[Federal Register Volume 71, Number 49 (Tuesday, March 14, 2006)]
[Rules and Regulations]
[Pages 13003-13008]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 06-2443]


-----------------------------------------------------------------------

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 301

[TD 9253]
RIN 1545-AY92


Revisions to Regulations Relating to Withholding of Tax on 
Certain U.S. Source Income Paid to Foreign Persons and Revisions of 
Information Reporting Regulations

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations and removal of temporary regulations.

-----------------------------------------------------------------------

SUMMARY: This document contains final regulations relating to the 
withholding of tax under sections 1441 and 1442 on certain U.S. source 
income paid to foreign persons and related requirements governing 
collection, deposit, refunds, and credits of withheld amounts under 
sections 1461 through 1463. Additionally, this document contains final 
regulations under sections 6049 and 6114. These regulations affect 
persons making payments of U.S. source income to foreign persons and 
foreign persons claiming benefits under a U.S. income tax treaty.

DATES: Effective date: These regulations are effective March 14, 2006. 
The removal of Sec.  1.1441-1(e)(4)(vii)(G) is effective as of January 
1, 2001.

FOR FURTHER INFORMATION CONTACT: Ethan Atticks, (202) 622-3840 (not a 
toll free number).

SUPPLEMENTARY INFORMATION: 

Paperwork Reduction Act

    The collections of information contained in this final rule have 
been previously reviewed and approved by the Office of Management and 
Budget in accordance with the Paperwork Reduction Act of 1995 (44 
U.S.C. 3507(d)) under control number 1545-1484.
    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

    In Treasury Decision 8734 (1997-2 C.B. 109 [62 FR 53387]), the 
Treasury Department and the IRS issued comprehensive regulations under 
chapter 3 (sections 1441-1464) and subpart B of Part III of Subchapter 
A of chapter 61 (sections 6041 through 6050T) of the Internal Revenue 
Code (Code). Those regulations were amended by TD 8804 (1999-1 C.B. 793 
[63 FR 72183]), TD 8856 (2000-1 C.B. 298 [64 FR 73408]), TD 8881 (2000-
1 C.B. 1158 [65 FR 32152]), and TD 9023 (2002-2 C.B. 955 [67 FR 70310]) 
(collectively the current regulations). The current regulations are 
generally effective as of January 1, 2001.
    In Notice 2001-4 (2001-1 C.B. 267), Notice 2001-11 (2001-1 C.B. 
464), and

[[Page 13004]]

Notice 2001-43 (2001-2 C.B. 72), the Treasury Department and the IRS 
announced the intention to amend the current regulations under sections 
1441, 6049 and 6114 to address the matters discussed in those notices.
    On March 30, 2005, the IRS and Treasury published a notice of 
proposed rulemaking (REG-125443-01, 2005-16 I.R.B. 912) in the Federal 
Register (70 FR 16189) (hereinafter the proposed regulations). The 
proposed regulations contained provisions to implement certain changes 
announced in those notices and other changes.
    No public hearing regarding the proposed regulations was requested 
or held. However, certain written comments were received. After 
consideration of the comments, the proposed regulations are adopted as 
revised by this Treasury decision.

Summary of Comments

    These final regulations finalize the provisions of the proposed 
regulations with only two areas of modification. The comments received 
and the modifications made in response to those comments are described 
below.

A. Taxpayer Identification Number (TIN) Requirement for Certain Foreign 
Grantor Trusts

    Section 1.1441-1(e)(4)(vii)(G) provides that a TIN must be stated 
on a withholding certificate from a person representing to be a foreign 
grantor trust with 5 or fewer grantors. Generally, if no TIN is 
provided, the withholding certificate is considered invalid. See Sec.  
1.1441-1(e)(2)(ii).
    The proposed regulations eliminated this TIN requirement for 
withholding certificates provided by such persons to qualified 
intermediaries (QIs), but retained it for withholding certificates 
provided by such persons to other withholding agents if the certificate 
was executed on or before December 31, 2003.
    Commentators requested that these final regulations adopt the 
provisions of the proposed regulations that remove the TIN requirement 
but with an effective date that applies to certificates executed and 
provided to all withholding agents, not just QIs, on or after January 
1, 2001, the effective date of the current regulations. The 
commentators state that the retroactive effective date for withholding 
certificates provided to the other withholding agents is consistent 
with the IRS and Treasury's recognition that the TIN requirement in the 
current regulations is not serving to enhance enforcement objectives. 
Further, the commentators state that for administrative reasons the 
effective dates should be consistent whether or not the withholding 
certificate is provided to a QI or other withholding agent. The IRS and 
Treasury agree with this comment. Accordingly, under these final 
regulations, a withholding certificate executed on or after January 1, 
2001, and provided to a QI or other withholding agent by a person 
representing to be a foreign grantor trust with five or fewer grantors 
does not need to state a TIN for such certificate to be valid.

