[Federal Register Volume 67, Number 12 (Thursday, January 17, 2002)]
[Rules and Regulations]
[Pages 2327-2329]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-1125]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 301

[TD 8977]
RIN 1545-BA39


Taxpayer Identification Number Rule Where Taxpayer Claims Treaty 
Rate and Is Entitled to an Unexpected Payment

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

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SUMMARY: This document contains temporary regulations that provide 
additional guidance needed to comply with the withholding rules under 
section 1441 and conforming changes to the regulations under section 
6109. Specifically, these temporary regulations provide rules that 
facilitate compliance by withholding agents where foreign individuals 
who are claiming reduced rates of withholding under an income tax 
treaty receive an unexpected payment from the withholding agent, yet do 
not possess the required individual taxpayer identification number. The 
text of the temporary regulations also serves as the text of the 
proposed regulations set forth in the cross-referenced notice of 
proposed rulemaking on this subject in the Proposed Rules section in 
this issue of the Federal Register.

DATES: Effective Date: These temporary regulations are effective 
January 17, 2002.
    Applicability Date: For dates of applicability, see Sec. 1.1441-
6T(h)(6).

FOR FURTHER INFORMATION CONTACT: Jonathan A. Sambur (202) 622-3840 (not 
a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    Payments of U.S. source income to foreign persons create a number 
of withholding and information reporting obligations for both the payor 
and the recipient of these payments under the Internal Revenue Code and 
associated Treasury regulations. Specifically, under section 871(a), 
nonresident alien individuals are subject to a 30 percent tax on 
certain 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. Those items of income include 
interest, dividends, royalties, compensation, and other fixed or 
determinable annual or periodical income. The tax liability imposed 
under section 871(a) on the payment of such items of income is 
generally collected by way of withholding at the source pursuant to 
section 1441(a). Withholding agents are generally required to report 
payments of such income to the IRS on Form 1042-S.
    The 30 percent rate of tax can be reduced under an income tax 
treaty. Under current Treasury regulations, a withholding agent may 
generally rely on a Form W-8BEN, ``Certificate of Foreign Status of 
Beneficial Owner for United States Tax Withholding,'' or Form 8233, 
``Exemption From Withholding on Compensation for Independent (and 
Certain Dependent) Personal Services of a Nonresident Alien 
Individual,'' provided by, or for, the foreign individual certifying 
eligibility for a reduced rate of tax under an income tax treaty.
    Section 1.1441-1(e)(4)(vii) generally provides that a taxpayer 
identifying number (TIN) must be furnished on a Form W-8BEN or Form 
8233 in order for a foreign individual to obtain the benefit of reduced 
withholding under an income tax treaty. See Sec. 1.1441-6(b)(2)(ii). 
Treasury and the IRS have recently become aware, however, of certain 
unusual cases where an unexpected payment to a nonresident alien 
individual claiming treaty benefits arises on short notice. In general, 
a foreign individual receiving such an unexpected payment currently may 
be unable to obtain a TIN prior to payment. In such a case, unless the 
foreign individual already has a TIN, the withholding agent would be 
required to withhold tax at the 30 percent rate, rather than the treaty 
rate, and the foreign individual would be required to file for a refund 
in order to obtain the benefits of the income tax treaty.
    To alleviate this filing burden on foreign individuals, IRS is 
putting in place administrative procedures that will allow certain 
withholding agents, who also are acceptance agents (as defined in 
Sec. 301.6109-1(d)(3)(iv)) and who make unexpected payments to foreign 
individuals, to apply for and obtain an individual taxpayer 
identification number (ITIN) for such individuals on an expedited 
basis. However, Treasury and IRS recognize that, in certain 
circumstances, these expedited ITIN procedures will not be sufficient 
to ensure that foreign individuals receiving an unexpected payment can 
obtain the benefits of a reduced rate of withholding under an income 
tax treaty at the time of payment. Accordingly, these temporary 
regulations will allow, in limited circumstances, withholding agents to 
rely on a Form W-8BEN or Form 8233 that does not include a TIN for 
purposes of withholding at the reduced treaty rate.
    The proposed rules are published elsewhere in this issue of the 
Federal Register.

