[Federal Register Volume 83, Number 242 (Tuesday, December 18, 2018)]
[Proposed Rules]
[Pages 64757-64768]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-27290]
=======================================================================
-----------------------------------------------------------------------
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-132881-17]
RIN 1545-BO30
Regulations Reducing Burden Under FATCA and Chapter 3
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking.
-----------------------------------------------------------------------
SUMMARY: This document contains proposed regulations eliminating
withholding on payments of gross proceeds, deferring withholding on
foreign passthru payments, eliminating withholding on certain insurance
premiums, and clarifying the definition of investment entity. This
notice of proposed rulemaking also includes guidance concerning certain
due diligence requirements of withholding agents and guidance on
refunds and credits of amounts withheld.
DATES: Written or electronic comments and requests for a public hearing
must be received by February 19, 2019.
ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-132881-17), Internal
Revenue Service, Room 5203, P.O. Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may also be hand-delivered Monday
through Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR
(REG-132881-17), Courier's Desk, Internal Revenue Service, 1111
Constitution Avenue NW, Washington, DC 20224; or sent electronically
via the Federal eRulemaking Portal at http://www.regulations.gov (IRS
REG-132881-17).
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
John Sweeney, Nancy Lee, or Subin Seth, (202) 317-6942; concerning
submissions of comments and/or requests for a public hearing, Regina
Johnson, (202) 317-6901 (not toll free numbers).
SUPPLEMENTARY INFORMATION:
Background
This document contains amendments to the Income Tax Regulations (26
CFR part 1) under chapter 4 (sections 1471 through 1474) commonly known
as the Foreign Account Tax Compliance Act (FATCA). This document also
contains amendments to the Income Tax Regulations (26 CFR part 1) under
sections 1441 and 1461.
On January 28, 2013, the Department of the Treasury (Treasury
Department) and the IRS published final regulations under chapter 4 in
the Federal Register (TD 9610, 78 FR 5873), and on September 10, 2013,
corrections to the final regulations were published in the Federal
Register (78 FR 55202). The regulations in TD 9610 and the corrections
thereto are collectively referred to in this preamble as the 2013 final
chapter 4 regulations. On March 6, 2014, the Treasury Department and
the IRS published temporary regulations under chapter 4 (TD 9657, 79 FR
12812) that clarify and modify certain provisions of the 2013 final
chapter 4 regulations, and corrections to the temporary regulations
were published in the Federal Register on July 1, 2014, and November
18, 2014 (79 FR 37175 and 78 FR 68619, respectively). The regulations
in TD 9657 and the corrections thereto are referred to in this preamble
as the 2014 temporary chapter 4 regulations. A notice of proposed
rulemaking cross-referencing the 2014 temporary chapter 4 regulations
was published in the Federal Register on March 6, 2014 (79 FR 12868).
On March 6, 2014, the Treasury Department and the IRS published
temporary regulations under chapters 3 and 61 in the Federal Register
(TD 9658, 79 FR 12726) to coordinate with the regulations under chapter
4, and corrections to those temporary regulations were published in the
Federal Register (79 FR 37181) on July 1, 2014. Collectively, the
regulations in TD 9657 and the corrections thereto are referred to in
this preamble as the 2014 temporary coordination regulations. A notice
of proposed rulemaking cross-referencing the 2014 temporary
coordination regulations was published in the Federal Register on March
6, 2014 (79 FR 12880).
On January 6, 2017, the Treasury Department and the IRS published
final and temporary regulations under chapter 4 in the Federal Register
(TD 9809, 82 FR 2124), and corrections to those final regulations were
published on June 30, 2017 in the Federal Register (82 FR 27928).
Collectively, the regulations in TD 9809 and the corrections thereto
are referred to in this preamble as the 2017 chapter 4 regulations. A
notice of proposed rulemaking cross-referencing the temporary
regulations in TD 9809 and proposing regulations under chapter 4
relating to verification requirements for certain entities was
published in the Federal Register on January 6, 2017 (82 FR 1629). Also
on January 6, 2017, the Treasury Department and the IRS published final
and temporary regulations under chapters 3 and 61 in the Federal
Register (TD 9808, 82 FR 2046), and corrections to those final
regulations were published on June 30, 2017 in the Federal Register (82
FR 29719). Collectively, the regulations in TD 9808 and the corrections
thereto are referred to in this preamble as the 2017 coordination
regulations. A notice of proposed rulemaking cross-referencing the
temporary regulations in TD 9808 was published in the Federal Register
on January 6, 2017 (82 FR 1645).
Pursuant to Executive Order 13777, Presidential Executive Order on
Enforcing the Regulatory Reform Agenda (82 FR 9339), the Treasury
Department is responsible for conducting a broad review of existing
regulations. In a Request for Information published on June 14, 2017
(82 FR 27217), the Treasury Department invited public comment
concerning regulations that should be modified or eliminated in order
to reduce unnecessary burdens. In addition, in Notice 2017-28 (2017-19
I.R.B. 1235), the Treasury Department and the IRS invited public
comment on recommendations for the 2017-2018 Priority Guidance Plan for
tax guidance, including recommendations relating to Executive Order
13777. In response to the invitations for comments in the Request for
Information and Notice 2017-28, the Treasury Department and the IRS
received comments suggesting modifications to the regulations under
chapters 3 and 4. See also Executive Order 13789, Identifying and
Reducing Tax Regulatory Burdens, issued on April 21, 2017 (82 FR 19317)
and the second report issued in response (82 FR 48013) (stating that
the Treasury Department continues to analyze all recently issued
significant regulations and is considering possible reforms of recent
regulations, which include regulations under chapter 4).
Based on public input, and taking into account the burden-reducing
policies described in Executive Orders 13777 and 13789, these
regulations propose certain amendments to the regulations under
chapters 3 and 4, including certain refund related issues for which
comments were received. The Explanation of Provisions section of this
preamble describes these proposed amendments and addresses public
comments received in response to the Request for Information and Notice
2017-28, other than comments that would require a statutory change or
[[Page 64758]]
were addressed in prior Treasury decisions. The Explanation of
Provisions section of this preamble also discusses comments to the 2017
chapter 4 regulations and 2017 coordination regulations to the extent
the comments relate to amendments that are included in these proposed
regulations. The Treasury Department and the IRS continue to study
other public comments.
Explanation of Provisions
I. Elimination of Withholding on Payments of Gross Proceeds From the
Sale or Other Disposition of Any Property of a Type Which Can Produce
Interest or Dividends From Sources Within the United States
Under sections 1471(a) and 1472, withholdable payments made to
certain foreign financial institutions (FFIs) and certain non-financial
foreign entities (NFFEs) are subject to withholding under chapter 4.
Section 1473(1) states that, except as otherwise provided by the
Secretary, the term ``withholdable payment'' means: (i) Any payment of
interest (including any original issue discount), dividends, rents,
salaries, wages, premiums, annuities, compensations, remunerations,
emoluments, and other fixed or determinable annual or periodical gains,
profits, and income, if such payment is from sources within the United
States; and (ii) any gross proceeds from the sale or other disposition
of any property of a type which can produce interest or dividends from
sources within the United States.
Since the enactment of chapter 4, the Treasury Department and the
IRS have received comments from withholding agents on the burden of
implementing a requirement to withhold on gross proceeds. The comments
have noted in particular the lead time required to implement such a
requirement and the potential complexity of a sufficient regulatory
framework. The comments assert that withholding on gross proceeds would
require significant efforts by withholding agents, including executing
brokers that do not obtain tax documentation. The comments assert that
adding this withholding requirement is of limited incremental benefit
in supporting the objectives of chapter 4 with respect to foreign
entities investing in U.S. securities. In response to these comments,
the Treasury Department and the IRS have repeatedly issued guidance
deferring the date when withholding on gross proceeds would begin. The
2017 chapter 4 regulations provide that such withholding will begin on
January 1, 2019.
Many U.S. and foreign financial institutions, foreign governments,
the Treasury Department, the IRS, and other stakeholders have devoted
substantial resources to implementing FATCA withholding on withholdable
payments. At the same time, 87 jurisdictions have an IGA in force or in
effect and 26 jurisdictions are treated as having an IGA in effect
because they have an IGA signed or agreed in substance, which allows
for international cooperation to facilitate FATCA implementation. The
Treasury Department and the IRS have determined that the current
withholding requirements under chapter 4 on U.S. investments already
serve as a significant incentive for FFIs investing in U.S. securities
to avoid status as nonparticipating FFIs, and that withholding on gross
proceeds is no longer necessary in light of the current compliance with
FATCA. For these reasons, under the authority provided under section
1473(1) these proposed regulations would eliminate withholding on gross
proceeds by removing gross proceeds from the definition of the term
``withholdable payment'' in Sec. 1.1473-1(a)(1) and by removing
certain other provisions in the chapter 4 regulations that relate to
withholding on gross proceeds. As a result of these proposed changes to
the chapter 4 regulations, only payments of U.S. source FDAP that are
withholdable payments under Sec. 1.1473-1(a) and that are not
otherwise excepted from withholding under Sec. 1.1471-2(a) or (b)
would be subject to withholding under sections 1471(a) and 1472.