B. Reporting of Treaty-Based Return Positions

    Section 301.6114-1(a) provides that, if a taxpayer takes a return 
position that a tax treaty overrules or modifies any provision of the 
Code and thereby effects a reduction of any tax at any time, the 
taxpayer must disclose that return position, either on a statement 
attached to the return or on a return filed for the purpose of making 
such disclosure. When applicable, Sec.  301.6114-1(d) generally 
requires a taxpayer to attach Form 8833, Treaty Based Return Position 
Disclosure Under Section 6114 or 7701(b), to its U.S. Federal income 
tax return. Section 301.6114-1(b) states that reporting is required 
unless it is expressly waived and provides a nonexclusive list of 
particular positions for which reporting is required. Section 301.6114-
1(c) then provides a list of specific exceptions from the general 
reporting requirements of Sec.  301.6114-1(a) and (b).
    The proposed regulations provided that reporting under Sec.  
301.6114-1(b)(4)(ii) is required only for the positions specifically 
described in paragraphs (b)(4)(ii)(A) and (B), or (C) or (D) of that 
section. Further, the proposed regulations provided that reporting 
under Sec.  301.6114-1(b)(4)(ii)(D) is waived for taxpayers that are 
not individuals or States and that receive amounts of income subject to 
withholding that do not exceed $10,000 in the aggregate for the taxable 
year. See Prop. Reg. Sec.  301.6114-1(c)(1)(i), and (7).
    Commentators suggested that the $10,000 threshold applicable to 
taxpayers that are not individuals or States should be increased to 
$500,000, the threshold amount for reporting under Sec.  301.6114-
1(b)(4)(ii)(C) (addressing payments to a related foreign person where 
benefits are claimed under a treaty that contains a limitation on 
benefits article). The commentators noted that entities typically have 
substantially higher levels of investment as compared to individuals 
and therefore a higher threshold is warranted. The commentators 
concluded that the administrative burden placed on these entities by 
the regulations is not appropriate when considering the benefit to the 
government by the disclosure. As a result, the commentators believed 
that the exception should be modified.
    In addition, the commentators suggested that reporting be waived 
for pension funds and certain other persons required to report under 
Sec.  301.6114-1(b)(4)(ii)(D), which requires reporting whenever a 
treaty imposes ``any condition'' in addition to a person's residence in 
the treaty country for entitlement to treaty benefits. The commentators 
stated that because, for example, an income tax treaty may condition a 
pension fund's entitlement to a reduced rate of taxation on dividends 
on the pension fund not being engaged in a trade or business, and 
because a pension fund rarely will violate such a condition, from a 
practical standpoint the sole requirement for entitlement to treaty 
benefits is the residence of the pension fund. Therefore, the 
commentators suggested that requiring the pension fund to file an 
income tax return and make a treaty based disclosure of its position 
imposes an unnecessary administrative burden. Accordingly, the 
commentators believed that it was appropriate to interpret the 
regulations such that the trade or business requirement described above 
with respect to pension funds is not ``any condition'' described in 
Sec.  301.6114-1(b)(4)(ii)(D). To clarify this point, the commentators 
requested that the final regulations waive reporting for pension funds.
    Commentators also requested that Sec.  301.6114-1(c)(6), which 
waives reporting for amounts required to be reported under section 
6038A on a Form 5472, ``Information Return of a 25% Foreign-Owned U.S. 
Corporation or a Foreign Corporation Engaged in a U.S. Trade or 
Business (under sections 6038A and 6038(c) of the Internal Revenue 
Code),'' to the extent permitted under the form or accompanying 
instructions, be activated by including such permission in the form or 
instructions.
    The IRS and Treasury considered the comments discussed above, as 
well as the general bases for requiring reporting under section 6114. 
The IRS and Treasury agree that reporting under section 6114 should not 
be required in certain circumstances where the payment is properly 
reported on Form 1042-S, ``Foreign Person's U.S. Source Income Subject 
to Withholding,'' and the withholding agent is a U.S. person,