Explanation of Provisions

    These temporary regulations amend Sec. 1.1441-1(b)(7) and 
Sec. 1.1441-6(b)(1) and add new Sec. 1.1441-6T(h) to provide a limited 
exception to the requirement that a foreign individual provide a TIN to 
its withholding agent before obtaining a reduced rate of withholding 
tax under an income tax treaty. As noted above, under the current 
regulatory framework, a foreign individual generally is required to put 
the individual's TIN on the Form W-8BEN or Form 8233 in order to claim 
a reduced rate of withholding based upon a tax treaty. If a foreign 
individual does not have a TIN, a withholding agent who is an 
acceptance agent, as defined in Sec. 301.6109-1(d)(3)(iv), can aid the 
foreign individual in obtaining an ITIN.
    In order to lessen the administrative burden on foreign individuals 
receiving unexpected payments, the IRS has decided to permit certain 
withholding agents to enter into special acceptance agent agreements 
with the IRS that will allow those withholding agents, in their 
capacity as acceptance agents, to seek ITINs through an expedited 
process for these foreign individuals claiming treaty benefits. It is 
anticipated that any withholding agent who qualifies as an acceptance 
agent under Sec. 301.6109-1(d)(3)(iv) and who anticipates making 
unexpected payments will be allowed to enter into such an agreement. 
However, the IRS intends to allow the use of the expedited process only 
when an application for an ITIN using the standard process will not 
generate an ITIN in time for the payment.
    These temporary regulations provide that, in limited circumstances, 
a withholding agent who has entered into such a special acceptance 
agent agreement may rely on a beneficial owner withholding certificate 
without regard to the requirement that it include a TIN. Generally, 
these temporary regulations provide that, in order for a withholding 
agent to rely on a beneficial owner withholding certificate that does

[[Page 2328]]

not contain a TIN, the withholding agent must be unable to obtain an 
ITIN for the foreign individual because the IRS is not issuing ITINs at 
the time of an unexpected payment to the individual or any time prior 
to the time of payment when the withholding agent had knowledge of the 
unexpected payment and the nature of the unexpected payment must be 
such that it cannot reasonably be delayed until the withholding agent 
could obtain an ITIN for the foreign individual through the use of the 
expedited process. The temporary regulations further provide that the 
IRS must receive the foreign individual's application for an ITIN on 
the first business day following payment. At this time, the IRS intends 
to issue ITINs through the expedited process from 6 a.m. until 11:30 
p.m. E.S.T., except for weekends and holidays. The IRS intends to 
increase the availability of this expedited process in the future.
    Except as provided in these regulations or in Sec. 1.1441-6(c), a 
foreign individual will continue to be required to provide a TIN on a 
beneficial owner withholding certificate (Form W-8BEN or Form 8233) in 
order to obtain the benefit of a reduced rate of withholding under an 
income tax treaty.

Special Analyses

    It has been determined that this Treasury decision 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. These 
regulations impose no new collection of information on small entities, 
therefore, a Regulatory Flexibility Analysis under the Regulatory 
Flexibility Act (5 U.S.C. chapter 6) is not required. Pursuant to 
section 7805(f) of the Code, these temporary regulations will be 
submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on their impact on small business.

Drafting Information

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

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 301

    Administrative practice and procedure, Income taxes, Reporting and 
recordkeeping requirements.

Amendments to the Regulations

    Accordingly, 26 CFR parts 1 and 301 are 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. Section 1.1441-1T is added to read as follows:


Sec. 1.1441-1T  Requirement for the deduction and withholding of tax on 
payments to foreign persons (temporary).

    (a) Through (b)(7)(i)(C) [Reserved]. For further guidance, see 
Sec. 1.1441-1(a) through (b)(7)(i)(C).
    (b)(7)(i)(D). The withholding agent has complied with the 
provisions of Sec. 1.1441-6(d).
    (b)(7)(ii) through (f)(2)(ii) [Reserved]. For further guidance, see 
Sec. 1.1441-1(b)(7)(ii) through (f)(2)(ii).


Sec. 1.1441-6  [Amended]

    Par. 3. In Sec. 1.1441-6, the fifth sentence of paragraph (b)(1) is 
amended by adding the language ``and Sec. 1.1441-6T(h)'' immediately 
following the language ``(c)(1) of this section.''

    Par. 4. Section 1.1441-6T is added to read as follows:


Sec. 1.1441-6T  Claim of reduced withholding under an income tax treaty 
(temporary).

