaty in effect that exempts
residents of the country from U.S. tax on that income. In all other
cases, the payor could presume that the payee is a foreign person. A
withholding agent may use these presumptions as a safe harbor or may,
at its option, choose to withhold at a higher rate if it were unsure of
the application of the presumption in a particular case.
[[Page 17624]]
Paragraph (f)(4) provides special rules for pass-through entities.
Paragraph (f)(4)(i) provides rules for determining whether to treat a
partnership as foreign or domestic. The withholding agent or payor
could presume that the partnership is a foreign partnership if the
withholding agent or payor actually knows that the partnership's EIN
begins with the digits ``98,'' if the mailing address of the
partnership is in a foreign country, if the payment is made outside of
the United States (as defined in proposed Sec. 1.6049-5(e)), or if the
withholding agent or payor knows or had reason to know that the
partnership is foreign.
Under paragraph (f)(4)(ii), a withholding agent or payor that makes
a reportable payment to a person determined to be a foreign partnership
could presume that any partner for which it does not hold the required
documentation is a U.S. individual. In that case, the payee would be
treated as a U.S. payee that is not an exempt recipient and the payment
would be subject to reporting under chapter 61 of the Code and to
backup withholding under section 3406.
Paragraph (f)(4)(iii) provides rules for partners' distributive
shares. A domestic partnership could treat a partner as a U.S. payee
if, at the time it is required to withhold on a reportable payment, it
did not hold all of the required documentation for that partner. A
foreign partnership that is a qualified intermediary under proposed
Sec. 1.1441-1(e)(5)(ii) could treat a partner as a foreign payee if, at
the time it were required to withhold on a reportable payment, it could
not associate the payment with the required documentation.
Paragraph (f)(5) clarifies that a withholding agent that does not
act in accordance with the presumptions and fails to withhold the
required amount may be liable under section 1461 or 3403 for the tax
that should have been withheld based upon the presumptions in paragraph
(f), unless the withholding agent can demonstrate either that the
correct amount of tax was, in fact, withheld or that the beneficial
owner paid the tax due. Proof of payment of tax could be established on
the basis of a Form 4669 furnished by the beneficial owner certifying
the amount of tax paid to the IRS. Proof that the correct amount of tax
was, in fact, withheld, could be based upon obtaining the required
documentation. Late-received documentation could be accepted as proof
of status and entitlement to a reduced rate of tax. However, if the
delays involved in obtaining this documentation affected its
reliability, the IRS could require further proof of status or
entitlement to a reduced rate. Further, pursuant to section 1463 or
section 3403, the withholding agent would be liable for interest under
section 6601, even though, ultimately, there is no underlying tax
liability. Penalties may also apply.
Under paragraph (f)(6), a reportable payment is an amount
reportable under section 3406(b) (without regard to any exception to
reporting under section 6041, 6041A, 6042, 6045, 6049, 6050A, or
6050N).
Paragraph (f)(7) provides that if overwithholding occurs under
section 1441 as a result of application of the presumptions in
paragraph (f), adjustments may be made in accordance with proposed
Sec. 1.1461-2(a). Appropriate refunds and credits may be claimed under
section 1464 or 6414. Amounts overwithheld under section 3406 are
subject to adjustments pursuant to Sec. 31.6413(a)-3(a)(1).
Paragraph (g) provides that these rules are effective for payments
made after December 31, 1997. However, transition rules are provided so
that valid certificates (as determined under current rules) that are
outstanding on the date that is 60 days after these regulations are
published as final regulations may continue to be relied upon for their
period of validity. In addition, dividends on publicly traded stocks
are given special transition relief. See proposed Sec. 1.1441-6(b)(2).
section 1.1441-2 Income Subject to Withholding
Paragraph (a) restates the rules in Secs. 1.1441-1 and -3(a) of the
existing regulations limiting withholding to items of income from
sources within the United States. Paragraph (b) simplifies Sec. 1.1441-
2(a) of the existing regulations by providing that, for purposes of
chapter 3 of the Code, fixed or determinable, annual or periodical
(FDAP) income is any income includable in income under section 61,
subject to enumerated exceptions in paragraph (b)(2) (including certain
exceptions for original issue discount and capital gains, including
option premiums). Under these proposed rules, income paid under a
national principal contract would be FDAP, but see proposed
Sec. 1.1441-4(a)(3) for an exemption from withholding.
Paragraph (b)(3) reflects the position adopted by the IRS in TIR-
877 (December 27, 1966) and in Rev. Rul. 68-333, 1968-1 C.B. 390 that
FDAP includes original issue discount paid by an original issuer of
bonds or other obligations with original issue discount. However, under
the authority of section 1441(c)(8), only certain items of original
issue discount are currently subject to withholding of tax under
Chapter 3. The lack of rules in this area in the past reflects the
difficulties in determining the amount of OID upon which withholding
should be applied. These proposed regulations, however, identify
transactions in which information about the amount of original issue
discount would generally be known or available to the withholding
agent. Therefore, the proposed regulations require withholding on
amounts paid upon sale by an obligor that is related to the original
issuer. In addition, amounts that fail to qualify for the portfolio
interest exemption under section 871(h) or 881(c) (because, for
example, the statement described in section 871(h)(5) has not been
furnished to the U.S. withholding agent) would also be subject to
withholding, regardless of whether it is possible for the withholding
agent to determine precisely the amount of OID. See proposed
Sec. 1.871-14(c)(2). If the required documentation were not furnished,
the amounts could be treated as paid to a U.S. or foreign payee based
upon the presumptions in proposed Sec. 1.1441-1(f). If the amounts are
presumed paid to a U.S. payee, backup withholding under section 3406
might apply. See Sec. 31.3406(b)(2)-(2). If the amounts are presumed
paid to a foreign payee, withholding under section 1441 would apply
(unless the OID instrument had a maturity not exceeding 183 days from
the date of issue).
Under these rules, the entire amount of OID (as determined on the
date of issue) would have to be reported as taxable if the exact amount
of OID were not known. Any amount of overwithholding may be adjusted or
refunded in accordance with the procedures in proposed Sec. 1.1461-2(a)
or Sec. 1.1464-1.
The proposed changes to the OID rules would be effective for OID on
obligations issued after a date that is 60 days after these regulations
are published as final regulations.
Paragraph (c) restates Sec. 1.1441-2(b) of the existing regulations
to eliminate the reference to pre-1967 payments. It also eliminates the
reference to items of income under section 402(a)(2) and 403(a)(2),
relating to payments from certain employees trusts or under employee
annuities, in order to conform to the amendment made to sections
1441(b) and (c)(5) by Public Law 102-318 that deleted these sections
from the requirement of withholding under section 1441.
Paragraph (d) lists exemptions from withholding for certain items
that
[[Page 17625]]
otherwise constitute FDAP income. Paragraph (d)(1) lists the exceptions
that are not conditioned upon furnishing documentation (e.g., interest
on bearer or foreign targeted registered obligations, short-term
obligations). However, documentation may be required under the 1099
reporting provisions in order to avoid reporting under sections 6041 or
6049 and backup withholding under section 3406. Paragraph (d)(2) lists
two other exceptions, but those exceptions are conditioned upon
furnishing documentation described in proposed Sec. 1.871-14(c)(2). The
exceptions are portfolio interest on registered obligations described
in section 871(h)(2)(B) or 881(c)(2)(B) (other than foreign targeted
obligations) and bank deposit interest described in section
871(i)(2)(A). Because bank deposit interest is not subject to
beneficial owner documentation requirements under current rules, the
regulations propose a transition rule that would allow interest paid on
accounts in existence on or before a date that is 60 days after these
regulations are published as final regulations to continue to be
subject to current rules until December 31, 1999.
Paragraph (e) clarifies the meaning of payment for purposes of
withholding. An amount would be considered paid when it is includable
in income under the cash basis method of accounting. Under paragraph
(e)(2), income reallocated under section 482 from a U.S. person to a
related foreign person would be considered a payment for withholding
tax purposes. A payment would also be considered to be made if income
arose as a result of a secondary adjustment made after income is
allocated under section 482, unless the taxpayer entered into a
repatriation agreement that eliminated the liability for withholding.
Paragraph (e)(3) provides that income is not considered paid if it is
blocked under certain executive authority, but is considered paid on
the date the blocking restriction is removed and, therefore, subject to
withholding as of that date. Paragraph (e)(4) provides special payment
rules for dividends. These rules are similar to those in effect for
purposes of backup withholding. See Sec. 31.3406(b)(2)-4. Paragraph
(e)(5) coordinates the payment election for branch interest tax under
Sec. 1.884-4(c)(1) with section 6049 and the withholding provisions
under section 1441.
Section 1.1441-3 Amounts Subject to Withholding
Paragraph (a) restates the rule in Sec. 1.1441-2(a)(1) of the
existing regulations that withholding is generally imposed on the gross
amount of income. Paragraph (b) provides for special withholding rules
for interest. Paragraph (b)(1) restates the rule in Sec. 1.1441-3(c)(3)
of the existing regulations that requires withholding on the entire
amount of stated interest owed on an interest-bearing obligation,
regardless of the character of the amounts paid. The heading is
modified to eliminate any inference that this rule is limited to
payments on defaulted interest coupons. Paragraph (b)(2) restates the
exemption from withholding in Sec. 1.1441-4(h) of the existing
regulations regarding sales of obligations between interest payment
dates. An anti-abuse rule is added that would require withholding where
the withholding agent knew or had reason to know that the sale
transaction was part of a plan the principal purpose of which was to
avoid withholding through a pattern of sales and repurchases.
Paragraph (c) provides rules relating to corporate distributions
and substantially relieves the withholding burden imposed under
Sec. 1.1441-3(b) of the existing regulations on these distributions.
Under the proposed regulations, a corporation could determine the
amount of a distribution subject to withholding based on a reasonable
estimate of available earnings and profits for the taxable year. A
corporation that made a reasonable estimate, but nonetheless
underwithheld, would remain liable for the amount of tax underwithheld
(and interest), but not penalties. These proposed regulations adopt the
same ``reasonable estimate'' standard as is provided under
Sec. 31.3406(b)(2)-4(c)(2). Under paragraph (c)(2)(ii), an intermediary
could rely on a reasonable estimate represented by the distributing
corporation. The distributing corporation would be made liable for any
amount of underwithholding where the withholding agent had relied on
the representation and the estimate had not been reasonably determined.
Paragraph (c)(3) proposes special procedures for withholding on
certain distributions made by a Regulated Investment Company (RIC). In
order to determine whether a withholding obligation arises in that
case, a RIC would benefit from the same exceptions that would apply to
other corporations for distributions payable in stock or stock rights
or distributions treated in part or in full as in exchange for stock.
In addition, the proposed regulations provide that no withholding is
required for a distribution that is a capital gain dividend defined in
section 852(b)(3)(C) or an exempt interest dividend defined in section
852(b)(5)(A). Special procedures are proposed for implementing these
exemptions, however, because a RIC must specifically designate the
extent to which a distribution falls under one of these provisions.
Under applicable rules, the designation may be made as late as 60 days
after the close of the RIC's taxable year, and after making the
designation, the RIC may find that the amount so designated exceeds
what the Code and the regulations allow. This presents special
difficulties under section 1441, which assumes that the amounts subject
to withholding are fixed at the time they are paid.
To address these special difficulties, paragraph (c)(3) would allow
a RIC to designate interim distributions as being subject to section
852(b)(3)(C) or 852(b)(5)(A). If it later determined that the
designation was in excess of what was permitted and, as a result, had
underwithheld, the RIC would have to satisfy the tax liability and
could adjust the withholding pursuant to proposed Sec. 1.1461-2(b). A
RIC would not be subject to penalties for failure to withhold timely,
provided the designation was based upon a reasonable estimate when
made. However, interest would apply under section 6601. In addition,
the RIC might be liable for penalties if the IRS determined that the
estimates were not reasonably determined.
Paragraph (d) restates, without significant changes, the rule in
Sec. 1.1441-3(d) of the existing regulations regarding withholding on
the full amount realized from the sale of property where the
withholding agent does not know the amount of gain subject to
withholding. A withholding agent may, however, determine gain based on
the beneficial owner's withholding certificate if it indicates the
beneficial owner's basis in the property sold. This rule is of limited
application as most capital gains are exempt from withholding under
section 1441.
Paragraph (e) restates the rule in Sec. 1.1441-7(c) of the existing
regulations pertaining to payments in kind. The property conversion
requirement under current rules would be made optional. Instead, the
withholding agent could choose to obtain payment from another source.
The regulations further propose to clarify that the amount of a payment
in kind is measured by the fair market value of the property
transferred or of the services provided. Payments made in foreign
currency require a conversion of the amount of tax using the spot rate
(as defined in Sec. 1.988-1(d)(1)) or a reasonable spot rate
convention. Paragraph (e)(3) provides guidance
[[Page 17626]]
where the withholding agent's satisfaction of the beneficial owner's
tax liability constitutes additional income to the beneficial owner
that is subject to withholding. In that case, the final withholding tax
liability would be calculated under a gross-up formula.
The provisions currently stated under Sec. 1.1441-3(j), relating to
conduit financing arrangements, are proposed to be incorporated without
change into a new paragraph (f). These provisions are not reproposed.
The address rule in Sec. 1.1441-3(b)(3) of the existing regulations
would be eliminated and replaced by requirements to furnish appropriate
documentation or to establish foreign status and, if applicable,
residence in a treaty country. See proposed Sec. 1.1441-1(e) and
1.1441-6. Section Sec. 1.1441-3(c)(1) requiring withholding in the case
of interest paid on obligations issued by the U.S. government would be
deleted as unnecessary given the provisions in Sec. 1.1441-2(a)
describing income subject to withholding. Section Sec. 1.1441-3(c)(4)
addressing unknown owners would also be deleted because the presumption
provisions in Sec. 1.1441-1(f) provide guidance. The special rules for
tax-free covenant bonds issued prior to 1934 are proposed to be
deleted. Comments are solicited as to whether these rules are still
necessary.
Section 1.1441-4 Certain Exemptions From Withholding
Paragraph (a)(1) restates, without significant change, the
provisions in Sec. 1.1441-4(a) of the existing regulations regarding
the exemption from withholding for certain income effectively connected
with the conduct of a trade or business within the United States. The
regulations clarify that the exemption under this section does not
apply to claim an exemption under an income tax treaty (i.e., income
not attributable to a permanent establishment). Claims of treaty
benefit must be made under the procedures described in proposed
Sec. 1.1441-6.
Under paragraph (a)(2)(i), a withholding agent could rely on a
claim that income is effectively connected with the conduct of a trade
or business within the United States if it held a withholding
certificate so stating. The regulations do not permit a withholding
agent to rely on a qualified intermediary withholding certificate to
grant a reduced rate of withholding for income claimed to be
effectively connected, except in the case of a qualified intermediary
that is a partnership acting for its own account. A partnership that
does not claim to be a qualified intermediary could also furnish an
intermediary withholding certificate described in proposed Sec. 1.1441-
1(e)(3)(iii) (i.e., the transmittal certificate normally required from
a partnership transmitting its partners' documentation under the
procedures described in proposed Sec. 1.1441-5(b)). For purposes of
claiming an effectively connected income exemption, it would not be
necessary to attach the partners' documentation to the certificate
since the exemption is available regardless of the status of the
partners and, under section 1446, the partnership is required to
withhold. The validity period of a withholding certificate used to
claim an effectively connected exemption is proposed to be extended
from one year to three years (subject to amendment if a change in
circumstances affected the character of the income that the beneficial
owner anticipated would be effectively connected). This rule should
significantly ease the burden on continuing transactions that generate
effectively connected income every year.
The regulations propose to eliminate the requirement that the
certificate be attached to the Form 1042-S; the withholding agent would
be required to state the beneficial owner's TIN on the Form 1042-S. See
proposed Sec. 1.1461-1(c)(1)(i). If the withholding certificate were
silent as to whether the income is effectively connected or if the
required documentation were lacking, incorrect, or unreliable, the
withholding agent should presume that the income is not effectively
connected.
The rules provided in Sec. 1.1441-4(f) of the existing regulations
are proposed to be restated in a new paragraph (a)(2)(ii) and are not
reproposed. Paragraph (a)(2)(iii) provides for special rules for
payments made to joint owners that would require each joint owner to
provide a withholding certificate certifying that the income is
effectively connected with a trade or business in the United States.
These rules are consistent with the joint owners rules provided under
the section 3406 regulation. See Sec. 31.3406(h)-2(a).
Paragraph (a)(3) provides that no withholding is required on income
from national principal contracts regardless of whether a withholding
certificate is provided. However, such income would have to be reported
on a Form 1042 and 1042-S. This rule would significantly simplify the
paper flows currently associated with these transactions.
Paragraph (a)(4) parallels the rule in proposed Sec. 1.1441-1(f)(5)
regarding the consequences of acting in a manner contrary to prescribed
presumptions. Late received documentation could relieve the withholding
agent from the tax liability. However, an interest charge would apply
under section 6601 on the amount that should have been withheld even
if, ultimately, there is no underlying tax liability. In addition,
penalties might apply.
Paragraph (b) of the existing regulations concerning compensation
for personal services of an individual is substantially unchanged. A
new paragraph (b)(1)(ii) is added to require that withholding on
distributions from certain qualified pension plans and annuities occur
under section 1441 rather than under section 3405 as was required under
Sec. 1.1441-4T(b)(ii) (which expired on February, 1993). A new
paragraph (b)(1)(vi) is also added that would allow employers to wage
withhold on compensation that is otherwise exempt from wage withholding
by reason of section 3402(e). This rule provides relief for employers
of nonresident alien individuals who derive income from sources partly
within and partly without the United States on a regular basis (e.g.,
crew members working on cruise ships). Without this rule, employers
would have to withhold at the 30 percent rate instead of the lower wage
withholding rate.
The provisions under paragraph (b)(2) of the existing regulations
(dealing with a claim of reduced rate of withholding on personal
service income under an income tax treaty) are unchanged with one
exception. The 10-day review rule in paragraphs (b)(2)(i) and (iv)
would be extended to 20 days. This extension is necessary because of
the increase in the number of Forms 8233 that the IRS receives.
Paragraph (b)(6) is added to eliminate the requirement in
Sec. 1.1441-3(e) of the existing regulations to pro-rate the personal
exemption based on the period during which a nonresident alien
individual is present in the United States during the taxable year.
Therefore, the entire personal exemption amount could be taken into
account to determine the base amount on which to withhold.
Paragraph (c) incorporates the provisions in Sec. 1.1441-2(c) of
the existing regulations dealing with participants in certain exchange
or training programs and provides additional guidance with respect to
payments of scholarship or fellowship grants to nonresident alien
individuals. It reflects 1988 and 1994 statutory amendments to section
1441 concerning certain visa holders. Such income is subject to a lower
withholding rate of 14 percent under section 871(c). The regulations
propose an alternate withholding election so that taxpayers
[[Page 17627]]
may choose to be subject to the withholding rates applicable to wages,
which in many cases are likely to result in a lower rate. Also,
individuals who receive both scholarship or grants and compensation
income from the same withholding agent could choose to combine all
income on Form 8233 to claim a reduced rate under a tax treaty for both
types of income.
Paragraphs (d) (dealing with annuities) and (e) (dealing with
central banks of issue and the Bank of International Settlement) merely
reflect conforming changes regarding the proposed documentation
requirements.
Section 1.1441-5 Withholding on Payments to Pass-Through Entities
The existing regulations in Sec. 1.1441-5 address claims of U.S.
status. These provisions are restated, with modifications, in proposed
Sec. 1.1441-1(d).
This section, as revised, would provide special withholding
procedures for payments to partnerships. Paragraph (a) deals with
domestic partnerships. As under current regulations, payments to
domestic partnerships would not require withholding, even if the
partners were foreign persons. A domestic partnership is the
withholding agent for items of income included in the distributive
share of a partner that is a foreign person. Paragraph (b) proposes to
modify the current rules for payments to foreign partnerships to permit
a look-through approach, so that claims of reduced rate could be
presented by the partnership on behalf of the partners (including
partners that are U.S. persons). The look-through approach would apply
through tiers of foreign partnerships. In the alternative, a foreign
partnership could, under an agreement with the IRS, become a qualified
intermediary so that the partners' documentation would not have to be
furnished to the withholding agent. See proposed Sec. 1.1441-1(e)(5)
for rules applicable to qualified intermediaries. Paragraph (b)(2)
clarifies how the look-through approach would operate in the case of a
tiered partnership. Generally, the partnership would have to look
through tiers until it reached the beneficial owner (as determined
under proposed Sec. 1.1441-1(c)(6)). However, it could stop at any
level in the chain that constitutes a payee (as defined in proposed
Sec. 1.1441-1(c)(3)).
Section 1.1441-6 Claim of a Reduced Rate Under an Income Tax Treaty
The proposed regulations eliminate the ``address'' rule in
Sec. 1.1441-6(c)(1) of the existing regulations and in regulations
under several income tax treaties, which permits a withholding agent to
grant a reduced rate of tax under a treaty based upon the address of
the payee (including a nominee). Paragraph (b)(1) provides general
procedures for reliance by a withholding agent on a claim for a reduced
rate of withholding under a treaty based upon the documentation
requirements described in proposed Sec. 1.1441-1(e)(1)(i). A
withholding agent could rely upon a beneficial owner withholding
certificate described in proposed Sec. 1.1441-1(e)(2) as establishing
both foreign status and residence in the treaty country provided a TIN
is stated on the certificate. In addition, in the case of dividends
with respect to which an advance ruling is required in order to secure
the reduced rate of tax under the tax treaty, the withholding
certificate would have to state that the beneficial owner has obtained
such a ruling. Such rulings are currently required under a very limited
number of tax treaties: Austria, Denmark, Ireland, and Switzerland. See
paragraph (e) regarding the procedures for obtaining such a ruling.
Further, for amounts exceeding $500,000 in the aggregate for the
taxable year paid to a beneficial owner related to the withholding
agent, the beneficial owner would have to indicate on the certificate
that it will file a Form 8833 under section 6114. The regulations under
section 6114 are proposed to be modified accordingly. Claims of treaty
benefit could also be made on the basis of an intermediary withholding
certificate described in proposed Sec. 1.1441-1(e)(3). Further, a U.S.
withholding agent could act through an authorized foreign agent
described in proposed Sec. 1.1441-7(c)(2).
Paragraph (b)(2) provides special rules for certain dividends paid
on stock that is traded on a U.S. established market. For these
dividends, the withholding agent could grant treaty benefits based upon
the same documentation procedures as are proposed to apply to portfolio
interest on registered obligations (e.g., no TIN is required on a
beneficial owner withholding certificate). See proposed Sec. 1.871-
14(c)(2). Paragraph (b)(3) provides that the competent authorities may
agree to different certification procedures under an applicable tax
treaty.
Paragraph (b)(4) clarifies the manner in which beneficial owners
could claim benefits under a tax treaty where foreign law principles
apply to identify the beneficial owner of a payment made to a foreign
entity. Under proposed Sec. 1.1441-1(c)(6)(ii)(B), the beneficial owner
would be determined based upon the laws of the country whose tax treaty
with the United States is invoked to claim a reduced rate of tax.
These procedures are intended to apply in a reciprocal manner.
Therefore, paragraph (b)(4)(iv) provides that, if the IRS determined
that a treaty partner is not identifying beneficial owners in a similar
manner and, as a result, denies benefits under an otherwise applicable
treaty to an entity organized in the United States or to interest
holders residing in the United States, the benefits of these procedures
could be suspended for entities organized, or interest holders
residing, in that country until the competent authorities reached a
reciprocal agreement on the application of treaty benefits in such
cases. Suspension of benefits under this provision would be effective
on a prospective basis only.
Paragraph (c) states the rules regarding certification of a TIN by
the IRS. These procedures would apply to payments for which a Form W-8
is furnished with a TIN. They are directed to beneficial owners (or
their agents) and are designed to ensure that the IRS can verify the
beneficial owner's status as a resident of a treaty country based upon
the information return later filed by the withholding agent on Form
1042-S. If the IRS determined that the TIN does not support the
beneficial owner's claim of residence in the treaty country, it would
so notify the withholding agent. The IRS could waive the requirement
that a taxpayer certify its TIN with the IRS when it implements
procedures to verify a taxpayer's status directly with a foreign
competent authority. The IRS could also certify a TIN based upon
representations made by a qualified intermediary.
The IRS would certify a TIN based upon a certificate of residence
or documentary evidence. Paragraph (c)(3) describes a certificate of
residence as a certificate issued by the tax authorities of the treaty
country certifying that the taxpayer files income tax returns as a
resident of that country and is current on his filing obligations.
Paragraph (c)(4) describes documentary evidence as a document that is
no more than three-years old and sufficiently identifies the person and
the residence of that person in the treaty country.
Paragraph (e) incorporates the provisions in existing regulations
that condition the benefit of the reduced five-percent rate on related
party dividends to an advance ruling from the IRS determining that the
parent-subsidiary relationship is not established or maintained with
the principal purpose to secure the reduced rate. The ruling would be
required only
[[Page 17628]]
if so required under an applicable treaty. It must be requested prior
to the payment of the dividend. While a request made after payment
would not disqualify the dividend from the benefit of the reduced rate
if a favorable ruling is later obtained, the withholding agent would
nevertheless withhold. Failure to do so would subject the withholding
agent to an interest charge under section 6601. Also, the withholding
agent would be liable for the tax and related penalties if a favorable
ruling were not issued. See proposed Sec. 1.1441-1(f)(5) regarding the
consequences to the withholding agent when it does not withhold the
full amount even though it does not hold the required documentation
prior to payment.
The regulations are proposed to be effective for payments made
after December 31, 1997. However, certificates issued on or before the
date that is 60 days after these regulations are published as final
regulations will continue to be valid until they expire, based upon
existing regulations. In addition, because no documentation is
currently required for dividends, the regulations propose a transition
rule that would allow dividends paid on publicly-traded stock to
accounts in existence on or before a date that is 60 days after these
regulations are published as final regulations to continue to be
subject to the current address rule until December 31, 1999.
Section 1.1441-7 General Provisions Relating to Withholding Agents
This section modifies Sec. 1.1441-7 of the existing regulations
dealing with withholding agents. Paragraph (a) clarifies that a
withholding agent is any person that has the control, receipt, custody,
disposal, or payment of an item of income and not merely a person that
pays or causes an amount to be paid. If there are several withholding
agents with respect to one payment, only one tax should be withheld and
only one return should be filed.
Paragraph (b) restates the ``actual knowledge or reason to know''
standards applicable to a withholding agent as in effect under current
law. The IRS and Treasury are aware that the application of a ``reason
to know'' standard without limitation may be impractical in the case of
financial institutions handling large volumes of transactions for many
customers. Therefore, the regulations propose to limit the due
diligence expected from withholding agents paying portfolio interest,
deposit interest, or dividends on publicly traded stock. Under
paragraph (b)(2)(ii), a withholding agent's due diligence regarding a
beneficial owner certificate would be limited to examining the address
stated on the certificate. If this information indicated that the
beneficial owner might be a U.S. taxpayer or conflicted with
information that the withholding agent otherwise had in its records for
that account, the withholding agent would have to obtain specified
documentation to verify the beneficial owner's claim of foreign status
or residence. Paragraph (b)(3) proposes to incorporate rules consistent
with those under section 3406 dealing with universal accounts.
Therefore, if the withholding agent used a system of universal
accounts, it would be required to use that system to determine the
scope of its due diligence under the regulations.
Paragraph (c) restates and expands the provisions in Sec. 1.1441-
7(b) of the existing regulations pertaining to authorized agents and
adds provisions regarding an authorized foreign agent. This new concept
is intended to facilitate compliance by U.S. withholding agents that
make payments through their agent abroad. By imputing the acts of a
foreign agent to a U.S. withholding agent, the required documentation
could remain with the foreign agent and would not have to be provided
to the U.S. withholding agent. However, the regulations require that
the agent be ``authorized'' in order to insure that the IRS can verify
the foreign agent's compliance with the withholding procedures, which,
in turn, would determine whether the U.S. withholding agent has itself
complied. See proposed Sec. 1.1461-1 (b)(2)(iii) and (c)(4)(iii)
regarding corresponding filing requirements.
Section Sec. 1.1441-7(b)(3) of the Existing Regulations is Proposed
to be Deleted, Pending Comments on the Continuing Necessity of
Providing Guidance on Tax-Free Covenant Bonds
Paragraph (d) restates without changes the provisions in
Sec. 1.1441-7(a)(2) of the existing regulations dealing with the United
States as a withholding agent. Paragraph (e) restates without changes
the provisions in Sec. 1.1441-3(c)(2) of the existing regulations
dealing with assumed obligations. Section Sec. 1.1441-7(c) of existing
regulations dealing with payments other than money would be deleted and
restated in proposed Sec. 1.1441-3(f) dealing with withholding
procedures for payments in kind.
Section 1.1441-8T Foreign Government and International Organization
Exemption From Withholding
This section exempts from withholding certain types of income
excluded from gross income under section 892 that are paid to foreign
governments and international organizations. Revisions are proposed to
paragraph (b) of the existing regulations to conform the certification
procedures to the proposed withholding certificate procedures described
in proposed Sec. 1.1441-1(e)(1)(i). Therefore, Form 8709 would be
replaced by the standard withholding certificate (Form W-8), meaning
that foreign governments and international organizations would be
relieved from the requirement to furnish annual certification. A
foreign government or an international organization would not be
required to furnish a tax identifying number. However, if it did, the
certificate would be valid indefinitely for income required to be
reported on Form 1042 or for which the withholding agent reports the
TIN to the IRS. See proposed Sec. 1.1441-1(e)(4)(ii).
Section 1.1441-9 Exemption From Withholding on Exempt Income of
Foreign Tax-Exempt Corporations and Foreign Private Foundations
This new section provides that income paid to a foreign
organization described in section 501(c) would not be subject to
withholding under section 1442 if the income were not subject to tax as
unrelated business income under section 511 and the entity were exempt
from tax under section 501(a). For purposes of granting a reduced rate,
a withholding agent could rely on a withholding certificate satisfying
the requirements of proposed Sec. 1.1441-1(e)(1). A beneficial owner
certificate must include a taxpayer identifying number and must certify
that it will not be subject to tax under section 511, and that the IRS
has issued a determination letter. In the absence of such a letter, the
beneficial owner should provide an opinion of counsel stating that the
organization meets the conditions for a tax exemption under section
501(c). Since the affidavit requirement for foreign foundations is
proposed to be eliminated, foreign tax-exempt organizations would be
subject to the same documentation requirements as would apply to
foreign foundations under proposed Sec. 1.1443-1(b).
[[Page 17629]]
Section 1.1461-1 Deposit and Return of Tax Withheld
The provisions in Sec. 1.1461-1 of the existing regulations
pertaining to ownership certificates for bond interest are proposed to
be deleted. Interest on bonds described in this section would be
subject to the regular procedures provided in the regulations under
sections 1441 and 1443. The special rules would no longer be necessary
in view of the substitute procedures provided in the proposed
regulations. Comments are solicited as to the continuing need for
provisions governing tax-free covenant bonds.
Section 1.1461-1 contains proposed procedures for withholding
agents to pay the withheld tax and file the annual income tax return
and information returns with respect to payments of income subject to
section 1441 withholding. Paragraph (a) restates Sec. 1.1461-3 of the
existing regulations regarding the payment of amounts withheld. The
provisions regarding pre-1973 years are proposed to be deleted as
obsolete. Paragraph (b) revises Sec. 1.1461-2(b) of the existing
regulations on the filing of returns of amounts withheld. Paragraph
(b)(1) clarifies that the Form 1042 must include the total amount of
income paid during the preceding calendar year. Also, the filing date
is changed from March 15 to February 28 in order to conform with the
filing dates for Form 1099. The proposed regulations would eliminate
the requirement to attach the Forms 1042-S to the return. Instead, the
Forms 1042-S would have to be filed separately with a transmittal form.
See paragraph (c)(1)(i).
Paragraph (b)(2) describes applicable return requirements for
multiple withholding agents. Generally, as under current rules, only
one Form 1042 would have to be filed for an item of income. Exceptions
to this general rule are provided for payments to qualified
intermediaries where the U.S. withholding agent would have to file a
return, regardless of whether the qualified intermediary assumed
primary withholding responsibility for the payment and regardless of
whether the qualified intermediary were also required to file a return
under its agreement with the IRS. Another exception would be provided
for payments to an authorized foreign agent. In that case, the U.S.
withholding agent and the authorized foreign agent would each be
required to make a return. The return of the withholding agent would
report amounts paid to the authorized foreign agent. The return of the
authorized foreign agent would report amounts paid to the beneficial
owner or its intermediaries.
Paragraph (b)(3) requires that changes to the originally filed Form
1042 be filed on an amended return on a new Form 1042X. This change is
designed to facilitate the processing of returns by the IRS and would
be consistent with the procedures for filing other amended returns.
Paragraph (c) revises the provisions in Sec. 1.1461-2(c) of the
existing regulations regarding the filing of information returns on
Form 1042-S. As under existing regulations, any income subject to
withholding must be reported on an information return on Form 1042-S
and a return would be due irrespective of the fact that no tax was
withheld (e.g., the beneficial owner claimed an exemption or the
withholding agent failed to withhold).
The provisions of Sec. 1.1461-2(c)(3) of the existing regulations
requiring that the name of the beneficial owner be reported on Form
1042-S would be retained. However, more detailed guidance is provided
regarding reporting of income paid to intermediaries. See paragraph
(c)(4) below dealing with multiple agents. The proposed regulations
eliminate as unnecessary the requirements under existing regulations to
attach any certificate, form, or statement to the return.
Paragraph (c)(1)(ii) proposes new rules pertaining to joint owners.
A single Form 1042-S may be provided to one of the joint owners. In
that case, the withholding agent should provide the Form 1042-S to the
joint owner whose status determines the tax withheld. Further, any one
owner may request a separate Form 1042-S, but the total amounts of
income and tax reported paid and withheld on all the forms 1042-S may
not exceed the total amount of income actually paid and tax actually
withheld.