II. Deferral of Withholding on Foreign Passthru Payments
An FFI that has an agreement described in section 1471(b) in effect
with the IRS is required to withhold on any passthru payments made to
its recalcitrant account holders and to FFIs that are not compliant
with chapter 4 (nonparticipating FFIs). Section 1471(d)(7) defines a
``passthru payment'' as any withholdable payment or other payment to
the extent attributable to a withholdable payment.
In Notice 2010-60 (2010-37 I.R.B. 329), the Treasury Department and
the IRS requested comments on methods a participating FFI could use to
determine whether payments it makes are attributable to withholdable
payments. In Notice 2011-34 (2011-19 I.R.B. 765), the Treasury
Department and the IRS set forth a proposed framework for participating
FFIs to withhold on such payments based on a methodology for
determining a ``passthru payment percentage'' to be applied to certain
payments made by FFIs. After the publication of Notice 2011-34,
stakeholders noted the burdens and complexities in implementing a
system for withholding on these payments along the lines of that
described in the notice. In light of those comments, the framework
outlined in Notice 2011-34 was not incorporated into the 2013 final
chapter 4 regulations. In addition, the Treasury Department and the IRS
have repeatedly issued guidance deferring the date when withholding on
these payments would begin (referred to in guidance as ``foreign
passthru payments''). The 2017 chapter 4 regulations provide that such
withholding will not begin until the later of January 1, 2019, or the
date of publication in the Federal Register of final regulations
defining the term ``foreign passthru payment.''
The Treasury Department and the IRS have received comments noting
that withholding on foreign passthru payments may not be needed given
the number of IGAs in effect. One comment also recommended that if the
Treasury Department and the IRS determine, based on an evaluation of
the data received from FFIs on payments to nonparticipating FFIs in
2015 and 2016, that withholding on foreign passthru payments is
necessary, the Treasury Department and the IRS should develop a more
targeted solution.
Both in recognition of the time necessary to implement a system for
withholding on foreign passthru payments and in recognition of the
successful engagement of Treasury and partner jurisdictions to conclude
intergovernmental agreements to implement FATCA, these proposed
regulations further extend the time for withholding on foreign passthru
payments. Accordingly, under proposed regulation Sec. 1.1471-4(b)(4),
a participating FFI will not be required to withhold tax on a foreign
passthru payment made to a recalcitrant account holder or
nonparticipating FFI before the date that is two years after the date
of publication in the Federal Register of final regulations defining
the term ``foreign passthru payment.'' The proposed regulations also
make conforming changes to other provisions in the chapter 4
regulations that relate to foreign passthru payment withholding.
Notwithstanding these proposed amendments, the Treasury Department
and the IRS remain concerned about the long-term omission of
withholding on foreign passthru payments. The Treasury Department and
the IRS acknowledge the progress made in implementing FATCA.
Nevertheless, concerns remain regarding account
[[Page 64759]]
holders of participating FFIs that remain recalcitrant account holders
or nonparticipating FFIs and regarding payments made to
nonparticipating FFIs. Withholding on foreign passthru payments serves
important purposes. First, it provides one way for an FFI that has
entered into an FFI agreement to continue to remain in compliance with
its agreement, even if some of its account holders have failed to
provide the FFI with the information necessary for the FFI to properly
determine whether the accounts are U.S. accounts and perform the
required reporting, or, in the case of account holders that are FFIs,
have failed to enter into an FFI agreement. Second, withholding on
foreign passthru payments prevents nonparticipating FFIs from avoiding
FATCA by investing in the United States through a participating FFI
``blocker.'' For example, a participating FFI that is an investment
entity could receive U.S. source FDAP income free of withholding under
chapter 4 and then effectively pay the amount over to a
nonparticipating FFI as a corporate distribution. Despite being
attributable to the U.S. source payment, the payment made to the
nonparticipating FFI may be treated as foreign source income and
therefore not a withholdable payment subject to chapter 4 withholding.
Accordingly, the Treasury Department and the IRS continue to
consider the feasibility of a system for implementing withholding on
foreign passthru payments. The Treasury Department and the IRS request
additional comments from stakeholders on alternative approaches that
would serve the same compliance objectives as would foreign passthru
payment withholding and that could be more efficiently implemented by
FFIs.
III. Elimination of Withholding on Non-Cash Value Insurance Premiums
Under Chapter 4
Under Sec. 1.1473-1(a)(1), a withholdable payment generally
includes any payment of U.S. source FDAP income, subject to certain
exclusions, such as for ``excluded nonfinancial payments.'' Excluded
nonfinancial payments do not include premiums for insurance contracts.
The 2013 final chapter 4 regulations included, however, a transitional
rule that deferred withholding on payments with respect to offshore
obligations until January 1, 2017, which was extended in the 2014
chapter 4 regulations to include premiums paid by persons acting as
insurance brokers with respect to offshore obligations. Additionally,
in response to comments noting the burden of providing to withholding
agents withholding certificates and withholding statements for payments
of insurance premiums, the chapter 4 regulations provide a rule
generally allowing a withholding agent to treat as a U.S. payee a U.S.
broker receiving a payment of an insurance premium in its capacity as
an intermediary or an agent of a foreign insurer. The IRS also
generally permits non-U.S. insurance brokers that are NFFEs to become
qualified intermediaries in order to alleviate burden on the foreign
brokers and U.S. withholding agents.
Notwithstanding these allowances, the Treasury Department and the
IRS continued to receive comments requesting elimination of withholding
under chapter 4 on premiums for insurance contracts that do not have
cash value (non-cash value insurance premiums). The comments cited the
burden on insurance brokers of documenting insurance carriers,
intermediaries, and syndicates of insurers for chapter 4 purposes,
noting examples to demonstrate the volume and complexity of placements
with insurers of the insurance policies typically arranged by the
brokers for their clients. The comments argued that withholding on non-
cash value insurance premiums is not necessary to further the purposes
of chapter 4.
At the same time, certain foreign entities that conducted a
relatively small amount of insurance business had taken the position
that they were not passive foreign investment companies (PFICs) under
section 1297(a). Section 1297(a) generally defines a PFIC as a foreign
corporation if 75 percent or more of the corporation's gross income for
the taxable year is passive income or 50 percent or more of its assets
produce, or are held for the production of, passive income. Section
1297(b)(2)(B), prior to a recent change in law (described below),
provided an exception from the U.S. owner reporting and anti-deferral
rules applicable to PFICs for corporations ``predominantly engaged'' in
an insurance business. Withholding under chapter 4 on non-cash value
insurance premiums strengthened the IRS's enforcement efforts, with
respect to the use of the exception in section 1297(b)(2)(B) by U.S.
owners of foreign corporations for tax avoidance and evasion, by
facilitating reporting of the U.S. owners to avoid withholding on
premiums received by the entity.
The preamble to the 2017 chapter 4 regulations noted that future
changes to the PFIC rules may create an opportunity to revise the
treatment of foreign insurance companies under chapter 4. 82 FR 2140.
On December 22, 2017, the Tax Cuts and Jobs Act, Public Law 115-97
(2017) amended section 1297(b)(2)(B) to provide a more limited
exception to PFIC status by replacing the exception for corporations
predominantly engaged in an insurance business with a more stringent
test based generally on a comparison of the corporation's insurance
liabilities and its total assets. This amendment is expected to
mitigate the need for reporting on the U.S. owners of these companies
under chapter 4 because the Treasury Department and the IRS anticipate
that these entities will either amend their business models on account
of the change in law or will otherwise comply with the PFIC reporting
requirements.
In light of the aforementioned change in law and in furtherance of
the burden-reducing policies in Executive Orders 13777 and 13789, these
proposed regulations provide that premiums for insurance contracts that
do not have cash value (as defined in Sec. 1.1471-5(b)(3)(vii)(B)) are
excluded nonfinancial payments and, therefore, not withholdable
payments.
IV. Clarification of Definition of Investment Entity
Under Sec. 1.1471-5(e)(4)(i)(B), an entity is an investment entity
(and therefore a financial institution) if the entity's gross income is
primarily attributable to investing, reinvesting, or trading in
financial assets and the entity is ``managed by'' another entity that
is a depository institution, custodial institution, insurance company,
or an investment entity described in Sec. 1.1471-5(e)(4)(i)(A).