    (a) through (g) [Reserved]. For further guidance, see Sec. 1.1441-
6(a) through (g).
    (h) Special taxpayer identifying number rule for certain foreign 
individuals claiming treaty benefits--(1) General rule. Except as 
provided in Sec. 1.1441-6(c) or paragraph (h)(2) of this section, for 
purposes of Sec. 1.1441-6(b)(1), a withholding agent may not rely on a 
beneficial owner withholding certificate, described in Sec. 1.1441-
6(b)(1), that does not include the beneficial owner's taxpayer 
identifying number (TIN).
    (2) Special rule. For purposes of satisfying the TIN requirement of 
Sec. 1.1441-6(b)(1), a withholding agent may rely on a beneficial owner 
withholding certificate, described in such paragraph, without regard to 
the requirement that the withholding certificate include the beneficial 
owner's TIN, if--
    (i) A withholding agent, who is also an acceptance agent, as 
defined in Sec. 301.6109-1(d)(3)(iv) of this chapter (hereafter the 
payor), has entered into an acceptance agreement that permits the 
acceptance agent to request an individual taxpayer identification 
number (ITIN) on an expedited basis because of the circumstances of 
payment or unexpected nature of payments required to be made by the 
payor;
    (ii) The payor was required to make an unexpected payment to the 
beneficial owner who is a foreign individual;
    (iii) An ITIN for the beneficial owner cannot be received by the 
payor from the Internal Revenue Service (IRS), Philadelphia Service 
Center, because the IRS, Philadelphia Service Center is not issuing 
ITINs at the time of payment or any time prior to the time of payment 
when the payor has knowledge of the unexpected payment;
    (iv) The unexpected payment to the beneficial owner could not be 
reasonably delayed to permit the payor to obtain an ITIN for the 
beneficial owner on an expedited basis; and
    (v) The payor satisfies the provisions of paragraph (h)(3) of this 
section.
    (3) Requirement that an ITIN be requested during the first business 
day following payment. The payor must submit a beneficial owner payee 
application for an ITIN (Form W-7) that complies with the requirements 
of Sec. 301.6109-1(d)(3)(ii) of this chapter, and also the 
certification described in Sec. 301.6109-1(d)(3)(iv)(A)(4) of this 
chapter, to the IRS, Philadelphia Service Center, during the first 
business day after payment is made.
    (4) Definition of unexpected payment. For purposes of this section, 
an unexpected payment is a payment that, because of the nature of the 
payment or the circumstances in which it is made, could not reasonably 
have been anticipated by the payor or beneficial owner during a time 
when the payor or beneficial owner could obtain an ITIN from the IRS. 
For purposes of this paragraph (h)(4), a payor or beneficial owner will 
not lack the requisite knowledge of the forthcoming payment solely 
because the amount of the payment is not fixed.
    (5) Examples. The rules of this paragraph (h) are illustrated by 
the following examples:

    Example 1. G, a citizen and resident of Country Y, a country 
with which the U.S. has an income tax treaty that exempts U.S. 
source gambling winnings from U.S. tax, is visiting the U.S. for the 
first time. During his visit, G visits Casino B, a casino that has 
entered

[[Page 2329]]