Paragraph (c)(2) replaces Sec. 1.1461-2(c)(1) of the existing
regulations and states that the items of income that are subject to
reporting on Form 1042-S are those items of income subject to
withholding, income from a notional principal contract, and amounts
described in sections 6041 through 6050P that are paid to a foreign
person and are not exempt from reporting under those sections or the
corresponding regulations. This provision is intended to standardize
reports of payments to foreign persons to the IRS and should simplify
compliance by withholding agents. Paragraph (c)(2)(ii) lists the
exceptions to reporting on a Form 1042-S. As under current regulations,
items of income exempt from reporting include portfolio interest on a
bearer obligation and original issue discount on short-term
obligations. An explicit exception for reporting on deposits described
in section 871(i)(2)(A) would be added. However, bank deposit interest
that is subject to withholding under section 1441 (because, for
example, documentation was not furnished but payments were made to a
foreign address; see special grace period provisions under proposed
Sec. 1.1441-1(f)(2)(i)(B)) would have to be reported. Also, interest on
bank deposit interest paid to Canadian residents would have to be
reported based upon provisions under final regulations under section
6049 published in the Rules and Regulations section of this issue of
the Federal Register. In addition to the items excepted from reporting
under existing Sec. 1.1461-1(c)(1), other items are added that prevent
duplicative reporting. Finally, the proposed regulations would clarify
that to the extent group-term life insurance and other items of income
required to be reported pursuant to the provisions in Secs. 1.6041-2
and 1.6052-1 can be associated with wages required to be reported on a
Form W-2, then such items may also be reported on a Form W-2 instead of
a Form 1042-S.
Paragraph (c)(3) restates the provisions of Sec. 1.1461-2(c)(2) of
the existing regulations regarding the types of information to be
included on Form 1042-S. It clarifies that the information could be
based on the information furnished by or on behalf of the beneficial
owner, as corrected based on the withholding agent's actual knowledge
if necessary. In addition, the Form 1042-S would have to include the
TIN of the beneficial owner if required to be shown on the withholding
certificate. Also, a beneficial owner's TIN that the beneficial owner
is not required to furnish but which is actually known to the
withholding agent would have to be reported on Form 1042-S.
Paragraph (c)(4) is added to provide rules for filing Form 1042-S
where there are multiple withholding agents. Generally, as with the
Form 1042, only one Form 1042-S must be filed with respect to an item
of income. Current rules requiring the withholding agent to identify
the beneficial owners of payments made to agents, nominees, or
representatives, if known, would be eliminated for payments to an
intermediary that either claims to be a qualified intermediary or is an
authorized foreign agent. In all other cases, the information on a Form
1042-S must be reported for each beneficial owner. This would modify
Sec. 1.1461-
[[Page 17630]]
2(c)(3)(i) of the existing regulations providing that beneficial owner
information be reported only if known. For payments made to a person
claiming to be a qualified intermediary or is an authorized foreign
agent, each withholding agent in the chain would be permitted to report
on one Form 1042-S reflecting the payment made to the next qualified
intermediary or authorized foreign agent in the chain. In the case of a
payment to an authorized foreign agent, however, the withholding agent
would be excused from the requirement to report the beneficial owner
information only to the extent that the authorized foreign agent
actually complies with the filing requirements under paragraph
(c)(4)(iv).
Paragraph (c)(5) is added to cross-reference the magnetic media
filing requirements applicable to Forms 1042-S under Sec. 1.6011-1(c).
Generally, a filer of 250 or more Forms 1042-S must file on magnetic
media, unless a waiver is granted.
Paragraph (d) would allow a withholding agent to provide a list of
taxpayer identifying numbers furnished by or on behalf of beneficial
owners to the extent the agent has relied upon such number to grant a
reduced rate of withholding tax. This is a special filing procedure
under which the reporting of the associated amount of income would not
be have to be reported.
Finally, paragraph (e) clarifies the provisions regarding
indemnification of withholding agents. Section 1461 indemnifies a
withholding agent from the claim of any person for the amount of any
payments made in accordance with the provisions of chapter 3 of the
Code. Some commentators and withholding agents have expressed concerns
that section 1461 could be interpreted to limit indemnification to
amounts that were required to be withheld. The proposed regulations
clarify that a withholding agent that withheld based upon a reasonable
belief that such amount was withheld in accordance with chapter 3 of
the Code would be treated for purposes of section 1461 as having
withheld in accordance with chapter 3 (even though it is later
determined that the withholding agent's application of the rules was
incorrect). Additionally, a withholding agent would be indemnified
against any claim of any person for the amount of any withholding made
in accordance with the grace period provisions under proposed
Sec. 1.1441-1(f)(2)(ii).
Paragraph (f) restates without changes Sec. 1.1461-2(f) of the
existing regulations dealing with amounts that may not constitute gross
income, in whole or in part. This rule would apply to amounts subject
to withholding under proposed Secs. 1.1441-3(b)(1) or 1.1441-3(d).
Paragraph (g) is added to provide guidance on requests of
extensions of time to file Form 1042, Forms 1042-S, and to furnish
Forms 1042-S to recipients. The rules with respect to such requests
would parallel those under section 6081. A change would be made,
however, to the form to be used for making a request for an extension
of time to file Forms 1042-S.
Currently, these requests are made on Form 2758; the proposed
regulations require such a request to be made on Form 8809.
Section 1.1461-2 Adjustments for Overwithholding and Underwithholding
of Tax
This section has also been renumbered and, although the rules are
the same as those of the current regulations in Sec. 1.1461-4, it has
been redrafted to simplify the language and to update the examples.
Specifically, the rule for reimbursements remains the same, but the
rule in proposed Sec. 1.1461-4(b) with respect to the adjustment of tax
payments or deposits is now titled ``set-offs,'' which more accurately
describes the adjustment process.
Section 1.1462-1 Withheld Tax as Credit to Recipient of Income
Section 1.1462-1(a) is clarified by stating that the amount of
income from which the tax is required to be withheld includes the
amount calculated under the gross-up formula in proposed Sec. 1.1441-
3(e)(3).
Section 1.1463-1 Tax Paid by Recipient of Income
This section provides that if the income tax for which the
beneficial owner and the withholding agent have joint liability under
section 1461 has been paid by either one of them, the IRS may not
collect from the other, regardless of the original liability for the
tax. This section has been changed to reflect the 1989 statutory
amendment (Pub. L. 101, 239, Sec. 7743(a)) that provides for the
imposition of interest and penalties on the party that fails to
withhold.
Prior Proposed Regulations Under Section 871 and Chapter 3 of the Code
In 1976, proposed regulations were published relating primarily to
withholding and original issue discount. In 1984, proposed regulations
were published relating primarily to claims of benefits under income
tax treaties. These proposed regulations were contained in project
number LR-2043, published on July 12, 1976 (41 FR 28517) and project
number LR-271-83, published on September 10, 1984 (49 FR 35511). Both
proposed regulations are being withdrawn on April 22, 1996.
Regulations Under Sections 6041, 6041A, 6042, 6045, 6049, and 6050N
These proposed regulations provide exceptions from information
reporting and backup withholding under sections 3406, 6041, 6041A,
6042, 6045, 6049, and 6050N for payments to foreign beneficial owners
and for income paid by certain foreign payors or middlemen.
Generally the regulations clarify and simplify the regulations
under sections 3406, 6041, 6042, 6045, and 6049 that were proposed on
February 29, 1988, at 53 FR 5991 (1988) (the 1988 proposed
regulations). In addition, the regulations under these sections are
proposed to be revised. The regulations also would add new exceptions
from reporting (including the addition of middleman rules) to sections
6041, 6041A, and 6050N. These proposed revisions and new exceptions
from reporting parallel the exceptions under these proposed regulations
under sections 6042 and 6049. Further, parallel provisions are found in
each section for: definitions of terms (such as non-U.S. payor or non-
U.S. middleman); presumptions as to whether a payee is U.S. or foreign
where the required documentation is lacking, incorrect, or unreliable;
rules for payments to joint owners; and rules for converting into U.S.
dollars amounts paid in foreign currency. In addition, the proposed
regulations specify that the standard of knowledge applicable to payors
and middlemen would be actual knowledge. Thus, the ``reason to know''
standard would not apply for purposes of the reporting provisions.
The subparagraphs under proposed Sec. 1.6042-3(a) (dealing with the
definition of dividends for purposes of information reporting under
that section) are proposed to be restated with changes in drafting
only. The substantive rules in that paragraph would be unchanged and
are, therefore, not reproposed. Also, Sec. 1.6042-3(b) (3) and (4) of
the 1988 proposed regulations (relating to capital gain dividends from
regulated investment companies and payments to exempt recipients) would
be redesignated as subparagraphs (vii) and (viii), respectively, of
proposed Sec. 1.6042-3(b)(1). These rules are not reproposed.
This document also proposes to revise the definition of an exempt
recipient in the case of a corporation. Section Sec. 1.6049-
4(c)(1)(ii)(A) of the 1988 proposed regulations provides that a person
would be treated as a corporation, and therefore as an exempt
[[Page 17631]]
recipient not subject to information reporting, if the name of the
payee or a corporate resolution provided to the payor clearly indicates
corporate status (the eyeball test). These proposed regulations retain
the eyeball test of the 1988 proposed regulations for payments (1)
other than interest, dividends and broker proceeds paid to accounts
established after a date that is 60 days after the date that these
regulations are published as final regulations in the Federal Register
and (2) other than interest, dividends and broker proceeds that are not
paid to a person to whom the payor has an account relationship. For
interest and dividends paid to a new account, the entity would be
required to provide either a corporate resolution or similar document
that clearly indicates corporate status, a Form W-9 with an EIN, or a
Form W-8. For interest and dividends paid where an account relationship
does not exist, the payor may continue to rely on the eyeball test if
the payor also has a mailing address of the payee in the United States.
The IRS and Treasury understand that financial institutions routinely
request a corporate resolution when opening accounts for entities.
Therefore, requiring such a document would not significantly increase
burden and would improve compliance. This proposed rule is reflected in
paragraph (c)(1)(ii)(A). In addition, the list of international
organizations under paragraph (c)(1)(ii)(G) is proposed to be
eliminated as a simplification measure.
In addition, the 1988 proposed regulations under Sec. 1.6049-5 are
proposed to be substantially redrafted, although without significant
substantive changes. Paragraph (b)(6) provides an exception from
reporting for amounts from sources outside the United States paid
outside the United States by a non-U.S. payor or non-U.S. middleman.
This provision duplicates that found in the 1988 proposed regulations
at proposed Secs. 1.6049-5(b)(8) and 1.6049-5(d)(3) (i), (ii), and the
foreign source portion of proposed Sec. 1.6049-5(d)(3)(iii).
Paragraph (b)(7) (which corresponds to Sec. 1.6049-5(c)(6) of the
1988 proposed regulations) would except portfolio interest paid on
bearer obligations if paid outside the United States. In these proposed
regulations, this exception would not apply where a U.S. middleman acts
as a custodian, nominee, or other agent of the payee and collects the
amount for, or on behalf of, the payee, whether or not the middleman is
also acting as agent of the payor. Paragraph (b)(8) (which corresponds
to Sec. 1.6049-5(c)(6) of the 1988 proposed regulations) provides an
exception for portfolio interest paid on registered obligations.
The provisions of Sec. 1.6049-5(b)(9) of the 1988 proposed
regulations, which excepted from reporting amounts paid by an
international organization (or its agent) on an obligation issued by
the international organization are proposed to be incorporated in
paragraph (b)(9) of these new proposed regulations. These rules are not
reproposed.
Paragraph (b)(10) (which corresponds to Sec. 1.6049-5(c)(5)(ii) of
the 1988 proposed regulations) provides an exception for certain short-
term foreign targeted obligations. Paragraph (b)(11) (which corresponds
to Sec. 1.6049-5(e)(1) (the parenthetical language) and Sec. 1.6049-
5(e)(2) (i) and (ii) of the proposed 1988 proposed regulations)
provides an exception for certain foreign-targeted obligations issued
by persons engaged in the banking business. Although the 1988 proposed
regulations limited the exceptions at Sec. 1.6049-5(e)(2) (i) and (ii)
to Canadians, these proposed regulations expand the scope of the
exceptions to apply to all beneficial owners. However, as under the
1988 proposed regulations, the exception would not apply where a U.S.
middleman acts as an agent of the payee.
Paragraph (b)(12) (which corresponds to Secs. 1.6049-5(b)(7) and
(c) (1), (2), and (3) of the 1988 proposed regulations) would except
any amount of U.S. source interest subject to withholding under section
1441. Such interest would be required to be reported on a Form 1042-S
under proposed Sec. 1.1461-1(c). This exception would replace
Sec. 1.6049-5(b)(1)(vi), (b)(1)(vi)(B)(1) and (b)(2)(iv) of the
existing regulations, which provide an exception for reporting for bank
deposit interest paid to a foreign person, but only if a Form W-8 (or
documentary evidence in appropriate cases) is provided to the payor.
The withholding certificate requirement for bank deposit interest is
now found at proposed Sec. 1.1441-2(d)(2).
Paragraph (b)(13) provides a new exception for assets blocked
pursuant to an executive order.
Paragraph (b)(14) provides the general rule for exempting any other
amount of otherwise reportable interest based on specified
documentation furnished to the payor or middleman. The standards of
documentation are described in paragraph (c) and would generally
parallel the documentation standards proposed for purposes of claiming
a reduced rate of withholding under section 1441. Therefore, the payor
could rely on a beneficial owner or intermediary withholding
certificate described in proposed Sec. 1.1441-1(e)(1)(i) provided it
complied with the procedures described in proposed Sec. 1.1441-1(e)(4)
(iv) and (v) (dealing with on-line confirmation and notification
procedures). No taxpayer identifying number is required to be stated on
a beneficial owner withholding certificate. These proposed regulations
retain the permission under current regulations to furnish documentary
evidence instead of a certificate for payments made to an off-shore
account. The on-shore and off-shore distinction is similar to that
found in the 1988 proposed regulations. The provisions of the 1988
proposed regulations contained in paragraphs (d), (e), (f), (g), (h),
(i), and (l) are withdrawn. Proposed paragraphs (j) (relating to
payments outside the United States) and (k) (dealing with original
issue discount) of the 1988 proposed regulations would be renumbered as
paragraphs (e) and (f), respectively. The provisions in these
paragraphs are not restated.
Section 31.3401(a)(6)-1(e)--Income Exempt From Income Tax
This section is amended to reflect the new certification procedures
under proposed Secs. 1.1441-1(e).
Backup Withholding Regulations Under Section 3406
Several changes to the backup withholding regulations under section
3406 are proposed to conform those regulations to the proposed
information reporting and chapter 3 withholding regulations. Section
31.3406(d)-3 (c) would be amended to extend to 90 days the current 30-
day grace period applicable to readily tradeable instruments acquired
directly from a payor if the payment were made to a person for whom
indicia of foreign status existed, as described in proposed
Sec. 1.1441-1(f)(2)(i)(B).
Section 31.3406(g)-1(e) would revise the proposed regulations
contained in project number IA-224-82 published in the Federal Register
on September 27, 1990 (55 FR 39427) to restate the principles that no
backup withholding applies under section 3406 to reportable payments
made outside the United States even though documentary evidence of non-
U.S. status may be required in order to exempt the payment from 1099
reporting, unless the payor has actual knowledge that the payee is a
United States person. The regulations propose to add an exception for
notional principal contract payments that are made outside the United
States.
Amendments to Sec. 31.6413(a)-3
The regulations under Sec. 31.6413(a)-3 are proposed to be amended
in order to
[[Page 17632]]
allow payers to refund backup withholding in certain circumstances.
Those regulations currently prohibit a refund of backup withholding
except when erroneous withholding has occurred. It is proposed to
expand the definition of erroneous withholding to a situation where the
withholding agent backup withholds because the payee fails to provide
sufficient documentation as required under section 3406 and 1441 and
the regulations under these sections. Where an appropriate withholding
certificate is later provided, the withholding agent could treat the
earlier withholding as erroneous withholding. However, the withholding
certificate should to be received prior to the end of the calendar year
in which the payment is made and prior to the time the payor furnishes
a Form 1099 to the payee with respect to the payment for which the
withholding erroneously occurred. The amount refunded would be the
amount actually withheld less the amount required to be withheld, if
any, under chapter 3 of the Code.
Removal of Q&A Regulations
The existing regulations under part 35a are proposed to be removed
in order to reflect the proposed revisions in this document.
Amendments to Sec. 301.6109-1
Amendments to the regulations under this section are currently
pending to authorize the IRS to issue taxpayer identifying numbers to
certain foreign persons and to require a taxpayer to state a TIN on any
tax return filed (other than an information return). These regulations
are proposed to be further amended to require that a TIN be stated on
withholding certificates as may be required under the regulations
proposed under sections 1441, 1442, and 1443.
Amendments to Sec. 301.6114-1
The regulations under section 6114 are proposed to be amended to
require certain foreign entities to file a Form 8833 if they are
claiming to be qualified under a limitation of benefits provision under
an income tax treaty, even though the income is also reported on a Form
1042 by the withholding agent. The filing requirement would be limited
to payments between related parties that exceed $500,000 for the
taxable year. See proposed Sec. 1.1441-6(b)(1).
Amendments to Sec. 301.6402-3(e)
Paragraph (e) of the regulations under Sec. 301.6402-3 is proposed
to be amended to require that returns filed to claim a refund of tax
include the taxpayer's TIN. In addition, the Form 1042-S would have to
be attached to the return and also show the taxpayer's TIN.
Removal of Certain Regulations Under Tax Conventions
This document proposes to remove certain regulations issued under
income tax conventions between the United States and Greece, Germany,
Switzerland, Ireland, France, Austria, Pakistan, Sweden and Denmark.
Removal of these regulations will be done in consultation with the
competent authorities of these countries.
Special Analyses
It has been determined that this notice of proposed rulemaking is
not a significant regulatory action as defined in EO 12866. Therefore,
a regulatory assessment is not required. It has also been determined
that section 553(b) of the Administrative Procedure Act (5 U.S.C.
chapter 5) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do
not apply to these regulations, and, therefore, a Regulatory
Flexibility Analysis is not required. Pursuant to section 7805(f) of
the Internal Revenue Code, these regulations will be submitted to the
Chief Counsel for Advocacy of the Small Business Administration for
comment on their impact on small business.
Comments and Requests for a Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any written comments (a signed original
and eight (8) copies) that are submitted timely to the IRS. All
comments will be available for public inspection and copying. A public
hearing will be scheduled on a date, time, and place as will be
published in the Federal Register.
List of Subjects
26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
26 CFR Part 31
Employment taxes, Income taxes, Penalties, Pensions, Railroad
retirement, Reporting and recordkeeping requirements, Social security,
Unemployment compensations.
26 CFR Part 35a
Employment taxes, Income taxes, Reporting and recordkeeping
requirements.
26 CFR Part 301
Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income
taxes, Penalties, Reporting and recordkeeping
26 CFR 502
Greece, Reporting and recordkeeping requirements, Tax treaties.
26 CFR Part 503
Germany, reporting and recordkeeping requirements, Tax treaties.
26 CFR Part 509
Switzerland, Reporting and recordkeeping requirements, Tax
treaties.
26 CFR Part 513
Ireland, Reporting and recordkeeping requirements, Tax treaties.
26 CFR Part 514
France, Reporting and recordkeeping requirements, Tax treaties.
26 CFR 516
Austria, Reporting and recordkeeping requirements, Tax treaties.
26 CFR Part 517
Pakistan, Reporting and recordkeeping requirements, Tax treaties.
26 CFR Part 520
Sweden, Reporting and recordkeeping requirements, Tax treaties.
26 CFR Part 521
Denmark, Reporting and recordkeeping requirements, Tax treaties.
Proposed Amendment to the Regulations
Accordingly, under the authority of 26 U.S.C. 7805, 26 CFR chapter
I is proposed to be amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 is amended by adding
entries in numerical order and removing the entry for Sec. 1.1441-4T to
read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.1441-2 also issued under 26 U.S.C. 1441(c)(4) and 26
U.S.C. 3401(a)(6).
Section 1.1441-3 also issued under 26 U.S.C. 1441(c)(4) and 26
U.S.C. 3401(a)(6). * * *
Section 1.1441-6 also issued under 26 U.S.C. 1441(c)(4) and 26
U.S.C. 3401(a)(6).
Section 1.1441-7 also issued under 26 U.S.C. 1441(c)(4) and 26
U.S.C. 3401(a)(6). * * *
[[Page 17633]]
Sec. 1.163-5 [Amended]
Par. 2. In Sec. 1.163-5 paragraph (c)(2)(i)(B)(5) is amended by
removing the language ``subdivision (iii) of A-5 of Sec. 35a.9999-4T''
in the last sentence and adding ``Sec. 1.6049-5(c)(2)(ii)'' in its
place.
Par. 3. Section 1.165-12(c) is amended by:
1. Removing paragraph (c)(1)(iii).
2. Redesignating paragraphs (c)(1)(iv) and (c)(1)(v) as paragraphs
(c)(1)(iii) and (c)(1)(iv), respectively.
3. Amending paragraphs (c)(1)(i) and (c)(1)(ii) by removing the
language ``(c)(1)(v)'' and adding ``(c)(1)(iv)'' in its place.
4. Revising newly designated paragraph (c)(1)(iii). The revision
reads as follows:
Sec. 1.165-12 Denial of deduction for losses on registration-required
obligations not in registered form.
* * * * *
(c) * * *
(1) * * *
(iii) The holder may deliver an obligation in bearer form that is
offered or sold inside the United States only if the holder delivers it
to a financial institution that is purchasing for its own account, the
account of another foreign institution, or an exempt organization that
will comply with the requirements of section 165(j)(3) (A), (B), or
(C). The holder may deliver a registration-required obligation in
bearer form that is offered and sold outside the United States to a
person other than a financial institution only if the holder has
evidence in its records that such person is not a U.S. citizen or
resident and does not have actual knowledge that such evidence is
false. Such evidence may include a statement by that person that is
delivered electronically. For purposes of this paragraph (c), the term
deliver includes a transfer of an obligation evidenced by a book entry
including a book entry notation by a clearing organization evidencing
transfer of the obligation from one member of the organization to
another member. For purposes of this paragraph (c), the term deliver
does not include a transfer of an obligation to the issuer or its agent
for cancellation or extinguishment.
* * * * *
Par. 4. Section 1.871-14 is added to read as follows:
Sec. 1.871-14 Rules relating to repeal of tax on interest of
nonresident alien individuals and foreign corporations received from
certain portfolio debt investments.
(a) General rule. No tax shall be imposed under sections
871(a)(1)(A), 871(a)(1)(C), 881(a)(1) or 881(a)(3) on any portfolio
interest as defined in sections 871(h)(2) and 881(c)(2) received by a
foreign person. But see section 871(h) or 882(a) if such interest is
effectively connected with the conduct of a trade or business within
the United States.
(b) Rules concerning obligations not in registered form--(1) In
general. [Reserved] For further guidance, see Sec. 35a.9999-5(a),
Answer 1.
(2) Convertible obligations. [Reserved] For further guidance, see
Sec. 35a.9999-5(c), Answers 18 and 19.
(3) Coordination with withholding and reporting rules. See
Sec. 1.1441-2(d)(1)(i) for an exception from documentation requirements
otherwise applicable for purposes of section 1441. See section 6049 and
Sec. 1.6049-5(b)(7) for rules relating to an exemption from Form 1099
reporting and backup withholding under section 3406.
(c) Rules concerning obligations in registered form--(1) In
general. In the case of interest paid on an obligation that is in
registered form, the term portfolio interest means any interest
(including original issue discount)--
(i) That is paid on an obligation issued after July 18, 1984;
(ii) That would be subject to tax under section 871(a)(1)(A),
871(a)(1)(C), 881(a)(1) or 881(a)(3) but for section 871(h) or 881(c);
and
(iii) With respect to which a United States (U.S.) person otherwise
required to deduct and withhold tax under section 1441(a) or 1442(a)
receives a statement that meets the requirements of section 871(h)(5)
that the beneficial owner of the obligation is not a U.S. person.
(2) Required statement. A U.S. person will be considered to have
received a statement that meets the requirements of section 871(h)(5)
if either it complies with one of the procedures described in this
paragraph and does not have actual knowledge or reason to know that the
beneficial owner is a U.S. person or it complies with the procedures
described in paragraph (d) or (e) of this section.
(i) The U.S. person (or its authorized foreign agent described in
Sec. 1.1441-7(c)(2)) complies with the withholding certificate
procedures described in Sec. 1.1441-1(e)(1).
(ii) The U.S. person complies with the documentary evidence
procedures described in Sec. 1.6049-5(c)(2)(ii) (but only if payments
are made outside the United States with respect to offshore accounts).
See Sec. 1.6049-5(e) for determining the place of payment and
Sec. 1.6049-5(d)(3) for a definition of offshore accounts.
(iii) [Reserved] For further guidance, see Sec. 35a.9999-5(b),
Answer 9, sentences 5 through 13.
(iv) The U.S. person complies with procedures that the U.S.
competent authority may agree to with the competent authority of a
country with which the United States has an income tax treaty in
effect.
(3) Time for providing certificate or documentary evidence.
Interest on a registered obligation shall qualify as portfolio interest
if the withholding certificate or documentary evidence that must be
provided is furnished before expiration of the beneficial owner's
period of limitation for claiming a refund of tax with respect to such
interest. See, however, Sec. 1.1441-1(f)(5) for consequences to a
withholding agent that makes a payment without withholding even though
it cannot associate the payment with the required documentation prior
to the payment.
(4) Coordination with withholding and reporting rules. For an
exemption from withholding under section 1441 with respect to
obligations described in this paragraph (c), see Sec. 1.1441-2(d)(2).
For rules applicable to withholding certificates, see Sec. 1.1441-
1(e)(4). For application of presumptions when the U.S. person cannot
associate the payment with the required documentation, see Sec. 1.1441-
1(f). For standards of knowledge applicable to withholding agents, see
Sec. 1.1441-7(b). For rules relating to an exemption from Form 1099
reporting and backup withholding under section 3406, see section 6049
and Sec. 1.6049-5(b)(8). For rules relating to reporting on Forms 1042
and 1042-S, see Sec. 1.1461-1(b) and (c).
(d) Application of repeal of 30 percent withholding to pass-through
certificates. [Reserved] For further guidance, see Sec. 35a.9999-5(e),
Answers 21 and 22.
(e) Foreign-targeted registered obligations. [Reserved] For further
guidance, see Sec. 35a.9999-5(b), Answers 12 through 15.
(f) Definitions. For purposes of this section, the terms foreign
person and beneficial owner have the meaning set forth in Sec. 1.1441-
1(c)(2) and (c)(6), respectively; the term withholding agent has the
meaning set forth in Sec. 1.1441-7(a); and the term payment has the
meaning set forth in Sec. 1.1441-2(e).
(g) Effective date--(1) In general. This section shall apply to
payments of interest made after December 31, 1997.
(2) Transition rule. For purposes of paragraph (c)(2)(i) of this
section, a withholding agent that holds a valid Form W-8 on a date that
is 60 days after these regulations are published as final regulations
in the Federal Register may
[[Page 17634]]
treat it as a valid withholding certificate until its validity expires
under applicable provisions as in effect on April 22, 1996.
Par. 5. Section 1.1441-0 is added to read as follows:
Sec. 1.1441-0 Outline of regulation provisions for section 1441.
This section lists captions contained in Secs. 1.1441-1, 1.1441-2,
1.1441-3, 1.1441-4, 1.1441-5, 1.1441-6, 1.1441-7, 1.1441-8T, and
1.1441-9.
Sec. 1.1441-1 Requirement for the deduction and withholding of tax
on payments to foreign persons.
(a) Purpose and scope.
(b) General rule of withholding.
(c) Definitions.
(1) Withholding.
(2) Foreign person.
(3) Payee.
(4) Individual.
(5) Foreign corporations.
(6) Beneficial owner.
(7) Chapter 3 of the Internal Revenue Code.
(d) Claim of U.S. status by payee or beneficial owner.
(1) In general.
(2) Payments to a payee that is a U.S. person.
(3) Payments to a foreign person acting for a U.S. payee.
(e) Beneficial owner's claim of foreign status.
(1) Withholding agent's reliance.
(2) Beneficial owner withholding certificate.
(3) Intermediary withholding certificate.
(4) Applicable rules.
(5) Qualified intermediaries.
(f) Presumptions.
(1) In general.
(2) Reportable payments to non-exempt recipients.
(3) Special rules for scholarships, grants, pensions, annuities,
etc.
(4) Special rules for pass-through entities.
(5) Failure to act in accordance with presumptions.
(6) Reportable payment.
(7) Adjustment, refund, or credit of overwithheld tax.
(g) Effective date.
(1) In general.
(2) Transition rules.
Sec. 1.1441-2 Income subject to withholding.
(a) In general.
(b) Fixed or determinable annual or periodical income.
(1) In general.
(2) Exceptions.
(3) Original issue discount.
(4) Securities lending transactions.
(c) Other income subject to withholding.
(d) Items of income not subject to withholding under section
1441.
(1) Exemptions for which no withholding certificate or
documentation is required.
(2) Exemptions for portfolio interest and income on bank, etc.
deposits requiring a withholding certificate or documentation.
(e) Payment.
(1) General rule.
(2) Income allocated under section 482.
(3) Blocked income.
(4) Special rules for dividends.
(5) Certain interest accrued by a foreign corporation.
(6) Payments other than in U.S. dollars.
(f) Effective date.
Sec. 1.1441-3 Amounts subject to withholding.
(a) Withholding on gross amount.
(b) Withholding on payments on certain obligations.
(1) Withholding at time of payment of interest.
(2) No withholding between interest payment dates.
(c) Corporate distributions.
(1) General rule.
(2) Determination of accumulated and current earnings and
profits on the date of payment.
(3) Special rules in the case of distributions from a regulated
investment company.
(4) Overwithholding of tax.
(d) Withholding on certain gains.
(e) Payments other than in U.S. dollars.
(1) In general.
(2) Payments in foreign currency.
(3) Tax liability of beneficial owner satisfied by withholding
agent.
(f) Conduit financing arrangements.
(g) Effective date.
Sec. 1.1441-4 Certain exemptions from withholding.
(a) Certain income connected with a U.S. trade or business.
(1) In general.
(2) Withholding agent's reliance on a claim of effectively
connected income.
(3) Income on notional principal contracts.
(4) Failure to act in accordance with presumption.
(b) Compensation for personal services of an individual.
(1) Exemption from withholding.
(2) Manner of obtaining withholding exemption under tax treaty.
(6) Personal exemption.
(c) Special rules for scholarship and fellowship income.
(1) In general.
(2) Alternate withholding election.
(d) Annuities received under qualified plans.
(e) Income of foreign central bank of issue or the Bank for
International Settlements.
(f) Effective date.
(1) General rule.
(2) Transition rules.
Sec. 1.1441-5 Withholding on payments to pass-through entities.
(a) Domestic partnerships.
(1) Exemption from withholding on payment to domestic
partnerships.
(2) Withholding by a domestic partnership.
(b) Foreign partnerships.
(1) In general.
(2) Special rules in the case of tiered partnerships.
(3) Presumptions.
(4) Example.
(c) Trusts and estates. [Reserved]
(d) Effective date.
(1) General rule.
(2) Transition rules.
Sec. 1.1441-6 Claim of a reduced rate of tax under an income tax
treaty.
(a) In general.
(b) Reliance on claim of treaty benefits.
(1) In general.
(2) Special rules for certain dividends.
(3) Competent authorities agreement.
(4) Special rules for payments to certain foreign entities.
(c) Proof of tax residence in a treaty country.
(1) In general.
(2) Certification of taxpayer identifying number.
(3) Certificate of residence.
(4) Documentary evidence establishing residence in the treaty
country.
(d) Joint owners.
(e) Related party dividends under certain treaties.
(f) Effective date.
(1) General rule.
(2) Transition rules.
Sec. 1.1441-7 General provisions relating to withholding agents.
(a) Withholding agent defined.
(b) Standards of knowledge.
(1) In general.
(2) Reason to know.
(3) Universal accounts.
(c) Authorized agent.
(1) In general.
(2) Authorized foreign agent.
(3) Notification.
(4) Liability of U.S. withholding agent.
(5) Filing of returns.
(d) United States obligations.
(e) Assumed obligations.
(f) Conduit financing arrangements. [Reserved]
(g) Effective date.
Sec. 1.1441-8T Foreign government and international organization
exemption from withholding (temporary).
(a) Foreign governments.
(b) Statement claiming exemption.
(c) Effective date.
(1) In general.
(2) Transition rules.
Sec. 1.1441-9 Exemption from withholding on exempt income of a
foreign tax-exempt organization and foreign private foundations.
(a) Income not subject to tax under section 511.
(b) Statement claiming exemption.
(c) Effective date.
(1) In general.
(2) Transition rules.
Par. 6. Section 1.1441-1 is revised to read as follows:
Sec. 1.1441-1 Requirement for the deduction and withholding of tax on
payments to foreign persons.
(a) Purpose and scope. This section and Secs. 1.1441-2 through
1.1441-9 provide rules for withholding under section 1441 when a
payment is made to a foreign person. This section provides definitions
of terms used in
[[Page 17635]]
chapter 3 of the Internal Revenue Code and regulations under that
chapter. It prescribes procedures to determine whether a tax must be
withheld under chapter 3 of the Internal Revenue Code, including
presumptions for determining whether a withholding agent should treat a
payee as a United States (U.S.) person or a foreign person. Special
procedures regarding payments to foreign persons that act as
intermediaries are also provided. Section 1.1441-2 describes the income
subject to withholding under section 1441. Section 1.1441-3 provides
rules regarding the amount subject to withholding. Section 1.1441-4
provides exemptions from withholding for certain income effectively
connected with the conduct of a trade or business in the United States,
including certain compensation for the personal services of an
individual. Section 1.1441-5 provides rules regarding withholding on
payments made to pass-through entities. Section 1.1441-6 provides rules
regarding claiming a reduced rate of withholding under an income tax
treaty. Section 1.1441-7 defines the term withholding agent and
provides rules regarding withholding agents' obligations to withhold.
Section 1.1441-8T provides rules for income received by a foreign
government that is excluded from gross income under section 892.
Section 1.1441-9 provides rules for payments to foreign tax exempt
organizations and foreign private foundations.