[[Page 13005]]

or a foreign person that has entered into an agreement that provides 
for IRS audit. Thus, in response to the comments described above, the 
following amendments are made to the waiver provisions of Sec.  
301.6114-1(c).
    First, rather than activating the exception for amounts required to 
be reported under section 6038A on Form 5472, paragraph (c)(6) of the 
regulations is revised to replace this provision regarding Form 5472 
with a provision waiving reporting for amounts properly reported on 
Form 1042-S by a withholding agent that is a reporting corporation 
within the meaning of section 6038A(a). Second, a new paragraph (c)(7) 
is added to provide that reporting is waived for amounts properly 
reported on Form 1042-S by a withholding agent that is a U.S. financial 
institution, a QI, or a withholding foreign partnership (WP) or 
withholding foreign trust (WT) if the beneficial owner is a direct 
account holder of the U.S. financial institution or QI or a direct 
beneficiary or owner of the WP or WT. Third, a new paragraph (c)(8) is 
added which replaces the provision in the proposed regulations (see 
Prop. Reg. Sec.  301.6114-1(c)(7)) waiving reporting for taxpayers that 
are not individuals or States and that receive amounts of income 
subject to withholding that do not exceed the $10,000 threshold. New 
paragraph (c)(8) contains a waiver for taxpayers that are not 
individuals or States that receive amounts that have been properly 
reported on Form 1042-S, do not exceed $500,000, and are not received 
through an intermediary or flow-through entity.
    Notwithstanding the discussion above, the final regulations provide 
that the waivers from reporting in paragraph (c)(6), (7) and (8) do not 
apply to the extent that reporting is specifically required under the 
instructions to Form 8833.
    Finally, these final regulations clarify that reporting under 
section 301.6114-1(b)(4)(ii) is required only for the positions 
specifically described in paragraphs (b)(4)(ii)(A) and (B), or (C) or 
(D).

Effect on Other Documents

    Sections (V)(C), (D), and (E) of Notice 2001-4 (2001-1 C.B. 267), 
Notice 2001-11 (2001-1 C.B. 464), and Sections 2 and 3 of Notice 2001-
43 (2001-2 C.B. 72), are superseded as of March 14, 2006.

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, and, because the 
regulations do not impose a new 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, the proposed 
regulations preceding these regulations were 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 proposed regulations is Ethan 
Atticks, Office of 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

    Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income 
taxes, Penalties, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

0
Accordingly, 26 CFR parts 1 and 301 are amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read, in 
part, as follows:

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

0
Par. 2. Section 1.1441-1 is amended as follows:
0
1. Paragraph (b)(2)(iv)(A) is revised.
0
2. Paragraph (b)(3)(iii)(E) is added.
0
3. Paragraph (c)(30) is added.

0
4. Paragraph (e)(4)(vii)(G) is removed and paragraph (e)(4)(vii)(H) and 
(I) are redesignated as paragraph (e)(4)(vii)(G) and (H) respectively.
    The revisions and additions read as follows:


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

* * * * *
    (b) * * *
    (2) * * *
    (iv) Payments to a U.S. branch of certain foreign banks or foreign 
insurance companies--(A) U.S. branch treated as a U.S. person in 
certain cases. A payment to a U.S. branch of a foreign person is a 
payment to a foreign person. However, a U.S. branch described in this 
paragraph (b)(2)(iv)(A) and a withholding agent (including another U.S. 
branch described in this paragraph (b)(2)(iv)(A)) may agree to treat 
the branch as a U.S. person for purposes of withholding on specified 
payments to the U.S. branch. Notwithstanding the preceding sentence, a 
withholding agent making a payment to a U.S. branch treated as a U.S. 
person under this paragraph (b)(2)(iv)(A) shall not treat the branch as 
a U.S. person for purposes of reporting the payment made to the branch. 
Therefore, a payment to such U.S. branch shall be reported on Form 
1042-S under Sec.  1.1461-1(c). Further, a U.S. branch that is treated 
as a U.S. person under this paragraph (b)(2)(iv)(A) shall not be 
treated as a U.S. person for purposes of the withholding certificate it 
may provide to a withholding agent. Therefore, the U.S. branch must 
furnish a U.S. branch withholding certificate on Form W-8 as provided 
in paragraph (e)(3)(v) of this section and not a Form W-9. An agreement 
to treat a U.S. branch as a U.S. person must be evidenced by a U.S. 
branch withholding certificate described in paragraph (e)(3)(v) of this 
section furnished by the U.S. branch to the withholding agent. A U.S. 
branch described in this paragraph (b)(2)(iv)(A) is any U.S. branch of 
a foreign bank subject to regulatory supervision by the Federal Reserve 
Board or a U.S. branch of a foreign insurance company required to file 
an annual statement on a form approved by the National Association of 
Insurance Commissioners with the Insurance Department of a State, a 
Territory, or the District of Columbia. In addition, a financial 
institution organized in a possession of the United States will be 
treated as a U.S. branch for purposes of this paragraph (b)(2)(iv)(A). 
The Internal Revenue Service (IRS) may approve a list of U.S. branches 
that may qualify for treatment as a U.S. person under this paragraph 
(b)(2)(iv)(A) (see Sec.  601.601(d)(2) of this chapter). See Sec.  
1.6049-5(c)(5)(vi) for the treatment of U.S. branches as U.S. payors if 
they make a payment that is subject to reporting under chapter 61 of 
the Internal Revenue Code. Also see Sec.  1.6049-5(d)(1)(ii) for the 
treatment of U.S. branches as foreign payees under chapter 61 of the 
Internal Revenue Code.
* * * * *
    (3) * * *
    (iii) * * *

[[Page 13006]]

    (E) Certain payments for services. A payment for services is 
presumed to be made to a foreign person if--
    (1) The payee is an individual;
    (2) The withholding agent does not know, or have reason to know, 
that the payee is a U.S. citizen or resident;
    (3) The withholding agent does not know, or have reason to know, 
that the income is (or may be) effectively connected with the conduct 
of a trade or business within the United States; and
    (4) All of the services for which the payment is made were 
performed by the payee outside of the United States.
* * * * *
    (c) * * *
    (30) Possessions of the United States. For purposes of the 
regulations under chapters 3 and 61 of the Internal Revenue Code, 
possessions of the United States means Guam, American Samoa, the 
Northern Mariana Islands, Puerto Rico, and the Virgin Islands.
* * * * *
    Par. 3. Section 1.1441-3 is amended by revising paragraphs (c)(3) 
and (e)(2) to read as follows:


Sec.  1.1441-3  Determination of amounts to be withheld.

* * * * *
    (c) * * *
    (3) Special rules in the case of distributions from a regulated 
investment company--(i) General rule. If the amount of any 
distributions designated as being subject to section 852(b)(3)(C) or 
5(A), or 871(k)(1)(C) or (2)(C), exceeds the amount that may be 
designated under those sections for the taxable year, then no penalties 
will be asserted for any resulting underwithholding if the designations 
were based on a reasonable estimate (made pursuant to the same 
procedures as described in paragraph (c)(2)(ii)(A) of this section) and 
the 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 IRS 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.
    (ii) Reliance by intermediary on reasonable estimate. For purposes 
of determining whether a payment is a distribution designated as 
subject to section 852(b)(3)(C) or (5)(A), or 871(k)(1)(C) or (2)(C), a 
withholding agent that is not the distributing regulated investment 
company may, absent actual knowledge or reason to know otherwise, rely 
on the designations that the distributing company represents have been 
made in accordance with paragraph (c)(3)(i) of this section. Failure by 
the withholding agent to withhold the required amount due to a failure 
by the regulated investment company to reasonably estimate the required 
amounts or to properly communicate the relevant information to the 
withholding agent shall be imputed to the distributing company. In such 
a case, the IRS may collect from the distributing company any 
underwithheld amount and subject the company to applicable interest and 
penalties as a withholding agent.
* * * * *
    (e) * * *
    (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 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)) in 
effect on that date. A withholding agent making regular or frequent 
payments in foreign currency may use a month-end spot rate or a monthly 
average spot rate. In addition, such a withholding agent may use the 
spot rate on the date the amount of tax is deposited (within the 
meaning of Sec.  1.6302-2(a)), provided that such deposit is made 
within seven days of the date of the payment giving rise to the 
obligation to withhold. A spot rate convention must be used 
consistently for all non-dollar amounts withheld and 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.
* * * * *

0
Par. 4. In Sec.  1.1441-6, paragraph (b)(1) is revised to read as 
follows:


Sec.  1.1441-6  Claim of reduced withholding under an income tax 
treaty.