Section 1.1471-5(e)(4)(v), Example 2, illustrates this rule with an
example in which a fund is an investment entity because another
financial institution (an investment advisor) provides investment
advice to the fund and has discretionary management of the assets held
by a fund and the fund meets the gross income test. In Example 6 of
Sec. 1.1471-5(e)(4)(v), a trust is an investment entity because the
trustee (an FFI) manages and administers the assets of the trust in
accordance with the terms of the trust instrument and the trust meets
the gross income test. Section 1.1471-5(e)(4)(v), Example 8, provides
an example in which an entity is an investment entity because an
introducing broker (that is, a broker using another broker to clear and
settle its trades) has discretionary authority to manage the entity's
assets and provides services as an investment advisor and manager to
the entity and the entity meets the gross income test.
The Treasury Department and the IRS received a comment requesting
that
[[Page 64760]]
``discretionary authority'' be more narrowly construed for purposes of
treating an entity as an investment entity described in Sec. 1.1471-
5(e)(4)(i)(B). The comment suggested that an entity should not be
treated as an investment entity solely because the entity invests in a
mutual fund or similar vehicle because the investments made by the
mutual fund are not tailored to the entity that invests in it. The
comment requested the same result for a variety of other types of
investment products and solutions with varying degrees of investor
involvement and standardization, including an investment in a
``discretionary mandate.'' According to the comment, a ``discretionary
mandate'' is an investment product or solution offered by a financial
institution to certain clients where the financial institution manages
and invests the client's funds directly (rather than the client
investing in a separate entity) in accordance with the client's
investment goals. The comment noted that some discretionary mandate
clients claim to be passive NFFEs rather than FFIs.
As described in the examples, the ``managed by'' category of
investment entities generally covers entities that receive specific
professional management advice from an advisor that is tailored to the
investment needs of the entity. A financial institution does not have
discretionary authority over an entity merely because it sells the
entity shares in a widely-held fund that employs a predetermined
investment strategy. These proposed regulations clarify that an entity
is not ``managed by'' another entity for purposes of Sec. 1.1471-
5(e)(4)(i)(B) solely because the first-mentioned entity invests all or
a portion of its assets in such other entity, and such other entity is
a mutual fund, an exchange traded fund, or a collective investment
entity that is widely held and is subject to investor-protection
regulation. In contrast, an investor in a discretionary mandate
described above is ``managed by'' the financial institution under Sec.
1.1471-5(e)(4)(i)(B).
The clarification in these proposed regulations is similar to the
guidance published by the OECD interpreting the definition of a
``managed by'' investment entity under the Common Reporting Standard.
V. Modifications to Due Diligence Requirements of Withholding Agents
Under Chapters 3 and 4
A. Treaty Statements Provided With Documentary Evidence for Chapter 3
Under chapter 3, a withholding agent must generally obtain either a
withholding certificate or documentary evidence and a treaty statement
in order to apply a reduced rate of withholding based on a payee's
claim for benefits under a tax treaty. The 2017 coordination
regulations added a requirement that when a treaty statement is
provided with documentary evidence by an entity beneficial owner to
claim treaty benefits, the statement must identify the specific
limitation on benefits (LOB) provision relied upon in the treaty. In
addition, the 2017 coordination regulations added a three-year validity
period applicable to treaty statements provided with documentary
evidence and a transition period that expires January 1, 2019, for
withholding agents to obtain new treaty statements that comply with the
new LOB requirement for accounts that were documented with documentary
evidence before January 6, 2017 (preexisting accounts). The QI
agreement in Revenue Procedure 2017-15, 2017-3 I.R.B. 437 (2017 QI
agreement) cross-references the 2017 coordination regulations for the
three-year validity period for treaty statements provided with
documentary evidence and provides a two-year transition rule for
accounts documented before January 1, 2017. Similar provisions are
included in the WP and WT agreements in Revenue Procedure 2017-21,
2017-6 I.R.B. 791 (2017 WP and WT agreements).
Comments have noted the burden of complying with the new treaty
statement requirements, including difficulties in obtaining new treaty
statements for preexisting accounts within the transitional period
given the large number of account holders impacted by this requirement.
The comments requested an additional one-year period for withholding
agents to obtain new treaty statements for preexisting accounts, and
the removal of the three-year validity period for a treaty statement
that meets the LOB requirement. A comment also noted that a three-year
validity period for a treaty statement is not needed for certain
categories of entities whose treaty status is unlikely to change, such
as publicly traded corporations and government entities.
In response to these comments, these proposed regulations include
several changes to the rules on treaty statements provided with
documentary evidence. First, these proposed regulations extend the time
for withholding agents to obtain treaty statements with the specific
LOB provision identified for preexisting accounts until January 1, 2020
(rather than January 1, 2019). Second, these proposed regulations add
exceptions to the three-year validity period for treaty statements
provided by tax exempt organizations (other than tax-exempt pension
trusts or pension funds), governments, and publicly traded
corporations, entities whose qualification under an applicable treaty
is unlikely to change. See proposed Sec. 1.1441-1(e)(4)(ii)(A)(2). In
addition, these proposed regulations correct an inadvertent omission of
the actual knowledge standard for a withholding agent's reliance on the
beneficial owner's identification of an LOB provision on a treaty
statement provided with documentary evidence, the same as the standard
that applies to a withholding certificate used to make a treaty claim.
See proposed Sec. 1.1441-6(c)(5)(i). The proposed amendments described
in this section V.A. will also be incorporated into the 2017 QI
agreement and 2017 WP and WT agreements, and a QI, WP, or WT may rely
upon these proposed modifications until such time.
B. Permanent Residence Address Subject to Hold Mail Instruction for
Chapters 3 and 4
In response to comments received on the 2014 temporary coordination
regulations and the 2014 QI agreement regarding the definition of a
``permanent residence address,'' the 2017 coordination regulations (and
the 2017 chapter 4 regulations by cross-reference) allow an address to
be treated as a permanent residence address despite being subject to a
hold mail instruction when a person provides documentary evidence
establishing residence in the country in which the person claims to be
a resident for tax purposes. Comments noted that the allowance to
obtain documentary evidence establishing residence in a particular
country is unnecessarily strict when the person is not claiming treaty
benefits, and that it is unclear what documentary evidence may be used
to establish residence for purposes of this allowance.
These proposed regulations provide that the documentary evidence
required in order to treat an address that is provided subject to a
hold mail instruction as a permanent residence address is documentary
evidence that supports the person's claim of foreign status or, for a
person claiming treaty benefits, documentary evidence that supports the
person's residence in the country where the person claims treaty
benefits. Regardless of whether the person claims treaty benefits, the
documentary evidence on which a withholding agent may rely is the
documentary evidence described in
[[Page 64761]]
Sec. 1.1471-3(c)(5)(i), without regard to the requirement that the
documentation contain a permanent residence address.
A comment also requested the removal of any limitation on reliance
on a permanent residence address subject to a hold mail instruction
because many account holders prefer to receive electronic
correspondence rather than paper mail. In response to this comment,
proposed Sec. 1.1471-1(b)(62) adds a definition of a hold mail
instruction to clarify that a hold mail instruction does not include a
request to receive all correspondence (including account statements)
electronically.
These proposed regulations apply for purposes of chapters 3 and 4.
A QI, WP, or WT may rely upon these proposed modifications until they
are incorporated into the 2017 QI agreement and 2017 WP and WT
agreements.
VI. Revisions Related to Credits and Refunds of Overwithheld Tax
A. Withholding and Reporting in a Subsequent Year
Under Sec. 1.1441-5(b)(2)(i)(A), a U.S. partnership is required to
withhold on an amount subject to chapter 3 withholding (as defined in
Sec. 1.1441-2(a)) that is includible in the gross income of a partner
that is a foreign person. A U.S. partnership satisfies this requirement
by withholding on distributions to the foreign partner that include an
amount subject to chapter 3 withholding. To the extent a foreign
partner's distributive share of income subject to chapter 3 withholding
is not actually distributed to the partner, the U.S. partnership must
withhold on the partner's distributive share of the income on the
earlier of the date that the statement required under section 6031(b)
(Schedule K-1, Partner's Share of Income, Deductions, Credits, etc.) is
mailed or otherwise provided to the partner or the due date for
furnishing the statement. Under section 6031(b), a partnership that
files its return for a calendar year (calendar-year partnership) must
generally furnish to each partner a Schedule K-1 on or before March 15
following the close of the taxable year, a due date that may be
extended up to six months. See Sec. Sec. 1.6031(b)-1T(b) and 1.6081-
2T(a). Similar requirements apply to a foreign partnership that has
entered into an agreement with the IRS to act as a WP. See the 2017 WP
agreement. A foreign partnership other than a WP generally satisfies
its withholding requirement in the same manner for amounts received
from a withholding agent that failed to withhold to the extent
required. See Sec. 1.1441-5(c)(2) and (c)(3)(v). For purposes of
chapter 4, similar withholding rules apply to a partnership that
receives a withholdable payment allocable to a foreign partner. See
Sec. 1.1473-1(a)(5)(ii) and (vi).