(b) General rule of withholding. A withholding agent (as defined in
Sec. 1.1441-7(a)) must withhold 30 percent of the gross amount of a
payment (as defined in Sec. 1.1441-2(e)) of income subject to
withholding made to a payee that is a foreign person unless the
beneficial owner of the income is a foreign person entitled to a
reduced rate of tax and for the withholding agent holds an appropriate
withholding certificate or documentation or unless the beneficial owner
of the income is a U.S. person. For this purpose, a payment to the U.S.
agent of a foreign person is treated as a payment to a foreign person
if the withholding agent has actual knowledge or reason to know of the
agency relationship. For the documentation upon which a withholding
agent may rely in order to treat a payee or beneficial owner as a U.S.
person, see paragraph (d) of this section. For the documentation upon
which a withholding agent may rely in order to treat a payee or a
beneficial owner as a foreign person, see paragraph (e) of this
section. For applicable presumptions if the withholding agent cannot
associate the payment with the required documentation at the time of
payment, see paragraph (f) of this section. For definitions of foreign
person, payee, and beneficial owner, see paragraphs (c)(2), (3), and
(6) of this section, respectively. For the determination of income
subject to withholding, see Sec. 1.1441-2(a). For a definition of an
offshore account, see Sec. 1.6049-5(d)(3). For withholding procedures
applicable to payments to U.S. and foreign partnerships, respectively,
see Sec. 1.1441-5(a) and (b). For withholding procedures applicable to
payments to U.S. and foreign trusts and estates, see Sec. 1.1441-5(c).
(c) Definitions--(1) Withholding. The term withholding means the
deduction and withholding of tax at the applicable rate from the
payment of income.
(2) Foreign person. The term foreign person means a nonresident
alien individual, a foreign corporation, a foreign partnership, a
foreign trust, a foreign estate, and any other person that is not a
United States person for purposes of chapter 3 of the Internal Revenue
Code. A United States person is a person described in section
7701(a)(30), the U.S. government (including an agency or
instrumentality thereof), or a State and the District of Columbia
(including an agency or instrumentality thereof).
(3) Payee--(i) General rule. Except as otherwise provided in
paragraph (c)(3)(ii) of this section, a payee is the person to whom a
payment is made. See Sec. 1.1441-2(e) for the determination of when a
payment is considered made. Treatment of a person as a payee has
consequences for purposes of withholding under chapter 3 of the
Internal Revenue Code (see paragraph (b) of this section (relating to
the general rule of withholding)) as well as for purposes of reporting
income under the provisions of chapter 61 of the Internal Revenue Code
and backup withholding under section 3406. See paragraph (d)(3) of this
section for when a withholding agent may treat a payment to a foreign
person as a payment made to a payee that is a U.S. person if the
foreign person is acting for or representing the U.S. person.
(ii) Payments to a foreign partnership. For purposes of chapter 3
of the Internal Revenue Code, section 3406, and chapter 61 of the
Internal Revenue Code, a payment made to a foreign partnership shall be
treated as a payment made to the partners rather than to the
partnership. A withholding agent may, however, treat a payment to a
foreign partnership as made to the partnership (rather than to its
partners) if, with respect to the partnership, it holds an intermediary
withholding certificate described in paragraph (e)(3)(ii) of this
section (relating to a certificate from a qualified intermediary) or an
intermediary withholding certificate described in paragraph (e)(3)(iii)
of this section (relating to a certificate from a foreign partnership)
representing that the income to which the certificate relates is
effectively connected with the conduct of a trade or business in the
United States. In addition, if the withholding agent holds an
intermediary withholding certificate described in paragraph (e)(3)(iv)
of this section (relating to a certificate from an agent, nominee,
representative, etc.), then the payee shall be the person on whose
behalf the partnership is receiving the payment. In the case of tiered
foreign partnerships that are not treated as payees under the
provisions of this paragraph (c)(3)(ii), the payees shall be the
partners of the next higher-tier foreign partnership. Thus, the rules
of this paragraph (c)(3) shall apply through any number of tiers of
foreign partnerships in order to determine which partner is treated as
the payee. For example, if a payment is made to a foreign partnership
(second tier) and one of the partners of the second tier partnership is
another foreign partnership (first tier) with two individual partners,
the payment to the second tier is treated as made to the individual
partners of the first tier (unless the second tier partnership has
furnished one of the intermediary withholding certificates referred to
in this paragraph (c)(3)(ii)). If one of the partners in the first tier
is a domestic partnership, the domestic partnership is treated as the
payee under the provisions of paragraph (c)(3)(i) of this section, even
though one of the partners of the domestic partnership might be a
foreign partnership. If the first tier foreign partnership is a nominee
and furnishes an intermediary withholding certificate described in
paragraph (e)(3)(iv) of this section, the person on whose behalf the
first tier partnership receives the payment is treated as the payee.
See Sec. 1.1441-5(b) for rules regarding procedures applicable to
beneficial owners' claims of reduced rate of withholding under chapter
3 of the Internal Revenue Code.
(4) Individual--(i) Alien individual. The term alien individual
means an individual who is not a citizen or a national of the United
States. See Sec. 1.1-1(c).
(ii) Nonresident alien individual. The term nonresident alien
individual means a person described in section 7701(b)(1)(B), an alien
individual who is
[[Page 17636]]
a resident of a foreign country under the residence article of an
income tax treaty and Sec. 301.7701(b)-7(a)(1) of this chapter, or an
alien individual who is a resident of Puerto Rico, Guam, the
Commonwealth of Northern Mariana Islands, the U.S. Virgin Islands, or
American Samoa as determined under Sec. 301.7701(b)-1(d) of this
chapter. An alien individual who has made an election under section
6013(g) or (h) to be treated as a resident of the United States is
nevertheless treated as a nonresident alien individual for purposes of
withholding under chapter 3 of the Internal Revenue Code.
(5) Foreign corporations. For purposes of this section, a
corporation created or organized in Guam, the Commonwealth of Northern
Mariana Islands, the U.S. Virgin Islands, and American Samoa, is not
treated as a foreign corporation if the requirements of subparagraphs
(A), (B), and (C) of section 881(b)(1) are met for such corporation.
Further, a payment made to a foreign government or an international
organization shall be treated as a payment made to a foreign
corporation for purposes of withholding under chapter 3 of the Internal
Revenue Code.
(6) Beneficial owner--(i) General rule. In the case of a payment of
income, the term beneficial owner means the person required under U.S.
tax principles to include the amount paid in gross income under section
61 (determined without regard to an exclusion or exemption from gross
income under the Internal Revenue Code). Thus, a nominee, agent,
custodian, or any person acting in a similar capacity is not the
beneficial owner. In the case of a scholarship, the student receiving
the scholarship is the beneficial owner of that scholarship.
(ii) Special rules for certain entities--(A) General rule. The
beneficial owners of income paid to a partnership are those persons
that, under U.S. tax principles, are the taxpayers with respect to that
income in their separate or individual capacities. For example, a
partnership (first tier) that is a partner in another partnership
(second tier) is not the beneficial owner of income paid to the second
tier partnership since the first tier partnership is not liable for
income tax under U.S. tax principles. See, however, Sec. 1.1441-5(a)
for applicable withholding procedures for payments to a domestic
partnership. See also Sec. 1.1441-5(b)(2) for applicable withholding
procedures for payments to a foreign partnership where one of the
partners (at any level in the chain of tiers) is a domestic
partnership.
(B) Special rules when an income tax treaty applies. For purposes
of claiming a reduction in the rate of withholding on income paid to a
foreign entity based on an income tax treaty between the United States
and a foreign country, the tax principles in effect under the laws of
that foreign country shall apply to determine whether the entity or the
persons holding an interest in that entity are required to include the
amounts in income and, therefore, whether, under the principles of this
paragraph (c)(6), the entity or the interest holders in the entity are
the beneficial owners of the income. See Sec. 1.1441-6(b)(4)(iii)
permitting a withholding agent to treat, at its option, payments made
to a single foreign entity as beneficially owned in part by the entity
and, in part, by any one or more persons holding an interest in the
entity. The possibility of dual treatment may also occur if a reduced
rate of tax is claimed under the Internal Revenue Code for certain
types of income and under a U.S. income tax treaty for other types of
income or if reduced rates are claimed under different tax treaties.
For purposes of this paragraph (c)(6)(ii)(B), the term foreign entity
does not include a trust or an estate. See Sec. 1.1441-6(b)(4) for
procedures governing claims of benefits under an income tax treaty.
(C) Trusts. The provisions of paragraphs (c)(6)(i) and
(c)(6)(ii)(A) of this section shall not apply to a trust, whether
domestic or foreign. The beneficial owner of income paid to a trust
shall be determined under the provisions of Sec. 1.1441-3(f) and (g),
as in effect on the date preceding the date on which this document is
published as a final regulation in the Federal Register.
(7) Chapter 3 of the Internal Revenue Code. For purposes of the
regulations under sections 1441, 1442, and 1443, any reference to
chapter 3 of the Internal Revenue Code shall not include references to
sections 1445 and 1446, unless the context indicates otherwise.
(d) Claim of U.S. status by payee or beneficial owner--(1) In
general. Payments made to a U.S. person are not subject to the
withholding of tax under section 1441, absent actual knowledge or
reason to know that the U.S. person may be acting as an agent for a
foreign person. See paragraph (b) of this section. Absent actual
knowledge or reason to know otherwise, a withholding agent may apply
the provisions of this paragraph (d) to a payment of income otherwise
subject to withholding to determine whether to treat the payment as
made to a U.S. person. See paragraph (f) of this section for applicable
presumptions if the withholding agent cannot associate the payment with
the required documentation prior to the time of payment.
(2) Payments to a payee that is a U.S. person--(i) Reportable
payments. If a reportable payment (as defined in section 3406(b)) is
made to a payee that is not an exempt recipient (as defined under the
applicable information reporting provisions of chapter 61 of the
Internal Revenue Code), the withholding agent may treat the payment as
made to a U.S. person if the payee complies with the procedures
described in Secs. 31.3406(d)-1 through 31.3406(d)-5 of this chapter
(including requiring a payee to furnish its taxpayer identifying
number) and the withholding agent meets all the requirements described
in Sec. 31.3406(h)-3(e) of this chapter regarding reliance by a payor
on a Form W-9).
(ii) Payments to exempt recipients and certain other payments. If a
reportable payment is made to a payee that is an exempt recipient (as
defined under the applicable information reporting provisions of
chapter 61 of the Internal Revenue Code) or is a scholarship, grant,
pension, or annuity, a withholding agent may treat the payment as made
to a U.S. person if the payee provides a certificate of U.S. status.
For purposes of this paragraph (d)(2)(ii), a certificate of U.S. status
is a Form W-9 (or such other form as the Internal Revenue Service may
prescribe) that is signed under penalties of perjury by the payee and
contains all required information. For purposes of this paragraph
(d)(2)(ii), required information consists of the payee's name,
permanent residence address, and taxpayer identifying number. The
procedures described in Sec. 31.3406(h)-3(a) of this chapter shall
apply to payments to joint payees. A withholding agent that receives a
Form W-9 in order to satisfy this paragraph (d)(2)(ii) must retain the
form in accordance with the provisions of paragraph (e)(4)(iii) of this
section relating to the retention of withholding certificates. The
rules of this paragraph (d)(2)(ii) are only intended to provide a
method by which a withholding agent may determine that a payee is not a
foreign person and do not otherwise impose a requirement that
documentation be furnished by an exempt recipient or for payments
subject to this paragraph (d)(2)(ii).
(3) Payments to a foreign person acting for a U.S. payee. Absent
actual knowledge or reason to know otherwise, for purposes of chapter 3
of the Internal Revenue Code, section 3406, and chapter 61 of the
Internal Revenue Code, a withholding agent may treat a payment to a
foreign person as a payment made to a payee that is a U.S. person if it
receives an intermediary withholding certificate described in
[[Page 17637]]
paragraph (e)(3)(iv) of this section regarding the foreign person to
which is attached the applicable certification described in paragraph
(d)(2) of this section concerning the U.S. payee on whose behalf the
foreign person is receiving the payment. See paragraph (e)(5) of this
section for applicable procedures in the case of a payment to a foreign
person acting as a qualified intermediary. See also, Sec. 1.1441-
5(b)(1) for applicable procedures in the case of a payment to a foreign
partnership that is not a qualified intermediary.
(e) Beneficial owner's claim of foreign status--(1) Withholding
agent's reliance. Absent actual knowledge or reason to know otherwise,
a withholding agent may rely on a claim that the beneficial owner of
income is a foreign person, if, prior to the payment, it complies with
the requirements described in paragraphs (e)(1)(i), (ii), and (iii) of
this section. For this purpose, a withholding agent acting through an
authorized foreign agent is deemed to comply with such requirements to
the extent its authorized foreign agent so complies. See Sec. 1.1441-
7(c)(2) for the description of an authorized foreign agent. In the case
of a payment to a person other than an individual, a withholding agent
may rely on the claim of entity classification made on the basis of the
certification (or documentation, if applicable) furnished to the
withholding agent, unless it has actual knowledge or reason to know
that the classification claimed is incorrect.
(i) The withholding agent holds a beneficial owner withholding
certificate described in paragraph (e)(2)(i) of this section or an
intermediary withholding certificate described in paragraph (e)(3)(i)
of this section.
(ii) The withholding agent complies with the electronic
confirmation procedures described in paragraph (e)(4)(v) of this
section, if required.
(iii) The withholding agent has not been notified by the Internal
Revenue Service that any of the information on the withholding
certificate is incorrect or unreliable.
(2) Beneficial owner withholding certificate--(i) In general. A
beneficial owner withholding certificate is a statement by which the
beneficial owner of the income paid represents that it is a foreign
person and, if applicable, claims a reduced rate of withholding under
section 1441. A separate withholding certificate must be submitted to
each withholding agent. If the beneficial owner receives more than one
type of income from a single payor, the beneficial owner may submit one
withholding certificate to the single payor for the different types of
income. See paragraph (c)(6)(ii)(B) of this section and Sec. 1.1441-
6(b)(4)(i) for the determination of beneficial owner when a benefit is
claimed under an income tax treaty. A beneficial owner of an interest
in a mutual fund that has a common investment advisor or common
principal underwriter with other mutual funds (within the same family
of funds) may, in the discretion of the mutual fund, provide one
withholding certificate for shares acquired or owned in any of the
funds. See Sec. 31.3406(h)-3(a)(2) of this chapter.
(ii) Requirements for validity of certificate. A beneficial owner
withholding certificate is valid only if it is provided on a Form W-8
(or, in the case of personal services income described in Sec. 1.1441-
4(b), a Form 8233), its validity period has not expired, it is signed
under penalties of perjury by the beneficial owner and it contains all
of the information described in this paragraph (e)(2)(ii). The required
information is the name, permanent residence address, and taxpayer
identifying number (TIN) of the beneficial owner (if required), the
basis for the reduced rate of withholding claimed, if applicable,
(including any applicable tax treaty provisions), and any other
information as may be required (in addition to, or in lieu of, the
information described in this paragraph (e)(2)(ii)) by the regulations
under section 1441 or by a form or accompanying instructions. A
permanent residence address is the address in the country where the
person claims to be a resident for purposes of that country's income
tax. The address of a financial institution with which the beneficial
owner maintains an account, a post office box, or an address used
solely for mailing purposes is not a residence address for this
purpose. If the beneficial owner is an individual who does not to have
a tax residence in any country, the address is where the beneficial
owner normally resides. If the beneficial owner is a corporation, then
the address is where the corporation maintains its principal office in
its country of incorporation. Instead of the Form W-8 (or the Form
8233, if applicable), the withholding agent may rely on an acceptable
substitute form or such other form as the Internal Revenue Service may
prescribe. See paragraph (g)(2) of this section for continued validity
of certificates during the transition period. See paragraph (e)(4)(vii)
of this section for circumstances in which a taxpayer identifying
number is required on a beneficial owner withholding certificate.
(3) Intermediary withholding certificate--(i) In general. An
intermediary withholding certificate is a statement by which a foreign
payee represents that it is not the beneficial owner of the income paid
or is a statement furnished by a partnership for its partners. It is
used either to make representations regarding the status of beneficial
owners of the income or to transmit appropriate documentation to the
withholding agent. This paragraph (e)(3) describes the requirements for
the validity of an intermediary withholding certificate issued either
by a qualified intermediary, by a foreign partnership that is not a
qualified intermediary, or by any other person that is neither a
qualified intermediary nor a foreign partnership.
(ii) Intermediary withholding certificate from a qualified
intermediary. In the case of an intermediary withholding certificate
issued by a qualified intermediary (described in paragraph (e)(5)(ii)
of this section), the certificate is valid only if it is furnished on a
Form W-8 (or an acceptable substitute form or such other form as the
Internal Revenue Service may prescribe), it is signed under penalties
of perjury by an officer or partner of the qualified intermediary with
authority to sign for the intermediary, and it contains the information
and certifications described in this paragraph (e)(3)(ii).
(A) The name, permanent residence address (as described in
paragraph (e)(2)(ii) of this section), and the employer identification
number of the qualified intermediary.
(B) A certification that the issuer is a qualified intermediary.
(C) A certification that the issuer has obtained, as required in
the withholding agreement with the Internal Revenue Service, the
appropriate certificates (such as Forms W-8 or W-9) or any other
documentation regarding its account holders or partners.
(D) A statement whether the qualified intermediary is assuming
primary withholding responsibility for the amounts to which the
certificate relates.
(E) If the information is not assuming primary withholding
responsibility, the information and certificates required under
paragraph (e)(5)(iv)(B) of this section regarding the basis for any
reduced rate of withholding tax claimed.
(F) Any other information or certification as may be required (in
addition to, or in lieu of, the information and certifications
described in this paragraph (e)(3)(ii)) by the form or accompanying
instructions.
(iii) Intermediary withholding certificate from a foreign
partnership. In the case of an intermediary withholding
[[Page 17638]]
certificate issued under the provisions of Sec. 1.1441-5(b) by a
foreign partnership that is not a qualified intermediary, the
certificate is valid only if it is furnished on a Form W-8 (or an
acceptable substitute form or such other form as the Internal Revenue
Service may prescribe), it is signed under penalties of perjury by a
partner with authority to sign for the partnership, and it contains the
information and certifications described in this paragraph (e)(3)(iii).
(A) The name, permanent residence address (as described in
paragraph (e)(2)(ii) of this section), and the employer identification
number of the partnership.
(B) The basis for the reduced rate of withholding claimed,
expressed in relation to the distributive share of each partner to
which the certificate relates.
(C) The appropriate withholding certificates for the partners as
required under Sec. 1.1441-5(b)(1) (except for an intermediary
withholding certificate furnished in order to claim a reduced rate for
income effectively connected with the conduct of a trade or business in
the United States).
(D) A statement that the income is effectively connected with the
conduct of a trade or business in the United States, if applicable.
(E) Any other information or certification as may be required (in
addition to, or in lieu of, the information described in this paragraph
(e)(3)(iii)) by the form or accompanying instructions.
(iv) Intermediary withholding certificate from an agent, nominee,
representative, etc. In the case of an intermediary withholding
certificate issued by a person that is not a qualified intermediary and
is not acting for its own account, the certificate is valid if it is
described in this paragraph (e)(3)(iv). In addition, a certificate
furnished to qualify interest as portfolio interest for purposes of
sections 871(h) and 881(c) or to qualify dividends on publicly traded
stock (as defined in Sec. 1.1441-6(b)(2)) is valid if it is described
in Sec. 1.871-14(c)(2)(iii). A certificate is described in this
paragraph (e)(3)(iv) if it is furnished on a Form W-8 (or an acceptable
substitute form, or such other form as the Internal Revenue Service may
prescribe), it is signed under penalties of perjury by a person
authorized to sign for the issuer of the certificate, and it contains
the information and certifications described in this paragraph
(e)(3)(iv).
(A) The name, permanent resident address (as described in paragraph
(e)(2)(ii) of this section) and the taxpayer identifying number of the
issuer of the certificate.
(B) A certification that the issuer is not acting for its own
account and is using the certificate as a form to transmit beneficial
owner documentation for the payment to which the certificate relates
(or other applicable documentation concerning the person for whom the
intermediary is receiving the payment.
(C) If furnishing an intermediary certificate to transmit more than
one withholding certificate, the certificate may indicate the basis for
the reduced rate of withholding claimed, based upon the attached
withholding certificates.
(D) Any other information or certification as may be required (in
addition to, or in lieu of the information and certification described
in this paragraph (e)(3)(iv)) by the form or accompanying instructions.
(4) Applicable rules--(i) Joint owners. In the case of a payment to
joint owners, a withholding certificate must be provided by each owner
claiming to be a foreign person.
(ii) Period of validity--(A) Three year period. Except as otherwise
provided in paragraph (e)(4)(ii)(B) of this section, a beneficial owner
withholding certificate or an intermediary withholding certificate
shall remain valid for three years or until such time as a change in
circumstances makes any information on the certificate incorrect.
(B) Validity period where TIN provided. A withholding certificate
furnished with a taxpayer identifying number shall remain valid until
such time as a change in circumstances makes any information on the
certificate incorrect but only if the income for which such certificate
is furnished is required to be reported under Sec. 1.1461-1(c)(2)(ii)
or the taxpayer identifying number furnished on the certificate is
reported to the Internal Revenue Service under the procedures described
in Sec. 1.1461-1(d).
(C) Withholding certificate for effectively connected income.
Notwithstanding paragraph (e)(4)(ii)(B) of this section, the period of
validity of a withholding certificate furnished to a withholding agent
to claim a reduced rate of tax for income that is effectively connected
with the conduct of a trade or business within the United States shall
be limited to three years.
(D) Computation of three-year period. The three-year validity
period shall start from the date that the certificate is signed until
the last day of the third succeeding calendar year. For example, a
certificate signed on September 30, 1998 remains valid through December
31, 2001.
(E) Change in circumstances. If a change in circumstances makes any
information on the certificate incorrect, then the issuer of the
certificate must inform the withholding agent within 30 days of the
change and issue a new certificate. If a beneficial owner withholding
certificate is used to claim foreign status only (and not, also,
residence in a particular foreign country for purposes of an income tax
treaty), a change of address is a change in circumstances for purposes
of this paragraph (e)(4)(ii)(E) only if it changes to an address in the
United States. Further, a change of address within a foreign country is
not a change in circumstances for purposes of this paragraph
(e)(4)(ii)(E). A withholding agent may require a new certificate at any
time prior to a payment, even though the withholding agent has no
actual knowledge or reason to know that any information stated on the
certificate has changed.
(iii) Retention of withholding certificate. A withholding agent
must retain each withholding certificate for as long as it may be
relevant to the determination of the withholding agent's tax liability
under section 1461 and Sec. 1.1461-1.
(iv) Electronic transmission of information. Under procedures
issued by the Internal Revenue Service, a withholding agent may be
permitted to receive in electronic form the information required to be
included on a withholding certificate or a certificate of U.S. status.
(v) Electronic confirmation of information on withholding
certificate. Under procedures issued by the Internal Revenue Service, a
withholding agent may be required to use an electronic on-line system
to confirm with the Internal Revenue Service information concerning any
taxpayer identifying number stated on a withholding certificate or a
certificate of U.S. status.
(vi) Acceptable substitute form. For purposes of the regulations
under section 1441, 1442, and 1443, the term acceptable substitute in
the case of a Form W-8 or Form 8233 described in paragraph (e)(2) or
(e)(3) of this section is a document prepared and furnished based on
the rules set forth in Sec. 31.3406(h)-3(c)(1) of this chapter
(relating to substitutes for a Form W-9).
(vii) Requirement of taxpayer identifying number. A taxpayer
identifying number must be stated on a withholding certificate when
required by this paragraph (e)(4)(vii). A taxpayer identifying number
is required to be stated on a beneficial owner certificate if the
beneficial owner is claiming the benefit of a reduced rate under an
income tax treaty (other than with respect to dividends on stock traded
on
[[Page 17639]]
a U.S. established financial market), an exemption from withholding
because income is effectively connected with a U.S. trade or business,
an exemption under section 871(f) for certain annuities received under
qualified plans, or an exemption based on a foreign organization's tax
exempt status under section 501(c) or private foundation status. In
addition, a taxpayer identifying number is required to be stated on all
intermediary withholding certificates. A taxpayer identifying number is
an IRS individual tax identification number, an employer identification
number, or a social security number as described in section 6109 and
Sec. 301.6109-1 of this chapter, or any other identifier the
Commissioner may designate.
(5) Qualified intermediaries--(i) General rule. A qualified
intermediary, as defined in paragraph (e)(5)(ii) of this section, may
furnish an intermediary withholding certificate to a withholding agent
for purposes of certifying on behalf of beneficial owners,
intermediaries (such as agents or nominees acting for the accounts of
others), other qualified intermediaries or U.S. payees for the purpose
of claiming reduced rates of withholding tax under section 1441, 1442,
or 1443. Such certificate is in lieu of transmitting withholding
certificates or other required documentation to a withholding agent.
While the qualified intermediary is generally required to obtain
withholding certificates or other appropriate documentary evidence from
beneficial owners or payees pursuant to its agreement with the Internal
Revenue Service, it is not required to attach such documentation to the
intermediary withholding certificate.
(ii) Definition of qualified intermediary. The term qualified
intermediary means a foreign person that is a party to a withholding
agreement with the Internal Revenue Service and that is--
(A) A financial institution (as defined in Sec. 1.165-12(c)(1)(iv))
or a clearing organization (as defined in Sec. 1.163-5(c)(2)(i)(D)(8));
(B) A partnership; or
(C) Any other person acceptable to the Internal Revenue Service.
(iii) Withholding agreement--(A) In general. The Internal Revenue
Service may, upon request, enter into a withholding agreement with a
foreign person described in paragraph (e)(5)(ii) of this section
pursuant to such procedures as the Internal Revenue Service may
prescribe. The withholding agreement shall include the terms,
conditions and procedures that the Internal Revenue Service shall deem
appropriate to insure the collection of the tax due and reporting of
information under sections 1441, 1461, 3406 and chapter 61 of the
Internal Revenue Code.
(B) Terms of the withholding agreement. Generally, the agreement
must include provisions dealing with defining, obtaining, and
maintaining appropriate certification and documentation upon which the
foreign person may rely to ascertain the nationality and residence of
beneficial owners and U.S. payees, reporting account information to the
Internal Revenue Service or otherwise making the account information
available to the Internal Revenue Service, and, if applicable, acting
as an acceptance agent to perform the duties described in
Sec. 301.6109-1(d)(3)(iv)(A) of this chapter (as proposed in project
number INTL-0024-94, published on June 8, 1995 (60 FR 30211)). In
addition the agreement must specify the manner in which the Internal
Revenue Service will verify compliance with the agreement. In
appropriate cases, the Internal Revenue Service may agree to rely on
audits performed by an intermediary's approved external auditor's
records (including workpapers of the auditor and reports prepared by
the auditor indicating the methodology employed to verify the entity's
compliance with the agreement). For this purpose, the agreement shall
specify which auditor or class of auditors is approved. An external
auditor may not be approved unless it is subject to regulatory
supervision under the laws of the country in which a significant part
of the intermediary activities under the agreement are expected to
occur, its internal procedures require it to verify that the
intermediary complies with the terms of the withholding agreement and
to report non-compliance findings under the agreement in the same
manner as it is required to report other findings of non-compliance
with applicable local laws and regulatory requirements, and the
auditor's relevant records (i.e., workpapers and reports) are available
to the Internal Revenue Service. The agreement must include provisions
for the assessment and collection of tax in the event that failure to
comply with the terms of the agreement result in the failure by the
withholding agent or the qualified intermediary to withhold and deposit
the required amount of tax. Further, the agreement shall provide that a
qualified intermediary that withholds any amount of tax must make
deposits of the tax as required under Sec. 1.1461-1(a). The Internal
Revenue Service may require the posting of a bond conforming to the
requirements of Sec. 301.7101-1 of this chapter as to form of bond or
surety required. The agreement shall specify the scope of the agreement
in the case of a foreign person with branches or relevant intermediary
activities in more than one country. To determine the terms of any
particular withholding agreement, the Internal Revenue Service will
consider appropriate factors including whether or not the foreign
person agrees to assume primary responsibility as a withholding agent,
the type of local ``know-your-customer'' laws and practices to which it
is subject, the extent and nature of supervisory and regulatory control
exercised under the laws of the foreign country over the foreign
person, the volume of investments in U.S. securities (determined in
dollar amounts and number of account holders), and financial condition
of the foreign person.
(iv) Assignment of primary withholding responsibility--(A) In
general. A partnership that is a qualified intermediary acting for its
own account must assume primary withholding responsibility. Any other
qualified intermediary may assume primary withholding responsibility
only if it is permitted to do so under its agreement with the Internal
Revenue Service. A withholding agent and a qualified intermediary may
arrange on who of the withholding agent or the qualified intermediary
shall have primary responsibility for any amount required to be
withheld under this section and section 3406 for any one or more
classes of beneficial owners or payees and for any or more types of
income expected to be paid to the intermediary. In a relationship
between a withholding agent and a qualified intermediary, the qualified
intermediary may agree to assume primary withholding responsibility for
some types of income and not others. However, unless otherwise
specified in the agreement, primary withholding responsibility for a
type of income must be assumed for all beneficial owners and payees of
that income or for none of them.
(B) Applicable procedures when a qualified intermediary does not
assume primary withholding responsibility. When a qualified
intermediary does not assume primary withholding responsibility, the
intermediary withholding certificate must contain the information
described in this paragraph (e)(5)(iv)(B) or in any agreement between
the qualified intermediary and the Service. The certificate must
separately identify the assets that are associated with each U.S. payee
to
[[Page 17640]]
which the certificate relates and that generate the type of income
described in Sec. 1.1441-2(a) (i.e., income that would be subject to
withholding if paid to a foreign person). The qualified intermediary
must furnish a Form W-9 for each U.S. payee that is not an exempt
recipient and the name and address of each U.S. payee that is an exempt
recipient. The intermediary withholding certificate must also
separately identify the assets associated with non-U.S. payees to which
the certificate relates and the applicable withholding tax rate or
rates. If different withholding tax rates apply, the intermediary
withholding certificate must indicate the applicable rate for each
class of non-U.S. payees to which different withholding rates apply and
the assets associated with each class. For payments that the
intermediary withholding certificate states are made to U.S. payees, a
withholding agent dealing with a qualified intermediary that has not
assumed primary withholding responsibility must comply with applicable
reporting requirements under chapter 61 of the Internal Revenue Code in
the same manner as if it had received a Form W-9 (or acceptable
substitute form) directly from the U.S. payee. The withholding agent
must also comply with the return requirements under section 1461 and
Sec. 1.1461-1 (b)(2)(ii) and (c)(4)(ii) for payments made to non-U.S.
payees.
(C) Applicable procedures when qualified intermediary assumes
primary withholding responsibility. A withholding agent relying on an
intermediary withholding certificate from a qualified intermediary
representing that the qualified intermediary assumes primary
withholding responsibility as permitted under its agreement with the
Internal Revenue Service is relieved from the obligation to withhold on
payments made to the intermediary. The withholding agent must comply
with the return requirements under section 1461 and Sec. 1.1461-1
(b)(2)(ii) and (c)(4)(ii) for payments made to the qualified
intermediary.
(v) Special rules for qualified intermediaries that are foreign
partnerships. A foreign partnership that is a qualified intermediary
shall be a withholding agent with respect to its partner's distributive
share of income subject to withholding that is paid to the partnership.
Therefore, it shall withhold under the same procedures and at the same
time as is prescribed for withholding by a domestic partnership. See
Sec. 1.1441-5(a)(2) for withholding procedures applicable to domestic
partnerships. In addition, the partnership shall not be relieved from
its obligation to make a return on Form 1065 as required under section
6031 and the regulations under that section and to furnish the
statements required under section 6031(b) and the regulations under
that section.
(f) Presumptions--(1) In general--(i) Reliance. Absent actual
knowledge or reason to know otherwise, a withholding agent or a payor
described in Sec. 31.3406(a)-2 of this chapter may rely on the
presumptions of this paragraph (f) to determine whether to treat a
beneficial owner or a payee as a U.S. or a foreign person when, before
making a payment of income subject to withholding, or a payment subject
to reporting under chapter 61 of the Internal Revenue Code, the
withholding agent or payor cannot associate the payment with the
required documentation. When applying the provisions of this section,
any presumption of foreign status pursuant to this paragraph (f) shall
have effect only for purposes of applying the provisions of paragraph
(b) of this section (regarding the rules of withholding) and may not be
relied upon for purposes of granting a reduced rate of withholding
under the Internal Revenue Code (e.g. section 1441(c)(9) or (c)(10)) or
under an income tax treaty.
(ii) Required documentation. For purposes of this paragraph (f),
the term required documentation means the applicable documentation that
is required to be furnished in connection with the payment under this
section, under Sec. 1.871-14(c)(2), or under chapter 61 of the Internal
Revenue Code. A withholding agent or payor is not able to associate a
payment with required documentation if, for that payment, it lacks
documentation, the documentation it holds lacks information, or the
withholding agent or payor knows or has reason to know that information
associated with the required documentation is incorrect or unreliable.
For purposes of this paragraph (f)(1), a withholding agent or payor has
reason to know that information is incorrect or unreliable if the
withholding agent or payor would have reason to know under the rules of
Sec. 1.1441-7(b)(2) or cannot reasonably rely on a Form W-9 (or an
acceptable substitute) under Sec. 31.3406(h)-3(e) of this chapter. For
purposes of this paragraph (f)(1), a Form W-9 (or an acceptable
substitute) must contain the information described in Sec. 31.3406(h)-
3(e)(2)(i) through (iv) of this chapter in order for a payor to
reasonably rely on the Form W-9. In the case of other documentation,
the required information shall include only the name, permanent
residence address, taxpayer identifying number (when required), and
signature under penalties of perjury (when required).
(2) Reportable payments to non-exempt recipients--(i) In general.
Except as otherwise provided in paragraphs (f)(2)(ii) and (f)(4) of
this section, a reportable payment (as defined in paragraph (f)(6) of
this section) made to a payee who is an individual or other non-exempt
recipient is presumed made to a U.S. payee for purposes of chapter 61
of the Internal Revenue Code, section 3406, and this section if, before
payment, the withholding agent or payor cannot associate the payment
with the required documentation (as determined under paragraph
(f)(1)(i) of this section). In such a case, the withholding agent or
payor must treat the payment as a payment that may be subject to
reporting under chapter 61 of the Internal Revenue Code and the
regulations under that chapter and to backup withholding under section
3406 and the regulations under that section.
