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

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 31

[TD 8881]

RIN 1545-AX53; RIN 1545-AV27; RIN 1545-AV41

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.

SUMMARY:

This document contains amendments to final regulations relating to the withholding of income tax under sections 1441, 1442, and 1443 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 amendments under sections 6041, 6041A, 6042, 6045, 6049, and 3406. This regulation affects persons making payments of U.S. source income to foreign persons.

DATES:

These regulations are effective January 1, 2001.

FOR FURTHER INFORMATION CONTACT:

Carl Cooper, Laurie Hatten-Boyd, or Kate Hwa (202) 622-3840 (not a toll free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collections of information in these final regulations have been reviewed and approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507) under control number 1545-1484. Responses to these collections of information are required to obtain a benefit (to claim an exemption to, or a reduction in, withholding), and to facilitate tax compliance (to verify entitlement to an exemption or a reduced rate). The likely respondents are individuals, businesses, and other for-profit organizations.

Comments on the collections of information should be sent to the Office of Management and Budget, Attn: Desk Officer for the Department of the Treasury, Office of Information and Regulatory Affairs, Washington, DC 20503, with copies to the Internal Revenue Service, Attn: IRS Reports Clearance Officer, OP:FS:FP, Washington, DC 20224.

The estimated average annual burden per respondent and/or recordkeeper are reflected in the burdens of Forms W-8, 1042, 1042-S, 1099, and the income tax return of a foreign person filed for purposes of claiming a refund.

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 (TD) 8734 (62 FR 53387), the Treasury Department and the IRS issued comprehensive regulations (final regulations) under chapter 3 (sections 1441-1464) and subpart G of Subchapter A of chapter 61 (sections 6041-6050S) of the Internal Revenue Code. Those final regulations were amended by TD 8804 (63 FR 72183 [1999-12 I.R.B. 5]) which delayed the effective date of the final regulations to payments made after December 31, 1999. The effective date of the regulations was again extended by TD 8856 (64 FR 73408) to payments made after December 31, 2000.

Need for Changes

Since the publication of TD 8734, the IRS and Treasury have received numerous comments relating to technical errors in the regulations and ways to ease compliance while keeping the objectives of the regulations in place. In Notice 99-8 (1999-5 I.R.B. 26), the IRS and Treasury announced amendments that would be made to the regulations. This TD implements Notice 99-8 and contains additional changes made in response to comments as well as the IRS and Treasury's further analysis of the regulations.

Explanation of Revisions

A. Changes to § 1.1441-1

1. Payments to a U.S. Branch of Certain Foreign Banks or Foreign Insurance Companies

Generally, a payment to a U.S. branch of a foreign person is a payment to a foreign person. Under § 1.1441-1(b)(2)(iv), however, a U.S. branch of certain foreign banks or insurance companies and a withholding agent may agree to treat the U.S. branch as a U.S. person for purposes of chapter 3 of the Internal Revenue Code. The regulation as initially drafted required a withholding agent to treat such a U.S. branch as a U.S. person for all purposes under chapter 3 of the Internal Revenue Code. The regulation itself, however, does not treat a U.S. branch as a U.S. person for all purposes under chapter 3 of the Internal Revenue Code. For example, a U.S. branch of a foreign bank or insurance company provides a withholding certificate on a Form W-8, which is used only by foreign persons. Further, under § 1.1461-1(c), payments to such a branch are reportable as payments to a foreign person on Form 1042-S. Therefore, § 1.1441-1(b)(2)(iv) has been amended to state that, notwithstanding the agreement between the withholding agent and a U.S. branch to treat the U.S. branch as a U.S. person, the branch is not treated as a U.S. person for purposes of providing documentation or for reporting payments to the branch.

2. Rules for Reliably Associating a Payment With a Withholding Certificate or Other Appropriate Documentation

Section 1.1441-1(b)(2)(vii) contains rules to determine whether a payment can be reliably associated with valid documentation. A payment that cannot be reliably associated with valid documentation is subject to the presumption rules in §§ 1.1441-1(b)(3), 1.1441-4(a)(2)(ii) and (3)(i), 1.1441-5(d) and (e)(6), 1.1441-9(b)(3), and 1.6049-5(d). Paragraph (b)(2)(vii) did not adequately address when a payment made to a nonqualified intermediary, a flow-through entity, or a U.S. branch of certain foreign banks and insurance companies (other than a branch that acts as a U.S. person) would be treated as reliably associated with documentation. These entities provide a withholding certificate for themselves and withholding certificates, documentary evidence, or other information for the persons on whose behalf they act. Therefore, the payment must be reliably associated not only with a withholding certificate from the intermediary, flow-through entity, or U.S. branch, but also with documentation from, or information relating to, the payee on whose behalf the entity acts.