* * * * *
    (b) Reliance on claim of reduced withholding under an income tax 
treaty--(1) In general. The withholding imposed under section 1441, 
1442, or 1443 on any payment to a foreign person is eligible for 
reduction under the terms of an income tax treaty only to the extent 
that such payment is treated as derived by a resident of an applicable 
treaty jurisdiction, such resident is a beneficial owner, and all other 
requirements for benefits under the treaty are satisfied. See section 
894 and the regulations thereunder to determine whether a resident of a 
treaty country derives the income. 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 can reliably associate the payment with a beneficial owner 
withholding certificate, as described in Sec.  1.1441-1(e)(2), that 
contains the information necessary to support the claim, or, in the 
case of a payment of income described in paragraph (c)(2) of this 
section made outside the United States with respect to an offshore 
account, documentary evidence described in paragraphs (c)(3), (4), and 
(5) of this section. See Sec.  1.6049-5(e) for the definition of 
payments made outside the United States and Sec.  1.6049-5(c)(1) for 
the definition of offshore account. For purposes of this paragraph 
(b)(1), a beneficial owner withholding certificate described in Sec.  
1.1441-1(e)(2)(i) contains information necessary to support the claim 
for a treaty benefit only if it includes the beneficial owner's 
taxpayer identifying number (except as otherwise provided in paragraph 
(c)(1) of this section and Sec.  1.1441-6(g)) and the representations 
that the beneficial owner derives the income under section 894 and the 
regulations thereunder, if required, and meets the limitation on 
benefits provisions of the treaty, if any. The withholding certificate 
must also contain any other representations required by this section 
and any other information, certifications, or statements as may be 
required by the form or accompanying instructions in addition to, or in 
place of, the information and certifications described in this section. 
Absent actual knowledge or reason to know that the claims are incorrect 
(and subject to the standards of knowledge in Sec.  1.1441-7(b)), a 
withholding agent may rely on the claims made on a withholding 
certificate or on documentary evidence. A withholding agent may also 
rely on the information contained in a withholding statement provided 
under Sec.  1.1441-1(e)(3)(iv) and 1.1441-5(c)(3)(iv) and (e)(5)(iv) to 
determine whether the appropriate statements regarding section 894 and

[[Page 13007]]

limitation on benefits have been provided in connection with 
documentary evidence. If the beneficial owner is related to the person 
obligated to pay the income, within the meaning of section 267(b) or 
707(b), the withholding certificate must also contain a representation 
that the beneficial owner will file the statement required under Sec.  
301.6114-1(d) of this chapter (if applicable). The requirement to file 
an information statement under section 6114 for income subject to 
withholding applies only to amounts received during the taxpayer's 
taxable year that, in the aggregate, exceed $500,000. See Sec.  
301.6114-1(d) of this chapter. The Internal Revenue Service (IRS) may 
apply the provisions of Sec.  1.1441-1(e)(1)(ii)(B) to notify the 
withholding agent that the certificate cannot be relied upon to grant 
benefits under an income tax treaty. See Sec.  1.1441-1(e)(4)(viii) 
regarding reliance on a withholding certificate by a withholding agent. 
The provisions of Sec.  1.1441-1(b)(3)(iv) dealing with a 90-day grace 
period shall apply for purposes of this section.
* * * * *

0
Par. 5. Section 1.6049-5 is amended as follows:
0
1. Paragraph (c)(1) is revised.
0
2. Paragraphs (c)(5)(i), (ii), (iii), (iv), (v) and (vi) are 
redesignated as paragraphs (c)(5)(i)(A), (B), (C), (D), (E), and (F), 
respectively.
0
3. A new heading is added to paragraph (c)(5)(i).
0
4. New paragraph (c)(5)(ii) is added.
    The revisions and additions read as follows:


Sec.  1.6049-5  Interest and original issue discount subject to 
reporting after December 31, 1982.