Under Sec. 1.1461-1(c)(1) and (2), a partnership is required to
report on Form 1042-S, Foreign Person's U.S. Source Income Subject to
Withholding, any amount subject to withholding that is allocable to a
foreign partner for a calendar year. The partnership must file Form
1042-S (and furnish a copy to the partner) by March 15 of the calendar
year following the year in which it receives the amount subject to
withholding. The due date for filing a Form 1042-S may be automatically
extended by 30 days (and an additional 30 days at the discretion of the
IRS). See Sec. 1.6081-8T(a). Amounts that are reportable on Forms
1042-S are also required to be reported on a withholding agent's income
tax return, Form 1042, Annual Withholding Tax Return for U.S. Source
Income of Foreign Persons. The due date for Form 1042 is March 15,
which may be automatically extended for six months. See Sec. 1.6081-
10. Similar reporting rules apply to a partnership that receives a
withholdable payment and withholds under chapter 4. See Sec. 1.1474-
1(c) and (d)(1).
Because the extended due date for filing a Form 1042-S generally
occurs before the extended due date for furnishing a Schedule K-1 to a
foreign partner, a partnership may be required to report an amount
subject to withholding on a Form 1042-S before it performs all of the
withholding required on such amount under Sec. 1.1441-5(b)(2)(i)(A) or
Sec. 1.1473-1(a)(5)(ii) and (vi). To address this case, the
Instructions for Form 1042 require a domestic partnership to report any
withholding that occurs with respect to an amount that a partnership
received but did not distribute to a partner in a calendar year
(preceding year) on the partnership's Form 1042 for the following
calendar year (subsequent year) (referred to as the ``lag method'' of
reporting). In this case, the partnership would deposit the amount in
the subsequent year and designate the deposit as made for that year for
reporting on Form 1042. To correspond to the timing of the reporting on
Form 1042, the partnership must also report this withholding on Forms
1042-S filed and issued for the subsequent year. For example, a
calendar year domestic partnership that receives U.S. source dividends
in 2017 (but does not make a distribution to its foreign partners),
must withhold on the foreign partners' share of the dividend income by
the time the partnership issues Schedules K-1 to the foreign partners,
which could be as late as September 15, 2018. The lag method of
reporting requires the partnership to report the withholding on the
Forms 1042-S and 1042 for the 2018 year (which are issued and filed in
2019). The WP agreement includes a similar requirement to that
described in this paragraph when a WP withholds after the due date for
Form 1042-S (including extensions). The Instructions for Form 1042
provide a similar reporting rule for a domestic trust that withholds in
a subsequent year on income of the trust that it is required to
distribute but has not actually distributed to a foreign beneficiary.
See Sec. 1.1441-5(b)(2)(ii) and (iii). The WT agreement includes a
similar requirement for a WT.
Apart from the cases described in the preceding paragraph, in
certain other cases, a withholding agent is permitted to withhold an
amount in a subsequent year that relates to the preceding year. For
example, a withholding agent adjusting underwithholding under Sec.
1.1461-2(b) or Sec. 1.1474-2(b) may withhold the additional amount by
the due date (without extensions) of Form 1042. In these cases, the
Instructions for Form 1042 provide that, in contrast to the reporting
required by partnerships and certain trusts described in the preceding
paragraph, a withholding agent withholding in a subsequent year must
designate the deposit and report the tax for the preceding year.
Comments have noted issues that arise under the lag method when a
partner files an income tax return to report the partnership income
allocated to the partner and to claim credit under section 33 (or a
refund) based on the partnership's withholding. When a partnership
applies the lag method, it issues a Form 1042-S for the subsequent year
(and the related withholding) that generally reflects the income
received by the partnership in the preceding year. However, the income
is reported to the partner on Schedule K-1 for the preceding year, thus
resulting in a mismatch between the income allocated to the partner and
the withholding on that income. Because a partner must attach to its
income tax return a Form 1042-S that it receives from a partnership to
claim a credit or refund of overwithholding under Sec. 301.6402-3(e),
the partner cannot support the claim with the Form 1042-S until after
the year in which the partner is required to report the income shown on
the Schedule K-1.
These proposed regulations generally require a withholding agent
(including a partnership or trust) that withholds in a
[[Page 64762]]
subsequent year to designate the deposit as attributable to the
preceding year and report the amount on Forms 1042 and 1042-S for the
preceding year. This proposed rule incorporates the existing rule for
withholding agents (other than partnerships and trusts) from the form
instructions, and extends the rule to partnerships and trusts. An
exception to this requirement for a partnership that is not a calendar-
year partnership (a fiscal-year partnership) provides that such
partnership may designate a deposit as made for the subsequent year and
report the amount on Forms 1042 and 1042-S for the subsequent year.
This exception allows a fiscal-year partnership flexibility to
determine the year for reporting that will result in the best matching
of the income and the related withholding.
These proposed regulations also provide a revised due date for a
partnership to file and furnish Form 1042-S when it withholds the tax
after March 15 of the subsequent year that it designates as deposited
for the preceding year. Under this new rule, the due date for a
partnership to file and furnish a Form 1042-S in such a case will be
September 15 of the subsequent year. This revised due date corresponds
to the due date for a partnership to file Form 1042 with an extension
and the due date for a calendar-year partnership to furnish a Schedule
K-1 to a partner with an extension so that the partnership has
sufficient time to determine the amount of withholding due and to
coordinate with the extended due date for furnishing the Schedule K-1.
Based on the revisions included in these proposed regulations, the
IRS intends to amend the Instructions for the 2019 Form 1042 to remove
the requirement that a partnership or trust apply the lag method and to
incorporate these proposed regulations. The IRS also intends to amend
the Instructions to the 2019 Form 1042-S to require that in a case when
a partnership is filing Form 1042-S after March 15 for a partner's
distributive share of an amount received by the partnership in the
preceding year, the partnership must file and issue a separate Form
1042-S for such amount for the preceding year (in addition to any Forms
1042-S filed and issued to the partner for amounts that are withheld
when distributed to the partner before March 15 and reported for the
preceding year).
The Treasury Department and the IRS intend to amend the WP and WT
agreements to the extent necessary to incorporate the proposed
regulations, and until such time a WP or WT may rely on these proposed
modifications for purposes of its filing and deposit requirements.
B. Adjustments to Overwithholding Under the Reimbursement and Set-Off
Procedures
Under Sec. 1.1461-2(a), a withholding agent that has overwithheld
and deposited the tax may adjust the overwithheld amount under either
the reimbursement procedure or the set-off procedure. Under the
reimbursement procedure, a withholding agent may repay the beneficial
owner or payee the amount of tax overwithheld and then reimburse itself
by reducing, by the amount of such repayment, any deposit of
withholding tax otherwise required to be made before the end of the
calendar year following the year of overwithholding. The withholding
agent must make any repayment to the beneficial owner or payee before
the earlier of the due date for filing Form 1042-S (without extensions)
for the calendar year of overwithholding or the date on which the Form
1042-S is actually filed with the IRS, and must state on a timely filed
Form 1042 (without extensions) for the calendar year of overwithholding
that the filing constitutes a claim for credit in accordance with Sec.
1.6414-1.
Under the set-off procedure, a withholding agent may apply the
overwithheld amount against any amount which would otherwise be subject
to withholding that is paid to the beneficial owner or payee before the
earlier of the due date for filing Form 1042-S (without extensions) for
the calendar year of overwithholding or the date that the Form 1042-S
is actually filed with the IRS. Similar rules for adjusting
overwithholding apply for purposes of chapter 4. See Sec. 1.1474-
2(a)(3) and (4).
If a withholding agent cannot apply the reimbursement or set-off
procedure, a beneficial owner or payee must file a claim for credit or
refund with the IRS in order to recover the overwithheld tax. Informal
comments have requested to expand the cases in which a withholding
agent may apply the reimbursement and set-off procedures in order to
limit the need for a beneficial owner or payee to claim a credit or
refund. These proposed regulations respond to these comments by
modifying the reimbursement procedure to allow a withholding agent to
use the extended due date for filing Forms 1042 and 1042-S to make a
repayment and claim a credit. These proposed regulations also include
revisions to conform the requirements for the set-off procedures to
those that apply to the reimbursement procedures. In addition, these
proposed regulations remove the requirement that a withholding agent
include with its Form 1042 a statement that the filing constitutes a
claim for credit when it applies reimbursement in the year following
the year of the overwithholding. This statement is no longer necessary
because Form 1042 was revised in 2016 to provide separate fields for
adjustments to overwithholding and underwithholding.