(ii) Special grace period for certain reportable payments in the
case of indicia of a foreign payee--(A) General rule. This paragraph
(f)(2)(ii)(A) applies to payments of dividends, interest, original
issue discount, broker proceeds described in Sec. 1.6045-1(d)(5), and
exchanges of personal property or services through barter exchanges
described in Sec. 1.6045-1(e)(2). A withholding agent or payor may
treat the payee as a beneficial owner that is a foreign person for the
grace period described in this paragraph (f)(2)(ii)(A) if, at the time
a payment is first credited to an account, the withholding agent or
payor has the name and an address in a foreign country for the account
holder or a facsimile copy or an electronic transmission of the
information contained in a withholding certificate described in
paragraph (e)(2) or (e)(3) of this section. The grace period is 90 days
from the date that the withholding agent or payor first credits the
account or, if shorter, until the end of the calendar year. If this
paragraph (f)(2)(ii)(A) applies, the withholding agent may then treat
the payee as a beneficial owner that is a foreign person and is,
therefore, required to withhold under section 1441 on the basis of this
presumption from the time that the amounts are credited to the account.
(B) Additional withholding in the event of payments or withdrawals.
If, at any time before provision or correction of the required
documentation within the grace period specified in paragraph
(f)(2)(ii)(A) of this section, the withholding agent loses control over
[[Page 17641]]
any part or all of the amounts in an account described in paragraph
(f)(2)(ii)(A) of this section (such as by making an actual payment from
the account or allowing withdrawal of any part or all of the amounts in
the account, other than for purposes of withholding an amount of tax),
then the withholding agent or payor must treat the payee as a U.S.
person for all amounts credited to the account during the grace period.
Accordingly, the payor must withhold to the extent required under
section 3406 on all reportable payments made to the account during the
period to which the grace period applies and thereafter. The amount of
backup withholding is equal to 31 percent of the reportable payments
reduced by any amount previously withheld from the amounts credited to
the account.
(C) Application of withholding upon expiration of grace period. If,
upon the termination of the grace period described under paragraph
(f)(2)(ii)(A) of this section, the required documentation has not been
furnished or corrected, the payee is then presumed to be a U.S. person
for purposes of section 3406 and chapter 61 of the Internal Revenue
Code. Accordingly, the payor must withhold to the extent required under
section 3406 on all reportable payments credited to the account during
the grace period and thereafter (until appropriate documentation has
been furnished or corrected). Any amount withheld from the payments
subject to the grace period may be credited toward any amount of backup
withholding due under section 3406. If the required documentation is
furnished or corrected on or before the expiration of the grace period
described in paragraph (f)(2)(ii)(A) of this section and establishes
that the beneficial owner is a foreign person, then any amount withheld
on any payment made during the grace period will be treated as having
been withheld under section 1441. To the extent such amount exceeds the
amount of tax ultimately determined to be owed under section 1441, the
excess shall be treated as an amount of overwithholding subject to
adjustment under Sec. 1.1461-2(a), or refund or credit under
Sec. 1.1464-1. If, on the other hand, U.S. status is established by
required documentation on or before expiration of the grace period,
then any amount withheld from the payments made during the grace period
may be credited towards any amount of backup withholding due under
section 3406. To the extent such tax exceeds the amount required to be
withheld under section 3406, the excess shall be treated as erroneously
withheld from the payee and shall be subject to adjustments as provided
in Sec. 31.6413(a)-3 of this chapter.
(iii) Joint owners or payees. A withholding agent or payor may
presume that a payment made to joint owners or payees for whom it
cannot associate the required documentation for all payees is made to
U.S. individuals. For purposes of applying this paragraph (f)(2)(iii),
the grace period rules in paragraph (f)(2)(ii)(A) of this section shall
apply only if each payee qualifies for it. In that case, the rules of
paragraph (f)(2)(ii)(B) of this section would apply when any one of the
joint account holders receives a payment, makes a withdrawal, or
reinvests any portion of the funds in the account that are subject to
the grace period.
(iv) Special rules for exempt recipients. If the payee is an exempt
recipient described in Sec. 1.6049-4(c)(1)(ii) and the withholding
agent or payor has actual knowledge of the payee's employer
identification number, then the withholding agent or payor may presume
that the payee is a foreign person if the employer identification
number begins with the two digits ``98.'' The withholding agent or
payor may also presume that the payee is foreign if the withholding
agent's or payor's communications with the payee are mailed to an
address in a foreign country, or if the payment is made outside the
United States (as defined in Sec. 1.6049-5(e)). In other cases, the
withholding agent or payor may presume that the exempt recipient is a
U.S. person and, therefore, subject to section 3406 and chapter 61 of
the Internal Revenue Code and the regulations under those provisions.
If a withholding agent or payor treats a payee as a foreign person
pursuant to the presumption of this paragraph (f)(2)(iv), it must treat
the payee as the beneficial owner and apply the provisions of section
1441, Sec. 1.871-14, and chapter 61 of the Internal Revenue Code
accordingly. If the withholding agent treats the payee as a foreign
person, it is subject to the return requirements of Sec. 1.1461-1(b)
and (c). The presumption of this paragraph (f)(2)(iv) may be rebutted
by providing the required documentation to the withholding agent or
payor.
(3) Special rules for scholarships, grants, pensions, annuities,
etc.--(i) Scholarships and grants. A payment representing scholarship
or fellowship grant income (as defined in section 117) is presumed made
to a U.S. person if the withholding agent or payor has a record of the
payee's U.S. visa status in its records. In that case, the withholding
agent or payor has reason to know that such individual is a foreign
person and, therefore, the presumption of this paragraph (f)(3)(i)
shall not apply.
(ii) Pensions, annuities, etc. A withholding agent or payor may
presume that a payment from a trust described in section 401(a), an
annuity plan described in section 401(a), an annuity plan described in
section 403(a), or a payment with respect to any annuity, custodial
account, or retirement income account described in section 403(b) is
made to a U.S. or foreign person under the rules of this paragraph
(f)(3)(ii).
(A) Such payment is presumed made to a U.S. person, if the
withholding agent or payor has a Social Security number for the payee
and a mailing address as described in this paragraph (f)(3)(ii)(A). A
mailing address is an address used for purposes of information
reporting or otherwise communicating with the payee that is an address
in the United States or in certain foreign countries with which the
United States has an income tax treaty. For this purpose, a income tax
treaty must provide that the payee, if an individual resident in that
country, would be entitled to an exemption from U.S. tax on amounts
described in this paragraph (f)(3)(ii).
(B) Such payment is presumed made to a foreign person in all cases
not described in paragraph (f)(3)(ii)(A) of this section.
(4) Special rules for pass-through entities--(i) Payments to
partnerships. In the case of a payment to a partnership, the
presumptions of this paragraph (f)(4)(i) shall apply to determine
whether to treat the partnership as a domestic or foreign partnership.
This determination must be made before determining who are the payees
under paragraph (c)(3) of this section. If the withholding agent or
payor has actual knowledge of the partnership's employer identification
number, then the withholding agent or payor may presume that the
partnership is a foreign partnership if the employer identification
number begins with the two digits ``98.'' The withholding agent or
payor may also presume that the partnership is foreign if the
withholding agent's or payor's communications with the partnership are
mailed to an address in a foreign country, or if the payment is made
outside the United States (as defined in Sec. 1.6049-5(e)). In all
other cases, the withholding agent or payor may presume that the
partnership is domestic. The presumptions in this paragraph (f)(4)(i)
may be rebutted by
[[Page 17642]]
providing the required documentation to the withholding agent or payor.
(ii) Payments to a foreign partnership. A withholding agent or
payor that makes a reportable payment to a partnership that it treats
as a foreign partnership may presume that a partner is a U.S. payee
that is not an exempt recipient if, before payment, the withholding
agent cannot associate the payment with the required documentation for
the partner. See paragraph (c)(3)(ii) of this section treating partners
of a foreign partnership as payees. In such case, the withholding agent
or payor must treat the portion of the payment allocable to the partner
as made to a U.S. payee who is not an exempt recipient. Thus, the
payment may be subject to reporting under chapter 61 of the Internal
Revenue Code and the regulations under that chapter and to backup
withholding under section 3406 and the regulations under that section.
The portion of a payment allocable to a partner shall be determined
based on the distributive shares of the partnership income allocable to
each partner.
(iii) Partners' distributive shares--(A) Domestic partnership. For
purposes of this paragraph (f)(4)(iii)(A), a domestic partnership may
presume that a partner is a U.S. payee that is not an exempt recipient
if, at the time it is required to withhold on the amount, the
partnership cannot associate the payment with the required
documentation for that partner and the amount relates to a reportable
payment made to the partnership.
(B) Foreign partnership. For purposes of this paragraph
(f)(4)(iii)(B), a foreign partnership that is a qualified intermediary
may treat a partner as a foreign payee if, at the time it is required
to withhold on the amount, it cannot associate the amount with the
required documentation for that partner.
(5) Failure to act in accordance with presumptions. A withholding
agent that, contrary to the presumptions in this paragraph (f), grants
a claim of reduced rate of withholding under section 1441 on income
subject to withholding will be liable under section 1461 for the tax
required to be withheld under section 1441, without the benefit of a
reduced rate unless the withholding agent can demonstrate to the
satisfaction of the District Director or the Assistant Commissioner
(International) that the proper amount of tax, if any, was in fact paid
to the Internal Revenue Service. Proof of payment of tax may be
established on the basis of a Form 4669 (or such other form as the
Internal Revenue Service may prescribe), establishing the amount of
tax, if any, actually paid by the beneficial owner on the income. Proof
that a reduced rate of withholding was appropriate may also be
established on the basis of the required documentation described in
paragraph (f)(1)(ii) of this section. However, if the required
documentation was not received by the withholding agent before the time
the payment was made or within the grace period specified in paragraph
(f)(2)(ii)(A) of this section, then the Commissioner, or his or her
delegate, may require additional proof if it determines that the delays
in obtaining the required documentation affect its reliability. The
withholding agent will be liable for interest under section 6601
regardless of whether the underlying tax liability is due. In addition,
the withholding agent may be subject to penalties.
(6) Reportable payment. Solely for purposes of the presumptions in
this paragraph (f), a reportable payment is any payment of income
subject to withholding (as defined in Sec. 1.1441-2(a)) or any payment
described in section 3406(b), notwithstanding the provisions in
sections 6041, 6041A, 6042, 6044, 6045, 6049, 6050A, 6050N and the
regulations under those sections that provide exemptions from reporting
based upon the status of the payee as a foreign person. For example, a
payment of interest described in Sec. 1.6049-5(b)(14) as a non-
reportable payment if paid to a foreign person is treated as a
reportable payment for purposes of this paragraph (f). Accordingly, the
withholding agent or payor must determine under the presumptions
described in this paragraph (f) whether to treat the beneficial owner
or payee as a foreign or U.S. person. See sections 6041 through 6049
and sections 6050A and 6050N and the regulations under those sections
for reporting requirements for amounts treated as reportable payments
for purposes of this paragraph (f).
(7) Adjustment, refund, or credit of overwithheld tax. If, as a
result of the presumption rules of paragraph (f) of this section, the
amount withheld under section 1441 is greater than the tax due,
adjustments may be made in accordance with the procedures described in
Sec. 1.1461-2(a). Alternatively, refunds or credits may be claimed in
accordance with the procedures described in Sec. 1.1464-1, relating to
refunds or credits claimed by the beneficial owner, or Sec. 1.6414-1,
relating to refunds or credits claimed by the withholding agent. If an
amount was withheld under section 3406, see Sec. 31.6413(a)-3(a)(1) of
this chapter.
(g) Effective date--(1) In general. This section applies to
payments of income made after December 31, 1997.
(2) Transition rules. For purposes of paragraph (e)(2)(i) and
(d)(2)(ii) of this section, a withholding agent that holds a valid Form
W-8, 1001, 4224, 1078, or a statement described in Sec. 1.1441-5(b) (as
contained in 26 CFR Part 1, edition revised April 1, 1995) on the date
that is 60 days after these regulations are published as final
regulations in the Federal Register may treat it as a valid withholding
certificate until its validity expires under applicable provisions as
in effect on April 22, 1996. In addition, the documentation
requirements for dividends on stock traded on a U.S. established
financial market described in Sec. 1.1441-6(b)(2) shall apply only to
accounts established after the date that is 60 days after these
regulations are published as final regulations in the Federal Register.
For accounts established on or before that date, the documentation
requirements under this section shall apply to payments made after
December 31, 1999.
Par. 7. Section 1.1441-2 is revised to read as follows:
Sec. 1.1441-2 Income subject to withholding.
(a) In general. For purposes of the regulations under section 1441,
the term income subject to withholding means items of income from
sources within the United States (not including items listed in
paragraph (d)(1) of this section) that constitute either fixed or
determinable annual or periodical income described in paragraph (b) of
this section or other income subject to withholding described in
paragraph (c) of this section. Withholding applies to the gross amount
of the payment made to a foreign person. See part I (section 861 and
following), subchapter N, chapter 1 of the Internal Revenue Code, and
the regulations under such part for rules governing the determination
of the source of income. See section 884(f) and the regulations
thereunder to determine the circumstances under which interest paid by
a foreign corporation is U.S. source income.
(b) Fixed or determinable annual or periodical income--(1) In
general. For purposes of chapter 3 of the Internal Revenue Code, fixed
or determinable annual or periodical income is all income included in
gross income under section 61 (including original issue discount),
except for the items listed in paragraph (b)(2) of this section.
(2) Exceptions. For purposes of chapter 3 of the Internal Revenue
Code, the items of income described in this paragraph (b)(2) are not
fixed or
[[Page 17643]]
determinable annual or periodical income--
(i) Gains derived from the sale of property (including market
discount and option premiums), except for gains described in paragraph
(b)(3) or (c) of this section;
(ii) Insurance premiums within the meaning of section 4372 paid to
a foreign insurer or reinsurer;
(iii) Items of U.S. source income that are excluded from gross
income under any provision of law without regard to the identity of the
holder, such as interest excluded from gross income under section
103(a); and
(iv) Any other income that the Internal Revenue Service may
determine, in published guidance, is not fixed or determinable annual
or periodical income.
(3) Original issue discount. Amounts of original issue discount are
fixed or determinable annual or periodical income. However, based on
the authority of section 1441(c)(8), only the original issue discount
described in this paragraph (b)(3) may be subject to withholding.
(i) Amounts paid by original issuer. Amounts paid by the original
issuer (or its paying agent) to the beneficial owner on any obligation
issued after March 31, 1972 and payable more than 6 months from the
date of original issue that represent original issue discount realized
by the beneficial owner upon the retirement of the obligation, or upon
payment by the issuer on the obligation, to the extent that the amount
is subject to tax under section 871(a)(1)(C) or under section
881(a)(3). This paragraph (b)(3)(i) only applies to original issue
discount as defined in section 1273(a)(1). Therefore, it does not apply
to market discount as defined in section 1278(a)(2).
(ii) Amounts paid by related obligor. Amounts paid by the obligor
(or its paying agent) on obligations issued after the date that is 60
days after these regulations are published as final regulations in the
Federal Register and payable more than 6 months from the date of
original issue representing an amount of original issue discount if the
obligor is related to the original issuer (within the meaning of
section 163(e)(3)), to the extent such accrued amount is subject to tax
under section 871(a)(1)(C)(ii) or under section 881(a)(3)(B).
(iii) Amounts paid in a sale between related parties. Amounts paid
on the sale or exchange of obligations issued after the date that is 60
days after these regulations are published as final regulations in the
Federal Register and payable more than 6 months from the date of
original issue representing an amount of original issue discount if the
seller is related to the purchaser within the meaning of section
163(e)(3), to the extent such accrued amount is subject to tax under
section 871(a)(1)(C)(i) or under section 881(a)(3)(A).
(iv) Amounts actually known to be taxable original issue discount.
Amounts paid on obligations issued after the date that is 60 days after
these regulations are published as final regulations in the Federal
Register and payable more than 6 months from the date of original issue
representing an amount of original issue discount if the obligor (or
the seller in the case of a sale or exchange of obligations) has actual
knowledge of the amount subject to tax under section 871(a)(1)(C) or
under section 881(a)(3).
(v) Amounts for which required documentation is not furnished. Any
amount of original issue discount paid on obligations issued after the
date that is 60 days after the publication of these regulations as
final regulations in the Federal Register and payable more than 6
months from the date of original issue representing an amount that
fails to qualify as portfolio interest under section 871(h) or 881(c)
(because of the failure to furnish the statement described in section
871(h)(5) and Sec. 1.871-14(c)(2)), to the extent the amount is subject
to tax under section 871(a)(1)(C)(ii) or under section 881(a)(3)(B).
The applicable rate of withholding tax shall be applied to the entire
amount of stated interest, if any, and original issue discount on the
obligation as determined on the date of original issue if the
withholding agent does not know what proportion of the payment on the
obligation represents taxable income. Adjustments to any amount of
overwithheld tax may be made in compliance with the procedures
described in Sec. 1.1461-2(a). Alternatively, refunds may be claimed in
compliance with the procedures in Sec. 1.1464-1.
(4) Securities lending transactions. [Reserved]
(c) Other income subject to withholding. Withholding is also
required on the gross amount of the following items of income:
(1) Gains described in sections 631(b) or (c), relating to
treatment of gain on disposal of timber, coal, or domestic iron ore
with a retained economic interest.
(2) Gains subject to the 30 percent tax under section 871(a)(1)(D)
or section 881(a)(4), relating to contingent payments received from the
sale or exchange of patents, copyrights, and similar intangible
property.
(d) Items of income not subject to withholding under section 1441--
(1) Exemptions for which no withholding certificate or documentation is
required. The items of income described in this paragraph (d)(1) are
not subject to withholding of tax under section 1441 regardless of the
fact that no withholding certificate or other documentation has been
furnished to establish foreign or U.S. status.
(i) Portfolio interest paid on bearer obligations that are
described in section 871(h)(2)(A) or 881(c)(2)(A) and Sec. 1.871-14(b).
See Sec. 1.6049-5(b)(7) regarding exemption from reporting under
section 6049, and thus, from backup withholding under section 3406.
(ii) Original issue discount on any obligation payable less than 6
months from the date of original issue described in section
871(g)(1)(B)(i). See Sec. 1.6049-5(b)(10), (11), and (14) for
exemptions from reporting under section 6049, and thus, from backup
withholding under section 3406.
(iii) Any amount of original issue discount not described in
paragraph (b)(3) of this section. See Sec. 1.6049-5(b)(10) and (11) for
exemptions from reporting under section 6049, and thus, from backup
withholding under section 3406.
(iv) Proceeds from a wager placed by a nonresident alien individual
in the games of blackjack, baccarat, craps, roulette, or big-6 wheel.
(2) Exemptions for portfolio interest and income on bank, etc.
deposits requiring a withholding certificate or documentation--(i) In
general. No withholding is required under sections 1441(c)(9) and
(c)(10) on interest and original issue discount that either qualifies
as portfolio interest on an obligation in registered form described in
section 871(h)(2)(B) or 881(c)(2)(B) (including interest on a foreign-
targeted registered obligation described in Sec. 1.871-14(e)) or is
paid on deposits described in section 871(i)(2)(A). A withholding agent
may exempt from withholding an amount of interest and original issue
discount paid on deposits described in section 871(i)(2)(A) only if,
prior to the payment, the withholding agent complies with the
procedures described in Sec. 1.871-14(c). The preceding sentence does
not apply to amounts of original issue discount described in paragraph
(d)(1)(ii) of this section or in Sec. 1.6049-5(b)(10) or (11).
(ii) Transition rule. The documentation requirements for interest
on deposits described in section 871(i)(2)(A) shall apply to payments
made after December 31, 1997 with respect to accounts established after
the date that is 60 days after these
[[Page 17644]]
regulations are published as final regulations in the Federal Register.
For accounts established on or before that date, the documentation
requirements under this section shall apply to payments made after
December 31, 1999.
(e) Payment--(1) General rule. A payment is considered made when
the amount would be includible in the income of the beneficial owner
under the U.S. tax principles governing the cash basis method of
accounting. A payment is considered made whether it is made directly to
the beneficial owner or paid to another person for the benefit of the
beneficial owner (e.g., to the agent of the beneficial owner). Thus, a
payment of income is considered made to a beneficial owner if it is
paid in complete or partial satisfaction of the beneficial owner's debt
to a creditor.
(2) Income allocated under section 482. A payment is considered
made to the extent income subject to withholding is allocated under
section 482. Further, income arising as a result of a secondary
adjustment made in conjunction with a reallocation of income under
section 482 from a foreign person to a related U.S. person is
considered paid to a foreign person unless the taxpayer to whom the
income is reallocated has entered into a repatriation agreement with
the Internal Revenue Service and the agreement eliminates the liability
for the withholding tax. For purposes of determining the liability for
withholding tax, the payment of income is deemed to have occurred on
the dates of the transactions that give rise to the allocation of
income and the secondary adjustments, if any.
(3) Blocked income. Income is not considered paid if it is blocked
under executive authority, such as the President's exercise of
emergency power under the Trading with the Enemy Act, 50 U.S.C. App. 5,
or the International Emergency Economic Powers Act, 50 U.S.C. 1701 et
seq. However, on the date that the blocking restrictions are removed,
the income that was blocked is considered constructively received by
the beneficial owner (and therefore paid for purposes of this section)
and subject to withholding under Sec. 1.1441-1.
(4) Special rules for dividends. For purposes of sections 1441 and
6042, in the case of stock for which the record date is earlier than
the payment date, dividends are considered paid on the payment date. In
the case of a corporate reorganization, if a beneficial owner is
required to exchange stock held in a former corporation for stock in a
new corporation before dividends that are to be paid with respect to
the stock in the new corporation will be paid on such stock, the
dividend is considered paid on the date that the payee or beneficial
owner actually exchanges the stock and receives the dividend. See
Sec. 31.3406(a)-4(a)(2) of this chapter.
(5) Certain interest accrued by a foreign corporation. For purposes
of sections 1441 and 6049, a foreign corporation shall be treated as
having made a payment of interest as of the last day of the taxable
year if it has made an election under Sec. 1.884-4(c)(1) to treat
accrued interest as if it were paid in that taxable year.
(6) Payments other than in U.S. dollars. For purposes of section
1441, a payment includes amounts paid in a medium other than U.S.
dollars. See Sec. 1.1441-3(e) for rules regarding the amount subject to
withholding in the case of such payments.
(f) Effective date. This section applies to payments of income made
after December 31, 1997.
Par. 8. Section 1.1441-3 is amended by:
1. Revising the heading of the section.
2. Revising paragraphs (a) through (e).
3. Removing paragraph (f).
4. Redesignating paragraph (j) as paragraph (f).
5. Revising paragraph (g).
6. Removing paragraphs (h) and (i).
7. Removing the OMB parenthetical and the authority citation at the
end of the section.
The revisions read as follows:
Sec. 1.1441-3 Amounts subject to withholding.
(a) Withholding on gross amount. Except as otherwise provided in
regulations under section 1441, the amount subject to withholding under
Sec. 1.1441-1 is the gross amount of income subject to withholding. The
gross amount of income subject to withholding may not be reduced by any
deductions, except to the extent that one or more personal exemption is
allowed as provided under Sec. 1.1441-4(b)(6).
(b) Withholding on payments on certain obligations--(1) Withholding
at time of payment of interest. When making a payment on an interest-
bearing obligation, a withholding agent must withhold under
Sec. 1.1441-1 upon the gross amount of stated interest payable on the
interest payment date, regardless of whether the payment constitutes a
return of capital or the payment of income within the meaning of
section 61. To the extent an amount was withheld on an amount of
capital rather than interest, adjustments to any amount of overwithheld
tax may be made under the procedures described in Sec. 1.1461-2(a).
Alternatively, refunds or credits may be claimed by the beneficial
owner under the procedures described in Sec. 301.6402-2 of this
chapter.
(2) No withholding between interest payment dates--(i) In general.
A withholding agent is not required to withhold tax under Sec. 1.1441-1
upon interest accrued on the date of a sale of debt obligations when
that sale occurs between two interest payment dates, even though the
interest is subject to tax under section 871 or section 881. See
Sec. 1.6045-1(c) for reporting requirements by brokers with respect to
sale proceeds. The exemption from withholding granted by this paragraph
(b)(2) is not subject to the withholding certificate procedures
described in Sec. 1.1441-1(e)(1). However, the exception is not a
determination that the accrued interest is not fixed or determinable
annual or periodical income.
(ii) Anti-abuse rule. The exemption in paragraph (b)(2)(i) of this
section does not apply if the sale of securities is part of a plan the
principal purpose of which is to avoid tax by selling and repurchasing
securities and the withholding agent has actual knowledge or reason to
know of such plan.
(c) Corporate distributions--(1) General rule. Subject to the
provisions of this paragraph (c), a corporation making a distribution
with respect to its stock is not required to withhold under section
1441,1442, or 1443 on the portion of the distribution--
(i) That is treated as a nontaxable distribution payable in stock
or stock rights;
(ii) That is treated as a distribution in part or full payment in
exchange for stock;
(iii) That is not paid out of accumulated earnings and profits or
current earnings and profits;
(iv) That is paid by a regulated investment company and is a
capital gain dividend (as defined in section 852(b)(3)(C)) or an exempt
interest dividend (as defined in section 852(b)(5)(A)); or
(v) That is paid by a real property holding corporation (defined in
section 897(c)(2)) or a real estate investment trust (defined in
section 856) and is subject to withholding under section 1445 and the
regulations under that section.
(2) Determination of accumulated and current earnings and profits
on the date of payment--(i) General rule. In order for a corporation to
determine the amount of withholding tax due on any distribution with
respect to stock, the distributing corporation may, at its option,
either treat the entire distribution as a dividend as defined in
section 316 or may treat only a portion
[[Page 17645]]
of the distribution as a dividend if, prior to, and at a time
reasonably close to the date of payment, the distributing corporation
makes a reasonable estimate of the portion of the distribution that is
not a dividend based upon expected earnings and profits as relevant
facts and circumstances shall indicate. A reasonable estimate may be
made based on the procedures described in Sec. 31.3406(b)(2)-4(c)(2) of
this chapter.
(ii) Procedures in case of underwithholding. A distributing
corporation that determines at the end of the taxable year of the
distribution that it underwithheld under section 1441 shall be liable
under section 1461 for the amount underwithheld. No penalties shall be
imposed for failure to withhold and deposit tax if--
(A) The corporation made a reasonable estimate as provided in
paragraph (c)(2)(i) of this section; and
(B) Either--
(1) The corporation pays over the underwithheld amount on or before
the date that it is required to file a return on Form 1042 for the
calendar year of the distribution pursuant to Sec. 1.1461-2(b); or
(2) The corporation is not a calendar year taxpayer and it files an
amended return on Form 1042X (or such other form as the Commissioner
may prescribe) for the calendar year in which the distribution is made
and pays the additional amount of tax and interest within 60 days of
the close of the taxable year of the distribution.
(iii) Reliance on reasonable estimate by intermediary. For purposes
of determining whether the payment of a corporate distribution is a
dividend, a withholding agent that is not the distributing corporation
may rely on representations made by the distributing corporation
regarding the reasonable estimate of expected earnings and profits made
pursuant to paragraph (c)(2)(i) of this section. Failure by the
withholding agent to withhold the required amount due to an erroneous
estimate that the Internal Revenue Service has determined was not
reasonably made shall be imputed to the distributing corporation.
Therefore, the Internal Revenue Service may collect any additional
amount from the distributing corporation and subject the corporation to
applicable interest and penalties as a withholding agent.
(3) Special rules in the case of distributions from a regulated
investment company. If the amount of distributions designated as
subject to section 852(b)(3)(C) or 852(b)(5)(A) exceeds the amount
permitted to be designated under those sections for the taxable year,
then no penalties will be asserted for any resulting underwithholding
provided the designations were based on a reasonable estimate (made
pursuant to paragraph (c)(2)(i) of this section) and adjustments to the
amount withheld are made within the time period described in paragraph
(c)(2)(ii)(B) of this section. Any adjustment to the amount of tax due
and paid to the Internal Revenue Service by the withholding agent as a
result of underwithholding shall not be treated as a distribution for
purposes of section 562(c) and the regulations thereunder. Any amount
of U.S. tax that a foreign shareholder is treated as having paid on the
undistributed capital gain of a regulated investment company under
section 852(b)(3)(D) may be claimed by the foreign shareholder as a
credit or refund under Sec. 1.1464-1. The procedures described in
paragraph (c)(2)(iii) of this section shall apply in the case of
distributions made to an intermediary.
(4) Overwithholding of tax. If the tax on any distribution has been
overwithheld, adjustments may be made in accordance with the procedures
described in Sec. 1.1461-2(a). Alternatively, refunds or credits may be
claimed in accordance with Sec. 1.1464-1, relating to refunds or
credits claimed by the beneficial owner, or Sec. 1.6414-1, relating to
refunds or credits claimed by the withholding agent.
(d) Withholding on certain gains. Absent actual knowledge or reason
to know otherwise, a withholding agent may rely on a claim regarding
the amount of gain described in Sec. 1.1441-2(c) if the beneficial
owner withholding certificate, or other appropriate withholding
certificate, states the beneficial owner's basis in the property giving
rise to the gain. In the absence of a withholding certificate, the
withholding agent may withhold an amount under Sec. 1.1441-1 that is
necessary to assure that the tax withheld is not less than 30 percent
of the recognized gain. For this purpose, the recognized gain is
determined without regard to any deduction allowed by the Internal
Revenue Code from the gains. The amount so withheld shall not exceed 30
percent of the amount payable by reason of the transaction giving rise
to the recognized gain. Adjustments to any amount of overwithheld tax
may be made in accordance with the procedures described in Sec. 1.1461-
2(a). Alternatively, refunds or credits may be claimed in accordance
with Sec. 1.1464-1, relating to refunds or credits claimed by the
beneficial owner, or Sec. 1.6414-1, relating to refunds or credits
claimed by the withholding agent.
(e) Payments other than in U.S. dollars--(1) In general. The amount
of a payment made in a medium other than U.S. dollars is measured by
the fair market value of the property or services provided in lieu of
U.S. dollars. The withholding agent may liquidate the property prior to
payment in order to withhold the required amount of tax under section
1441 or obtain payment of the tax from an alternative source. However,
the obligation to withhold under section 1441 is not deferred even if
no alternative source can be located. Thus, for purposes of withholding
under chapter 3 of the Internal Revenue Code, the provisions of
Sec. 31.3406(h)-2(b)(2)(ii) of this chapter (relating to backup
withholding from another source) shall not apply. If the withholding
agent satisfies the tax liability related to such payments, the rules
of paragraph (e)(3) of this section apply.
(2) Payments in foreign currency. If the amount subject to
withholding tax is paid in a currency other than the U.S. dollar, the
amount of withholding tax under section 1441 shall be determined by
applying the applicable rate of withholding to the foreign currency
amount and converting the amount withheld into U.S. dollars on the date
of payment at the spot rate (as defined in Sec. 1.988-1(d)(1)) or
pursuant to a reasonable spot rate convention. For example, a
withholding agent may use a month-end spot rate or a monthly average
spot rate. A spot rate convention must be used consistently for all
non-dollar amounts withheld from year to year. Such convention cannot
be changed without the consent of the Commissioner. The U.S. dollar
amount so determined shall be treated by the beneficial owner as the
amount of tax paid on the income for purposes of determining the final
U.S. tax liability and, if applicable, claiming a refund or credit of
tax.
(3) Tax liability of beneficial owner satisfied by withholding
agent--(i) General rule. In the event the satisfaction of a tax
liability of a beneficial owner by a withholding agent constitutes
income to the beneficial owner and such income is of a type that is
subject to withholding, the amount of the payment deemed made by the
withholding agent for purposes of this paragraph (e)(3) shall be
determined under the following gross-up formula:
[GRAPHIC] [TIFF OMITTED] TP22AP96.002
[[Page 17646]]
(ii) Example. The following example illustrates the provisions of
this paragraph (e)(3):
Example. College X awards a qualified scholarship within the
meaning of section 117(b) to foreign student, FS, who is in the
United States on an F visa. FS is a resident of a country that does
not have an income tax treaty with the United States. The
scholarship is $20,000 to be applied to tuition, mandatory fees and
books, plus benefits in kind consisting of room and board and
roundtrip air transportation. College X agrees to pay any U.S.
income tax owed by FS with respect to the scholarship. The fair
market value of the room and board measured by the amount College X
charges non-scholarship students is $6,000. The cost of the
roundtrip air transportation is $2,600. Therefore, the total fair
market value of the scholarship received by FS is $28,600. However,
the amount taxable is limited to the fair market value of the
benefits in kind ($8,600) because the portion of the scholarship
amount for tuition, fees, and books is not included in gross income
under section 117. Under the gross-up formula, College X is deemed
to make a payment of $10,000 ($8,600 divided by (1-.14). The U.S.
tax that must be deducted and withheld from the payment under
section 1441(b) is $1,400 (.14 x $10,000). College X reports
scholarship income of $30,000 and $1,400 of U.S. tax withheld on
Forms 1042 and 1042-S.
* * * * *
(g) Effective date. This section applies to payments of income made
after December 31, 1997.
Par. 9. Section 1.1441-4 is amended by:
1. Revising the section heading.
2. Revising paragraphs (a) and (b)(1)(ii).
3. Adding paragraph (b)(1)(vi).
4. Revising the last sentence of paragraph (b)(2)(i).
5. Revising the introductory text of paragraph (b)(2)(ii).
6. Paragraph (b)(2)(ii) is amended by:
a. Revising paragraph (b)(2)(ii)(A).
b. Redesignating paragraph (b)(2)(ii)(H) as paragraph (b)(2)(ii)(J)
and amending newly designated paragraph (b)(2)(ii)(J) by removing the
period and adding ``; and'' in its place.
c. Redesignating paragraphs (b)(2)(ii) (B), (C), (D), (E), (F) and
(G) as paragraphs (b)(2)(ii) (D), (E), (F), (G), (H) and (I),
respectively.
d. Adding new paragraphs (b)(2)(ii) (B), (C), and (K).
e. Amending newly designated paragraph (b)(2)(ii)(I) by removing
the language ``, and'' and adding a semicolon in its place.
f. Amending newly designated paragraphs (b)(2)(ii) (D), (E), (F),
(G), and (H) by removing the comma at the end of the paragraphs and
adding a semicolon in its place.