* * * * *
    (c) Applicable rules--(1) Documentary evidence for offshore 
accounts and for possessions accounts. A payor may rely on documentary 
evidence described in this paragraph (c)(1) instead of a beneficial 
owner withholding certificate described in Sec.  1.1441-1(e)(2)(i) in 
the case of a payment made outside the United States to an offshore 
account, in the case of a payment made to a U.S. possessions account 
or, in the case of broker proceeds described in Sec.  1.6045-1(c)(2), 
in the case of a sale effected outside the United States (as defined in 
Sec.  1.6045-1(g)(3)(iii)(A)). For purposes of this paragraph (c)(1), 
an offshore account means an account maintained at an office or branch 
of a U.S. or foreign bank or other financial institution at any 
location outside the United States (i.e., other than in any of the 
fifty States or the District of Columbia) and outside of possessions of 
the United States. Thus, for example, an account maintained in a 
foreign country at a branch of a U.S. bank or of a foreign subsidiary 
of a U.S. bank is an offshore account. For purposes of this paragraph 
(c)(1), a U.S. possessions account means an account maintained at an 
office or branch of a U.S. or foreign bank or other financial 
institution located within a possession of the United States. For the 
definition of a payment made outside the United States, see paragraph 
(e) of this section. A payor may rely on documentary evidence if the 
payor has established procedures to obtain, review, and maintain 
documentary evidence sufficient to establish the identity of the payee 
and the status of that person as a foreign person (including, but not 
limited to, documentary evidence described in Sec.  1.1441-6(c)(3) or 
(4)); and the payor obtains, reviews, and maintains such documentary 
evidence in accordance with those procedures. A payor maintains the 
documents reviewed by retaining the original, certified copy, or a 
photocopy (or microfiche or similar means of record retention) of the 
documents reviewed and noting in its records the date on which and by 
whom the document was received and reviewed. Documentary evidence 
furnished for the payment of an amount subject to withholding under 
chapter 3 of the Internal Revenue Code must contain all of the 
information that is necessary to complete a Form 1042-S for that 
payment. A payor may also rely on documentary evidence associated with 
a flow-through withholding certificate for payments treated as made to 
foreign partners of a nonwithholding foreign partnership, as defined in 
Sec.  1.1441-1(c)(28), the foreign beneficiaries of a foreign simple 
trust, as defined in Sec.  1.1441-1(c)(24), or foreign owners of a 
foreign grantor trust, as defined in Sec.  1.1441-1(c)(26), even though 
the partnership or trust account is maintained in the United States.
* * * * *
    (5) * * * (i) Definition. * * *
    (ii) Reporting by U.S. payors in U.S. possessions. U.S. payors are 
not required to report on Form 1099 income that is from sources within 
a possession of the United States and that is exempt from taxation 
under section 931, 932, or 933, each of which sections exempts certain 
income from sources within a possession of the United States paid to a 
bona fide resident of that possession. For purposes of this paragraph 
(c)(5)(ii), a U.S. payor may treat the beneficial owner as a bona fide 
resident of the possession of the United States from which the income 
is sourced if, prior to payment of the income, the U.S. payor can 
reliably associate the payment with valid documentation that supports 
the claim of residence in the possession of the United States from 
which the income is sourced. This paragraph (c)(5)(ii) shall not apply 
if the U.S. payor has actual knowledge or reason to know that the 
documentation is unreliable or incorrect or that the income does not 
satisfy the requirements for exemption under section 931, 932, or 933. 
For the rules determining whether income is from sources within a 
possession of the United States, see section 937(b) and the regulations 
thereunder.
* * * * *

PART 301---PROCEDURE AND ADMINISTRATION

0
Par. 6. The authority citation for part 301 continues to read, in part, 
as follows:

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

0
Par. 7. In Sec.  301.6114-1 is amended as follows:
0
1. Paragraphs (c)(1)(i) through (c)(1)(vii) are redesignated as 
paragraphs (c)(1)(ii) through (c)(1)(viii), respectively.
0
2. New paragraph (c)(1)(i) is added.
0
3. Paragraph (c)(6) is revised.
0
4. Paragraphs (c)(7) and (8) are added.
    The additions and revision read as follows:


Sec.  301.6114-1  Treaty-based return positions.