These proposed regulations also provide that a withholding agent
may not apply the reimbursement and set-off procedures after the date
on which Form 1042-S has been furnished to the beneficial owner or
payee (in addition to, under the current regulations, after the date a
Form 1042-S has been filed). Because of the liberalizing amendments
described in the preceding paragraph, this change is needed to ensure
that a Form 1042-S furnished to a beneficial owner or payee reflects
any repayments made pursuant to these adjustment procedures and is
consistent with the associated Form 1042-S that is filed with the IRS.
A QI, WP, or WT may rely upon the proposed modifications described in
this section VI.B until they are incorporated into the 2017 QI
agreement and 2017 WP and WT agreements.
C. Reporting of Withholding by Nonqualified Intermediaries
A withholding agent that makes a payment subject to chapter 3
withholding to a nonqualified intermediary (as defined in Sec. 1.1441-
1(c)(14)) can reliably associate the payment with documentation when it
obtains a valid intermediary withholding certificate (that is, Form W-
8IMY, Certificate of Foreign Intermediary, Foreign Flow-Through Entity,
or Certain U.S. Branches for United States Tax Withholding) from the
nonqualified intermediary and a withholding statement that allocates
the payment among the payees and includes the documentation for each
payee as described in Sec. 1441-1(b)(2)(vii)(B) and (e)(3)(iii). For
purposes of chapter 4, a withholding agent making a withholdable
payment to a nonqualified intermediary that is a participating FFI or a
registered deemed-compliant FFI may rely on a withholding statement
that includes an allocation of the payment to a chapter 4 withholding
rate pool of payees, and must obtain payee-specific documentation for
payees that are not includible in a chapter 4 withholding rate pool to
permit any reduced rate of withholding. See Sec. 1.1471-
3(c)(3)(iii)(B).
To the extent that a withholding agent cannot reliably associate a
withholdable
[[Page 64763]]
payment made to a nonqualified intermediary with valid documentation
under Sec. 1.1471-3(c), the withholding agent must presume that the
payment is made to a nonparticipating FFI and withhold 30 percent of
the payment. See Sec. 1.1471-3(f)(5). In such a case, the withholding
agent is required to report the payment as a chapter 4 reportable
amount made to an unknown recipient on a Form 1042-S that reports the
nonqualified intermediary as an intermediary and the amount withheld as
chapter 4 withholding. See the Instructions for Form 1042-S. If the
amount withheld upon under chapter 4 is an amount subject to
withholding under chapter 3, the withholding agent is relieved from its
obligation to also withhold under chapter 3 on the payment. Sec.
1.1441-3(a)(2). To the extent that a nonqualified intermediary is
required to report the same payments to its account holders on Forms
1042 and 1042-S under the chapter 3 or 4 regulations, the nonqualified
intermediary need not withhold when chapter 3 or 4 withholding has
already been applied by its withholding agent, and it substantiates the
withholding by attaching to its Form 1042 a copy of the Form 1042-S
furnished by the withholding agent.
Comments have noted that some U.S. withholding agents charge fees
for the administrative burden associated with reviewing underlying
documentation that is included with a withholding statement provided by
a nonqualified intermediary. In other cases, nonqualified
intermediaries may not be able to obtain such documentation from
account holders. For these reasons, some nonqualified intermediaries
provide withholding agents with valid Forms W-8IMY to establish their
chapter 4 statuses but do not provide any underlying payee
documentation or withholding rate pool information to substantiate the
allocations to payees shown on a withholding statement. Comments have
stated that the requirement for withholding agents to report the
withholding applied to withholdable payments as chapter 4 withholding
in these cases (because the payees are presumed to be nonparticipating
FFIs) has made it difficult for account holders to claim foreign tax
credits from foreign jurisdictions that do not view the chapter 4
withholding tax as a creditable income tax. These comments recommended
various proposals to allow a nonqualified intermediary to report the
withholding as chapter 3 withholding applied to its account holders.
In response to the comments described in the preceding paragraph,
these proposed regulations modify the rules for reporting by a
nonqualified intermediary under Sec. Sec. 1.1461-1(c)(4)(iv) and
1.1474-1(d)(2)(ii) to address a case in which a nonqualified
intermediary receives a payment for which a withholding agent has
withheld at the 30-percent rate under chapter 4 and reported the
payment on Form 1042-S as made to an unknown recipient. In such a case,
these proposed regulations permit a nonqualified intermediary that is a
participating FFI or registered deemed-compliant FFI to report the
withholding applied to the nonqualified intermediary on a Form 1042-S
as chapter 3 withholding to the extent that the nonqualified
intermediary determines that the payment is not an amount for which
withholding is required under chapter 4 based on the payee's chapter 4
status. Under the existing reporting requirements, the nonqualified
intermediary would be required to file a Form 1042 and would need to be
furnished a copy of the Form 1042-S filed by the withholding agent to
substantiate the credit against its withholding tax liability for the
withholding applied by its withholding agent. Under the modified
requirement, the nonqualified intermediary would be permitted to
substantiate the credit even though the Form 1042-S furnished to it
reports chapter 4 withholding and the corresponding Forms 1042-S that
the nonqualified intermediary issues reports chapter 3 withholding.
This change should assist account holders using Form 1042-S to claim
foreign tax credits in their jurisdictions of residence in these cases.
The Treasury Department and the IRS are of the view that this
determination should be limited to a nonqualified intermediary that is
a participating FFI or registered deemed-compliant FFI given the role
of these FFIs in documenting their account holders for chapter 4
purposes and their compliance requirements under the chapter 4
regulations or an applicable IGA jurisdiction.
Reliance on Proposed Regulations
Under section 7805(b)(1)(C), taxpayers may rely on the proposed
regulations until final regulations are issued, except as otherwise
provided in this paragraph. With respect to the elimination of
withholding on non-cash value insurance premiums under proposed Sec.
1.1473-1(a)(3)(iii), the clarification of the definition of a ``managed
by'' investment entity under proposed Sec. 1.1471-5(e)(4)(i)(B), and
the revised allowance for a permanent residence address subject to a
hold mail instruction under proposed Sec. Sec. 1.1441-1(c)(38) and
1.1471-1(b)(99), taxpayers may apply the modifications in these
proposed regulations for all open tax years until final regulations are
issued. For the revisions included in these proposed regulations that
relate to credits and refunds of withheld tax, taxpayers may not rely
on these proposed regulations until Form 1042 and Form 1042-S are
updated for the 2019 calendar year.
Special Analyses
The Administrator of the Office of Information and Regulatory
Affairs (OIRA), Office of Management and Budget (OMB), has waived
review of this proposed rule in accordance with section 6(a)(3)(A) of
Executive Order 12866. OIRA will subsequently make a significance
determination of the final rule, pursuant to section 3(f) of Executive
Order 12866 and the April 11, 2018, Memorandum of Agreement between the
Treasury Department and the OMB.
The Treasury Department and the IRS expect the proposed regulation,
when final, to be an Executive Order 13771 deregulatory action and
request comment on this designation.
Paperwork Reduction Act
The collection of information contained in these proposed
regulations is in a number of provisions, including Sec. Sec. 1.1441-
1, 1.1461-1, 1.1461-2, 1.1474-1, and 1.1474-2. The IRS intends that the
information collection requirements of these regulations will be
implemented through the use of Forms 1042 and 1042-S. As a result, for
purposes of the Paperwork Reduction Act (44 U.S.C. 3507), the reporting
burden associated with the collection of information in these
regulations will be reflected in the information burden and OMB control
number of the appropriate IRS form.
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 proposed regulations will not increase the number of taxpayers
required to file a return. Current filers may have to modify slightly
how they report, but the burden of reporting should not increase.
As described in section VI.A of the Explanations of Provisions, the
proposed regulations allow a partnership that withholds in a subsequent
year to designate the deposit as attributable to the preceding year and
report the withholding on Forms 1042 and 1042-S for the preceding year
[[Page 64764]]
(rather than the subsequent year). In addition, the proposed
regulations allow a partnership that withholds after March 15 of the
subsequent year to file Form 1042-S on or before September 15 of such
year. The IRS intends to modify Form 1042-S to add a check box to the
form so that a partnership filer can indicate that it qualifies for the
September 15 due date for filing the form. A partnership that relies on
the September 15 due date may need to file an additional Form 1042-S if
it is filing to report a partner's distributive share of an amount
received by the partnership in the preceding year and it has already
filed a Form 1042-S for such partner for the same year. Information on
the number of partnerships that withhold in a year subsequent to the
year in which the amount was received is not available. However, as an
upper bound, table 1 shows the estimated number of partnerships that
file Form 1042.