7. The concluding text of paragraph (b)(2)(iv) is amended by:
a. Removing the language ``ten'' and adding ``20'' in its place.
b. Removing the language ``Director of Foreign Operations'' and
adding ``Assistant Commissioner (International)'' in its place.
8. Revising paragraph (b)(2)(v).
9. Adding paragraph (b)(2)(vi).
10. Adding paragraph (b)(6).
11. Revising paragraphs (c), (d), (e), and (f).
12. Removing paragraphs (g), (h), and (i).
13. Removing the OMB parenthetical and the authority citation at
the end of the section.
The revisions and additions read as follows:
Sec. 1.1441-4 Certain exemptions from withholding.
(a) Certain income connected with a U.S. trade or business--(1) In
general. No withholding is required under section 1441 on income
otherwise subject to withholding if the income is (or is deemed to be)
effectively connected with the conduct of a trade or business within
the United States and is includible in the beneficial owner's gross
income for the taxable year. For purposes of this paragraph (a), an
amount is not deemed to be includible in gross income if the amount is
(or is deemed to be) effectively connected with the conduct of a trade
or business within the United States and the beneficial owner claims an
exemption from tax under an income tax treaty because the income is not
attributable to a permanent establishment in the United States. To
claim a reduced rate of withholding because the income is not
attributable to a permanent establishment, see Sec. 1.1441-6(b)(1).
This paragraph (a) does not apply to income of a foreign corporation to
which section 543(a)(7) applies for the taxable year or to compensation
for personal services performed by an individual. See paragraph (b) of
this section for compensation for personal services performed by an
individual.
(2) Withholding agent's reliance on a claim of effectively
connected income--(i) In general. Absent actual knowledge or reason to
know otherwise, a withholding agent may rely on a claim of exemption
based upon paragraph (a)(1) of this section if, prior to the payment to
the foreign person, the withholding agent complies with the
requirements of Sec. 1.1441-1(e)(1) and is furnished either a
beneficial owner withholding certificate (including one that is
transmitted with an intermediary withholding certificate described in
Sec. 1.1441-1(e)(3)(iv)), or an intermediary withholding certificate
described in Sec. 1.1441-1(e)(3)(ii) from a partnership acting for its
own account (regardless of whether the distributive share information
is stated on the certificate and whether the certificates described in
Sec. 1.1441-1(e)(3)(iii)(C) are attached). For purposes of this
paragraph (a), a withholding certificate is not valid unless it
includes a taxpayer identifying number. A statement on the withholding
certificate that the income is effectively connected with the conduct
of a trade or business in the United States and that the income will be
reported by the beneficial owner on an income tax return will satisfy
the requirement of Sec. 1.1441-1(e)(2)(ii) or (e)(3)(iii) that the
certificate describe the basis for the claim of reduced rate. A
withholding agent may presume that the income is not effectively
connected with the conduct of a trade or business in the United States
if the withholding certificate is silent or if the withholding agent
cannot associate the payment with the required documentation (as
defined in Sec. 1.1441-1(f)(1)). See Sec. 1.1441-1(e)(4)(ii)(B)(2) for
the period of validity applicable to a certificate provided under this
section. A withholding certificate shall be effective only for the item
or items of income specified therein. In compliance with Sec. 1.1441-
1(e)(3)(ii)(A), the validity of the certificate expires when subsequent
circumstances arising during the taxable year indicate that the income
to which the certificate relates is not, or is no longer expected to
be, effectively connected with the conduct of a trade or business
within the United States.
(ii) Exemption of certain foreign partnerships and foreign
corporations. [Reserved] For guidance prior to the date these
regulations are published as final regulations in the Federal Register,
see Sec. 1.1441-4(f) as contained in the 26 CFR Part 1, edition revised
April 1, 1995.
(iii) Payment to joint owners. In the case of payments to joint
owners, a withholding certificate must be provided by each beneficial
owner claiming a reduced rate certifying that the income is effectively
connected with the conduct of a trade or business within the United
States.
(3) Income on notional principal contracts. A withholding agent
that pays income attributable to a notional principal contract
described in Sec. 1.863-7(a) shall have no obligation to withhold on
the amounts paid under the terms of the notional principal contract
regardless of whether a withholding certificate is provided. For rules
regarding the obligation to file a return, see Secs. 1.1461-1(c)(1)(i)
and 1.6041-1(d)(5).
[[Page 17647]]
(4) Failure to act in accordance with presumption. A withholding
agent that does not withhold, contrary to the presumption set forth in
paragraph (a)(2) of this section that income is not effectively
connected with the conduct of a trade or business within the United
States, shall be liable for the tax imposed under section 1461, without
the benefit of a reduced rate, unless the withholding agent can
demonstrate to the satisfaction of the District Director or the
Assistant Commissioner (International) that the income is effectively
connected and was included in the Federal income tax return of the
beneficial owner and that the proper amount of tax, if any, has been
paid to the Internal Revenue Service. Proof of payment of tax may be
established on the basis of a Form 4669 (or such other form as the
Internal Revenue Service may prescribe) establishing the amount of tax,
if any, actually paid by the beneficial owner on the income. Proof that
a reduced rate of withholding was appropriate may be established by an
appropriate withholding certificate described in Sec. 1.1441-
1(e)(1)(i). However, if the required documentation was not received by
the withholding agent before the time the payment was made or within
the period specified in Sec. 1.1441-1(f)(2)(i)(B)(1), then the District
Director or the Assistant Commissioner (International) may require
additional proof if it determines that the delays in obtaining the
required documentation affect its reliability. The withholding agent
will be liable for interest under section 6601 regardless of whether
the underlying tax liability is due. In addition, the withholding agent
may be subject to penalties.
(b) Compensation for personal services of an individual--(1)
Exemption from withholding. * * *
* * * * *
(ii) Such compensation that would be subject to withholding under
section 3402 but for the provisions of section 3401(a) (not including
paragraph (a)(6) of that section) and the regulations under that
section. This paragraph (b)(1)(ii) does not apply to payments to a
nonresident alien individual from any trust described in section
401(a), any annuity plan described in section 403(a), or any annuity,
custodial account, or retirement income account described in section
403(b). Thus, for example, payments to a nonresident alien individual
from a trust described in section 401(a) are subject to withholding
under section 1441 and not under section 3405 or 3406.
* * * * *
(vi) Compensation that is exempt from withholding under section
3402 by reason of section 3402(e), provided that the employee and his
employer enter into an agreement under section 3402(p) to provide for
the withholding of income tax upon payments of amounts described in
Sec. 31.3401(a)-3(b)(1) of this chapter. An employee who desires to
enter into such an agreement should furnish his employer with Form W-4
(withholding exemption certificate) (or such other form as the Internal
Revenue Service may prescribe). See section 3402(f) and the regulations
thereunder and Sec. 31.3402(p)-1 of this chapter.
(2) Manner of obtaining withholding exemption under tax treaty--(i)
In general. * * * The exemption from withholding becomes effective for
payments made at least 20 days after a copy of the accepted statement
is forwarded to the Assistant Commissioner (International).
(ii) Statement claiming withholding exemption. The statement
claiming an exemption from withholding shall be made on Form 8233 (or
an acceptable substitute). Form 8233 shall be dated, signed by the
beneficial owner under the penalties of perjury, and contain the
following information:
(A) The individual's name, permanent residence address, taxpayer
identifying number, and the U.S. visa number, if any;
(B) The individual's current immigration status and visa type;
(C) The individual's original date of entry into the United States;
* * * * *
(K) Any other information as the form may require.
* * * * *
(v) Copies of Form 8233. The withholding agent shall forward one
copy of each Form 8233 that is accepted under paragraph (b)(2)(iv) of
this section to the Assistant Commissioner (International), within five
days of his or her acceptance. The Assistant Commissioner
(International) may review the forms so submitted. The withholding
agent shall retain a copy of Form 8233.
(vi) Electronic filing. Under procedures published by the Internal
Revenue Service, Forms 8233 may be filed electronically with the
Internal Revenue Service.
* * * * *
(6) Personal exemption--(i) In general. To determine the tax to be
withheld at source under Sec. 1.1441-1 from remuneration paid for
personal services performed within the United States by a nonresident
alien individual and from scholarship and fellowship income described
in paragraph (c) of this section, a withholding agent may take into
account one personal exemption pursuant to sections 873(b)(3) and 151
regardless of whether the income is effectively connected. The
exemption does not need to be prorated for purposes of withholding
under section 1441.
(ii) Multiple exemptions. More than one personal exemption may be
claimed in the case of a resident of a contiguous country or a national
of the United States under section 873(b)(3). In addition, residents of
a country with which the United States has an income tax treaty in
effect may be eligible to claim more than one personal exemption if the
treaty so provides. Claims for more than one personal exemption shall
be made on the withholding certificate furnished to the withholding
agent. The exemptions do not need to be prorated for purposes of
withholding under section 1441.
(iii) Special rule where both scholarship and compensation income
is received. The fact that both scholarship income and compensation
income are received during the taxable year does not entitle the
taxpayer to claim more than one personal exemption amount (or more than
the additional amounts permitted under paragraph (b)(6)(ii) of this
section). Thus, if a nonresident alien student receives taxable
scholarship amounts from one payor and compensation income from another
payor, no more than the total personal exemption amount permitted under
the Internal Revenue Code or under an income tax treaty may be taken
into account by both payors.
(c) Special rules for scholarship and fellowship income--(1) In
general. Under section 871(c), certain amounts paid as a scholarship or
fellowship for study, training, or research in the United States to a
nonresident alien individual temporarily present in the United States
as a nonimmigrant under subparagraph (F), (J), (M), or (Q) of section
101(a)(15) of the Immigration and Nationality Act are treated as income
effectively connected with the conduct of a trade or business within
the United States. Such amounts (as described in the second sentence of
section 1441(b)) are subject to withholding tax under section 1441, but
at the lower rate of 14 percent. That rate may be reduced under the
provisions of an income tax treaty. Claims of a reduced rate under an
income tax treaty shall be made under the procedures described in
Sec. 1.1441-6(b)(1). Therefore, claims for amounts described in this
paragraph (c)(1) may not be shown on
[[Page 17648]]
a Form 8233. However, if the payee is receiving both compensation for
personal services and income described in this paragraph (c)(1) from
the same withholding agent, claims for both types of income may be
shown on Form 8233.
(2) Alternate withholding election. A withholding agent may elect
to withhold on the amounts described in paragraph (c)(1) of this
section at the rates applicable under section 3402, as if the income
were wages. Such election shall be made by obtaining a Form W-4 (or an
acceptable substitute or such other form as the Internal Revenue
Service may prescribe) from the beneficial owner. Such Form W-4 shall
also serve as notice to the beneficial owner that the income is being
treated as wages for purposes of withholding tax under section 1441.
(d) Annuities received under qualified plans. Withholding is not
required under section Sec. 1.1441-1 in the case of any amount received
as an annuity if the amount is exempt from tax under section 871(f) and
the regulations under that section. A statement on the beneficial owner
withholding certificate that the annuity is excluded from gross income
by reason of section 871(f) and the basis for that exclusion satisfies
the requirement of Sec. 1.1441-1(e)(2)(ii) that the beneficial owner
state the basis for the claim of reduced rate. A beneficial owner
withholding certificate furnished for purposes of claiming the benefits
of the exemption under this paragraph (d) is not valid unless it
includes a taxpayer identifying number. See Sec. 1.1441-1(f)(3)(ii)
regarding applicable presumptions if the withholding agent does not
hold the required documentation prior to payment.
(e) Income of a foreign central bank of issue or the Bank for
International Settlements. Section 895 provides for the exclusion from
gross income of certain income derived by a foreign central bank of
issue, or by the Bank for International Settlements, from obligations
of the United States or of any agency or instrumentality thereof or
from bank deposits. Absent actual knowledge or reason to know that a
foreign central bank of issue, or the Bank for International
Settlements, is operating outside the scope of the exclusion granted by
section 895, the withholding agent may rely on a claim of exemption if,
prior to making the payment, the withholding agent complies with the
requirements of Sec. 1.1441-1(e)(1). The following statement on a
beneficial owner withholding certificate satisfies the requirement in
Sec. 1.1441-1(e)(2)(ii) that the beneficial owner state the basis for
the claim of reduced rate:
(1) The bank is a foreign central bank of issue, or the Bank for
International Settlements; and
(2) The bank does not, and will not, hold the obligations or the
bank deposits covered by the withholding agreement for, or use them in
connection with, the conduct of a commercial banking function or other
commercial activity.
(f) Effective date--(1) General rule. This section applies to
payments of income made after December 31, 1997.
(2) Transition rules. A withholding agent that holds a valid Form
4224 on a date that is 60 days after the date these regulations are
published as final regulations in the Federal Register may treat it as
a valid withholding certificate until its validity expires under
applicable provisions as in effect on April 22, 1996.
Sec. 1.1441-4T [Removed]
Par. 10. Section 1.1441-4T is removed.
Par. 11. Section 1.1441-5 is revised to read as follows:
Sec. 1.1441-5 Withholding on payments to pass-through entities.
(a) Domestic partnerships--(1) Exemption from withholding on
payment to domestic partnerships. A payment of income to a domestic
partnership is not subject to withholding of tax under section 1441
even though it may have partners that are foreign persons. A payor
(within the meaning of section 3406) may rely, in accordance with the
procedures under Sec. 1.1441-1(d), on a Form W-9 furnished by the
partnership.
(2) Withholding by a domestic partnership--(i) In general. A
domestic partnership is required to withhold tax under Sec. 1.1441-1 as
a withholding agent on the gross amount of items of income subject to
withholding that are includible in the distributive share of income of
a partner that is a foreign person. Pursuant to the authority provided
under section 702(a), each partner shall take into account separately
its distributive share of items of income subject to withholding, and
thus the partnership, pursuant to section 703(a)(1), shall separately
state these items of gross income when computing its taxable income. A
partnership shall withhold when any distributions that include items of
income subject to withholding are made. To the extent a foreign
partner's distributive share of an item of income subject to
withholding has not been actually distributed, the partnership is
required to withhold on the partner's distributive share of that item
of income on the earlier of the date that the statement required under
section 6031(b) and Sec. 1.6031-1(b) to be provided to that partner is
mailed or otherwise furnished to the partner or the due date for
furnishing that statement as provided under Sec. 1.6031-1(b)(1). If a
partnership withholds on a distributive share before the income is
actually distributed to the partner, then withholding is not required
when the income is subsequently distributed.
(ii) Reliance on a partner's claim for reduced withholding. Absent
actual knowledge or reason to know otherwise, a domestic partnership
may rely on a claim for reduced withholding by a partner, if prior to
the time the partnership is required to withhold, the partnership
complies with the requirements of Sec. 1.1441-1(d) or (e)(1), whichever
is applicable, with respect to the partner. See the presumptions
described in Sec. 1.1441-1(f)(4)(iii)(A) applicable to a domestic
partnership in determining the U.S. or foreign status of its partners.
(b) Foreign partnerships--(1) In general. A withholding agent must
treat a payment to a foreign partnership as a payment to its partners,
except to the extent the partnership is treated as a payee under
Sec. 1.1441-1(c)(3)(ii). See Sec. 1.1441-1(e)(5)(v) for payments to a
foreign partnership that claims to be a qualified intermediary. If the
partnership is not treated as a payee, a withholding agent may, absent
actual knowledge or reason to know otherwise, rely on a claim for a
reduced rate of withholding by a partner if, prior to the payment, the
withholding agent holds an intermediary withholding certificate
described in Sec. 1.1441-1(e)(3)(iii) pertaining to the partner. The
certificate will be considered to pertain to the partner if the
appropriate withholding certificate for the partner is attached to the
intermediary withholding certificate. The appropriate withholding
certificate for the partner may be a beneficial owner withholding
certificate described in Sec. 1.1441-1(e)(2) (for a partner claiming to
be a foreign person and a beneficial owner, determined under the
provisions of Sec. 1.1441-1(c)(6)), the applicable certificates
described in Sec. 1.1441-1(d)(2) (for a partner claiming to be a U.S.
payee), an intermediary withholding certificate described in
Sec. 1.1441-1(e)(3)(ii) or (iv) (for a partner that is a qualified
intermediary or not otherwise acting for its own account), or an
intermediary withholding certificate described in Sec. 1.1441-
1(e)(3)(iii) representing that the income to which the certificate
relates is effectively connected with the conduct of a trade or
business in the
[[Page 17649]]
United States. A claim must be presented for each portion of the
payment that represents an item of income includible in the
distributive share of the partner. When making a claim for several
partners, the partnership may present a single intermediary withholding
certificate to which the partners' certificates are attached.
(2) Special rules in the case of tiered partnerships. If a foreign
or domestic partnership is a partner of a foreign partnership, the
rules of this paragraph (b)(2) shall apply.
(i) A withholding agent may treat any portion of a payment made to
a foreign partnership that represents an item of income includible in
the distributive share of a partner (at any level in the chain of
tiers) that is a domestic partnership as a payment to a U.S. person if
the domestic partnership complies with the procedures described in
Sec. 1.1441-1(d) (relating to the claim of U.S. status by a payee or
beneficial owner).
(ii) A withholding agent may treat any portion of a payment made to
a foreign partnership that represents an item of income includible in
the distributive share of a partner (at any level in the chain of
tiers) that is a foreign partnership as a payment to a foreign person
if the withholding agent may treat the foreign partnership as the payee
pursuant to the provisions in Sec. 1.1441-1(c)(3)(ii).
(iii) Where the partner in the foreign partnership to whom the
payment is made (second tier) is a foreign partnership (first tier),
the appropriate withholding certificate for the partner is an
intermediary withholding certificate described in Sec. 1.1441-
1(e)(3)(iii) issued by the second tier, and an intermediary withholding
certificate described in Sec. 1.1441-1(e)(3)(iii) issued by the first
tier to which is attached an appropriate withholding certificate for
each of the partners of the first tier. The rules of this paragraph
(b)(2)(iii) shall apply to any number of tiers of foreign partnerships.
(3) Presumptions. A withholding agent may apply the presumption
described in Sec. 1.1441-1(f)(4)(ii) to any portion of a payment for
which the withholding agent does not receive the required documentation
(as defined in Sec. 1.1441-1(f)(1)(ii)).
(4) Example. The rules of this paragraph (b) may be illustrated by
the following example:
Example. (i) Facts. FP is a foreign partnership organized under
the laws of Country X deriving interest that would qualify as
portfolio interest described in section 871(h)(2)(B) if the
statement described in section 871(h)(5) is furnished. FP has three
partners, A, B, and C. FP furnishes to the withholding agent an
intermediary withholding certificate described in Sec. 1.1441-
1(e)(3)(iii) to which it attaches a Form W-9 for A and a beneficial
owner withholding certificate for B. No documentation is attached
for C.
(ii) Analysis. Absent actual knowledge or reason to know
otherwise, the withholding agent may rely on A's Form W-9 to treat A
as a U.S. person and, therefore, does not withhold on A's share of
the payment. The withholding agent must comply with any information
reporting obligations under sections 6042 (i.e., issue a Form 1099)
with respect to A. Absent actual knowledge or reason to know
otherwise, the withholding agent may also rely on B's claim for
portfolio interest treatment for its share of the payment. The
withholding agent must report the payment to B on Forms 1042 and
1042-S. Because the withholding agent cannot associate the required
documentation (as defined Sec. 1.1441-1(f)(1)) for C's share of the
interest income, the withholding agent may, for purposes of section
3406, treat that amount as a reportable payment made to a U.S. payee
that is not an exempt recipient. See Sec. 1.1441-1(f)(4)(ii).
(c) Trusts and estates. [Reserved]
(d) Effective date--(1) General rule. This section applies to
payments of income made after December 31, 1997.
(2) Transition rules. A withholding agent that holds a valid
withholding certificate on the date that is 60 days after the date
these regulations are published as final regulations in the Federal
Register may treat it as a valid withholding certificate until its
validity expires under applicable provisions as in effect on April 22,
1996.
Par. 12. Section 1.1441-6 is revised to read as follows:
Sec. 1.1441-6 Claim of a reduced rate of tax under an income tax
treaty.
(a) In general. Under an income tax treaty in effect between the
United States and a foreign country, the rate of tax to be withheld on
a payment of income subject to withholding may be reduced if the
beneficial owner of the income is a resident of the foreign country.
Other requirements or conditions of the treaty, or revenue procedures
issued thereunder, for claiming treaty benefits must also be satisfied,
such as a limitation of benefits provision. If the requirements of this
section are met, the amount withheld from the payment may be reduced at
source to account for the treaty benefit. See also Sec. 1.1441-4(b)(2)
for rules regarding claims of reduced rate of withholding under an
income tax treaty in the case of compensation from personal services.
(b) Reliance on claim of treaty benefits--(1) In general. Absent
actual knowledge or reason to know otherwise, a withholding agent may
rely on a claim that a beneficial owner is entitled to a reduced rate
of withholding based upon an income tax treaty if, prior to the
payment, the withholding agent complies with the requirements of
Sec. 1.1441-1(e)(1). Except as otherwise provided in paragraph (b)(2)
or (b)(3) of this section, for purposes of this paragraph (b)(1), a
beneficial owner withholding certificate mentioned in Sec. 1.1441-
1(e)(1) means a beneficial owner withholding certificate described in
Sec. 1.1441-1(e)(2), that includes the beneficial owner's taxpayer
identifying number and states that the taxpayer has complied with the
advance ruling requirements described in paragraph (e) of this section
(if applicable), and, if the beneficial owner is a person related to
the withholding agent within the meaning of section 267(b) and 707(b),
that the beneficial owner will file the statement required under
Sec. 1.6114-1(b) (if applicable). The requirement to file an
information return under section 6114 for income subject to withholding
applies only to amounts paid during the calendar year that, in the
aggregate, exceed $500,000. See Sec. 301.6114-1(b) of this chapter. See
paragraph (d) of this section for circumstances under which the
withholding agent may be notified by the Internal Revenue Service that
the certificate cannot be relied upon to grant benefits under an income
tax treaty. A beneficial owner's taxpayer identifying number on a
withholding certificate is valid for purposes of establishing proof of
residence in a treaty country only if the taxpayer identifying number
is certified by the Internal Revenue Service. However, absent actual
knowledge or reason to know otherwise, a withholding agent may rely on
a taxpayer identifying number that appears correct on its face, without
having to inquire as to whether the taxpayer identifying number is
certified, if the permanent residence address on the certificate is in
the country whose tax treaty with the United States is invoked. See the
confirmation and notification procedures described in Sec. 1.1441-
1(e)(4) (iv) and (v).
(2) Special rules for certain dividends. In the case of dividends
on stock traded on a U.S. established financial market, a withholding
agent may rely on a beneficial owner withholding certificate described
in Sec. 1.1441-1(e)(2). For this purpose, a U.S. established financial
market is a national securities exchange that is registered under
section 6 of the Securities Exchange Act of 1934 (15 U.S.C. 78F), or an
interdealer quotation system sponsored by a national securities
association registered under
[[Page 17650]]
section 15A of the Securities Exchange Act of 1934. In the case of
payments made outside the United States (as defined in Sec. 1.6049-
5(e)) with respect to an offshore account (as defined in Sec. 1.6049-
5(d)(3)), a withholding agent may also consider that it holds a
withholding certificate if it holds a certificate of residence
described in paragraph (c)(3) of this section or documentary evidence
described in paragraph (c)(4) of this section that the withholding
agent has reviewed and maintains in its records. The withholding agent
maintains the reviewed documents by retaining either the documents
viewed or a photocopy thereof and noting in its records the date on
which, and by whom, the documents were received and reviewed. This
paragraph (b)(2) shall not apply to dividends that are exempt from
withholding based on a claim that the dividends are effectively
connected with the conduct of a trade or business in the United States.
(3) Competent authorities agreement. The procedures described in
this section may be modified to the extent the U.S. competent authority
may agree with the competent authority of a country with which the
United States has an income tax treaty in effect.
(4) Special rules for payments to certain foreign entities--(i)
Determination of beneficial owner. Under Sec. 1.1441-1(c)(6)(ii)(B),
the tax principles in effect under the laws of the country whose tax
treaty with the United States is invoked apply in certain cases to
determine the beneficial owner of income entitled to claim a reduced
rate of withholding under that income tax treaty. Thus, if a beneficial
owner, as determined under Sec. 1.1441-1(c)(6)(ii)(B), is not a
resident of the country whose law has been applied to determine
beneficial owner status, then a payment to a foreign entity will not
qualify for a reduced rate under that country's tax treaty with the
United States even if the foreign entity receiving the payment is
organized in that foreign country. Conversely, if a beneficial owner,
as determined under Sec. 1.1441-1(c)(6)(ii)(B), is a resident of the
country whose law has been applied to determine beneficial owner
status, then the beneficial owner's share of a payment to a foreign
entity will qualify for a reduced rate under the applicable income tax
treaty (provided other requirements for qualification are met) even if
the foreign entity receiving the payment is not organized in, or is not
a resident of, the foreign country in which the beneficial owner is
resident.
(ii) Withholding certificates. The person claiming a reduced rate
of tax under an income tax treaty shall apply the rules of Sec. 1.1441-
1(c)(6)(ii)(B) and paragraph (b)(4)(i) of this section to determine the
beneficial owner of income and entitlement to a reduced rate under an
income tax treaty. The beneficial owner so determined may provide, as
appropriate, a beneficial owner withholding certificate described in
paragraph (b)(1) or (b)(2) of this section. Thus, for example, if the
beneficial owner, as determined under Sec. 1.1441-1(c)(6)(ii)(B), is
the interest holder rather than the entity, then the entity shall be
treated as a foreign partnership for purposes of determining which
withholding certificate is appropriate. If, conversely, the beneficial
owner, as determined under Sec. 1.1441-1(c)(6)(ii)(B), is the entity
rather than the interest holders, then the entity shall be treated as a
corporation for purposes of determining which withholding certificate
is appropriate.
(iii) Request for dual treatment. As set forth in Sec. 1.1441-
1(c)(6)(ii)(B), a withholding agent may make payments to a foreign
entity that is simultaneously claiming a reduced rate of tax on its own
behalf and a reduced rate on behalf of persons in their capacity as
interest holders in that entity. In such a case, the withholding agent
may, at its option, accept such dual claims based, as appropriate, on
beneficial owner withholding certificates described in paragraph (b)
(1) or (2) of this section or documentary evidence described in
Sec. 1.6049-5(c)(2)(ii) furnished by such persons with respect to their
respective share of such payments, even though the withholding agent
holds different withholding certificates that requires it to treat the
entity inconsistently with respect to different payments or with
respect to different portions of the same payment. See paragraph
(b)(4)(v) Example 2 of this section.
(iv) Reciprocal application by treaty partners. Paragraph (b)(4) of
this section and the principles of Sec. 1.1441-1(c)(6)(ii)(B) will not
apply if the U.S. competent authority determines that a treaty partner
is not reciprocally applying the principles of Sec. 1.1441-
1(c)(6)(ii)(B) to entities organized under the laws of the United
States or to interest holders residing in the United States. In such
case, the rules set forth in Sec. 1.1441-1(c)(6) shall apply without
regard to the rules in Sec. 1.1441-1(c)(6)(ii)(B). This determination
shall be effective upon publication of relevant guidance by the Service
and shall apply prospectively only.
(v) Examples. This paragraph (b)(4) is illustrated by the following
examples:
Example 1--(i) Facts. Entity A is a business organization formed
under the laws of country Y that has an income tax treaty with the
United States. Under the laws of country Y, A is subject to tax at
the entity level and, therefore, is treated as the beneficial owner
of income it receives and as a resident of country Y for purposes of
the U.S.-Y tax treaty. A receives U.S. source royalties from
withholding agent R and claims a reduced rate of withholding under
the U.S.-Y tax treaty on its own behalf (rather than on behalf of
its interest holders). A furnishes a beneficial owner withholding
certificate described in paragraph (b)(1) of this section claiming
to be the beneficial owner of the royalties.
(ii) Analysis. For purposes of claiming treaty benefits under
the U.S.-Y treaty, A is treated as the beneficial owner of the
royalties under Sec. 1.1441-1(c)(6)(ii)(B) since, under the tax law
of country Y, A is required to include the royalties in income. R
may treat A as the beneficial owner of the income for purposes of
granting the benefit of a reduced rate under the U.S.-Y tax treaty.
Example 2--(i) Facts. The facts are the same as under Example 1,
except that one of A's interest holders, T, is a corporation
residing in country X. The U.S.-X tax treaty reduces the rate on
royalties to zero whereas the rate on royalties under the U.S.-Y tax
treaty is only reduced to 5 percent. Under the laws of country X, A
is taxable on a flow-through basis and not at the entity level and T
is required to include in income its distributive share of A's
income. T claims to be the beneficial owner of its share of the
royalty income paid to A and provides a beneficial owner certificate
to A claiming the benefit of a zero rate under the U.S.-X tax
treaty. A furnishes to R a beneficial owner withholding certificate
for itself for the portion of the payment for which A alone claims
to be the beneficial owner. In addition, it furnishes to R an
intermediary withholding certificate described in Sec. 1.1441-
1(e)(3)(iii) to which it attaches T's beneficial owner withholding
certificate for the portion of the payment for which T claims to be
the beneficial owner.
(ii) Analysis. For purposes of claiming treaty benefits under
the U.S.-Y treaty, A is treated as the beneficial owner of all of
the royalty income received from R under Sec. 1.1441-1(c)(6)(ii)(B),
since, under the tax law of country Y (i.e., under the laws of the
country whose treaty benefits are claimed), A is subject to tax on
that income. However, for purposes of claiming benefits under the
U.S.-X treaty, T may also be treated as the beneficial owner of its
share of the royalty income under Sec. 1.1441-1(c)(6)(ii)(B), since,
under the tax law of country X (i.e., the laws of the country whose
treaty benefits are claimed), T is required to include in income its
share of A's income. Therefore, R may treat the royalty payment to a
single foreign entity (A) as beneficially owned by different persons
as a result of claims presented under different treaties. R may, at
its option, grant dual treatment, that is, a reduced rate of zero
percent under the U.S.-X treaty on the portion of the royalty
payment for which T claims to be the beneficial owner and a reduced
rate of 5 percent under the U.S.-Y
[[Page 17651]]
treaty for the balance. However, under paragraph (b)(4)(iii) of this
section, the withholding agent may, at its option, treat A as the
sole beneficial owner of the royalty and grant benefits under the
U.S.-Y treaty only.
Example 3. (i) Entity A is a business organization formed under
the laws of country Y. A receives from withholding agent R U.S.
source royalties and U.S. source interest income that is potentially
eligible for the portfolio interest exemption under section 871(h)
and 881(c) of the Internal Revenue Code. A's interest holders are S,
an individual who resides in country Y, T, an individual who resides
in country X, and U, an individual resident in the United States.
The United States has a tax treaty with both country Y and country
X. The U.S.-Y tax treaty reduces the rate on royalties to 5 percent,
and the U.S.-X tax treaty reduces the rate to zero. A is classified
as a partnership under U.S. tax principles. Under the tax laws of
country Y, A is taxable on a flow-through basis, and S is required
to include in income her distributive share of A's income. Under the
tax laws of country X, A is taxable on a flow-through basis and T is
required to include in income her distributive share of A's income.
A furnishes R an intermediary withholding certificate described in
Sec. 1.1441-1(e)(3)(iii) to which it attaches--
(A) A Form W-9 for U; and
(B) Beneficial owner withholding certificates for S and T that
claim the portfolio interest exemption and a reduced rate of
withholding under the U.S. treaties with Y and X, respectively.
(ii) Analysis. For purposes of claiming benefits under the U.S.-Y
treaty, S is treated as the beneficial owner of his distributive share
of royalty income received from R under Sec. 1.1441-1(c)(6)(ii)(B)
since, under the tax law of country Y (i.e., the laws of the country
whose treaty benefits are claimed in the case of S), S is the person
required to include in income her distributive share of the royalty.
Therefore, R may withhold on S's proportionate share of the royalty
income paid to A at the 5 percent rate under the U.S.-Y tax treaty. For
purposes of claiming benefits under the U.S.-X tax treaty, T is treated
as the beneficial owner of her distributive share of royalty income
under Sec. 1.1441-1(c)(6)(ii)(B), since, under the laws of country X
(i.e., the laws of the country whose treaty benefits are claimed in the
case of T), T is the person required to include in income her
distributive share of the royalty. Therefore, R may withhold on T's
proportionate share of the royalty income paid to A at the zero rate
under the U.S.-X treaty, even though A is not organized in, or a
resident of, country X. R may rely on U's Form W-9 to treat U as a U.S.
person. Therefore, R does not withhold on U's share of the royalty
payment. R also does not withhold on any portion of the interest paid
to A because S and T have furnished beneficial owner certificates and U
has furnished a Form W-9.
(c) Proof of tax residence in a treaty country--(1) In general. A
beneficial owner establishes proof of its tax residence in a treaty
country for purposes of its claim to the withholding agent that a
reduced rate of tax applies under an income tax treaty by complying
with the procedures described in this paragraph (c) or with such other
procedures as the Internal Revenue Service may prescribe in published
guidance. For purposes of this section, the residence of a beneficial
owner must be determined in accordance with the provisions of the
applicable U.S. income tax treaty as may be clarified by any applicable
regulations thereunder or technical explanations thereof, and any
procedures issued by the Internal Revenue Service on the determination
or proper method of certifying residence under particular income tax
treaties.
(2) Certification of taxpayer identifying number--(i) In general. A
taxpayer may certify its taxpayer identifying number as required under
paragraph (b)(1) of this section by having the taxpayer identifying
number certified by the Internal Revenue Service either directly as
provided under paragraph (c)(2)(ii) of this section or through a
qualified intermediary as provided in paragraph (c)(2)(iii) of this
section.
