[Federal Register Volume 66, Number 11 (Wednesday, January 17, 2001)]
[Proposed Rules]
[Pages 3925-3928]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-250]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 31

[REG-126100-00]
RIN 1545-AY62


Guidance on Reporting of Deposit Interest Paid to Nonresident 
Aliens

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

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SUMMARY: This document contains proposed regulations that provide 
guidance on the reporting requirements for interest on deposits 
maintained at the U.S. office of certain financial institutions and 
paid to nonresident alien individuals. These proposed regulations 
affect persons making payments of interest with respect to such a 
deposit. This document also provides a notice of public hearing on 
these proposed regulations.

DATES: Written or electronic comments must be received by February 27, 
2001. Requests to speak (with outlines of oral comments to be 
discussed) at the public hearing scheduled for 10 a.m. on March 21, 
2001, must be received by February 27, 2001.

ADDRESSES: Send submissions to: CC:M&SP:RU (REG-126100-00), Room 5226, 
Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, 
DC 20044. Submissions also may be hand delivered Monday through Friday 
between the hours of 8 a.m. and 5 p.m. to: CC:M&SP:RU (REG-126100-00), 
Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue, 
NW., Washington, DC. Alternatively, taxpayers may submit comments 
electronically via the Internet by selecting the ``Tax Regs'' option on 
the IRS Home Page, or by submitting comments directly to the IRS 
Internet site at http://www.irs.gov/tax-regs/regslist.html. The public 
hearing will be held in Room 4718, Internal Revenue Building, 1111 
Constitution Avenue, NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,

[[Page 3926]]

Kate Y. Hwa, (202) 622-3840 (not a toll free number); concerning 
submissions of comments, the hearing, and/or to be placed on the 
building access list to attend the hearing, Lanita Vandyke, (202) 622-
7180 (not a toll free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collection of information contained in this notice of proposed 
rulemaking has 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(d)). 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, W:CAR:MP:FP:S:O, 
Washington, DC 20224. Comments on the collections of information should 
be received by March 19, 2001. Comments are specifically requested 
concerning:
    Whether the proposed collection of information is necessary for the 
proper operation of the functions of the IRS, including whether the 
information will have practical utility;
    The accuracy of the estimated burden associated with the proposed 
collection of information (see below);
    How the quality, utility, and clarity of the information to be 
collected may be enhanced;
    How the burden of complying with the proposed collection of 
information may be minimized, including through the application of 
automated collection techniques or other forms of information 
technology; and
    Estimates of capital or start-up costs and costs of operation, 
maintenance, and purchase of service to provide information.
    The collection of information in these proposed regulations is in 
Secs. 1.6049-4(b)(5)(i), 1.6049-6(e)(4) (i), and (ii). This information 
is required to determine if taxpayers have properly reported amounts 
received as income. The collection of information is mandatory. The 
likely respondents are businesses and other for-profit institutions.
    The estimated average annual burden per respondent and/or 
recordkeeper required by Secs. 1.6049-4(b)(5)(i), 1.6049-6(e)(4) (i), 
and (ii) will be reflected in the burdens of Forms W-8, 1042, 1042-S, 
and the income tax return of a foreign person.
    Further, the estimated average annual burden per respondent and/or 
recordkeeper for the statement required by Sec. 1.6049-6(e)(4)(i) is as 
follows:
    Estimated total annual reporting burden: 500 hours.
    Estimated average annual burden per respondent: 15 minutes.
    Estimated number of respondents: 2,000.
    Estimated annual frequency of responses: annually.
    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 assigned by the Office of 
Management and Budget.
    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.