As explained in section IV.B of the Explanation of Provisions, the
proposed regulations provide additional time for withholding agents to
apply the reimbursement or set-off procedure to adjust overwithholding.
The proposed revision may increase the amounts reported by filers of
Forms 1042 and 1042-S, but should not affect the number of filers. It
is unknown how many withholding agents will use the reimbursement and
set-off procedures as a result of the modifications to those procedures
in the proposed regulations. However, as an upper bound, table 1 shows
the estimated number of withholding agents that report non-zero amounts
as adjustments to overwithholding.
Finally, as described in section IV.C of the Explanation of
Provisions, the proposed regulations permit certain nonqualified
intermediaries to report on certain payments on Form 1042-S using the
code for chapter 3 withholding rather than the code for chapter 4
withholding in certain cases in which chapter 4 withholding is applied
on payments made to the nonqualified intermediaries. This modification
in the proposed regulations should not affect the number of filers or
increase any burdens, but rather change how nonqualified intermediaries
report to certain recipients. It is not possible to estimate the number
of nonqualified intermediaries that may change the code from chapter 4
to chapter 3, so as an upper bound, table 1 shows the estimated number
of withholding agents that are nonqualified intermediaries that file
Form 1042-S.
Table 1--Related Tax Form Counts
------------------------------------------------------------------------
Number of
respondents
(estimated)
------------------------------------------------------------------------
Total number of Form 1042 filers....................... 45,000-50,000
Partnership filers of Form 1042........................ 2,000-3,000
Form 1042 filers reporting adjustments to 4,000-5,000
overwithholding.......................................
Nonqualified intermediaries filers of Form 1042-S...... 500
------------------------------------------------------------------------
Tax Form 1042 data are from administrative tax files while the Form
1042-S information is from a 2016 data file on foreign tax withholding.
Books and records relating to a collection of information must be
retained as long as their contents may be 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.
Regulatory Flexibility Act
It is hereby certified that the collection of information
requirements in this notice of proposed rulemaking will not have a
significant economic impact on a substantial number of small business
entities within the meaning of section 601(6) of the Regulatory
Flexibility Act (5 U.S.C. chapter 6). This notice of proposed
rulemaking reduces the information required to be reported under
chapters 3 and 4 as required by TDs 9610, 9657, 9658, 9808, and 9809,
information collections that were certified by the Treasury Department
and the IRS as not resulting in a significant economic impact on a
substantial number of small business entities. The burden-reducing
information collections of this notice of proposed rulemaking provide
benefits for small business entities consistent with the Regulatory
Flexibility Act's objective that information collections achieve
statutory objectives while minimizing any significant impact on small
business entities. Therefore, a Regulatory Flexibility Analysis is not
required.
Pursuant to section 7805(f), this regulation has been submitted to
the Chief Counsel for Advocacy of the Small Business Administration for
comment on its impact on small businesses.
Statement of Availability of IRS Documents
IRS Revenue Procedures, Revenue Rulings, Notices, and other
guidance cited in this preamble are published in the Internal Revenue
Bulletin (or Cumulative Bulletin) and are available from the
Superintendent of Documents, U.S. Government Publishing Office,
Washington, DC 20402, or by visiting the IRS website at www.irs.gov.
Comments and Requests for Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any comments that are submitted timely
to the IRS as prescribed in this preamble under the ``Addresses''
heading. The Treasury Department and the IRS request comments on all
aspects of the proposed rules but specifically on foreign passthru
payment withholding and the definition of investment entity, as
discussed in section II of the Explanation of Provisions. All comments
will be available for public inspection and copying. A public hearing
will be scheduled if requested in writing by any person that timely
submits written comments. If a public hearing is scheduled, notice of
the date, time, and place for the public hearing will be published in
the Federal Register.
Drafting Information
The principal authors of these proposed regulations are John
Sweeney, Nancy Lee, and Subin Seth, Office of Associate Chief Counsel
(International). However, other personnel from the IRS and the Treasury
Department participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 is amended by revising
the entries for Sec. Sec. 1.1471-1, 1.1471-2, 1.1471-3, 1.1471-4, and
1.1474-4 to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
* * * * *
Section 1.1471-1 also issued under 26 U.S.C. 1471 and 26 U.S.C.
1473.
Section 1.1471-2 also issued under 26 U.S.C. 1471 and 26 U.S.C.
1473.
Section 1.1471-3 also issued under 26 U.S.C. 1471 and 26 U.S.C.
1473.
Section 1.1471-4 also issued under 26 U.S.C. 1471 and 26 U.S.C.
1474.
* * * * *
[[Page 64765]]
Section 1.1474-1 also issued under 26 U.S.C. 1473 and 26 U.S.C.
1474.
* * * * *
0
Par. 2. Section 1.1441-1 is amended by revising paragraphs (c)(38) and
(e)(4)(ii)(A)(2) to read as follows:
Sec. 1.1441-1 Requirement for the deduction and withholding of tax on
payments to foreign persons.
* * * * *
(c) * * *
(38) Permanent residence address--(i) In general. The term
permanent residence address is the address in the country of which the
person claims to be a resident for purposes of that country's income
tax. In the case of a withholding certificate furnished in order to
claim a reduced rate of withholding under an income tax treaty, whether
a person is a resident of a treaty country must be determined in the
manner prescribed under the applicable treaty. See Sec. 1.1441-6(b).
The address of a financial institution with which the person maintains
an account, a post office box, or an address used solely for mailing
purposes is not a permanent residence address unless such address is
the only address used by the person and appears as the person's
registered address in the person's organizational documents. Further,
an address that is provided subject to a hold mail instruction (as
defined in Sec. 1.1471-1(b)(62)) is not a permanent residence address
unless the person provides the documentary evidence described in
paragraph (c)(38)(ii) of this section. If, after a withholding
certificate is provided, a person's permanent residence address is
subsequently subject to a hold mail instruction, the addition of the
hold mail instruction is a change in circumstances requiring the person
to provide the documentary evidence described in paragraph (c)(38)(ii)
of this section in order for a withholding agent to use the address as
a permanent residence address. If the person is an individual who does
not have a tax residence in any country, the permanent residence
address is the place at which the person normally resides. If the
person is an entity and does not have a tax residence in any country,
then the permanent residence address of the entity is the place at
which the person maintains its principal office.
(ii) Hold mail instruction. An address that is subject to a hold
mail instruction (as defined in Sec. 1.1471-1(b)(62)) can be used by a
withholding agent as a permanent residence address if the person has
provided the withholding agent with documentary evidence described in
Sec. 1.1471-3(c)(5)(i) (without regard to the requirement in Sec.
1.1471-3(c)(5)(i) that the documentary evidence contain a permanent
residence address). The documentary evidence described in Sec. 1.1471-
3(c)(5)(i) must support the person's claim of foreign status or, in the
case of a person that is claiming treaty benefits, must support
residence in the country where the person is claiming a reduced rate of
withholding under an income tax treaty.
* * * * *
(e) * * *
(4) * * *
(ii) * * *
(A) * * *
(2) Documentary evidence for treaty claims and treaty statements.
Documentary evidence described in Sec. 1.1441-6(c)(3) or (4) shall
remain valid until the last day of the third calendar year following
the year in which the documentary evidence is provided to the
withholding agent, except as provided in paragraph (e)(4)(ii)(B) of
this section. A statement regarding entitlement to treaty benefits
described in Sec. 1.1441-6(c)(5) (treaty statement) shall remain valid
until the last day of the third calendar year following the year in
which the treaty statement is provided to the withholding agent except
as provided in this paragraph (e)(4)(ii)(A)(2). A treaty statement
provided by an entity that identifies a limitation on benefits
provision for a publicly traded corporation shall not expire at the
time provided in the preceding sentence if a withholding agent
determines, based on publicly available information at each time for
which the treaty statement would otherwise be renewed, that the entity
is publicly traded. A withholding agent described in the preceding
sentence must retain a record of the information relied upon (to
confirm that the entity is publicly traded) 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. Notwithstanding the second
sentence of this paragraph (e)(4)(ii)(A)(2), a treaty statement
provided by an entity that identifies a limitation on benefits
provision for a government or tax-exempt organization (other than a
tax-exempt pension trust or pension fund) shall remain valid
indefinitely. Notwithstanding the validity periods (or exceptions
thereto) prescribed in this paragraph (e)(4)(ii)(A)(2), a treaty
statement will cease to be valid if a change in circumstances makes the
information on the statement unreliable or incorrect. For accounts
opened and treaty statements obtained prior to January 6, 2017
(including those from publicly traded corporations, governments, and
tax-exempt organizations), the treaty statement will expire January 1,
2020.