into a special acceptance agent agreement with the IRS that permits 
Casino B to request an ITIN on an expedited basis. During that 
visit, on a Sunday, G wins $5000 in slot machine play at Casino B 
and requests immediate payment from Casino B. ITINs are not 
available from the IRS on Sunday and would not again be available 
until Monday. G, who does not have an individual taxpayer 
identification number, furnishes a beneficial owner withholding 
certificate, described in Sec. 1.1441-1(e)(2), to the Casino upon 
winning at the slot machine. The beneficial owner withholding 
certificate represents that G is a resident of Country Y (within the 
meaning of the U.S.--Y tax treaty) and meets all applicable 
requirements for claiming benefits under the U.S.--Y tax treaty. The 
beneficial owner withholding certificate does not, however, contain 
an ITIN for G. On the following Monday, Casino B faxes a completed 
Form W-7, including the required certification, for G, to the IRS, 
Philadelphia Service Center for an expedited ITIN. Pursuant to 
Sec. 1.1441-6(b) and paragraph (h)(2) of this section, absent actual 
knowledge or reason to know otherwise, Casino B, may rely on the 
documentation furnished by G at the time of payment and pay the 
$5000 to G without withholding U.S. tax based on the treaty 
exemption.
    Example 2. The facts are the same as Example 1, except G visits 
Casino B on Monday. G requests payment Monday afternoon. In order to 
pay the winnings to G without withholding the 30 percent tax, Casino 
B must apply for and obtain an ITIN for G because an expedited ITIN 
is available from the IRS at the time of the $5000 payment to G.
    Example 3. The facts are the same as Example 1, except G 
requests payment fifteen minutes before the time when the IRS begins 
issuing ITINs. Under these facts, it would be reasonable for Casino 
B to delay payment to G. Therefore, Casino B must apply for and 
obtain an ITIN for G if G wishes to claim an exemption from U.S. 
withholding tax under the U.S.--Y tax treaty at the time of payment.
    Example 4. P, a citizen and resident of Country Z, is a lawyer 
and a well-known expert on real estate transactions. P is scheduled 
to attend a three-day seminar on complex real estate transactions, 
as a participant, at University U, a U.S. university, beginning on a 
Saturday and ending on the following Monday, which is a holiday. 
University U has entered into a special acceptance agent agreement 
with the IRS that permits University U to request an ITIN on an 
expedited basis. Country Z is a country with which the U.S. has an 
income tax treaty that exempts certain income earned from the 
performance of independent personal services from U.S. tax. It is 
P's first visit to the U.S. On Saturday, prior to the start of the 
seminar, Professor Q, one of the lecturers at the seminar, cancels 
his lecture. That same day the Dean of University U offers P $5000, 
to replace Professor Q at the seminar, payable at the conclusion of 
the seminar on Monday. P agrees. P gives her lecture Sunday 
afternoon. ITINs are not available from the IRS on that Saturday, 
Sunday, or Monday. After the seminar ends on Monday, P, who does not 
have an ITIN, requests payment for her teaching. P furnishes a 
beneficial owner withholding certificate, described in Sec. 1.1441-
1(e)(2), to University U that represents that P is a resident of 
Country Z (within the meaning of the U.S.--Z tax treaty) and meets 
all applicable requirements for claiming benefits under the U.S.--Z 
tax treaty. The beneficial owner withholding certificate does not, 
however, contain an ITIN for P. On Tuesday, University U faxes a 
completed Form W-7, including the required certification, for P, to 
the IRS, Philadelphia Service Center, for an expedited ITIN. 
Pursuant to Sec. 1.1441-6(b) and paragraph (h)(2) of this section, 
absent actual knowledge or reason to know otherwise, University U 
may rely on the documentation furnished by P and pay $5000 to P 
without withholding U.S. tax based on the treaty exemption.

    (6) Effective date. This paragraph (h) applies to payments made 
after December 31, 2001.

PART 301--PROCEDURE AND ADMINISTRATION

    Par. 5. The authority for part 301 continues to read in part as 
follows:

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


    Par. 6. In Sec. 301.6109-1, paragraph (g)(3) is revised to read as 
follows:


Sec. 301.6109-1  Identifying numbers.

* * * * *
    (g) * * *
    (3) [Reserved]. For further guidance, see Sec. 301.6109-1T(g)(3).
* * * * *

    Par. 7. Section 301.6109-1T is added to read as follows:


Sec. 301.6109-1T  Identifying numbers (temporary).

    (a) Through (g)(2) [Reserved]. For further guidance, see 
Sec. 301.6109-1(a) through (g)(2).
    (g)(3) Waiver of prohibition to disclose taxpayer information when 
acceptance agent acts. As part of its request for an IRS individual 
taxpayer identification number or submission of proof of foreign status 
with respect to any taxpayer identifying number, where the foreign 
person acts through an acceptance agent, the foreign person will agree 
to waive the limitations in section 6103 regarding the disclosure of 
certain taxpayer information. However, the waiver will apply only for 
purposes of permitting the Internal Revenue Service and the acceptance 
agent to communicate with each other regarding matters related to the 
assignment of a taxpayer identifying number, including disclosure of 
any taxpayer identifying number previously issued to the foreign 
person, and change of foreign status. This paragraph (g)(3) applies to 
payments made after December 31, 2001.
    (h) through (j)(2)(iii). For further guidance, see Sec. 301.6109(h) 
through (j)(2)(iii).

    Approved: December 21, 2001.
Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
Mark Weinberger,
Assistant Secretary of the Treasury.
[FR Doc. 02-1125 Filed 1-16-02; 8:45 am]
BILLING CODE 4830-01-P