Background and Explanation of Provisions

    The IRS previously determined that information concerning interest 
paid on deposits from U.S. bank accounts to nonresident alien 
individuals who are residents of Canada would be significant in 
furthering its compliance efforts. Consequently, Sec. 1.6049-8(a) 
requires the reporting of such interest on a Form 1042-S.
    The proposed regulations extend the information reporting 
requirement for bank deposit interest paid to nonresident alien 
individuals who are residents of other foreign countries. This 
extension is appropriate for two reasons. First, requiring routine 
reporting to the IRS of all bank deposit interest paid within the 
United States will help to ensure voluntary compliance by U.S. 
taxpayers by minimizing the possibility of avoidance of the U.S. 
information reporting system (such as through false claims of foreign 
status). Second, several countries that have tax treaties or other 
agreements that provide for the exchange of tax information with the 
United States have requested information concerning bank deposits of 
individual residents of their countries. Because of the importance that 
the United States attaches to exchanging tax information as a way of 
encouraging voluntary compliance and furthering transparency, see e.g. 
S. Exec. Rep. No. 106-8, at 15 (1st Sess. 1999), Treasury and the IRS 
believe it is important for the United States to facilitate, wherever 
possible, the effective exchange of all relevant tax information with 
our treaty partners.
    In addition to extending the information reporting requirement for 
interest paid on deposits maintained at a bank's office within the 
United States to all nonresident alien individuals, the proposed 
regulations also make the following minor changes and clarifications.
    Section 1.6049-6 provides that a copy of Form 1042-S must be 
furnished to the recipient for interest paid on deposits maintained at 
a bank's office within the United States. Paragraph (e)(4)(i) of that 
section has been revised to clarify that the payor or middleman can 
satisfy this requirement by furnishing a copy of Form 1042-S either in 
person or to the last known address of the recipient.
    A new paragraph (e)(4)(ii) has been added to Sec. 1.6049-6 to 
provide guidance on the manner in which a Form 1042-S is furnished when 
there are joint account holders. Specifically, if any joint account 
holder is a U.S. non-exempt recipient, the payor or middleman must 
report the entire payment to that person. If all joint account holders 
are foreign persons, the payor or middleman must report the payment to 
the nonresident alien individual that is a resident of a country with 
which the United States has an income tax treaty or a tax information 
exchange agreement (TIEA). If more than one of the joint account 
holders is a foreign person and is a resident of a country with which 
the United States has an income tax treaty or a TIEA, the payor or 
middleman must report the payment to the person that is the primary 
account holder. The payor or middleman must, however, furnish a Form 
1042-S to any account holder who requests it.
    Section 1.6049-8(a) provides that interest paid with respect to a 
deposit maintained at an office within the United States to individuals 
who are Canadian residents must be reported. The payor or middleman may 
rely on the permanent address found on Form W-8 to make the 
determination of whether the nonresident alien individual resides in 
Canada. However, the regulation also provides that a payor or middleman 
may rely on its actual knowledge of the individual's residence address 
in Canada, even if a valid Form W-8 has not been provided, to make such 
a determination. This ``actual knowledge of the individual's residence 
address'' rule has been eliminated because it creates a result that is 
contrary to the presumption rules contained in Sec. 1.1441-1(b)(3)(iii) 
(and made applicable to reportable payments by Sec. 1.6049-5(d)(2)). 
Accordingly, Sec. 1.6049-8(a) has been clarified to

[[Page 3927]]

provide that, while amounts described in Sec. 1.6049-8(a) generally are 
not subject to backup withholding under section 3406, the payor must 
report the payment on a Form 1099 as made to a U.S. non-exempt 
recipient in accordance with the presumption rules of Secs. 1.6049-
5(d)(2) and 1.1441-1(b)(3)(iii) if the payor or middleman does not have 
either a valid Form W-8 or valid Form W-9. Further, such payment is 
subject to backup withholding under section 3406.

Proposed Effective Date

    These regulations are proposed to apply to payments made after 
December 31 of the year in which they are published as final 
regulations in the Federal Register.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
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) does not apply to these regulations, and, because 
the regulations do not impose a collection of information on small 
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not 
apply. Pursuant to section 7805(f) of the Code, this notice of proposed 
rulemaking will be submitted to the Chief Counsel for Advocacy of the 
Small Business Administration for comment on its impact on small 
business.