* * * * *
0
Par. 3. Section 1.1441-6 is amended by adding a sentence at the end of
paragraph (c)(5)(i) to read as follows:
Sec. 1.1441-6 Claim of reduced withholding under an income tax
treaty.
* * * * *
(c) * * *
(5) * * *
(i) * * * A withholding agent may rely on the taxpayer's claim on a
treaty statement regarding its reliance on a specific limitation on
benefits provision absent actual knowledge that such claim is
unreliable or incorrect.
* * * * *
0
Par. 4. Section 1.1461-1 is amended by:
0
1. Adding two sentences after the first sentence in paragraph (a)(1).
0
2. Redesignating paragraph (c)(1)(i) as paragraph (c)(1)(i)(A) and
adding paragraphs (c)(1)(i) introductory text and (c)(1)(i)(B).
0
3. Adding a sentence at the end of paragraph (c)(4)(iv).
The additions read as follows:
Sec. 1.1461-1 Payment and returns of tax withheld.
(a)* * * (1) * * * In a case in which a withholding agent is
permitted to withhold on an amount subject to reporting (as defined in
paragraph (c)(2) of this section) in a calendar year (subsequent year)
following the calendar year (preceding year) in which the withholding
agent paid such amount (or, for a partnership or trust withholding with
respect to a foreign partner, beneficiary, or owner, the year the
partnership or trust received such amount), the withholding agent shall
designate the deposit of the withholding as made for the preceding year
and report the tax liability on Form 1042 for the preceding year. In
the case of a partnership that withholds as described in the preceding
sentence and does not file its federal income tax return on a calendar-
year basis, however, such partnership may instead designate the deposit
as made for the subsequent year and report the tax liability on Form
1042 for the subsequent year. * * *
* * * * *
(c) * * *
(1) * * *
(i) Withholding agent information reporting. This paragraph
(c)(1)(i) describes the general requirements for a withholding agent to
file an information return on Form 1042-S and describes a special rule
for a withholding agent that
[[Page 64766]]
withholds in a subsequent year as described in paragraph (a)(1) of this
section.
* * * * *
(B) Special reporting by withholding agents that withhold in a
subsequent year. Notwithstanding the first sentence of paragraph
(c)(1)(i)(A) of this section, if a withholding agent designates the
deposit of such withholding as made for the preceding calendar year as
described in paragraph (a)(1) of this section, the withholding agent is
required to report the amount on Form 1042-S for the preceding year.
With respect to a withholding agent described in the previous sentence
that is a partnership and that withholds after March 15 of the
subsequent year, such partnership may file and furnish the Form 1042-S
on or before September 15 of that year. In the case of a partnership
that designates the deposit of such withholding as made for the
subsequent year as permitted in paragraph (a)(1) of this section,
however, the partnership shall report the amount on Form 1042-S for the
subsequent year.
* * * * *
(4) * * *
(iv) * * * If a nonqualified intermediary that is a participating
FFI or a registered deemed-compliant FFI receives a payment that has
been withheld upon at a 30-percent rate under chapter 4 by another
withholding agent and that is reported as made to an unknown recipient
on Form 1042-S provided to the nonqualified intermediary, the
nonqualified intermediary may report the payment (or portion of the
payment) on Form 1042-S as made to a recipient that has been withheld
upon under chapter 3 when the payment is not an amount for which
withholding is required under chapter 4 based on the payee's chapter 4
status and the nonqualified intermediary reports the correct
withholding rate for the recipient.
* * * * *
0
Par. 5. Section 1.1461-2 is amended by:
0
1. Revising the second sentence of paragraph (a)(2)(i) introductory
text.
0
2. Revising paragraphs (a)(2)(i)(A) and (B).
0
3. Adding paragraph (a)(2)(i)(C).
0
4. Revising paragraph (a)(3).
The revisions and addition read as follows:
Sec. 1.1461-2 Adjustments for overwithholding or underwithholding of
tax.
(a) * * *
(2) * * *
(i) * * * In such a case, the withholding agent may reimburse
itself by reducing, by the amount of tax actually repaid to the
beneficial owner or payee, the amount of any deposit of withholding tax
otherwise required to be 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. * * *
(A) The repayment to the beneficial owner or payee occurs before
the earliest of the due date (including extensions) for filing the Form
1042-S for the calendar year of overwithholding, the date the Form
1042-S is actually filed with the IRS, or the date the Form 1042-S is
furnished to the beneficial owner or payee;
(B) The withholding agent states on a timely filed (including
extensions) Form 1042-S for the calendar year of overwithholding the
amount of tax withheld and the amount of any actual repayment; and
(C) The withholding agent states on a timely filed (including
extensions) Form 1042 for the calendar year of overwithholding the
amount of adjustments made to overwithholding under paragraph (a)(1) of
this section and the amount of any credit claimed under Sec. 1.6414-1.
* * * * *
(3) Set-off. Under the set-off procedure, the withholding agent may
repay the beneficial owner or payee by applying the amount overwithheld
against any amount of tax which otherwise would be required under
chapter 3 or 4 of the Internal Revenue Code or the regulations under
part 1 of this chapter to be withheld from income paid by the
withholding agent to such person. Any such set-off that occurs for a
payment period in the calendar year following the calendar year of
overwithholding shall be allowed only if--
(i) The repayment to the beneficial owner or payee occurs before
the earliest of the due date (including extensions) for filing the Form
1042-S for the calendar year of overwithholding, the date the Form
1042-S is actually filed with the IRS, or the date the Form 1042-S is
furnished to the beneficial owner or payee;
(ii) The withholding agent states on a timely filed (including
extensions) Form 1042-S for the calendar year of overwithholding the
amount of tax withheld and the amount of any repayment made through
set-off; and
(iii) The withholding agent states on a timely filed (including
extensions) Form 1042 for the calendar year of overwithholding the
amount of adjustments made to overwithholding under paragraph (a)(1) of
this section and the amount of any credit claimed under Sec. 1.6414-1.
* * * * *
0
Par. 6. Section 1.1471-1 is amended by:
0
1. Removing paragraph (b)(60) and redesignating paragraphs (b)(61) and
(b)(62) as new paragraphs (b)(60) and (b)(61).
0
2. Adding new paragraph (b)(62).
0
3. Revising paragraph (b)(99).
The addition and revision read as follows:
Sec. 1.1471-1 Scope of chapter 4 and definitions.
* * * * *
(b) * * *
(62) Hold mail instruction. The term hold mail instruction means a
current instruction by a person to keep the person's mail until such
instruction is amended. An instruction to send all correspondence
electronically is not a hold mail instruction.
* * * * *
(99) Permanent residence address. The term permanent residence
address has the meaning set forth in Sec. 1.1441-1(c)(38).
* * * * *
0
Par. 7. Section 1.1471-2 is amended by:
0
1. Removing the language ``or constitutes gross proceeds from the
disposition of such an obligation'' from the first sentence of
paragraph (a)(1).
0
2. Removing and reserving paragraph (a)(2)(iii)(B).
0
3. Removing paragraph (a)(2)(vi).
0
4. Removing the language ``, or any gross proceeds from the disposition
of such an obligation'' from the first and second sentences of
paragraph (b)(1).
0
5. Removing the language ``and the gross proceeds allocated to a
partner from the disposition of such obligation as determined under
Sec. 1.1473-1(a)(5)(vii)'' from paragraph (b)(3)(i).
0
6. Removing the language ``and further includes a beneficiary's share
of the gross proceeds from a disposition of such obligation as
determined under Sec. 1.1473-1(a)(5)(vii)'' from paragraph (b)(3)(ii).
0
7. Removing the language ``and the gross proceeds from the disposition
of such obligation to the extent such owner is treated as owning the
portion of the trust that consists of the obligation'' from paragraph
(b)(3)(iii).
The revision reads as follows:
Sec. 1.1471-2 Requirement to deduct and withhold tax on withholdable
payments to certain FFIs.
(a) * * *
(2) * * *
[[Page 64767]]
(iii) * * *
(B) [Reserved]
* * * * *
Sec. 1.1471-3 [Amended]
0
Par. 8. Section 1.1471-3 is amended by:
0
1. Removing the language that reads ``and that is excluded from the
definition of a withholdable payment under Sec. 1.1473-1(a)(4)'' from
paragraph (a)(3)(ii)(A)(4).