(ii) IRS-certified TIN. The Internal Revenue Service may certify a
taxpayer identifying number based upon a certificate of residence
described in paragraph (c)(3) of this section or documentary evidence
described in paragraph (c)(4) of this section. The certificate or
documentary evidence must be furnished to the Internal Revenue Service
by or on behalf of the beneficial owner upon application for the
taxpayer identifying number or at any other time, as permitted under
such procedures as the Internal Revenue Service may prescribe. If the
tax residence of the beneficial owner changes, the beneficial owner
shall promptly notify the Internal Revenue Service of that change. In
addition, the Internal Revenue Service may exchange information for the
purpose of confirming with the appropriate tax authority of the other
country that the beneficial owner continues to be a tax resident of
that country. The Internal Revenue Service may from time to time, in
its discretion, request that the beneficial owner reconfirm its
residence in the treaty country.
(iii) Special rules for qualified intermediaries. The Internal
Revenue Service may certify a taxpayer identifying number based upon
the certification of a qualified intermediary described in Sec. 1.1441-
1(e)(5)(ii) regarding the tax residence of any of its account holders,
or persons owning an interest in the qualified intermediary, under
procedures agreed upon with the Internal Revenue Service. If a new
account or interest holder has a taxpayer identifying number at the
time it opens an account or acquires an interest, the qualified
intermediary may rely on a statement by the account or interest holder
that appropriate proof of tax residence in the treaty jurisdiction was
previously provided to the Internal Revenue Service. In such case, the
qualified intermediary must notify the Internal Revenue Service each
time the account or interest holder's address changes to another
country or when the account or interest holder terminates its
relationship with the qualified intermediary.
(3) Certificate of residence. A certificate of residence is
generally a certificate issued by the competent authority (or another
appropriate tax authority) of the treaty country of which the taxpayer
claims to be a resident that certifies that the taxpayer has filed its
most recent income tax return as a resident of that country. A
certificate of residence is valid for a period of three years or such
longer period as the Internal Revenue Service may prescribe. The
competent authorities may agree to a different procedure for certifying
residence, in which case such procedure shall govern for payments made
to a person claiming to be a resident of the country with which such an
agreement is in effect.
(4) Documentary evidence establishing residence in the treaty
country. Generally, documentary evidence used to establish residence in
a treaty country must include the name, address, and photograph of the
person seeking to prove residence, must be an official document issued
by an authorized governmental body (i.e., a government or agency
thereof, or a municipality), and must have been issued no more than
three years prior to presentation to the withholding agent. A document
older than three years may be relied upon as proof of residence only if
it is accompanied by additional evidence of the person's residence in
the treaty country (i.e., a bank statement, utility or medical bills).
Documentary evidence must be in the form of original documents or a
certified copy thereof.
(d) Joint owners. In the case of a payment to joint owners, all
owners must furnish a withholding certificate
[[Page 17652]]
or, if applicable, documentary evidence or a certificate of residence.
The applicable rate of tax on a payment of income to joint owners shall
be the highest applicable rate.
(e) Related party dividends under certain treaties. Income tax
treaties between the United States and Austria, Denmark, Ireland, and
Switzerland reduce the rate of tax on dividends between related
corporations to 5 percent subject to the condition that the
relationship between the domestic and foreign corporations was not
arranged or maintained for the purpose of securing the reduced rate. A
domestic corporation that makes a distribution to a resident of one of
these countries may treat this condition as satisfied if, prior to the
payment, a request has been made to the Internal Revenue Service for a
private letter ruling determining that the relationship between the
corporation and the shareholder was not arranged or maintained for such
purpose and the Service has either issued a favorable ruling (and the
ruling has not been revoked) or is considering the ruling request.
(f) Effective date--(1) General rule. This section applies to
payments of income made after December 31, 1997.
(2) Transition rules. For purposes of this section, a withholding
agent that holds a valid Form 1001 or 8233 on the date that is 60 days
after these regulations are published as final regulations in the
Federal Register may treat it as a valid withholding certificate until
its validity expires under applicable provisions as in effect on April
22, 1996. In addition, the documentation requirements for dividends on
stock traded on a U.S. established financial market described in
paragraph (b)(2) of this section shall apply only to accounts
established after the date that is 60 days after these regulations are
published as final regulations in the Federal Register. For accounts
established on or before that date, the documentation requirements
under this section shall apply to payments made after December 31,
1999.
Par. 13. Section 1.1441-7 is revised to read as follows:
Sec. 1.1441-7 General provisions relating to withholding agents.
(a) Withholding agent defined. For purposes of chapter 3 of the
Internal Revenue Code, the term withholding agent means any person,
U.S. or foreign, that has the control, receipt, custody, disposal, or
payment of an item of income of a foreign person subject to
withholding. See Sec. 1.1441-1(b) (dealing with general rules of
withholding) and Sec. 1.1441-1(f) (dealing with presumptions of U.S. or
foreign status in the absence of required documentation) for
determining whether a payment is considered made to a foreign person.
Any person who meets the definition of a withholding agent is required
to deposit any tax withheld under Sec. 1.1461-1(a) and to make the
returns prescribed by Sec. 1.1461-1(b) and (c). When several persons
qualify as withholding agents with respect to a single payment, only
one tax is required to be withheld and only one return (on Form 1042,
as required under Sec. 1.1461-1(b)), is required to be made.
(b) Standards of knowledge--(1) In general. If a withholding agent
does not withhold the full amount even though it has actual knowledge
or reason to know that a claim of U.S. status or of a reduced rate of
tax under section 1441 is incorrect, the withholding agent may be
liable for tax, interest, and penalties under sections 1461 and 1463
and the regulations under those sections. A withholding agent that has
received notification by the Internal Revenue Service that a claim of
U.S. status or of a reduced rate is incorrect has actual knowledge
beginning on the date that is 30 calendar days after the date the
notice is received. A withholding agent that fails to act in accordance
with the presumptions set forth in Sec. 1.1441-1(f) may be liable for
tax, interest, and penalties. See Sec. 1.1441-1(f)(5).
(2) Reason to know--(i) In general. A withholding agent will be
considered to have reason to know if it has sufficient knowledge of the
underlying facts such that a reasonably prudent person in the position
of the withholding agent would question the claim made or if the
withholding agent has actual knowledge of sufficient facts to put it on
notice that the claim is false.
(ii) Limits on duty to inquire in certain cases. In the case of
portfolio interest, interest on deposits described in section
871(i)(2)(A), and dividends described in Sec. 1.1441-6(b)(2), a
withholding agent's duty to inquire with respect to a beneficial owner
withholding certificate is limited to the circumstances listed in this
paragraph (b)(2)(ii). Where one or more of the circumstances described
in this paragraph (b)(2)(ii) exist for a withholding certificate, the
withholding agent may rely on the withholding certificate only after
documentation is provided in support of the claim of foreign status, or
reduced rate of tax under a tax treaty, and the certificate is
corrected, if appropriate.
(A) The permanent residence address on the withholding certificate
is an address in the United States.
(B) The payment is directed to a P.O. Box, an in-care-of address, a
U.S. address, or an account with a financial institution in the United
States.
(C) In the case of income for which benefits are claimed under an
income tax treaty, the permanent residence address or mailing address
is not in the corresponding treaty country.
(D) The beneficial owner notifies the withholding agent of an
address for mailing purposes and that address is--
(1) Different from the permanent residence or mailing address
stated on the withholding certificate provided to the withholding agent
by or for the beneficial owner; and
(2) The address is one that is described in paragraph
(b)(2)(ii)(A), (B), or (C) of this section.
(E) Such other circumstances as the Internal Revenue Service may
prescribe in published guidance.
(3) Universal accounts. A withholding agent that is a financial
institution dealing with the public and with which a customer may
open an account shall apply the rules of this paragraph (b) on an
account-by-account basis, except to the extent it uses a universal
account system that uses a customer identifier that can be used to
retrieve systemically any other accounts of the customer. See
Sec. 31.3406(c)-1(c)(3)(ii) and (c)(3)(iii)(C) of this chapter.
(c) Authorized agent--(1) In general. The acts of an agent of a
withholding agent (including the receipt of withholding certificates,
the payment of amounts of income subject to withholding, and the
deposit of tax withheld) shall be imputed to the withholding agent on
whose behalf it is acting. However, if the agent is a foreign person, a
withholding agent that is a U.S. person may treat the acts of the
foreign agent as its own for purposes of determining whether it has
complied with the provisions of this section, but only if the agent is
an authorized foreign agent, as defined in paragraph (c)(2) of this
section.
(2) Authorized foreign agent. An agent is an authorized foreign
agent only if--
(i) There is a written agreement between the withholding agent and
the foreign person acting as agent;
(ii) The notification procedures described in paragraph (c)(3) of
this section have been complied with;
(iii) Books and records and relevant personnel of the foreign agent
are available for examination by the Internal Revenue Service in order
to evaluate the withholding agent's compliance with the provisions of
chapter 3, section 3406, and chapter 61 of the Internal Revenue Code,
and the regulations under those provisions; for this purpose, the
foreign agent's actual knowledge or
[[Page 17653]]
reason to know shall be imputed to the U.S. withholding agent; and
(iv) The U.S. withholding agent remains fully liable for the acts
of its agent and does not assert any of the defenses that may otherwise
be available under common law principles of agency in order to avoid
tax liability under the Internal Revenue Code.
(3) Notification. A withholding agent that appoints an authorized
agent to act on its behalf for purposes of Sec. 1.871-14(c)(2), for the
withholding provisions of chapter 3 of the Internal Revenue Code, or
for the reporting provisions of chapter 61 of the Internal Revenue
Code, is required to file notice of such appointment with the Office of
the Assistant Commissioner (International). Such notice shall be filed
before the first payment for which the authorized agent acts as such.
(4) Liability of U.S. withholding agent. A withholding agent acting
through an authorized foreign agent is liable for any failure of the
agent, such as failure to withhold an amount or make payment of tax, in
the same manner and to the same extent as if the agent's failure had
been the failure of the U.S. withholding agent. Such liability shall
exist irrespective of the fact that the authorized foreign agent is
also a withholding agent and is itself separately liable for failure to
comply with the provisions of the regulations under sections 1441,
1442, or 1443. However, liability for tax, interest, and penalties
shall not be collected more than once.
(5) Filing of returns. See Sec. 1.1461-1(b)(2)(iii) and (c)(4)(iii)
regarding returns required to be made where a U.S. withholding agent
acts through an authorized foreign agent.
(d) United States obligations. If the United States is a
withholding agent for an item of interest, including original issue
discount, on obligations of the United States or of any agency or
instrumentality thereof, the withholding obligation of the United
States is assumed and discharged by--
(1) The Commissioner of the Public Debt, for interest paid by
checks issued through the Bureau of the Public Debt;
(2) The Treasurer of the United States, for interest paid by him or
her, whether by check or otherwise;
(3) Each Federal Reserve Bank, for interest paid by it, whether by
check or otherwise; or
(4) Such other person as may be designated by the Internal Revenue
Service.
(e) Assumed obligations. If, in connection with the sale of a
corporation's property, payment of the bonds or other obligations of
the corporation is assumed by the assignee, the assignee, whether an
individual, partnership, or corporation, shall be a withholding agent
to the extent amounts subject to withholding tax are paid to a foreign
person. Thus, the assignee shall deduct and withhold such taxes under
Sec. 1.1441-1 as would be required to be withheld by the assignor had
no such sale or transfer been made.
(f) Conduit financing arrangements. [Reserved]
(g) Effective date. This section applies to payments of income made
after December 31, 1997.
Par. 14. Section 1.1441-8T is amended as follows:
1. The section heading is revised.
2. Paragraph (b) is revised.
3. Paragraph (c) is added.
The revisions and additions read as follows:
Sec. 1.1441-8T Foreign government and international organization
exemption from withholding (temporary).
* * * * *
(b) Statement claiming exemption. Absent actual knowledge or reason
to know otherwise, the withholding agent may rely upon a claim of
exemption made by the foreign government or international organization,
if, prior to making the payment, the withholding agent satisfies the
requirements of Sec. 1.1441-1(e)(1). For purposes of this paragraph
(b), a beneficial owner withholding certificate means a certificate
described in Sec. 1.1441-1(e)(2). A statement on the withholding
certificate that the income is, or will be, exempt from taxation under
section 892 and the regulations under that section will satisfy the
requirement in Sec. 1.1441-1(e)(2)(ii) that the beneficial owner state
on the certificate the basis for the claim of reduced rate.
(c) Effective date--(1) In general. This section applies to
payments of income made after December 31, 1997.
(2) Transition rules. For purposes of this section, a withholding
agent that holds a valid Form 8709 on the date that is 60 days after
these regulations are published as final regulations in the Federal
Register may treat it as a valid withholding certificate until its
validity expires under applicable provisions as in effect on April 22,
1996.
Par. 15. Section 1.1441-9 is added to read as follows:
Sec. 1.1441-9 Exemption from withholding on exempt income of a
foreign tax-exempt organization and foreign private foundations.
(a) Income not subject to tax under section 511. No withholding of
tax is required under Sec. 1.1441-1 on income of a foreign organization
described in section 501(c) of the Internal Revenue Code that is not
subject to the tax imposed by section 511 of the Internal Revenue Code
and is exempt from tax under section 501(a). See Sec. 1.1443-1 for
withholding rules applicable to foreign private foundations.
(b) Statement claiming exemption. Absent actual knowledge or reason
to know otherwise, a withholding agent may rely upon a claim of
exemption by the foreign tax-exempt organization if, prior to making
the payment, the withholding agent meets the requirements of
Sec. 1.1441-1(e)(1) (except that the certificate must contain a
taxpayer identifying number). The requirement in Sec. 1.1441-
1(e)(2)(ii) that the beneficial owner state on the certificate the
basis for the claim of reduced rate shall be satisfied by the
beneficial owner certifying that the income is not, or will not be,
subject to tax under section 511 and that the Internal Revenue Service
has issued a determination letter (and the date thereof). If the
organization cannot certify that it has been issued such a letter, it
must provide an opinion of counsel that it is tax exempt under section
501(c).
(c) Effective date--(1) In general. This section applies to
payments of income made after December 31, 1997.
(2) Transition rules. For purposes of this section, a withholding
agent that holds a valid Form W-8, 1001 or 4224 on the date that is 60
days after the date these regulations are published as final
regulations in the Federal Register may treat it as a valid withholding
certificate until its validity expires under applicable provisions as
in effect on April 22, 1996.
Par. 16. Sections 1.1442-1 and 1.1442-2 are revised to read as
follows:
Sec. 1.1442-1 Withholding of tax on foreign corporations.
For regulations concerning the withholding of tax at source under
section 1442 in the case of foreign corporations, see Secs. 1.1441-1
through 1.1441-7 and 1.1441-9.
Sec. 1.1442-2 Exemption under a tax treaty.
For regulations providing for a claim of reduced withholding tax
under section 1442 by certain foreign corporations pursuant to the
provisions of an income tax treaty, see Sec. 1.1441-6.
Par. 17. Section 1.1442-3 is added to read as follows:
Sec. 1.1442-3 Tax exempt income of a foreign tax-exempt corporation.
For regulations providing for a claim of exemption for income
exempt from tax under section 501(a) of a foreign tax-
[[Page 17654]]
exempt corporation, see Sec. 1.1441-9. See Sec. 1.1443-1 for
withholding rules applicable to foreign foundations.
Sec. 1.1443-1 [Amended]
Par. 18. Section 1.1443-1 is amended by:
1. Amending the second sentence of paragraph (b)(4)(i) by removing
the words ``an affidavit of the foreign organization or''.
2. Amending the third sentence in paragraph (b)(4)(i) by removing
the words ``an affidavit or''.
Par. 19. Section 1.1461-1 is revised to read as follows:
Sec. 1.1461-1 Payment and returns of tax withheld.
(a) Payment of withheld tax--(1) Deposits of tax. Every withholding
agent who withholds tax pursuant to chapter 3 of the Internal Revenue
Code shall deposit such amount of tax with a Federal reserve bank or
authorized financial institution as provided in Sec. 1.6302-2(a). If
for any reason the total amount of tax required to be returned for any
calendar year pursuant to paragraph (b) of this section has not been
deposited pursuant to Sec. 1.6302-2, the withholding agent shall pay
the balance of tax due for such year at such place as the Internal
Revenue Service shall specify. The tax shall be paid when filing the
return required under paragraph (b)(2) of this section for such year,
unless the Internal Revenue Service specifies otherwise. See paragraph
(b)(2) of this section when there are multiple withholding agents.
(2) Penalties for failure to pay tax. For penalties and additions
to the tax for failure to timely pay the tax required to be withheld
under chapter 3 of the Internal Revenue Code, see sections 6656, 6672,
and 7202 and the regulations under those sections.
(b) Income tax return--(1) General rule. A withholding agent shall
make an income tax return on Form 1042 (or such other form as the
Internal Revenue Service may prescribe) for income paid during the
preceding calendar year that the withholding agent is required to
report on an information return on Form 1042-S (or such other form as
the Internal Revenue Service may prescribe) under paragraph (c)(1) of
this section. See section 6011 and Sec. 1.6011-1(c). The withholding
agent must file the return on or before February 28 of the calendar
year following the year in which the income was paid. The return must
show the aggregate amount of income paid and tax withheld required to
be reported on all the Forms 1042-S for the preceding calendar year by
the withholding agent, in addition to such information as is required
by the form and accompanying instructions. Withholding certificates or
other statements or information provided to a withholding agent are not
required to be attached to the return. A return must be filed under
this paragraph (b)(1) even though no tax was required to be withheld
during the preceding calendar year. The withholding agent must retain a
copy of Form 1042 for the applicable statute of limitations on
assessments and collection with respect to the items of income required
to be reported on the Form 1042. See section 6501 and the regulations
thereunder for the applicable statute of limitations. Adjustments to
the total amount of tax withheld, as described in Sec. 1.1461-2, shall
be stated on the return as prescribed by the form and accompanying
instructions.
(2) Multiple withholding agents--(i) General rule. Except as
otherwise provided in paragraphs (b)(2) (ii) and (iii) of this section,
no Form 1042 is required to be filed under paragraph (b)(1) of this
section if a return is filed by another withholding agent reporting the
same income in compliance with the provisions of this paragraph (b) and
any remaining tax due is paid with the return as required under
paragraph (a) of this section.
(ii) Payment to a qualified intermediary. A U.S. withholding agent
making a payment to a qualified intermediary (as defined in
Sec. 1.1441-1(e)(5)(ii)) must file a return under paragraph (b)(1) of
this section, regardless of whether the qualified intermediary assumes
primary withholding responsibility for the payment, as described in
Sec. 1.1441-1(e)(5)(iv) and regardless of whether the qualified
intermediary is also required to file a return under the terms of its
agreement with the Internal Revenue Service. A qualified intermediary's
agreement with the Internal Revenue Service shall specify the extent,
if any, to which the intermediary is subject to filing requirements
under this section.
(iii) Payment to or through an authorized foreign agent. Both the
U.S. withholding agent making a payment to or through an authorized
foreign agent (defined in Sec. 1.1441-7(c)) and the authorized foreign
agent are required to file a return under paragraph (b)(1) of this
section.
(3) Amended returns. An amended return may be filed on a Form 1042X
or such other form as the Internal Revenue Service may prescribe. An
amended return must include such information as the form and
accompanying instructions shall require, including, with respect to any
information that has changed from the time of the filing of the return,
the information that was shown on the original return and the corrected
information.
(c) Information returns--(1) Filing requirement--(i) In general. A
withholding agent must make an information return on Form 1042-S (or
such other form as the Internal Revenue Service may prescribe) to
report the items of income specified in paragraph (c)(2) of this
section that were paid during the preceding calendar year. One Form
1042-S shall be prepared for each beneficial owner (except as otherwise
provided in paragraph (c)(4) of this section regarding multiple
withholding agents). The Form 1042-S shall be prepared in such manner
as the form and accompanying instructions prescribe. One copy of the
Form 1042-S shall be filed with the Internal Revenue Service on or
before February 28 of the calendar year following the year in which the
item of income was paid. It shall be filed with a transmittal form as
provided in the instructions to the Form 1042-S and the transmittal
form. Withholding certificates or other statements or documentation
provided to a withholding agent are not required to be attached to the
information return. Another copy of the Form 1042-S shall be furnished
to the payee on or before February 28 of the calendar year following
the year in which the item of income was paid after the calendar year
of payment. The withholding agent shall retain a copy of each Form
1042-S for the statute of limitations on assessment and collection
applicable to the Form 1042 to which the Form 1042-S relates.
(ii) Joint owners. In the case of joint owners, a single Form 1042-
S may be prepared. However, any one of the owners may request that it
be furnished its own Form 1042-S. Where more than one Form 1042-S is
issued with respect to a single payment to joint owners, the aggregate
amount of income and tax withheld reported on the Forms 1042-S cannot
exceed the amount of income to the joint owners and tax withheld
thereon. If a single Form 1042-S is prepared, the form shall state the
name of only one owner and that name shall be that of the person whose
status the withholding agent relied upon to determine the applicable
rate of withholding tax.
(2) Income subject to reporting--(i) In general. Subject to the
exceptions in paragraph (c)(2)(ii) of this section, the items of income
required to be reported on a Form 1042-S are income subject to
withholding (as defined in Sec. 1.1441-2(a)), income on a notional
principal contract described in Sec. 1.1441-4(a)(3), and amounts
described in sections 6041
[[Page 17655]]
through 6050P that are paid to a foreign person and are not exempt from
reporting under sections 6041 through 6050P or the regulations under
those sections.
(ii) Exceptions to reporting. The items of income listed in this
paragraph (c)(2)(ii) are not required to be reported on a Form 1042-S.
(A) Any item of income paid by a partnership, trust or estate to
the extent the item of income is required to be reported by the
partnership, trust or estate under section 6031 or 6034.
(B) Any item required to be reported on a Form W-2, including an
item required to be shown on Form W-2 solely by reason of Sec. 1.6041-2
(relating to return of information as to payments to employees) or
Sec. 1.6052-1 (relating to information regarding payment of wages in
the form of group-term life insurance).
(C) Any item of income required to be reported on Form 1099, and
such other forms prescribed under sections 6041 through 6050P and the
regulations under these sections.
(D) Any item of income paid to foreign governments, international
organizations, and foreign central banks of issue that are exempt from
tax under section 892 or section 895.
(E) Income required to be reported on Form 8288 (U.S. Withholding
Tax Return for Dispositions by Foreign Persons of U.S. Real Property
Interests) or Form 8804 (Annual Return for Partnership Withholding Tax
(Section 1446)).
(F) Income on deposits described in section 871(i)(2)(A), unless
actually subject to withholding or specifically subject to reporting
under section 6049 and the regulations under that section.
(G) Interest on a foreign-targeted registered obligation described
in Sec. 1.871-14(e), except as otherwise provided in Sec. 1.871-
14(e)(4)(ii)(A).
(3) Required information. Form 1042-S shall include such
information as is required by the form and accompanying instructions.
The information shall be based upon the information provided by or on
behalf of the beneficial owner (e.g., a beneficial owner withholding
certificate or documentary evidence), as corrected and supplemented
based on the agent's actual knowledge or reason to know. In particular,
the Form 1042-S must include the information described in this
paragraph (c)(3), if applicable.
(i) The name, address, and taxpayer identifying number of the
withholding agent.
(ii) A description of each category of income paid (e.g., interest,
dividends, royalties, etc.) and the aggregate amount in each category
expressed in U.S. dollars.
(iii) The rate of withholding applied and, if applicable, the basis
for withholding at a reduced rate.
(iv) The name, permanent residence address, and taxpayer
identifying number (if required under Sec. 1.1441-1(e)(4)(vii) to be
shown on a beneficial owner withholding certificate or actually known
to the withholding agent making the return) of the beneficial owner.
(4) Multiple withholding agents--(i) In general. Except as
otherwise provided in paragraph (c)(4) (ii), (iii), and (v) of this
section, no information return is required to be filed under paragraph
(c)(1)(i) of this section if a return is filed by another withholding
agent reporting the same income in compliance with the provisions of
this paragraph (c).
(ii) Payment to a qualified intermediary. A withholding agent
making a payment to a qualified intermediary (defined in Sec. 1.1441-
1(e)(5)(ii)) must report the payment but may do so on a single Form
1042-S.
(iii) Payment to an authorized foreign agent--(A) Filing obligation
of foreign authorized agent. An authorized foreign agent (as described
in Sec. 1.1441-7(c)(2)) is subject to the filing requirements described
in paragraph (c)(1)(i) of this section because it is a withholding
agent. Therefore, to the extent the U.S. withholding agent for which it
is acting is not reporting the information required under this
paragraph (c), it must report the information required to be reported
under paragraph (c)(3) or (c)(4)(vi) of this section.
(B) Filing obligations of the U.S. withholding agent. A U.S.
withholding agent making a payment to an authorized foreign agent is
exempted from the requirement under paragraph (c)(4)(iv) of this
section to make a return on Form 1042-S for each beneficial owner and
may, instead, make a single Form 1042-S to report the payment made to
the authorized foreign agent. The exemption in this paragraph
(c)(4)(iii)(B) shall apply only to the extent the authorized foreign
agent complies with the filing requirements under paragraph
(c)(4)(iii)(A) of this section.
(iv) Payment to other foreign person not acting for its own
account. Payment of an item of income to an agent, nominee or
representative for the benefit of other persons in respect of whom
Forms 1042-S are required may not be shown on a single Form 1042-S but
must be identified on separate Forms 1042-S for each beneficial owner
if such agent, nominee, or representative is a foreign person and is
not a qualified intermediary or an authorized foreign agent.
(v) Payment to a foreign partnership. Payment of an item of income
to a foreign partnership that is not a qualified intermediary and acts
for its own account may not be shown on a single Form 1042-S but must
be identified on separate Forms 1042-S for each beneficial owner (or
partner that is a qualified intermediary or authorized foreign agent).
(vi) Required information. An information return on a Form 1042-S
by a withholding agent reporting payments to an intermediary or to a
foreign partnership described in paragraph (c)(4)(v) of this section
must contain the information contained in this paragraph (c)(4)(vi).
The information on the Form 1042-S must be based upon the withholding
certificates furnished by the payee, as corrected and supplemented by
the withholding agent's actual knowledge or reason to know.
(A) The name, address, and taxpayer identifying number of the
withholding agent.
(B) A description of each category of income paid (e.g., interest,
dividends, royalties, etc.) and the aggregate amount in each category
expressed in U.S. dollars.
(C) The rate of withholding applied.
(D) The basis for not withholding or withholding at a reduced rate.
(E) The name, address, and taxpayer identifying number of the
payee.
(F) In the case of a payment to a partnership acting for its own
account, the name, address, and taxpayer identifying number (if
required under Sec. 1.1441-1(e)(4)(vii) to be stated on the withholding
certificates or actually known to the withholding agent) of the person
for whom a Form 1042-S is required to be prepared pursuant to the
provisions of paragraph (c)(4)(v) of this section.
(5) Magnetic media reporting. A withholding agent that makes 250 or
more Form 1042-S information returns for a taxable year must file Form
1042-S returns on magnetic media. See Sec. 301.6011-2 of this chapter
for requirements applicable to a withholding agent that files Forms
1042-S on magnetic media and publications of the Internal Revenue
Service relating to magnetic media filing.
(d) Report of taxpayer identifying numbers. When so required or
permitted under procedures issued by the Internal Revenue Service, a
withholding agent may attach to the Form 1042 a list of all the
taxpayer identifying numbers that have been
[[Page 17656]]
furnished to the withholding agent and upon which the withholding agent
has relied to grant a reduced rate of withholding and that are not
otherwise required to be reported on a Form 1042-S under the provisions
of this section.
(e) Indemnification of withholding agent. A withholding agent is
indemnified against the claims and demands of any person for the amount
of any tax it deducts and withholds in accordance with the provisions
of chapter 3 of the Internal Revenue Code and the regulations under
that chapter. A withholding agent that withholds based on a reasonable
belief that such withholding is required under chapter 3 of the
Internal Revenue Code is treated for purposes of section 1461 and this
paragraph (e) as having withheld tax in accordance with the provisions
of chapter 3 of the Internal Revenue Code and the regulations under
that chapter. In addition, a withholding agent is indemnified against
the claims and demands of any person for the amount of any payments
made in accordance with the grace period provisions set forth in
Sec. 1.1441-1(f)(2)(ii)(A). This paragraph (e) does not apply to
relieve a withholding agent from tax liability under chapter 3 of the
Internal Revenue Code.
(f) Amounts paid not constituting gross income. Any amount withheld
in accordance with Secs. 1.1441-3(b)(1) and 1.1441-3(d) shall be
returned and paid in accordance with this section, even though the item
or amount paid to the beneficial owner may not constitute gross income
in whole or in part. For this purpose, a reference in this section to
an item or amount of income shall, where appropriate, be deemed to
refer to the amount subject to withholding under Secs. 1.1441-3(b)(1)
and 1.1441-3(d).
(g) Extensions of time for requests made for calendar year
beginning after the date of publication of these regulations as final
regulations in the Federal Register--(1) Extension of time to file Form
1042. The Internal Revenue Service may grant an extension of time in
which to file a Form 1042. Form 2758, Application for Extension of Time
to File Certain Excise, Income, Information, and Other Returns, or such
other form as the Internal Revenue Service may prescribe, must be used
to request an extension of time. The request must contain a statement
of the reasons for requesting the extension. The request must be mailed
or delivered not later than February 28 of the year following the end
of the calendar year for which the return will be filed.
(2) Extension of time to file Form 1042-S. The Internal Revenue
Service may grant an extension of time in which to file Form 1042-S.
Form 8809, Request for Extension of Time to File Information Returns,
or such other form as the Internal Revenue Service may prescribe, must
be used to request an extension of time. The request must contain a
statement of the reasons for requesting the extension. The request must
be mailed or delivered not later than February 28 of the year following
the calendar year for which the return will be filed.
(3) Extension of time to furnish Forms 1042-S. The Internal Revenue
Service may grant an extension of time in which to furnish Forms 1042-S
to beneficial owners or intermediaries. Form 8809, request for
Extension of Time to File Information Returns, or such other form as
the Internal Revenue Service may prescribe, must be used to request an
extension of time. The request must contain the withholding agent's
name and address, the withholding agent's taxpayer identifying number,
the type of statement and a statement of the reasons for requesting the
extension. The request must be signed by the withholding agent or a
person who is duly authorized to sign a return, statement, or other
document. The request must be mailed or delivered not later than
February 28 of the year following the end of the calendar year for
which the statement will be furnished.
(h) Penalties. For penalties and additions to the tax for failure
to file returns in accordance with this section, see sections 6651,
6662, 6663, 6721, 6722, 6723, 6724(c), 7201, 7203, and the regulations
under those sections.
(i) Effective date. This section shall apply to returns required
for payments made after December 31, 1997.
Par. 20. Section 1.1461-2 is revised to read as follows:
Sec. 1.1461-2 Adjustments for overwithholding or underwithholding of
tax.
(a) Adjustments of overwithheld tax--(1) In general. A withholding
agent that has overwithheld under chapter 3 of the Internal Revenue
Code and made a deposit of that tax as provided in Sec. 1.6302-2(a) may
adjust the overwithheld amount either pursuant to the reimbursement
procedure described in paragraph (a)(2) of this section or pursuant to
the set-off procedure described in paragraph (a)(3) of this section.
Adjustments under this paragraph (a) may only be made within the time
prescribed under paragraph (a) (2) or (3) of this section. After such
time, an adjustment to the amount overwithheld can only be claimed by
the beneficial owner with the Internal Revenue Service pursuant to the
procedures described in chapter 65 of the Internal Revenue Code. For
purposes of this section, the term overwithholding means any amount
actually withheld (determined before application of the adjustment
procedures under this section) from an item of income pursuant to
chapter 3 of the Internal Revenue Code in excess of the actual tax
liability due, regardless of whether such overwithholding was in error
or appeared correct at the time it occurred.
(2) Reimbursement of tax--(i) General rule. Under the reimbursement
procedure, the withholding agent may repay the beneficial owner for the
amount overwithheld by reducing, by the amount of tax actually repaid,
the amount of any deposit of tax made by the withholding agent under
Sec. 1.6302-2(a)(1)(iii) for any subsequent payment period occurring
before the end of the calendar year following the calendar year of
overwithholding. Any such reduction that occurs for a payment period in
the calendar year following the calendar year of overwithholding shall
be allowed only if--
(A) The withholding agent states, on a timely filed (not including
extensions) Form 1042-S for the calendar year of overwithholding, the
amount of tax withheld and the amount of any actual repayment; and
(B) The withholding agent states on a timely filed (not including
extensions) Form 1042 for the calendar year of overwithholding, that
the filing of the Form 1042 constitutes a claim for credit in
accordance with Sec. 1.6414-1.
(ii) Record maintenance. If the beneficial owner is repaid an
amount of withholding tax under the provisions of this paragraph
(a)(2), the withholding agent shall keep as part of its records a
receipt showing the date and amount of repayment and the withholding
agent must provide a copy or such receipt to the beneficial owner. For
this purpose, a canceled check or an entry in a statement is sufficient
provided that the check or statement contains a specific notation that
it is a refund of tax overwithheld.
(3) Set-offs. Under the set-off procedure, the withholding agent
may repay the beneficial owner by applying the amount overwithheld
against any amount which otherwise would be required under chapter 3 of
the Internal Revenue Code to be withheld from income paid by the
withholding agent to such person before the earlier of the due date for
filing the Form 1042-S for the calendar year of overwithholding or the
date that the Form 1042-S is actually filed with the Internal Revenue
Service.
[[Page 17657]]
For purposes of making a return on Form 1042 or 1042-S (or an amended
form) for the calendar year of overwithholding and for purposes of
making a deposit of the amount withheld, the reduced amount shall be
considered the amount required to be withheld from such income under
chapter 3 of the Internal Revenue Code.
(4) Examples. The principles of this paragraph (a) are illustrated
by the following examples:
Example 1. (i) N is a nonresident alien individual who is a
resident of the United Kingdom. In December 1997, a domestic
corporation C pays a dividend of $100 to N, at which time C
Corporation withholds $30 and remits the balance of $70 to N. On
February 10, 1998, prior to the time that C files its Form 1042, N
advises C Corporation that, pursuant to the income tax convention
with the United Kingdom, only $15 tax should have been withheld from
the $100 dividend and requests reimbursement of the $15 that was
erroneously withheld. Although C Corporation has already deposited
the $30 that was withheld, as required by Sec. 1.6302-2(a)(1)(iv),
such corporation repays N in the amount of $15.