Paragraph (b)(2)(vii) has been amended to provide more detailed reliable association rules. For a payment made to a nonqualified intermediary, a flow-through entity, or a U.S. branch, new paragraph (b)(2)(vii)(B) provides that a withholding agent can reliably associate the payment with valid documentation if, prior to the payment, it has received a valid nonqualified

intermediary withholding certificate on Form W-8IMY; it can determine the portion of the payment that relates to valid documentation associated with the Form W-8IMY from a payee (i.e., a person other than a nonqualified intermediary, flow-through entity, or U.S. branch); and the nonqualified intermediary, flow-through entity, or U.S. branch has provided sufficient information for the withholding agent to report the payment on Form 1042-S or Form 1099, if reporting is required.

Paragraph (b)(2)(vii)(C) provides rules for a withholding agent that makes a payment to a qualified intermediary that does not assume primary withholding responsibility under chapter 3 of the Internal Revenue Code or primary Form 1099 reporting and backup withholding responsibility under chapter 61 and section 3406 of the Internal Revenue Code. The payment can be reliably associated with valid documentation if, prior to the payment, the withholding agent receives a valid qualified intermediary withholding certificate on Form W-8IMY and a withholding statement that allocates the payment among withholding rate pools, including withholding rate pools for each U.S. non-exempt recipient for which the qualified intermediary has provided a valid Form W-9 (or other information if a Form W-9 has not been provided).

For a payment made to a qualified intermediary that assumes primary withholding responsibility under chapter 3 of the Internal Revenue Code with respect to the payment, but does not assume primary Form 1099 reporting and backup withholding responsibility under chapter 61 and section 3406 of the Internal Revenue Code, paragraph (b)(2)(vii)(D) provides that a withholding agent can reliably associate the payment with valid documentation if, prior to the payment, it receives a valid Form W-8IMY and the withholding statement associated with the Form W-8IMY allocates the payment between a single withholding rate pool for which the qualified intermediary assumes primary withholding responsibility and separate withholding rate pools for each U.S. non-exempt recipient.

Paragraph (b)(2)(vii)(E) provides rules for a withholding agent that makes a payment to a qualified intermediary that assumes primary Form 1099 reporting and backup withholding responsibility under chapter 61 and section 3406 of the Internal Revenue Code, but does not assume primary withholding responsibility under chapter 3 of the Internal Revenue Code. The payment can be reliably associated with valid documentation if, prior to the payment, the withholding agent can associate the payment with a valid Form W-8IMY and the withholding statement associated with the Form W-8IMY allocates the payment among the withholding rate pool or pools for which withholding responsibility is not assumed and the portion of payment for which the qualified intermediary assumes Form 1099 reporting and backup withholding responsibility.

Finally, for a payment made to a qualified intermediary that assumes both primary withholding responsibility under chapter 3 of the Internal Revenue Code and primary Form 1099 reporting and backup withholding responsibility under chapter 61 and section 3406 of the Internal Revenue Code, paragraph (b)(2)(vii)(F) provides that a withholding agent can reliably associate the payment with valid documentation if, prior to the payment, it can associate the payment with a valid Form W-8IMY. In this case, no withholding rate pool allocation information is required. This same rule applies for payments made to a withholding foreign partnership.

3. Presumptions of Classification as Individual, Corporation, Partnership, etc.

As initially drafted, § 1.1441-1(b)(3)(ii) provided a withholding agent with presumption rules to determine a payee's classification (e.g., individual, corporation, partnership) if it could not reliably associate a payment with valid documentation. Paragraph (b)(3)(ii) did not, however, provide a presumption rule if a withholding agent could reliably associate a payment with documentary evidence (i.e., documentation other than a withholding certificate) from which it could not determine the payee's classification. For example, documentary evidence may indicate that a payee (other than an entity that is treated as a per se corporation under § 301.7701-2(b)(8)(i)) is a type of entity that can be organized so that all of its members have limited liability, in which case it would be treated as an association, or so that one or more of its members have unlimited liability, in which case it would be treated as a partnership. The determination of classification can be critical because if the entity is a flow-through entity, it is not the beneficial owner of the payment and its documentary evidence cannot be relied upon to grant a reduced rate of withholding.