0
2. Removing paragraph (c)(8)(iv) and redesignating paragraph (c)(8)(v)
as new paragraph (c)(8)(iv).
0
Par. 9. Section 1.1471-4 is amended by:
0
1. Removing the language ``or the gross proceeds from the disposition
of such an obligation'' from the seventh sentence of paragraph (b)(1).
0
2. Revising paragraph (b)(4).
The revision reads as follows:
Sec. 1.1471-4 FFI agreement.
* * * * *
(b) * * *
(4) Foreign passthru payments. A participating FFI is not required
to deduct and withhold tax on a foreign passthru payment made by such
participating FFI to an account held by a recalcitrant account holder
or to a nonparticipating FFI before the date that is two years after
the date of publication in the Federal Register of final regulations
defining the term foreign passthru payment.
* * * * *
0
Par. 10. Section 1.1471-5 is amended by adding a sentence at the end of
paragraph (e)(4)(i)(B) to read as follows:
Sec. 1.1471-5 Definitions applicable to section 1471.
* * * * *
(e) * * *
(4) * * *
(i) * * *
(B) * * * Notwithstanding the preceding sentence, an entity is not
managed by another entity for purposes of this paragraph (e)(4)(i)(B)
solely because the first-mentioned entity invests all or a portion of
its assets in such other entity, if such other entity is a mutual fund,
exchange traded fund, or a collective investment entity that is widely-
held and is subject to investor protection regulation.
* * * * *
0
Par. 11. Section 1.1473-1 is amended by:
0
1. Revising paragraph (a)(1).
0
2. Removing the fourth sentence of paragraph (a)(2)(vii)(A).
0
3. Removing and reserving paragraph (a)(3).
0
4. Revising paragraph (a)(4)(iii).
0
5. Removing paragraph (a)(4)(iv) and redesignating paragraphs (a)(4)(v)
through (viii) as new paragraphs (a)(4)(iv) through (vii).
0
6. Removing paragraph (a)(5)(vii).
The revisions read as follows:
Sec. 1.1473-1 Section 1473 definitions.
(a) * * * (1) In general. Except as otherwise provided in this
paragraph (a) and Sec. 1.1471-2(b) (regarding grandfathered
obligations), the term withholdable payment means any payment of U.S.
source FDAP income (as defined in paragraph (a)(2) of this section).
* * * * *
(3) [Reserved]
(4) * * *
(iii) Excluded nonfinancial payments. Payments for the following:
services (including wages and other forms of employee compensation
(such as stock options)), the use of property, office and equipment
leases, software licenses, transportation, freight, gambling winnings,
awards, prizes, scholarships, interest on outstanding accounts payable
arising from the acquisition of goods or services, and premiums for
insurance contracts that do not have cash value (as defined in Sec.
1.1471-5(b)(3)(vii)(B)). Notwithstanding the preceding sentence,
excluded nonfinancial payments do not include the following: Payments
in connection with a lending transaction (including loans of
securities), a forward, futures, option, or notional principal
contract, or a similar financial instrument; premiums for cash value
insurance contracts or annuity contracts; amounts paid under cash value
insurance or annuity contracts; dividends; interest (including
substitute interest described in Sec. 1.861-2(a)(7)) other than
interest described in the preceding sentence; investment advisory fees;
custodial fees; and bank or brokerage fees.
* * * * *
0
Par. 12. Section 1.1474-1 is amended by:
0
1. Adding two sentences after the first sentence in paragraph (b)(1).
0
2. Revising paragraph (b)(2).
0
3. Redesignating paragraph (d)(1)(i) as paragraph (d)(1)(i)(A) and
adding paragraphs (d)(1)(i) introductory text and (d)(1)(i)(B).
0
4. Adding a sentence after the first sentence in paragraph (d)(2)(ii).
The revisions and additions read as follows:
Sec. 1.1474-1 Liability for withheld tax and withholding agent
reporting.
* * * * *
(b) * * *
(1) * * * In a case in which a withholding agent is permitted to
withhold on a chapter 4 reportable amount (as defined in paragraph
(d)(2) of this section) in a calendar year (subsequent year) following
the calendar year (preceding year) in which the withholding agent paid
such amount (or, for a partnership or trust withholding with respect to
a foreign partner, beneficiary, or owner, the year the partnership or
trust received such amount), the withholding agent shall designate the
deposit of the withholding as made for the preceding year and shall
report the tax liability on Form 1042 for the preceding year. In the
case of a partnership that withholds as described in the preceding
sentence and does not file its federal income tax return on a calendar-
year basis, however, such partnership may instead designate the deposit
as made for the subsequent year and report the tax liability on Form
1042 for the subsequent year.* * *
(2) Special rule for foreign passthru payments that include an
undetermined amount of income subject to tax. [Reserved]
* * * * *
(d) * * *
(1) * * *
(i) Withholding agent information reporting. This paragraph
(d)(1)(i) describes the general requirements for a withholding agent to
file an information return on Form 1042-S and describes a special rule
for a withholding agent that withholds in a subsequent year as
described in paragraph (b)(1) of this section.
* * * * *
(B) Special reporting by withholding agents that withhold in a
subsequent year. Notwithstanding the first sentence of paragraph
(d)(1)(i)(A) of this section, if a withholding agent designates the
deposit of such withholding as made for the preceding calendar year as
described in paragraph (b)(1) of this section, the withholding agent is
required to report the amount on Form 1042-S for the preceding year.
With respect to a withholding agent described in the previous sentence
that is a partnership and that withholds after March 15 of the
subsequent year, such partnership may file and furnish the Form 1042-S
on or before September 15 of that year. In the case of a partnership
that designates the deposit of such withholding as made for the
subsequent year as permitted in paragraph (b)(1) of this section,
however, the partnership shall report the chapter 4 reportable amount
on Form 1042-S for the subsequent year.
* * * * *
(2) * * *
(ii) * * * A chapter 4 reportable amount also does not include an
[[Page 64768]]
amount received by a nonqualified intermediary that is a participating
FFI or a registered deemed-compliant FFI if the nonqualified
intermediary reports such amount as having been withheld upon under
chapter 3 to the extent permitted under Sec. 1.1461-1(c)(4)(iv). * * *
* * * * *
0
Par. 13. Section 1.1474-2 is amended by revising the second sentence of
paragraph (a)(3)(i) introductory text, paragraphs (a)(3)(i)(A) through
(C), and paragraph (a)(4) to read as follows:
Sec. 1.1474-2 Adjustments for overwithholding or underwithholding of
tax.
(a) * * *
(3) * * *
(i) * * * In such a case, the withholding agent may reimburse
itself by reducing, by the amount of tax actually repaid to the
beneficial owner or payee, the amount of any deposit of withholding tax
otherwise required to be 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. * * *
(A) The repayment to the beneficial owner or payee occurs before
the earliest of the due date (including extensions) for filing the Form
1042-S for the calendar year of overwithholding, the date the Form
1042-S is actually filed with the IRS, or the date the Form 1042-S is
furnished to the beneficial owner or payee;
(B) The withholding agent states on a timely filed (including
extensions) Form 1042-S for the calendar year of overwithholding the
amount of tax withheld and the amount of any actual repayment; and
(C) The withholding agent states on a timely filed (including
extensions) Form 1042 for the calendar year of overwithholding the
amount of adjustments made to overwithholding under paragraph (a)(1) of
this section and the amount of any credit claimed under Sec. 1.6414-1.
* * * * *
(4) Set-off. Under the set-off procedure, the withholding agent may
repay the beneficial owner or payee by applying the amount overwithheld
against any amount of tax which otherwise would be required under
chapter 3 or 4 of the Internal Revenue Code or the regulations under
part 1 of this chapter to be withheld from income paid by the
withholding agent to such person. Any such set-off that occurs for a
payment period in the calendar year following the calendar year of
overwithholding shall be allowed only if--
(i) The repayment to the beneficial owner or payee occurs before
the earliest of the due date (including extensions) for filing the Form
1042-S for the calendar year of overwithholding, the date the Form
1042-S is actually filed with the IRS, or the date the Form 1042-S is
furnished to the beneficial owner or payee;
(ii) The withholding agent states on a timely filed (including
extensions) Form 1042-S for the calendar year of overwithholding the
amount of tax withheld and the amount of any repayment made through
set-off; and
(iii) The withholding agent states on a timely filed (including
extensions) Form 1042 for the calendar year of overwithholding the
amount of adjustments made to overwithholding under paragraph (a)(1) of
this section and the amount of any credit claimed under Sec. 1.6414-1.
* * * * *
Kirsten Wielobob,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2018-27290 Filed 12-13-18; 4:15 pm]
BILLING CODE 4830-01-P