* * * * *
    (c) * * * (1) * * *
    (i) For amounts received on or after January 1, 2001, reporting 
under paragraph (b)(4)(ii) is waived, unless reporting is specifically 
required under paragraphs (b)(4)(ii)(A) and (B) of this section, 
paragraph (b)(4)(ii)(C) of this section, or paragraph (b)(4)(ii)(D) of 
this section;
* * * * *
    (6)(i) For taxable years ending after December 31, 2004, except as 
provided in paragraph (c)(6)(ii) of this section, reporting under 
paragraph (b)(4)(ii) of this section is waived for amounts received by 
a related party, within the meaning of section 6038A(c)(2), from a 
withholding agent that is a reporting corporation, within the meaning 
of section 6038A(a), and that are properly reported on Form 1042-S.
    (ii) Paragraph (c)(6)(i) of this section does not apply to any 
amounts for which reporting is specifically required under the 
instructions to Form 8833.
    (7)(i) For taxable years ending after December 31, 2004, except as 
provided

[[Page 13008]]

in paragraph (c)(7)(iv) of this section, reporting under paragraph 
(b)(4)(ii) of this section is waived for amounts properly reported on 
Form 1042-S (on either a specific payee or pooled basis) by a 
withholding agent described in paragraph (c)(7)(ii) of this section if 
the beneficial owner is described in paragraph (c)(7)(iii) of this 
section.
    (ii) A withholding agent described in this paragraph (c)(7)(ii) is 
a U.S. financial institution, as defined in Sec.  1.1441-1(c)(5) of 
this chapter, a qualified intermediary, as defined in Sec.  1.1441-
1(e)(5)(ii) of this chapter, a withholding foreign partnership, as 
defined Sec.  1.1441-5(c)(2)(i) of this chapter, or a withholding 
foreign trust, as defined in Sec.  1.1441-5(e)(5)(v) of this chapter.
    (iii) A beneficial owner described in this paragraph (c)(7)(iii) of 
this section is a direct account holder of a U.S. financial institution 
or qualified intermediary, a direct partner of a withholding foreign 
partnership, or a direct beneficiary or owner of a simple or grantor 
trust that is a withholding foreign trust. A beneficial owner described 
in this paragraph (c)(7)(iii) also includes an account holder to which 
a qualified intermediary has applied section 4A.01 or 4A.02 of the 
qualified intermediary agreement, contained in Revenue Procedure 2000-
12 (2000-1 C.B. 387), (as amended by Revenue Procedure 2003-64, (2003-2 
C.B. 306); Revenue Procedure 2004-21 (2004-1 C.B. 702); Revenue 
Procedure 2005-77 (2005-51 I.R.B. 1176) (see Sec.  601.601(b)(2) of 
this chapter) a partner to which a withholding foreign partnership has 
applied section 10.01 or 10.02 of the withholding foreign partnership 
agreement, and a beneficiary or owner to which a withholding foreign 
trust has applied section 10.01 or 10.02 of the withholding foreign 
trust agreement, contained in Revenue Procedure 2003-64, (2003-2 C.B. 
306), (as amended by Revenue Procedure 2004-21 (2004-1 C.B. 702); 
Revenue Procedure 2005-77 (2005-51 I.R.B. 1176); (see Sec.  
601.601(b)(2) of this chapter).
    (iv) Paragraph (c)(7)(i) of this section does not apply to any 
amounts for which reporting is specifically required under the 
instructions to Form 8833.
    (8)(i) For taxable years ending after December 31, 2004, except as 
provided in paragraph (c)(8)(ii) of this section, reporting under 
paragraph (b)(4)(ii) of this section is waived for taxpayers that are 
not individuals or States and that receive amounts of income that have 
been properly reported on Form 1042-S, that do not exceed $500,000 in 
the aggregate for the taxable year and that are not received through an 
account with an intermediary, as defined in Sec.  1.1441-1(c) (13), or 
with respect to interest in a flow-through entity, as defined in Sec.  
1.1441-1(c)(23), (ii) The exception contained in paragraph (c)(8)(i) of 
this section does not apply to any amounts for which reporting is 
specifically required under the instructions to Form 8833.
* * * * *

Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
    Approved: February 27, 2006.
Eric Solomon,
Acting Deputy Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 06-2443 Filed 3-13-06; 8:45 am]
BILLING CODE 4830-01-P