Section 1.1441-1(b)(3)(ii)(C) has been added to permit a withholding agent to treat an entity that has provided documentary evidence as a corporation if the classification of the entity cannot be determined from documentary evidence or by reference to the exempt recipient rules under § 1.6049-4(c)(1)(ii). This presumption rule will reduce burdens on withholding agents that are permitted to use documentary evidence, such as foreign intermediaries and flow-through entities, which would otherwise have to request from payees additional information regarding U.S. tax classification. The presumption rule is not, however, intended to allow foreign entities to avoid making the correct determination of their classification and to provide the correct documentation. Thus, a foreign entity must make a determination about its classification and if it determines that it is an intermediary, partnership, foreign simple trust, or foreign grantor trust under U.S. tax law principles, it must provide an intermediary or flow-through withholding certificate on Form W-8IMY together with the appropriate information relating to its customers, partners, beneficiaries, owners, or other payees. Further, a withholding agent cannot treat an entity as a corporation if it knows, or should know, that the entity is a flow-through entity or intermediary. For example, if a particular type of collective investment vehicle provides documentary evidence that does not establish that it is a corporation, partnership, or trust, but the withholding agent knows, or has reason to know, that the investment vehicle is classified as a partnership for U.S. tax purposes, it must request a partnership withholding certificate from the entity.

An entity that is presumed to be a foreign corporation under new paragraph (b)(2)(ii)(C) cannot be treated as the beneficial owner entitled to a reduced rate of withholding to the extent the documentary evidence indicates that it is a bank, broker, custodian, intermediary, or other agent unless the entity provides a statement that it is the beneficial owner of the income. For example, documentary evidence that indicates that the payee is a bank does not permit a withholding agent to apply the portfolio interest exception to payments of interest made to the bank. In addition, even though a foreign entity is treated as a beneficial owner for purposes of the exceptions to withholding under the Internal Revenue Code and regulations, it is not necessarily entitled to claim treaty benefits. Whether treaty benefits may be claimed by an entity depend on whether it meets the requirements under the income tax treaty and section 894.

4. Changes to Presumption Rules

Several simplifying and clarifying changes have been made to the presumption rules in § 1.1441-1(b)(3). First, the presumption rule applicable to pensions and annuities contained in § 1.1441-1(b)(3)(iii)(C) has been expanded to apply to individual retirement accounts and individual retirement annuities. Second, § 1.1441-1(b)(3)(iii)(D), which contains presumption rules applicable to offshore accounts, was revised to state the applicable rule more clearly. In addition, the restriction on applying the presumption rule of paragraph (b)(3)(iii)(D) to amounts that are not subject to withholding has been moved from that paragraph to § 1.6049-5(d)(2). This change eliminates a conflict with § 1.6049-5(d)(2), as previously drafted, which applied the paragraph (b)(3)(iii)(D) rule to amounts not subject to withholding.

Section 1.1441-1(b)(3)(iv) contains a grace period presumption rule that permits a withholding agent to treat a payee as a foreign person in certain situations where the withholding agent would presume the payee to be a U.S. person. Although the grace period rule generally does not permit a withholding agent to apply any exceptions to withholding, it does permit a withholding agent to apply a reduced rate of withholding for 90 days to a payee that provides a withholding certificate that would have been valid except that it was transmitted by facsimile. One commentator noted that because the facsimile rule applied only to payees that a withholding agent could, “in its discretion” treat as a foreign person, the rule was limited to those situations where the presumption rules would have treated the payee as a U.S. person and the withholding agent was exercising its discretion to treat the payee as foreign. Therefore, the commentator argued, the rule arguably could not be applied to payees that were required to be treated as foreign persons under the presumption rules, e.g., an exempt recipient with indicia of foreign status. The regulation has been modified by removing the phrase “in its discretion” thereby permitting the facsimile rule to apply to payees that are treated as foreign payees under the presumption rules.