Comments and 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 (in the manner 
described in the ADDRESSES portion of this preamble) to the IRS. The 
IRS and Treasury Department request comments on the clarity of the 
proposed rules and how they can be made easier to understand. All 
comments will be available for public inspection and copying.
    A public hearing has been scheduled for March 31, 2001, beginning 
at 10 a.m. in Room 4718, Internal Revenue Building, 1111 Constitution 
Avenue, NW., Washington, DC. Due to building security procedures, 
visitors must enter at the 10th Street entrance, located between 
Constitution and Pennsylvania Avenues, NW. In addition, all visitors 
must present photo identification to enter the building. Because of 
access restrictions, visitors will not be admitted beyond the immediate 
entrance area more than 15 minutes before the hearing starts. For 
information about having your name placed on the building access list 
to attend the hearing, see the FOR FURTHER INFORMATION CONTACT portion 
of this preamble.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who 
wish to present oral comments must submit written comments and an 
outline of the topics to be discussed and the time to be devoted to 
each topic (a signed original and eight (8) copies) by February 27, 
2001. A period of 10 minutes will be allotted to each person for making 
comments. An agenda showing the scheduling of the speakers will be 
prepared after the deadline for reviewing outlines has passed. Copies 
of the agenda will be available free of charge at the hearing.

Drafting Information

    The principal author of the regulations is Kate Y. Hwa, Office of 
Associate Chief Counsel (International). However, other personnel from 
the IRS and Treasury Department participated in their development.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR parts 1 and 31 are proposed to be amended as 
follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805 * * *

    Par. 2. In section 1.6049-4, paragraph (b)(5) is 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.

* * * * *
    (b) * * *
    (5) Interest payments to nonresident alien individuals--(i) General 
rule. In the case of interest aggregating $10 or more paid to a 
nonresident alien individual (as defined in section 7701(b)(1)(B)) that 
is reportable under Sec. 1.6049-8(a), the payor shall make an 
information return on Form 1042-S for the calendar year in which the 
interest is paid. The payor or middleman shall prepare and file Form 
1042-S at the time and in the manner prescribed by section 1461 and the 
regulations under that section and by the form and its accompanying 
instructions. See Secs. 1.1461-1(b) (rules regarding the preparation of 
a Form 1042) and 1.6049-6(e)(4) (rules for furnishing a copy of the 
Form 1042-S to the payee). To determine whether an information return 
is required for original issue discount, see Secs. 1.6049-5(f) and 
1.6049-8(a).
    (ii) Effective date. Paragraph (b)(5)(i) of this section shall be 
effective for payments made after December 31 of the year in which the 
final regulations are published in the Federal Register with respect to 
a Form W-8 (Certificate of Foreign Status) furnished to the payor or 
middleman after that date. (For interest paid to a Canadian nonresident 
alien individual on or before December 31 of the year in which final 
regulations are published in the Federal Register, see Sec. 1.6049-
4(b)(5) as in effect and contained in 26 CFR part 1 revised April 1, 
2000.)
* * * * *
    Par. 3. Section 1.6049-6 is amended as follows:
    1. Paragraph (e)(4) is revised.
    2. In paragraph (e)(5), the first sentence is revised and a new 
sentence is added at the end of the paragraph.
    The addition and revisions read as follows:


Sec. 1.6049-6  Statements to recipients of interest payments and 
holders of obligations for attributed original issue discount.

* * * * *
    (e) * * *
    (4) Special rule for amounts described in Sec. 1.6049-8(a)--(i) In 
general. In the case of amounts described in Sec. 1.6049-8(a) (relating 
to payments of deposit interest to nonresident alien individuals) paid 
after December 31 of the year in which the final regulations are 
published in the Federal Register, any person who makes a Form 1042-S 
under section 6049(a) and Sec. 1.6049-4(b)(5) shall furnish a statement 
to the recipient either in person or by first-class mail to the 
recipient's last known address. The statement shall include a copy of 
the Form 1042-S required to be prepared pursuant to Sec. 1.6049-4(b)(5) 
and a statement to the effect that the information on the form is being 
furnished to the United States Internal Revenue Service and may be 
furnished to the government of the foreign country where the recipient 
resides.
    (ii) Joint account holders. In the case of joint account holders, a 
payor or middleman must report the entire amount of interest as paid to 
any joint account holder that provides a valid Form W-9, or, if any 
account holder has not furnished a Form W-8 or Form W-9, any account 
holder that is presumed to be a U.S. non-exempt recipient under 
Sec. 1.6049-5(d)(2) and 1.1441-1(b)(3)(iii). If all of the joint 
account holders are