(ii) During 1997, C Corporation makes no other payments upon
which tax is required to be withheld under chapter 3 of the Internal
Revenue Code; accordingly, its return on Form 1042 for such year,
which is filed on February 28, 1998, shows total tax withheld of
$30, an adjusted total tax withheld of $15, and $30 previously paid
for such year. Pursuant to Sec. 1.6414-1(b), C Corporation claims
credit for the overpayment of $15 shown on the Form 1042 for 1997.
Accordingly, it is permitted to reduce by $15 any deposit required
by Sec. 1.6302-2 to be made of tax withheld during the calendar year
1998. The Form 1042-S required to be filed by C Corporation with
respect to the dividend of $100 paid to N in 1997 is required to
show tax withheld of $30 and tax released of $15.
(iii) During 1998, C Corporation is required to withhold $200
under chapter 3 of the Internal Revenue Code, all of which is
withheld in June of that year. Pursuant to Sec. 1.6302-2(a)(1)(iii),
C Corporation deposits the amount of $185 on July 15, 1998, that is,
$200 less the $15 for which credit is claimed on the Form 1042 for
1997. On February 28, 1999, C Corporation files its return on Form
1042 for calendar year 1998, which shows total tax withheld of $200,
$185 previously deposited by C Corporation, and $15 allowable
credit.
Example 2. The facts are the same as in Example 1 except that
paragraph (iii) of Example 1 does not apply and C Corporation is
required to deposit on a quarter-monthly basis the tax withheld
under chapter 3 of the Internal Revenue Code. C Corporation
withholds tax of $100 between February 8 and February 15, 1998, and
complies with the quarter-monthly deposit requirement of
Sec. 1.6302-2(a)(1)(ii) by depositing $75 [($100 x 90 percent) less
$15] of the withheld tax within 3 banking days after February 15,
1998, and by depositing $10 [($100-$15) less $75] within 3 banking
days after March 15, 1998.
(b) Withholding of additional tax when underwithholding occurs. A
withholding agent may withhold the tax that should have been withheld
from previous payments from future payments made to a beneficial owner.
Such additional withholding of tax may only be made from payments made
before the date that the Form 1042 is required to be filed (not
including extensions). See Sec. 1.6302-2 for making deposits of tax or
Sec. 1.1461-1(a) for making payment of the balance of tax due for a
calendar year.
(c) Definition. For purposes of this section, the term payment
period means the period for which the withholding agent is required by
Sec. 1.6302-2(a)(1) to make a deposit of tax withheld under chapter 3
of the Internal Revenue Code.
(d) Effective date. This section applies to payments of income made
after December 31, 1997.
Secs. 1.1461-3 and 1.1461-4 [Removed]
Par. 21. Sections 1.1461-3 and 1.1461-4 are removed.
Par. 22. Section 1.1462-1 is amended by:
1. Revising paragraph (a).
2. Adding paragraph (c).
3. Removing the OMB parenthetical and the authority citation at the
end of the section.
The revision and addition read as follows:
Sec. 1.1462-1 Withheld tax as credit to recipient of income.
(a) Creditable tax. The entire amount of the income from which the
tax is required to be withheld (including amounts calculated under the
gross-up formula in Sec. 1.1441-3(e)(3)) shall be included in gross
income in the return required to be made by the beneficial owner of the
income, without deduction for the amount required to be withheld, but
the tax so withheld shall be allowed as a credit against the total
income tax computed in the beneficial owner's return.
* * * * *
(c) Effective date. This section applies to payments of income made
after December 31, 1997.
Par. 23. Section 1.1463-1 is revised to read as follows:
Sec. 1.1463-1 Tax paid by recipient of income.
(a) Tax paid. If the tax required to be withheld under chapter 3 of
the Internal Revenue Code is paid by the beneficial owner of the income
or by the withholding agent, it shall not be re-collected from the
other, regardless of the original liability therefor. However, this
section does not relieve the person that did not withhold tax from
liability for interest or any penalties or additions to tax otherwise
applicable.
(b) Effective date. This section applies to failures to withhold
occurring after December 31, 1989.
Par. 24. In Sec. 1.6041-1, the amendments to paragraph (a)(1) as
proposed in project number INTL-52-86 published on February 29, 1988,
at 53 FR 5993, are withdrawn.
Par. 25. Section 1.6041-1 is amended by:
1. Removing paragraph (a)(1)(iii).
2. Redesignating paragraphs (a)(1) introductory text and (a)(1)(i)
as paragraphs (a)(1)(i) introductory text and (a)(1)(i)(A).
3. Adding a heading for paragraph (a)(1).
4. Amending newly designated paragraph (a)(1)(i)(A) by adding the
word ``or'' at the end of the paragraph.
5. Redesignating paragraph (a)(1)(ii) as paragraph (a)(1)(i)(B) and
removing the language ``; or'' at the end of the paragraph and adding a
period in its place.
6. Designating the concluding text immediately following newly
designated paragraph (a)(1)(i)(B) as paragraph (a)(1)(ii).
7. Removing the first sentence of newly designated paragraph
(a)(1)(ii) and adding two new sentences in its place.
8. Adding paragraph (d)(5).
The revisions and additions read as follows:
Sec. 1.6041-1 Return of information as to payments of $600 or more
(a) General rule--(1) Information returns required--(i) * * *
(ii) The payments described in paragraphs (a)(1)(i)(A) and (B) of
this section shall not include any payments with respect to which a
statement is required by, or may be required under authority of section
6042(a) (relating to dividends); section 6043(a)(2) (relating to
distributions in liquidation); section 6044(a) (relating to patronage
dividends); section 6045 (relating to brokers' transactions with
customers); section 6049(a)(1) and (a)(2) (relating to interest);
section 6050N(a) (relating to royalties); or section 6050P(a) or (b)
(relating to cancellation of indebtedness). In addition, the payments
described in paragraphs (a)(1)(i)(A) and (B) of this section shall not
include amounts excepted from the definition of dividends under section
6042(b)(2) and Sec. 1.6042-3(b)(1), amounts described in section
6044(b), amounts excepted from reporting under
[[Page 17658]]
Sec. 1.6045-1(g)(1), amounts excepted from the definition of interest
under section 6049(b)(2)(C) or (D), Sec. 1.6049-4(c)), or Sec. 1.6049-
5(b)(6) through (14). * * *
* * * * *
(d) * * *
(5) Amounts paid after December 31, 1997, with respect to notional
principal contracts referred to in Sec. 1.1441-4(a)(3) that the payor
or middleman may treat as paid to a beneficial owner that is a foreign
person and that are not described in Sec. 1.6041-4(a)(2) or (4) shall
be reported on a Form 1042 and 1042-S in accordance with Sec. 1.1461-1
(b) and (c), whether or not effectively connected with the conduct of a
trade or business in the United States. Although reportable, amounts
described in this paragraph (d)(5) are not subject to backup
withholding under section 3406 if paid outside the United States. See
31.3406(g)-(1)(e) of this chapter.
* * * * *
Par. 26. In Sec. 1.6041-3, paragraph (q), as proposed to be added
in project number LR-3-87 on June 9, 1988, at 53 FR 21694, is
withdrawn.
Par. 27. Section 1.6041-3 is amended by:
1. Revising the introductory text of the section.
2. Revising paragraph (a).
3. Adding paragraph (q).
The addition and revisions read as follows:
Sec. 1.6041-3 Payments for which no return of information is required
under section 6041.
Returns of information are not required under section 6041 and
Secs. 1.6041-1 and 1.6041-2 for payments described in paragraphs (a)
through (q) of this section. See Sec. 1.6041-4 for reporting exemptions
regarding foreign-related items.
(a) Payments of income required to be reported on Forms 1120-S,
941, W-2, and W-3, (however, see Sec. 1.6041-2 with respect to Forms W-
2 and W-3);
* * * * *
(q) Payments to individuals as scholarships or fellowship grants,
as defined in Sec. 1.117-6(c)(3). This exception does not apply to any
amount of a scholarship or fellowship grant that represents payment for
services, as defined in Sec. 1.117-6(d)(2). See Sec. 1.1461-1(c) for
applicable reporting requirements with respect to amounts paid to
foreign persons.
Par. 28. Section 1.6041-4 is revised to read as follows:
Sec. 1.6041-4 Foreign-related items.
(a) Exempted foreign-related items. Returns of information are not
required under section 6041 and Secs. 1.6041-1 and 1.6041-2 for
payments of the items described in paragraphs (a) (1) through (4) of
this section.
(1) Returns of information are not required for payments that a
payor or middleman, as defined in paragraph (b)(1) of this section, may
treat as made to a beneficial owner that is a foreign person pursuant
to Sec. 1.1441-1(e)(1) and from which the payor or middleman is either
required to withhold tax under section 1441 or the regulations under
that section or would be so required but for exceptions in the
regulations under section 1441 (such as, for example, under
Sec. 1.1441-4 (dealing with effectively connected income) or
Sec. 1.1441-6 (dealing with a reduction of rate of tax under an income
tax treaty)). See Sec. 1.1441-1(e)(4)(i) in the case of payments to
joint owners.
(2) Returns of information are not required for payments of amounts
from sources outside the United States made by a non-U.S. payor or non-
U.S. middleman (as defined in paragraph (b)(2) of this section) outside
the United States. See Sec. 1.6049-5(e) for circumstances in which a
payment is considered to be made outside the United States.
(3) Returns of information are not required for payments of amounts
from sources outside the United States that a payor or middleman may
treat as paid to a beneficial owner that is a foreign person (because
such person has furnished a certificate described in Sec. 1.6049-
5(c)(1)). For purposes of this paragraph (a)(3), the provisions in
Sec. 1.6049-5 (c)(3) through (c)(6) (regarding operating rules related
to the certificate of foreign status) shall apply.
(4) Returns of information are not required for the period that the
amounts paid represent assets blocked as described in Sec. 1.1441-
2(e)(3). The exemption in this paragraph (a)(4) shall terminate when
payment is deemed to occur in accordance with the provisions of
Sec. 1.1441-2(e)(3).
(b) Definitions--(1) Payor and middleman. For purposes of this
section, the term payor means any person who is required to make an
information return with respect to any reportable payment, as described
in section 3406(b), including any middleman. The term middleman means
any person whose legal relationship to the payor or payee (including
any other middleman) is of a kind described in Sec. 1.6049-4(f)(4) (as
proposed in project number INTL-52-86 published in 1988-1 C.B. 892).
(2) Non-U.S. payor and non-U.S. middleman. For purposes of this
section, the term non-U.S. payor or non-U.S. middleman means a payor or
middleman other than--
(i) A person described in section 7701(a)(30);
(ii) The government of the United States, the government of any
State or political subdivision thereof (or any agency or
instrumentality of any of the foregoing);
(iii) A controlled foreign corporation within the meaning of
section 957(a); or
(iv) A foreign person 50 percent or more of the gross income of
which, from all sources for the three-year period ending with the close
of its taxable year preceding the collection or payment (or such part
of such period as the person has been in existence), was effectively
connected with the conduct of trade or business within the United
States.
(c) Applicable presumptions. The presumptions of Sec. 1.1441-1(f)
shall apply for determining the payee's status where the required
documentation is lacking, incorrect, or unreliable.
(d) Joint owners. In the case of amounts paid to joint owners for
which a certificate or documentation is required as a condition for
being exempt from reporting under this paragraph (d), a payor or
middleman must receive from each joint owner the required certification
or documentation. Where any one of the joint owners has not furnished
such certification or documentation, the payment is not exempt from
reporting under this section.
(e) Payee. For determination of payee, see Sec. 1.1441-1(c)(3).
(f) Conversion into United States dollars of amounts paid in
foreign currency. For rules concerning foreign currency conversion, see
Sec. 1.6049-4(d)(3)(i).
(g) Effective date--(1) General rule. The provisions of this
section apply to payments made after December 31, 1997.
(2) Transition rules. A payor that holds a valid Form W-8 on the
date that is 60 days after these regulations are published as final
regulations in the Federal Register may treat it as a valid certificate
until its validity expires under applicable provisions as in effect on
April 22, 1996.
Par. 29. Section 1.6041A-1 as proposed to be added in project
number LR-214-82, published on January 7, 1986, at 51 FR 626, is
amended by adding a new paragraph (d)(3), to read as follows:
Sec. 1.6041A-1 Returns regarding payments of remuneration for services
and certain direct sales.
* * * * *
[[Page 17659]]
(d) Exceptions to return requirement. * * *
* * * * *
(3) Foreign transactions--(i) In general. No return shall be
required under paragraph (a) of this section with respect to payments
described in this paragraph (d)(3).
(A) Returns of information are not required for payments of
remuneration for services that a payor or middleman, as defined in
paragraph (d)(3)(ii)(A) of this section, may treat as made to a
beneficial owner that is a foreign person pursuant to Sec. 1.1441-
1(e)(1) and from which the payor or middleman is either required to
withhold tax under section 1441 or the regulations under that section
or would be so required but for exceptions in the regulations under
section 1441 (such as, for example, under Sec. 1.1441-4 (dealing with
effectively connected income) or Sec. 1.1441-6 (dealing with a
reduction of rate of tax under an income tax treaty)). See Sec. 1.1441-
1(e)(4)(i) in the case of payments to joint owners.
(B) Returns of information are not required for payments of
remuneration for services and certain direct sales from sources outside
the United States made outside the United States by a non-U.S. payor or
non-U.S. middleman (as defined in paragraph (d)(3)(ii)(B) of this
section). See Sec. 1.6049-5(e) for circumstances in which a payment is
considered to be made outside the United States.
(C) Payments of services and certain direct sales from sources
outside the United States that a payor or middleman may treat as paid
to a beneficial owner that is a foreign person (because such person has
furnished a certificate described in Sec. 1.6049-5(c)(1)). For purposes
of this paragraph (d)(3)(i)(C), the provisions in Sec. 1.6049-5 (c)(3)
through (c)(6) (regarding operating rules related to the certificate of
foreign status) shall apply. See Sec. 1.6041-1(d)(5) for reportable
payments made to foreign persons.
(D) Amounts paid for services and certain direct sales for the
period that they represent assets blocked as described in Sec. 1.1441-
2(e)(3). The exemption in this paragraph (d)(3)(i)(D) shall terminate
when payment is deemed to occur in accordance with the provisions of
Sec. 1.1441-2(e)(3).
(ii) Definitions--(A) Payor and middleman. For purposes of this
section, the term payor means any person who is required to make an
information return with respect to any reportable payment, as described
in section 3406(b), including any middleman and the term middleman
means any person whose legal relationship to the payor or payee
(including any other middleman) is of a kind described in Sec. 1.6049-
4(f)(4) (as proposed in project number INTL-52-86 published in 1988-1
C.B. 892).
(B) Non-U.S. payor and non-U.S. middleman. For purposes of this
section, the term non-U.S. payor or non-U.S. middleman means a payor or
middleman other than--
(1) A person described in section 7701(a)(30);
(2) The government of the United States, the government of any
State or political subdivision thereof (or any agency or
instrumentality of any of the foregoing);
(3) A controlled foreign corporation within the meaning of section
957(a); or
(4) A foreign person 50 percent or more of the gross income of
which, from all sources for the three-year period ending with the close
of its taxable year preceding the collection or payment (or such part
of such period as the person has been in existence), was effectively
connected with the conduct of trade or business within the United
States.
(C) Applicable presumptions. The presumptions of Sec. 1.1441-1(f)
shall apply for determining the payee's status where the required
documentation is lacking, incorrect, or unreliable.
(D) Joint owners. In the case of amounts paid to joint owners for
which a certificate of documentation is required as a condition for
being exempt from reporting under this paragraph (d)(3), the payor or
middleman must receive from each joint owner the certification
described in paragraph (d)(3)(i) (A) or (C) of this section. Where any
one of the joint owners has not furnished such certification, the
payment is not exempt from reporting under this section unless
described in paragraph (d)(3)(i) (B) or (D) of this section.
(E) Payee. For determination of payee, see Sec. 1.1441-1(c)(3).
(iii) Effective date--(A) General rule. The provisions of this
paragraph (d)(3) apply to payments made after December 31, 1997.
(B) Transition rules. A payor that holds a valid Form W-8 on a date
that is 60 days after these regulations are published as final
regulations in the Federal Register may treat it as a valid certificate
until its validity expires under applicable provisions as in effect on
April 22, 1996.
* * * * *
Par. 30. In Sec. 1.6042-3, paragraph (b), as proposed to be revised
in project number INTL-52-86, published on February 29, 1988 (53 FR
5995) is amended by:
1. Removing paragraphs (b)(1) and (b)(2).
2. Redesignating paragraphs (b)(3) and (b)(4) as paragraphs
(b)(1)(vii) and (b)(1)(viii), respectively.
Par. 31. Section 1.6042-3 is amended by:
1. Revising paragraph (a) introductory text.
2. Removing paragraph (b) introductory text.
3. Adding paragraph (b)(1) heading.
4. Revising paragraph (b)(1) introductory text.
5. Adding paragraphs (b)(1)(i) through (b)(1)(vi).
6. Revising paragraphs (b)(2) through (b)(4).
7. Adding paragraphs (b)(5) through (b)(7).
The additions and revisions read as follows:
Sec. 1.6042-3 Dividends subject to reporting.
(a) In general. Except as provided in paragraph (b) of this
section, the term dividend for purposes of this section and
Secs. 1.6042-2 and 1.6042-4 means the amounts described in paragraphs
(a)(1) and (2) of this section.
* * * * *
(b) Exceptions--(1) In general. Returns of information are not
required under section 6042 and Secs. 1.6042-2 and 1.6042-4 for amounts
described in paragraphs (b)(1) (i) through (viii) of this section.
(i) Amounts paid by an insurance company to a policyholder, other
than a dividend upon its capital stock.
(ii) Payments (however denominated) by a mutual savings bank,
savings and loan association, or similar organization, in respect of
deposits, investment certificates, or withdrawable or repurchasable
shares. See, however, section 6049 and the regulations under that
section for provisions requiring reporting of these payments.
(iii) Distributions or payments from sources within the United
States that a payor or middleman (as defined in paragraph (b)(2) of
this section) may treat as made to a beneficial owner that is a foreign
person pursuant to Sec. 1.1441-1(e)(1) or, in the case of dividends
paid on stock traded on a U.S. established financial market (as defined
in Sec. 1.1441-6(b) (2)), pursuant to Sec. 1.1441-6(b)(2) or (3), or
Sec. 1.6049-5(c).
(iv) Distributions or payments from sources outside the United
States paid outside the United States by a non-U.S. payor or a non-U.S.
middleman (as defined in paragraph (b)(2)(ii) of this section). See
Sec. 1.6049-5(e) for circumstances in which a payment is considered to
be made outside the United States.
[[Page 17660]]
(v) Distributions or payments from sources outside the United
States that a payor or middleman may treat as paid to a beneficial
owner that is a foreign person (because such person has furnished a
certificate or documentary evidence as required under Sec. 1.6049-5(c)
(1) or (2)). For purposes of this paragraph (b)(1)(v), the provisions
in Sec. 1.6049-5 (c)(3) through (c)(6) (regarding operating rules
related to the certificate of foreign status) shall apply.
(vi) Distributions or payments for the period that the amounts
represent assets blocked as described in Sec. 1.1441-2(e)(3). The
exemption in this paragraph (b)(1)(vi) shall terminate when payment is
deemed to occur in accordance with the rules of Sec. 1.1441-2(e)(3).
* * * * *
(2) Definitions--(i) Payor and middleman. For purposes of this
section, the term payor means any person who is required to make an
information return with respect to any reportable payment, as described
in section 3406(b) (including any middleman), and the term middleman
means any person whose legal relationship to the payor or payee
(including any other middleman) is of a kind described in Sec. 1.6049-
4(f)(4) (as proposed in project number INTL-52-86 published in 1988-1
C.B. 892).
(ii) Non-U.S. payor and non-U.S. middleman. For purposes of this
section, the term non-U.S. payor or non-U.S. middleman means a payor or
middleman other than--
(A) A person described in section 7701(a)(30);
(B) The government of the United States, the government of any
State or political subdivision thereof (or any agency or
instrumentality of any of the foregoing);
(C) A controlled foreign corporation within the meaning of section
957(a); or
(D) A foreign person 50 percent or more of the gross income of
which, from all sources for the three-year period ending with the close
of its taxable year preceding the collection or payment (or such part
of such period as the person has been in existence), was effectively
connected with the conduct of trade or business within the United
States.
(3) Applicable presumptions. The presumptions of Sec. 1.1441-1(f)
shall apply for determining the payee's status under Sec. 1.6042-3
where the required documentation is lacking, incomplete, incorrect, or
unreliable.
(4) Joint owners. In the case of amounts paid to joint owners for
which a certificate or documentation is required as a condition for
being exempt from reporting under this paragraph (b), the payor or
middleman must receive from each joint owner the required certification
or documentation. Where any one of the joint owners has not furnished
the required certification or documentation, the payment is not exempt
from reporting under this section.
(5) Payee. For determination of payee, see Sec. 1.1441-1(c)(3).
(6) Conversion into United States dollars of amounts paid in
foreign currency. For rules concerning foreign currency conversion, see
Sec. 1.6049-4(d)(3)(i).
(7) Effective date--(i) General rule. The provisions of this
paragraph (b) apply to payments made after December 31, 1997.
(ii) Transition rules. A payor that holds a valid Form W-8 on the
date that is 60 days after these regulations are published as final
regulations in the Federal Register may treat it as a valid certificate
until its validity expires under applicable provisions as in effect on
April 22, 1996.
Par. 32. Section 1.6045-1 as proposed to be amended in project
number INTL-52-86, published on February 29, 1988, at 53 FR 5996, is
amended by:
1. Removing paragraph (a)(1).
2. Removing paragraphs (g)(1)(i), (g)(1)(ii), (g)(1)(iii) heading,
(g)(1)(iii)(A), (g)(2), (g)(3), and (g)(4).
3. Redesignating paragraph (g)(1)(iii)(B) as follows:
------------------------------------------------------------------------
Paragraph Redesignated as paragraph
------------------------------------------------------------------------
(g)(1)(iii)(B)............................ (g)(1)(ii)
(g)(1)(iii)(B)(1) introductory text....... (g)(1)(ii)(A) introductory
text
(g)(1)(iii)(B)(1)(i)...................... (g)(1)(ii)(A)(1)
(g)(1)(iii)(B)(1)(ii)..................... (g)(1)(ii)(A)(2)
(g)(1)(iii)(B)(2) introductory text....... (g)(1)(ii)(B) introductory
text
(g)(1)(iii)(B)(2)(i)...................... (g)(1)(ii)(B)(1)
(g)(1)(iii)(B)(2)(ii)..................... (g)(1)(ii)(B)(2)
(g)(1)(iii)(B)(2)(iii).................... (g)(1)(ii)(B)(3)
(g)(1)(iii)(B)(2)(iv)..................... (g)(1)(ii)(B)(4)
(g)(1)(iii)(B)(2)(v)...................... (g)(1)(ii)(B)(5)
------------------------------------------------------------------------
4. Removing in newly designated paragraph (g)(1)(ii)(A)
introductory text the language ``subdivision 2 of this paragraph
(g)(1)(iii)(B)'' and adding ``paragraph (g)(1)(ii)(B) introductory text
of this section'' in its place.
5. Removing in newly designated paragraph (g)(1)(ii)(B)
introductory text the language ``subdivision (1) of this paragraph
(g)(1)(iii)(B)'' and adding ``paragraph (g)(1)(ii)(A)'' in its place.
6. Removing in newly designated paragraph (g)(1)(ii)(B)(3) the
language ``Sec. 1.6049-5(j)(4)'' and adding ``Sec. 1.6049-5(e)'' in its
place.
Par. 33. Section 1.6045-1(d)(6)(iii) as proposed to be added in
project number INTL-0015-91, published on March 17, 1992, at 57 FR
9224, is withdrawn.
Par. 34. Section 1.6045-1 is amended by:
1. Revising the heading of paragraph (a) and republishing paragraph
(a) introductory text.
2. Revising paragraph (a)(1).
3. Revising paragraph (d)(6).
4. Revising paragraph (g)(1) heading; removing paragraph (g)(i)
introductory text; and revising paragraphs (g)(1)(i) and (g)(2) through
(g)(4).
The revisions read as follows:
Sec. 1.6045-1 Returns of information of brokers and barter exchanges.
(a) Definitions. The following definitions apply for purposes of
this section:
(1) The term broker means any person (other than a person who is
required to report a transaction under section 6043), U.S. or foreign,
that, in the ordinary course of a trade or business during the calendar
year, stands ready to effect sales to be made by others. A broker
includes an obligor that regularly issues and retires its own debt
obligations or a corporation that regularly redeems its own stock.
However, with respect to a sale (including a redemption or retirement)
effected at an office outside the United States, a broker includes only
a person described as a U.S. payor or U.S. middleman in Sec. 1.6049-
5(d)(1). In addition, a broker does not include an international
organization described in Sec. 1.6049-4(c)(1)(ii)(G) that redeems or
retires an obligation of which it is the issuer.
* * * * *
(d) * * *
(6) Conversion into United States dollars of proceeds paid in
foreign currency--(i) Conversion rules. When the amount subject to
reporting is paid in a currency other than the U.S. dollar, the amount
subject to reporting under this section shall be determined by
converting such foreign currency into U.S. dollars on the date of
payment at the spot rate (as defined in Sec. 1.988-1(d)(1)) or pursuant
to a reasonable spot rate convention. For example, a withholding agent
may use a month-end spot rate or a monthly average spot rate. A spot
rate convention must be used consistently with respect to all non-
dollar amounts withheld and from year to year. Such convention cannot
be changed without the consent of the Commissioner or his or her
delegate.
(ii) Effect of identification under Sec. 1.988-5 (a), (b), or (c)
where the taxpayer effects a sale and a hedge through the same broker--
(A) In general. In lieu of the amount reportable under paragraph
(d)(6)(i) of this section,
[[Page 17661]]
the amount subject to reporting shall be the integrated amount computed
under Sec. 1.988-5 (a), (b) or (c) if--
(1) A taxpayer effects through a broker a sale in exchange for
nonfunctional currency (as defined in Sec. 1.988-1(c)) and hedges all
or a part of such sale as provided in Sec. 1.988-5 (a), (b) or (c) with
the same broker; and
(2) The taxpayer complies with the requirements of Sec. 1.988-5
(a), (b) or (c) and so notifies the broker prior to the end of the
calendar year in which the sale occurs.
(B) Effective date. The provisions of this paragraph (d)(6)(ii)
apply to transactions entered into on or after the date that is 60 days
after these regulations are published as final regulations in the
Federal Register.
* * * * *
(g) Exempt foreign persons--(1) Brokers--(i) In general. No return
of information is required by a broker with respect to a customer who
is considered to be an exempt foreign person under this paragraph
(g)(1)(i). Unless it has actual knowledge or reason to know otherwise,
a broker may treat a customer as an exempt foreign person under the
circumstances described in paragraph (g)(1)(i) (A) through (D) of this
section. See Sec. 1.6045-1(c)(2)(ii) for reportable proceeds paid to
foreign persons.
(A) With respect to a sale effected at an office of a broker inside
the United States, the broker may treat the customer as an exempt
foreign person if the broker complies with the procedures described in
paragraph (g)(3) of this section.
(B) With respect to a sale effected at an office of a broker
outside the United States, the broker may treat the customer as an
exempt foreign person if the broker complies with the procedures
described in paragraph (g)(3) of this section or Sec. 1.6049-5(c)(2).
(C) With respect to a redemption or retirement of stock or an
obligation (the interest or original issue discount on which is
described in Sec. 1.6049-5(b) (6), (7), (10), or (11)) or the dividends
on which are described in Sec. 1.6042-3(b)(1)(iv)) that is effected at
an office of a broker outside the United States by the issuer (or its
paying or transfer agent), the broker may treat the customer as an
exempt foreign person if the broker is not also acting in its capacity
as a custodian, nominee, or other agent of the payee.
(D) With respect to a sale effected by a broker at an office of the
broker either inside or outside the United States, the broker may treat
the customer as an exempt foreign person for the period that those
proceeds are assets blocked as described in Sec. 1.1441-2(e)(3). For
purposes of this paragraph (g)(1)(i)(D) and section 3406, a payment is
deemed to occur in accordance with Sec. 1.1441-2(e)(3).
* * * * *
(2) Barter exchange. No return of information is required by a
barter exchange with respect to a client or a member that the barter
exchange may treat as a foreign person pursuant to the procedures
described in paragraph (g)(3) of this section.
(3) Certificate of foreign status--(i) In general. For purposes of
this paragraph (g), a broker may treat a customer as an exempt foreign
person if the broker complies with the requirements of Sec. 1.1441-
1(e)(1) (dealing with reliance by a withholding agent on a beneficial
owner's claim of foreign status). For purposes of this paragraph
(g)(3)(i), the broker may rely on a beneficial owner withholding
certificate described in Sec. 1.1441-1(e)(2). For purposes of this
paragraph (g)(3)(i), in the case of an individual beneficial owner, the
certificate shall include a certification that the beneficial owner has
not been, and at the time the certificate is furnished, reasonably
expects not to be present in the United States for a period aggregating
183 days or more during the calendar year.
(ii) Applicable presumptions. Absent actual knowledge or reason to
know otherwise, the presumptions under Sec. 1.1441-1(f) shall apply in
determining the payee's status where the required documentation is
lacking, incorrect, or unreliable.
(iii) Joint owners. In the case of amounts paid to joint owners for
which a certificate or documentation is required as a condition for
being exempt from reporting under paragraph (g)(1)(i) of this section,
a broker or barter exchange must receive from each joint owner the
required certification or documentation. Where any one of the joint
owners has not furnished the required certification or documentation,
the transaction is not exempt from reporting under paragraph (g)(1)(i)
of this section.
(iv) Payee. For a determination of payee, see Sec. 1.1441-1(c)(3).
(v) Operating rules. For purposes of this paragraph (g), the
provisions in Sec. 1.6049-5(c) (3) through (6) (regarding operating
rules related to the certificate of foreign status) shall apply.
(4) Effective date--(i) General rule. The provisions of this
paragraph (g) apply to payments made after December 31, 1997.
(ii) Transition rules. A payor that holds a valid Form W-8 on a
date that is 60 days after these regulations are published as final
regulations in the Federal Register may treat it as a valid certificate
until its validity expires under applicable provisions as in effect on
April 22, 1996.
* * * * *
Par. 35. In Sec. 1.6049-4, paragraphs (c)(1)(ii)(A) and
(c)(1)(ii)(G), as proposed in project number INTL-52-86, published on
February 29, 1988, at 53 FR 6000, are revised to read as follows:
Sec. 1.6049-4 Return of information as to interest paid and original
issue discount includible in gross income after December 31, 1982.
* * * * *
(c) * * * (1)* * *
(ii) * * *
(A) Corporation. A corporation, as defined in section 7701(a)(3),
whether domestic or foreign, is an exempt recipient. In addition, for
purposes of this paragraph (c)(1), the term corporation includes a
partnership all of whose members are corporations described in this
paragraph (c)(1)(ii)(A), but only if the partnership files with the
payor a certificate meeting the certification requirements set out
below. Absent actual knowledge or reason to know otherwise, a payor may
treat a payee as a corporation (and, therefore, as an exempt recipient)
if one of the requirements of paragraph (c)(1)(ii)(A) (1), (2), (3),
(4), (5), or (6) of this section are met before a payment is made.
(1) For payments other than interest, dividends, or broker
proceeds, the name of the payee contains an unambiguous expression of
corporate status that is ``Incorporated,'' ``Inc.,'' ``Corporation,''
``Corp.,'' ``P.C.,'' (but not ``Company'' or ``Co.'') or contains the
term indemnity company, reinsurance company, or assurance company.
(2) For payments of interest, dividends or broker proceeds that are
paid to a person with whom the payor does not have an account
relationship, the payor may rely on the test of paragraph
(c)(1)(ii)(A)(1) of this section if the payor also has a mailing
address of the payee in the United States.
(3) The payor has on file a corporate resolution or similar
document clearly indicating corporate status.
(4) The payor receives a Form W-9 which includes an EIN and a
statement from the payee that it is a domestic corporation.
(5) The payor receives a withholding certificate described in
Sec. 1.1441-1(e)(2), that includes an employer identification number
and a statement from the payee that it is a foreign corporation.
(6) The payor maintains an account for an entity claiming to be a
[[Page 17662]]
corporation and the account was established on or before a date that is
60 days after these regulations are published as final regulations in
the Federal Register and the name of the payee contains an unambiguous
expression of corporate status that is ``Incorporated,'' ``Inc.,''
``Corporation,'' ``Corp.,'' or ``P.C.'' (but not Company or Co.), or
contains the term insurance company, indemnity company, reinsurance
company, or assurance company.
* * * * *
(G) International organization. An international organization and
any wholly owned agency or instrumentality thereof are exempt
recipients. The term international organization shall have the meaning
ascribed to it in section 7701(a)(18). Without requiring a certificate,
a payor may treat a payee as an international organization if the payee
is designated as an international organization by executive order
(pursuant to 22 U.S.C. 288 through 288(f)).
* * * * *
Par. 36. Section 1.6049-4 is amended by revising paragraph (d)(3)
to read as follows:
* * * * *
(d) * * *
(3) Conversion into United States dollars of amounts paid in
foreign currency--(i) Conversion rules. When the amount subject to
reporting is paid in a currency other than the U.S. dollar, the amount
subject to reporting under this section shall be determined by
converting such foreign currency into U.S. dollars on the date of
payment at the spot rate (as defined in Sec. 1.988-1(d)(1)) or pursuant
to a reasonable spot rate convention. For example, a withholding agent
may use a month-end spot rate or a monthly average spot rate. A spot
rate convention must be used consistently with respect to all non-
dollar amounts withheld and from year to year. Such convention cannot
be changed without the consent of the Commissioner or delegate.
(ii) Special rule for Sec. 1.988-5(a) transactions where the payor
on both components of a qualified hedging transaction is the same
person--(A) In general. Interest or original issue discount on a
qualified debt instrument that is part of a qualified hedging
transaction under Sec. 1.988-5(a) shall be computed for section 6049
reporting purposes under the rules described in Sec. 1.988-5(a)(9)(ii)
if--
(1) The payor on the qualified debt instrument and the counterparty
to the Sec. 1.988-5(a) hedge are the same person; and
(2) The payee complies with the requirements of Sec. 1.988-5(a) and
so notifies its payor prior to the date required for filing Form 1099
as required by this section.
(B) Effective date. The provisions of this paragraph (d)(3)(ii)
apply to transactions entered into on or after December 31, 1997.
* * * * *
Par. 37. Section 1.6049-5, as proposed to be amended in project
number INTL-52-86, published on February 29, 1988, at 53 FR 6003, is
amended as follows:
1. Revising paragraphs (b) introductory text and (b)(6) through
(b)(8).
2. Adding paragraphs (b)(10) through (b)(14).
3. Revising paragraphs (c) and (d).
4. Removing paragraph (e) and redesignating paragraph (j) as new
paragraph (e).
5. Removing and reserving paragraph (f).
6. Revising paragraph (g).
7. Removing paragraphs (h) and (i).
8. Redesignating paragraph (k) as paragraph (f) and removing the
last sentence.
9. Removing paragraph (l).
The revisions and additions read as follows:
Sec. 1.6049-5 Interest and original issue discount subject to
reporting after December 31, 1982.
* * * * *
(b) Interest excluded from reporting requirement. The term interest
or original issue discount (OID) does not include--
* * * * *
(6) Amounts from sources outside the United States paid outside the
United States by a non-U.S. payor or a non-U.S. middleman (as defined
in paragraph (d)(2) of this section).
(7) Portfolio interest, as defined in Sec. 1.871-14(b)(1), paid
with respect to bearer obligations described in section 871(h)(2)(A) or
881(c)(2)(A) or with respect to a foreign- targeted registered
obligation defined in Sec. 1.6049-5(j)(4) (as proposed in project
number INTL-52-86 (1988-1 C.B. 892)) (other than by a U.S. middleman
(as defined in paragraph (d)(1) of this section) that, as a custodian
or nominee of the payee, collects the amount for, or on behalf of, the
payee, regardless of whether the middleman is also acting as agent of
the payor).
(8) Portfolio interest, as defined in Sec. 1.871-14(c)(1), paid
with respect to registered obligations described in section
871(h)(2)(B) or 881(c)(2)(B).
* * * * *
(10) Amounts paid outside the United States (other than by a U.S.
middleman (as defined in paragraph (d)(1) of this section) that, as a
custodian or nominee or other agent of the payee, collects the amount
for, or on behalf of, the payee, regardless of whether the middleman is
also acting as agent of the payor) with respect to an obligation that:
has a face amount or principal amount of not less than $500,000; has a
maturity (at issue) of 183 days or less; satisfies the requirements of
sections 163(f)(2)(B)(i) and (ii)(I) (as if it were a registration-
required obligation within the meaning of section 163(f)(2)(A)) and is
issued in accordance with the procedures of Sec. 1.163-5(c)(2)(i)(D);
and has on its face the following statement (or a similar statement
having the same effect)--``By accepting this obligation, the holder
represents and warrants that it is not a United States person (other
than an exempt recipient described in section 6049(b)(4) of the
Internal Revenue Code and regulations thereunder) and that it is not
acting for or on behalf of a United States person (other than an exempt
recipient described in section 6049(b)(4) of the Internal Revenue Code
and the regulations thereunder).'' If the obligation is in registered
form, it must be registered in the name of an exempt recipient
described in Sec. 1.6049-4(c)(1)(ii). For purposes of this paragraph
(b)(10), a middleman may treat an obligation as described in section
163(f)(2)(B) (i) and (ii)(I) and the regulations under that section if
the obligation, or coupons detached therefrom, whichever is presented
for payment, contains the statement described in this paragraph
(b)(10).
(11) Amounts paid with respect to an account or deposit with a U.S.
or foreign branch of a domestic or foreign corporation or partnership
that is paid with respect to an obligation described in paragraph
(b)(11) (i) or (ii) of this section, if the branch is engaged in the
commercial banking business; and the interest or OID is paid outside
the United States (other than by a U.S. middleman (as defined in
paragraph (d)(1) of this section) that acts as a custodian, nominee, or
other agent of the payee, and collects the amount for, or on behalf of,
the payee, regardless of whether the middleman is also acting as agent
of the payor).
(i) An obligation is described in this paragraph (b)(11)(i) if it
is not in registered form (within the meaning of section 163(f) and the
regulations under that section), is described in section 163(f)(2)(B)
and issued in accordance with the procedures of Sec. 1.163-5(c)(2)(i)
(C) or (D), and, in the case of a U.S. branch, is part of a larger
single public
[[Page 17663]]
offering of securities. For purposes of this paragraph (b)(11)(i), a
middleman may treat an obligation as described in section 163(f)(2)(B)
if the obligation, and any detachable coupons, contains the statement
described in section 163(f)(2)(B)(ii)(II) and the regulations under
that section.
(ii) An obligation is described in this paragraph (b)(11)(ii) if it
produces income described in section 871(i)(2)(A); has a face amount or
principal amount of not less than $500,000; satisfies the requirements
of sections 163(f)(2)(B) (i) and (ii)(I) (as if it were a registration-
required obligation within the meaning of section 163(f)(2)(A)) and is
issued in accordance with the procedures of Sec. 1.163-5(c)(2)(i) (C)
or (D); has on its face, and on any detachable coupons, the following
statement (or a similar statement having the same effect)--``By
accepting this obligation, the holder represents and warrants that it
is not a United States person (other than an exempt recipient described
in section 6049(b)(4) of the Internal Revenue Code and regulations
thereunder) and that it is not acting for or on behalf of a United
States person (other than an exempt recipient described in section
6049(b)(4) of the Internal Revenue Code and the regulations
thereunder).'' If the obligation is in registered form, it must be
registered in the name of an exempt recipient described in Sec. 1.6049-
4(c)(1)(ii). For purposes of this paragraph (b)(11)(ii), a middleman
may treat an obligation as described in sections 163(f)(2)(B) (i) and
(ii)(I) and the regulations under that section if the obligation, or
any detachable coupon, contains the statement described in this
paragraph (b)(11)(ii).
(12) Amounts that the payor may treat as paid to a beneficial owner
that is a foreign person pursuant to Sec. 1.1441-1(e)(1) and from which
the payor or middleman is either required to withhold tax under section
1441 or the regulations under that section or would be so required but
for exceptions in the regulations under section 1441 (such as, for
example, under Sec. 1.1441-4 (dealing with effectively connected
income) or Sec. 1.1441-6 (dealing with a reduction of rate of tax under
an income tax treaty)).
(13) Amounts for the period that they represent an asset blocked as
described in Sec. 1.1441-2(e)(3)). Payment of such amounts, including
interest that is past due and OID on obligations that mature on or
before the date that the assets are no longer blocked, is deemed to
occur in accordance with the rules of Sec. 1.1441-2(e)(3).
(14) Amounts that are from sources outside the United States or
original issue discount on any obligation payable less than 6 months
from the date of original issue described in section 871(g)(1)(B)(i)
and that a payor or middleman may treat as paid to a beneficial owner
that is a foreign person
(because such person has furnished a certificate or documentary
evidence as required under paragraph (c) of this section).
(c) Treatment of payee as a foreign person--(1) On-shore accounts
or payments inside the U.S. A payor or middleman making a payment with
respect to an on-shore account, as defined in paragraph (d)(3) of this
section, or making a payment inside the United States, as defined in
paragraph (e) of this section, may treat the payment as made to a
beneficial owner that is a foreign person if it complies with the
requirements under Sec. 1.1441-1(e)(1) (dealing with reliance by a
withholding agent on a beneficial owner's claim of foreign status). For
purposes of this section, beneficial owner shall be as defined in
Sec. 1.1441-1(c)(6)(ii)(A).
(2) Payments made outside the United States with respect to off-
shore accounts--(i) In general. In the case of a payment made outside
the United States with respect to an offshore account, as defined in
paragraph (d)(3) of this section, a payor or middleman may treat a
payment as made to a beneficial owner (as described in Sec. 1.1441-
1(b)(6)) that is a foreign person if it complies with the procedures
described in paragraph (c)(1) of this section or complies with the
documentary evidence procedures described in paragraph (c)(2)(ii) of
this section.
(ii) Documentary evidence. A payor or middleman complies with the
documentary evidence procedures if, prior to the payment, the payor or
middleman has established procedures to obtain, review, and maintain
documentary evidence sufficient to establish the identity of the
beneficial owner and the status of that person as a foreign person; and
the payor or middleman obtains, reviews, and maintains such documentary
evidence in accordance with those procedures. A payor or middleman
maintains the documents reviewed by retaining the original, certified
copy, or a photocopy of the documents reviewed and noting in its
records the date on which and by whom the document was received and
reviewed.
(3) Presumptions. The presumptions of Sec. 1.1441-1(f) shall apply
for determining the payee's status where the required documentation is
lacking, incorrect, or unreliable.
(4) Validity of certificates and documentary evidence. For rules
regarding the period of validity of a withholding certificate, see
Sec. 1.1441-1(e)(4)(ii). Documentary evidence or a certificate that
does not include a taxpayer identifying number shall be valid for a
period of three years from the date received by the payor or middleman.
The three-year validity period shall start from the date that the
certificate is signed (or the documentation is received) until the last
day of the third succeeding calendar year. For example, a withholding
certificate signed on September 10, 1998, remains valid through
December 31, 2001. A beneficial owner that becomes a U.S. person must,
however, inform a payor or middleman within 30 days of change of
status.
(5) Retention of withholding certificate. A payor or middleman must
retain each withholding certificate, any applicable documentary
evidence, and any information obtained in lieu of the withholding
certificate as long as it may be relevant to the determination of the
payor's or middleman's liability under the reporting provisions of this
chapter and related provisions.
(6) Standard of knowledge. A payor or middleman may not rely on a
certificate or documentary evidence described in paragraph (c)(1) or
(c)(2)(ii) of this section if it has actual knowledge that the
representations made therein or on the basis thereof are incorrect or
if any of the required information or certifications described in
Sec. 1.1441-1(f)(1)(ii) are lacking from the certificate or documentary
evidence.
(7) Joint owners. In the case of amounts paid to joint owners and
for which a certificate or documentation is required as a condition for
being exempt from reporting under this paragraph (c), a payor or
middleman must receive from each joint owner the required certification
or documentation. Where any one of the joint owners has not furnished
the required certification or documentation, the payment is not exempt
from reporting under this paragraph (c).
(8) Payee. For determination of payee, see Sec. 1.1441-1(c)(3).
(d) Definitions--(1) Payor or middleman and U.S. payor or U.S.
middleman. For purposes of this section, the term payor means any
person who is required to make an information return with respect to
any reportable payment, as described in section 3406(b) (including any
middleman). For purposes of this section, the term middleman means any
person whose legal relationship to the payor or payee (including any
other
[[Page 17664]]
middleman) is of a kind described in Sec. 1.6049-4(f)(4) (as proposed
in project number INTL-52-86 published in 1988-1 C.B. 892). Thus, a
person who, from within the United States, forwards an interest coupon
or discount obligation on behalf of a payee for presentation,
collection or payment outside the United States is also a middleman for
purposes of this section (but the transfer, although subject to
information reporting under this section, does not make the payment
subject to backup withholding under section 3406). For purposes of this
section, the term U.S. payor or U.S. middleman means a payor or
middleman that is--
(i) A person described in section 7701(a)(30);
(ii) The government of the United States, the government of any
State or political subdivision thereof (or any agency or
instrumentality of any of the foregoing);
(iii) A controlled foreign corporation within the meaning of
section 957(a); or
(iv) A foreign person 50 percent or more of the gross income of
which, from all sources for the three-year period ending with the close
of its taxable year preceding the collection or payment (or such part
of such period as the person has been in existence), was effectively
connected with the conduct of trade or business within the United
States.
(2) Non-U.S. payor or non-U.S. middleman. A non-U.S. payor or a
non-U.S. middleman is a payor or middleman that is not a U.S. payor or
a U.S. middleman.
(3) On-shore and off-shore accounts. An on-shore account means an
account maintained at an office or branch of a payor or middleman in
the United States. An offshore account means an account that is not an
on-shore account.
* * * * *
(g) Effective date--(1) General rule. The provisions of paragraphs
(b)(6) through (b)(14), (c), (d), and (e) of this section apply to
payments made after December 31, 1997.
(2) Transition rules. A payor that holds a valid Form W-8 on a date
that is 60 days after these regulations are published as final
regulations in the Federal Register may treat it as a valid certificate
until its validity expires under applicable provisions as in effect on
April 22, 1996.
Par. 38. Section 1.6050N-1 is amended by:
1. Revising the section heading.
2. Redesignating paragraphs (c) and (d) as paragraphs (d) and (e),
respectively.
3. Adding a new paragraph (c).
4. Revising newly designated paragraph (e).
The addition and revisions read as follows:
Sec. 1.6050N-1 Statement to recipients of royalties paid after
December 31, 1986.
* * * * *
(c) Exempted foreign-related items--(1) In general. No return shall
be required under paragraph (a) of this section for payments of the
items described in paragraphs (c)(1) (i) through (iii) of this section.
(i) Returns of information are not required for payments of
royalties that a payor or middleman, as defined in paragraph (c)(2)(i)
of this section, may treat as made to a beneficial owner that is a
foreign person pursuant to Sec. 1.1441-1(e)(1) and from which the payor
or middleman is either required to withhold tax under section 1441 or
the regulations under that section or would be so required but for
exceptions in the regulations under section 1441 (such as, for example,
under Sec. 1.1441-4 (dealing with effectively connected income) or
Sec. 1.1441-6 (dealing with a reduction of rate of tax under an income
tax treaty)). See Sec. 1.1441-1(e)(4)(i) in the case of payments to
joint owners.
(ii) Returns of information are not required for payments of
royalties from sources outside the United States made outside the
United States by a non-U.S. payor or non-U.S. middleman (as defined in
paragraph (c)(2)(ii) of this section). See Sec. 1.6049-5(e) for
circumstances in which a payment is considered to be made outside the
United States.
(iii) Returns of information are not required for payments of
royalties from sources outside the United States that a payor or
middleman may treat as paid to a beneficial owner that is a foreign
person (because such person has furnished a certificate described in
Sec. 1.6049-5(c)(1)). For purposes of this paragraph (c)(1)(iii), the
presumptions in Sec. 1.6049-5(c) (3) through (6) (regarding operating
rules related to the certificate of foreign status) shall apply.
(2) Definitions--(i) Payor and middleman. For purposes of this
section, the term payor means any person who is required to make an
information return with respect to any reportable payment, as described
in section 3406(b), including any middleman. For purposes of this
section, the term middleman means any person whose legal relationship
to the payor or payee (including any other middleman) is of a kind
described in Sec. 1.6049-4(f)(4) (as proposed in project number INTL-
52-86 published in 1988-1 C.B. 892).
(ii) Non-U.S. payor and non-U.S. middleman. The term non-U.S. payor
or non-U.S. middleman means a payor or middleman other than--
(A) A person described in section 7701(a)(30);
(B) The government of the United States, the government of any
State or political subdivision thereof (or any agency or
instrumentality of any of the foregoing);
(C) A controlled foreign corporation within the meaning of section
957(a); or
(D) A foreign person 50 percent or more of the gross income of
which, from all sources for the three-year period ending with the close
of its taxable year preceding the collection or payment (or such part
of such period as the person has been in existence), was effectively
connected with the conduct of trade or business within the United
States.
(iii) Applicable presumptions. The presumptions of Sec. 1.1441-1(f)
shall apply for determining the payee's status where the required
documentation is lacking, incorrect, or unreliable.
(iv) Joint owners. In the case of amounts paid to joint owners and
requiring a certificate or documentation as a condition for being
exempt from reporting under this paragraph (c), the payor or middleman
must receive from each joint owner the required certification. Where
any one of the joint owners has not furnished the required
certification, the payment is not exempt from reporting under this
section.
(v) Payee. For determination of payee, see Sec. 1.1441-1(c)(3).
* * * * *
(e) Effective date--(1) General rule. The provisions of paragraph
(c) of this section apply to payments made after December 31, 1997.
(2) Transition rules. A payor that holds a valid Form W-8 on a date
that is 60 days after these regulations are published as final
regulations in the Federal Register may treat it as a valid certificate
until its validity expires under applicable provisions as in effect on
April 22, 1996.
PART 31--EMPLOYMENT TAXES AND COLLECTION OF INCOME TAX AT SOURCE
Par. 39. The authority for part 31 continues to read in part as
follows:
Authority: 26 U.S.C. 7805 * * *
Par. 40. Section 31.3401(a)(6)-1 is amended by:
1. Revising the section heading.
2. Revising the heading and first sentence of paragraph (e).
3. Adding paragraph (f).
4. Removing the authority citation at the end of the section.
[[Page 17665]]
The addition and revisions read as follows:
Sec. 31.3401(a)(6)-1 Remuneration for services of nonresident alien
individuals.
* * * * *
(e) Exemption from income tax for remuneration paid for services
performed before January 1, 1998. Remuneration paid for services
performed within the United States by a nonresident alien individual
before January 1, 1998 is excepted from wages and hence is not subject
to withholding if such remuneration is, or will be, exempt from income
tax imposed by chapter 1 of the Internal Revenue Code by reason of a
provision of the Internal Revenue Code or an income tax convention to
which the United States is a party. * * *
(f) Exemption from income tax for remuneration paid for services
performed after December 31, 1997. Remuneration paid for services
performed within the United States by a nonresident alien individual
after December 31, 1997 is excepted from wages and hence is not subject
to withholding if such remuneration is, or will be, exempt from the
income tax imposed by chapter 1 of the Internal Revenue Code by reason
of a provision of the Internal Revenue Code or an income tax convention
to which the United States is a party. An employer may rely on a claim
that the employee is entitled to an exemption from tax if it complies
with the requirements of Sec. 1.1441-1(e)(1) of this chapter (for a
claim based on a provision of the Internal Revenue Code) or
Sec. 1.1441-4(b)(2) of this chapter (for a claim based on an income tax
convention).
Par. 41. In Sec. 31.3406(d)-3, paragraph (c) is revised to read as
follows:
Sec. 31.3406(d)-3 Special 30-day rules for certain reportable
payments.
* * * * *
(c) Application to foreign payees. The rules of paragraphs (a) and
(b) of this section also apply to a payee from whom the payor is
required to obtain a Form W-8 (or an acceptable substitute) or is to
obtain other evidence of foreign status (pursuant to relevant
regulations under an applicable Internal Revenue Code section),
provided the payee represents orally or otherwise, before or at the
time of the acquisition or sale of the instrument or the establishment
of the account, that the payee is not a United States citizen or
resident. In the case of a payment made after December 31, 1997, to a
person with respect to whom indicia of foreign ownership exists, as
described in Sec. 1.1441-1(f)(2)(ii)(A) of this chapter, at any time
before expiration of the 30-day grace period described in this
paragraph (c), the procedures described in that section shall apply,
including the special grace period. The 30-day and 90-day grace periods
shall run concurrently. Therefore, for example, if indicia of foreign
ownership were provided on the 28th day after a payment is credited to
an account, the 30-day grace period would convert to a 90-day grace
period under Sec. 1.1441-1(f)(2)(ii)(A) of this chapter, of which 28
days would have already elapsed.
Par. 42. In Sec. 31.3406(g)-1, paragraph (e) is added to read as
follows:
Sec. 31.3406(g)-1 Exception for payments to certain payees and certain
other payments.
* * * * *
(e) Certain reportable payments made outside the United States by
foreign persons, foreign offices of United States banks and brokers,
and others. A payor of a reportable payment or transfer is not required
to backup withholding under section 3406 if such reportable payment or
transfer is of a kind that is exempt from reporting if documentary
evidence described in Sec. 1.6049-5(2)(ii) of this chapter is provided
to the payor, unless the payor has actual knowledge that the payee is a
United States person. In addition, amounts paid with respect to
notional principal contracts described in Sec. 1.6041-1(d)(5) of this
chapter are not subject to backup withholding if they are paid outside
the United States, unless the payor has actual knowledge that the payee
is a United States person.
Par. 43. Section 31.3406(h)-2 is amended by:
1. Removing the heading of paragraph (e)(1).
2. Removing the paragraph designation (e)(1).
3. Removing paragraph (e)(2).
4. Revising paragraph (a)(3)(i) to read as follows:
Sec. 31.3406(h)-2 Special rules.
(a) * * *
(3) Joint foreign payees--(i) In general. If the relevant payee
listed on an account or instrument provides the penalties of perjury
statement regarding its foreign status, withholding under section 3406
applies unless--
(A) Every joint payee provides the statement regarding foreign
status (under the provisions of chapter 3 and chapter 61 of the
Internal Revenue Code and the regulations under those provisions); or
(B) Any one of the joint owners who has not established foreign
status provides a taxpayer identifying number to the payor in the
manner required in Sec. 31.3406(d)-1.
* * * * *
Par. 44. Section 31.6413(a)-3 is amended as follows:
1. In paragraph (a)(1)(iii), the language ``(including the
certification relating to foreign status described in Sec. 1.6049-
5(b)(2)(iv) of this chapter or Sec. 1.6045-1(g)(1) of this chapter)''
is removed and ``(including the documentation required under
Secs. 1.1441-1(e)(1), 1.6045-1(g)(3), and 1.6049-5(c) of this
chapter)'' is added in its place.
2. Paragraph (a)(1)(ii) is amended by removing ``or'' at the end of
the paragraph and paragraph (a)(1)(iii) is amended by removing the
period at the end of the paragraph and adding ``; or'' in its place.
3. Paragraph (a)(1)(iv) is added.
4. Paragraphs (a)(2) and (b)(2) are revised. The addition and
revisions read as follows:
Sec. 31.6413(a)-3 Repayment by payor of tax erroneously collected from
payee.
(a) * * * (1) * * *
(iv) The amount is withheld because a payor imposed backup
withholding on a payment made to a person because the payee failed to
furnish the required documentation described in Secs. 1.1441-1(e)(1),
1.6045-1(g)(3), and 1.6049-5(c) of this chapter and the payee
subsequently furnishes, completes, or corrects the required
documentation. The required documentation must be furnished, completed,
or corrected prior to the end of the calendar year in which the payment
is made and prior to the time the payor furnishes a Form 1099 to the
payee with respect to the payment for which the withholding erroneously
occurred.
(2) For purposes of paragraph (a)(1) of this section (other than
erroneous withholding occurring under the circumstances described in
paragraph (a)(1)(iv) of this section), if a payor or broker withholds
because the payor or broker has not received a taxpayer identifying
number or required certification and the payee subsequently provides a
taxpayer identifying number or a required certification to the payor,
the payor or broker may not refund the amount to the payee.
(b) * * *
(2) Adjustment after the deposit of the tax--(i) In general. Except
as provided in paragraph (b)(2)(ii) of this section, if the amount
erroneously withheld has been deposited prior to the time that the
refund is made to the payee, the payor or broker may adjust any
subsequent deposit of the tax collected under chapter 24 of the
Internal Revenue Code that the payor or broker is required to
[[Page 17666]]
make in the amount of the tax that has been refunded to the payee.
(ii) Erroneous withholding from a payee that is a foreign person.
Where a payor withholds in error from a payee that is a nonresident
alien or foreign person, as described in paragraph (b)(1) of this
section, the payor may refund some or all of the amount subject to
backup withholding under section 3406. A refund may be paid in
accordance with the requirements of this paragraph (b)(2)(ii) where the
required documentation is furnished, completed, or corrected prior to
the end of the calendar year in which the payment is made and prior to
the time the payor furnishes a Form 1099 to the payee with respect to
the payment for which the withholding erroneously occurred. The amount
of the refund will be the amount erroneously withheld less the amount
of tax required to be withheld, if any, under chapter 3 of the Internal
Revenue Code. With respect to the amount of the payment to the foreign
person and the amount of tax required to be withheld under chapter 3 of
the Internal Revenue Code, returns must be made in accordance with the
requirements of Sec. 1.1461-1 (b) and (c) of this chapter.
PART 35a--TEMPORARY EMPLOYMENT TAX REGULATIONS UNDER THE INTEREST
AND DIVIDEND TAX COMPLIANCE ACT OF 1983
Par. 45. The authority for part 35a is amended by removing the
entries for Sec. 35a.9999-3, Sec. 35a.9999-3A and Sec. 35a.9999-4T to
read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Secs. 35a.9999-1 through 35a.9999-3A, and 35a.9999-4T [Removed]
Par. 46. Sections 35a.9999-1 through 35a.9999-3A, and 35a.9999-4T
are removed.
PART 301--PROCEDURE AND ADMINISTRATION
Par. 47. The authority citation for part 301 continues to read in
part as follows:
Authority: 26 U.S.C. 7805. * * *
Par. 48. Section 301.6109-1 as proposed to be amended in project
number INTL-0024-94, published on June 8, 1995, at 60 FR 30214, is
amended as follows:
1. Paragraph (b)(2)(iii) is amended by removing ``and'' at the end
of the paragraph.
2. Paragraph (b)(2)(iv) is revised.
3. Paragraph (b)(2)(v) is added.
4. Paragraph (c) is revised.
The revisions and additions read as follows:
Sec. 301.6109-1 Identifying numbers.
* * * * *
(b) * * *
(2) * * *
(iv) A foreign person that makes a return of tax under this title
(including income, estate, and gift tax returns) but excluding
information returns, statements, or documents;
(v) A foreign person that furnishes a withholding certificate
described in Sec. 1.1441-1 (e)(2) or (e)(3) of this chapter to the
extent required under Sec. 1.1441-1(e)(4)(vii) of this chapter.
(c) Requirement to furnish another's number. Every person required
under this title to make a return, statement, or other document must
furnish such taxpayer identifying numbers of other U.S. persons and
foreign persons that are described in paragraph (b)(2) (i), (ii),
(iii), or (v) of this section as required by the forms and the
accompanying instructions. The taxpayer identifying number of any
person furnishing a withholding certificate referred to in paragraph
(b)(2)(v) of this section shall also be furnished if it is actually
known to the person making a return, statement, or other document
described in this paragraph (c). If the person making the return,
statement, or other document does not know the taxpayer identifying
number of the other person, and such other person is one that is
described in paragraph (b)(2) (i), (ii), (iii), or (v) of this section,
such person must request the other person's number. The request should
state that the identifying number is required to be furnished under
authority of law. When the person making the return, statement, or
other document does not know the number of the other person, and has
complied with the request provision of this paragraph (c), such person
must sign an affidavit on the transmittal document forwarding such
returns, statements, or other documents to the Internal Revenue
Service, so stating. A person required to file a taxpayer identifying
number shall correct any errors in such filing when such person's
attention has been drawn to them.
* * * * *
Par. 49. Section 301.6114-1 is amended by:
1. Revising paragraph (a)(1)(ii).
2. Revising paragraph (b)(4)(ii) introductory text, and adding
paragraphs (b)(4)(ii)(C) and (b)(4)(ii)(D)
3. Revising paragraphs (c)(1) and (d)(4)(v): The revisions read as
follows:
Sec. 301.6114-1 Treaty-based return positions.
(a) * * * (1) * * *
(ii) If a return of tax would not otherwise be required to be
filed, a return must nevertheless be filed for purposes of making the
disclosure required by this section. For this purpose, such return need
include only the taxpayer's name, address, taxpayer identifying number,
and be signed under the penalties of perjury (as well as the subject
disclosure). Also, the taxpayer's taxable year shall be deemed to be
the calendar year (unless the taxpayer has previously established, or
timely chooses for this purpose to establish, a different taxable
year). In the case of a disclosable return position relating solely to
income subject to withholding (as defined in Sec. 1.1441-2(a) of this
chapter), however, the statement required to be filed in paragraph (d)
of this section must instead be filed at times and in accordance with
procedures to be published by the Internal Revenue Service.
* * * * *
(b) * * *
(4) * * *
(ii) A treaty exempts from tax, or reduces the rate of tax on,
fixed or determinable annual or periodical income subject to
withholding under sections 1441 or 1442 that a foreign person receives
from a U.S. person, but only if described in paragraphs (b)(4)(ii) (A)
and (B) of this section, or paragraph (b)(4)(ii) (C) or (D) of this
section.
* * * * *
(C) For payments made after December 31, 1997, with respect to a
treaty that contains a limitation on benefits article, that--
(1) The treaty exempts from tax, or reduces the rate of tax on
income subject to withholding (as defined in Sec. 1.1441-2(a) of this
chapter) that is paid to a foreign person (other than a State,
including a political subdivision or local authority) that is the
beneficial owner of the income and the beneficial owner is related to
the person obligated to pay the income within the meaning of sections
267(b) and 707(b), and the income exceeds $500,000; and
(2) A foreign person (other than an individual or a State,
including a political subdivision or local authority) meets the
requirements of the limitation on benefits article of the treaty; or
(D) For payments made after December 31, 1997, with respect to a
treaty that imposes any other conditions for the entitlement of treaty
benefits, for example as a part of the interest, dividends, or royalty
article, that such conditions are met;
* * * * *
(c) Reporting requirement waived. * * *
(1) Notwithstanding paragraph (b)(4) or (5) of this section, that a
treaty has
[[Page 17667]]
reduced the rate of withholding tax otherwise applicable to a
particular type of fixed or determinable annual or periodical income
subject to withholding under section 1441 or 1442, such as dividends,
interest, rents, or royalties to the extent such income is beneficially
owned by an individual or a State (including a political subdivision or
local authority);
* * * * *
(d) * * *
(4) * * *
(v) The provision(s) of the limitation on benefits article (if any)
in the treaty that the taxpayer relies upon to meet the requirements of
that article and a statement of the relevant facts in support of the
taxpayer's claim.
* * * * *
Par. 50. Section 301.6402-3 is amended as follows:
1. Paragraph (e) is revised as set forth below.
2. Removing the OMB parenthetical and the authority citation at the
end of the section.
Sec. 301.6402-3 Special rules applicable to income tax.
* * * * *
(e) In the case of a nonresident alien individual or foreign
corporation, the appropriate income tax return on which the claim for
refund or credit is made must contain the tax identification number of
the taxpayer required pursuant to section 6109 and the entire amount of
income of the taxpayer subject to tax, even if the tax liability for
that income was fully satisfied at source through withholding under
chapter 3 of the Internal Revenue Code. Also, if the overpayment of tax
resulted from the withholding of tax at source under chapter 3 of the
Internal Revenue Code, a copy of the Form 1042-S required to be
provided to the beneficial owner pursuant to Sec. 1.1461-1(c)(1)(i) of
this chapter must be attached to the return. For purposes of claiming a
refund, the Form 1042-S must include the taxpayer identifying number of
the beneficial owner even if not otherwise required. No claim of refund
or credit under chapter 65 may be made by the taxpayer for any amount
that the withholding agent has repaid to the taxpayer pursuant to
Sec. 1.1461-2(a)(2) of this chapter or that was subject to a set-off
pursuant to Sec. 1.1461-2(a)(3) of this chapter. Upon request, a
taxpayer must also submit such documentation as the Commissioner (or
delegate), the District Director, or the Assistant Commissioner
(International), may require establishing that the taxpayer is the
beneficial owner of the income for which a claim of refund or credit is
being made.
PART 502--[REMOVED]
Par. 51. Part 502 is removed.
PART 503--[REMOVED]
Par. 52. Part 503 is removed.
PART 509--[AMENDED]
Par. 53. The authority citation for part 509 is revised and the
authority citation for ``Subpart--General Income Tax'' is removed, to
read as follows:
Authority: 26 U.S.C. 62, 3791 and 7805.
Par. 54. Part 509 is amended as follows:
1. Subpart--Withholding of Tax consisting of Secs. 509.1 through
509.10 is removed.
2. In Sec. 509.103, paragraph (e) is removed and reserved.
3. In Sec. 509.117, paragraph (a) is removed and reserved.
4. Sections 509.119 and 509.122 are removed.
PART 513--[AMENDED]
Par. 55. The authority citation for part 513 is revised to read as
follows:
Authority: 26 U.S.C. 62.
Par. 56. Part 513 is amended as follows:
1. Section 513.1 is removed.
2. Section 513.2 is amended as follows:
a. Paragraphs (a)(1) and (a)(2) are removed and reserved.
b. Paragraph (a)(4) is removed.
c. Paragraph (b) is removed and reserved.
d. Paragraphs (c) and (d) are removed.
3. Section 513.3 is amended as follows:
a. Paragraph (a)(1) is removed and reserved.
b. Paragraphs (b) and (c) are removed.
4. Section 513.4 is amended as follows:
a. Paragraph (a) is removed and reserved.
b. Paragraphs (c) and (d) are removed.
5. Section 513.5 is amended as follows:
a. Paragraph (a) is removed and reserved.
b. Paragraphs (c) and (d) are removed.
PART 514--[AMENDED]
Par. 57. The authority citation for part 514 is revised to read as
follows:
Authority: 26 U.S.C. 7805.
Par. 58. Part 514 is amended as follows:
1. The undesignated centerheading preceding Sec. 514.1 and
Secs. 514.1 through 514.10 are removed.
2. Sections 514.20 through 514.21 are removed.
3. In Sec. 514.22, paragraph (c) is removed.
4. Sections 514.23 through 514.32 are removed.
5. Sections 514.101 through 514.117 are removed.
PART 516--[REMOVED]
Par. 59. Part 516 is removed.
PART 517--[REMOVED]
Par. 60. Part 517 is removed.
PART 520--[REMOVED]
Par. 61. Part 520 is removed.
PART 521--[AMENDED]
Par. 62. The authority citation for part 521 is revised to read as
follows:
Authority: 26 U.S.C. 62, 143, 144, 211, and 231.
Par. 63. Part 521 is amended as follows:
1. Subpart--Withholding of Tax consisting of Secs. 521.1 through
521.8 is removed.
2. In Sec. 521.103, paragraph (d) is removed and reserved.
Margaret Milner Richardson,
Commissioner of Internal Revenue.
[FR Doc. 96-8936 Filed 4-15-96; 10:14 am]
BILLING CODE 4830-01-P