[[Page 3928]]

foreign persons, then the payor or middleman must report the payment to 
the nonresident alien individual that is a resident of a country with 
which the United States has an income tax treaty or a tax information 
exchange agreement. If more than one of the joint account holders is a 
foreign person and is a resident of a country with which the United 
States has an income tax treaty or a tax information exchange 
agreement, then the payor or middleman may report the interest as paid 
to any such account holder that is treated as the primary account 
holder under Sec. 31.3406(h)-2(a) of this chapter. If, however, any 
account holder requests its own Form 1042-S, the payor or middleman 
must furnish a Form 1042-S to the account holder who requests it.
    (5) Effective date. Paragraph (e)(4) is effective for payee 
statements due after December 31 of the year in which the final 
regulations are published in the Federal Register, without regard to 
extensions. * * * (For interest paid to a Canadian nonresident alien 
individual on or before December 31 of the year in which final 
regulations are published in the Federal Register, see Sec. 1.6049-
6(e)(4) as in effect and contained in 26 CFR part 1 revised April 1, 
2000.)
* * * * *
    Par. 4. In section 1.6049-8, the section heading and paragraph (a) 
are revised to read as follows:


Sec. 1.6049-8  Interest and original issue discount paid to nonresident 
alien individuals.

    (a) Interest subject to reporting requirement. For purposes of 
Secs. 1.6049-4, 1.6049-6, and this section and except as provided in 
paragraph (b) of this section, the term interest means interest paid to 
a nonresident alien individual after December 31 of the year in which 
the final regulations are published in the Federal Register, where the 
interest is described in section 871(i)(2)(A) with respect to a deposit 
maintained at an office within the United States. For purposes of the 
regulations under section 6049, a nonresident alien individual is a 
person described in section 7701(b)(1)(B). The payor or middleman may 
rely upon a valid Form W-8 to determine whether the payment is made to 
a nonresident alien individual. Generally, amounts described in this 
paragraph (a) are not subject to backup withholding under section 3406. 
See Sec. 31.3406(g)-1(d) of this chapter. However, if the payor or 
middleman does not have either a valid Form W-8 or valid Form W-9, the 
payor or middleman must report the payment as made to a U.S. non-exempt 
recipient if it must so treat the payee under the presumption rules of 
Secs. 1.6049-5(d)(2) and 1.1441-1(b)(3)(iii) and must also backup 
withhold under section 3406. (For interest paid to a Canadian 
nonresident alien individual on or before December 31 of the year in 
which final regulations are published in the Federal Register, see 
Sec. 1.6049-8(a) as in effect and contained in 26 CFR part 1 revised 
April 1, 2000.)
* * * * *

PART 31--EMPLOYMENT TAXES AND COLLECTION OF INCOME TAX AT SOURCE

    Par. 5. The authority citation for part 31 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805 * * *
    Par. 6. In Sec. 31.3406(g)-1, paragraph (d) is revised to read as 
follows:


Sec. 31.3406(g)-1  Exceptions for payments to certain payees and 
certain other payment.

* * * * *
    (d) Reportable payments made to nonresident alien individuals. A 
payment of interest that is reported on Form 1042-S as paid to a 
nonresident alien individual under Sec. 1.6049-8(a) of this chapter is 
not subject to withholding under section 3406. (For interest paid to a 
Canadian nonresident alien individual on or before December 31 of the 
year in which final regulations are published in the Federal Register, 
see Sec. 31.3406(g)-1(d) as in effect and contained in 26 CFR part 1 
revised April 1, 2000.)

Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
[FR Doc. 01-250 Filed 1-16-01; 8:45 am]
BILLING CODE 4830-01-U