Paragraph (b)(3)(v), as promulgated in TD 8734, provided several presumption rules that applied if a withholding agent did not receive from a nonqualified intermediary the withholding certificates or documentary evidence of the persons on whose behalf the nonqualified intermediary acted or did not receive information allocating the payment to each person. Under paragraph (b)(3)(v)(C), if the withholding agent could associate a payment with a group of beneficial owners or payees, it could treat the payment as being made in its entirety to the person in the group that was subject to the highest withholding rate or, if the rates were equal, to the payee in the group with the highest U.S. tax liability. If a nonqualified intermediary grouped persons subject to similar withholding and tax rates together and allocated the payment to the group, the nonqualified intermediary could achieve a reduced rate of withholding for its customers without reliably associating the payment to each of the customers that would be entitled to the payment. Treasury and the IRS stated in Notice 99-8 that affording a reduced rate of withholding under these circumstances was inappropriate. Further, it was inappropriate to report the entire payment as if it were made to a single documented payee who was not entitled to receive the entire amount of income.

Paragraph (b)(3)(v) has been revised so that whenever a payment to a nonqualified intermediary cannot be reliably associated with valid documentation from a specific payee, the payment is treated as made to an undocumented foreign payee and is subject to 30 percent withholding. Under § 1.1461-1(c), such payments are reported to an unknown owner on Form 1042-S. Thus, a payment can no longer be subject to a reduced rate of withholding because it can be allocated to a group of documented payees all of whom are subject to the same reduced rate of withholding. Similar changes have been made to the presumption rules that applied to foreign partnerships under former § 1.1441-5(d)(3)(ii).

Paragraph (b)(3)(vi), as originally drafted, was in error. It stated that the presumption rules that applied to foreign intermediaries also applied to U.S. branches of foreign banks and insurance companies that assumed withholding responsibility. The rule should have provided that the intermediary presumption rules also apply to U.S. branches of foreign banks and insurance companies that do not agree to be treated as U.S. persons. Those branches are generally treated in the same manner as nonqualified intermediaries under chapter 3 of the Internal Revenue Code. Therefore, paragraph (b)(3)(vi) has been revised to apply only to those branches that are not treated as U.S. persons. Finally, paragraph (b)(3)(vii), which applies to payments to joint payees, has been amended to clarify the treatment of payments made to joint accounts.

5. Rules for Withholding and Reporting of Payments by a Foreign Intermediary and Certain U.S. Branches

Section 1.1441-1(b)(6) sets forth the withholding obligations of a foreign intermediary and certain U.S. branches. The regulation, as originally drafted, stated that a qualified intermediary, a nonqualified intermediary, or a U.S. branch of a foreign bank or insurance company was deemed to have satisfied any obligation it had to withhold and report an amount it paid if it did not know that the correct amount had not been withheld. The rule did not, however, require a foreign intermediary or U.S. branch to report a payment if it knew that the withholding agent from whom it received the payment had not reported the payment to the persons on whose behalf the foreign intermediary or U.S. branch acted as long as the correct amount was withheld. For example, if a U.S. withholding agent withheld 30 percent from a payment of an amount subject to withholding made to a nonqualified intermediary because the nonqualified intermediary failed to provide documentation or allocation information relating to the persons for whom it acted, the rule relieved the nonqualified intermediary from any obligation to report the payment to those persons. Foreign intermediaries and U.S. branches, however, are withholding agents under § 1.1441-7(a) and, as stated in Notice 99-8, it is inappropriate to relieve them of any reporting responsibility unless they have provided another withholding agent with all of the information that the withholding agent needs to report amounts paid to the appropriate recipients of the income. In addition, paragraph (b)(6) should not have included qualified intermediaries, because a qualified intermediary has reporting responsibilities whether or not another withholding agent properly reported the payment made to the qualified intermediary.

The regulation has been revised to provide that a nonqualified intermediary or U.S. branch (other than a U.S. branch treated as a U.S. person) is not required to withhold and report if the nonqualified intermediary or U.S. branch (i) has provided a valid nonqualified intermediary or U.S. branch withholding certificate, (ii) has provided all of the information required to be included in a withholding statement associated with its withholding certificate so that another withholding agent can do the required reporting on Form 1042-S or Form

1099, and (iii) does not know, and has no reason to know, that the other withholding agent did not withhold the correct amount or did not report the payment correctly. A qualified intermediary's obligations to withhold and report are determined in accordance with its qualified intermediary agreement.

6. Definitions

Section 1.1441-1(c) contains the definitions of terms used in the regulations under chapter 3 of the Internal Revenue Code. The section has been significantly expanded and certain definitions have been consolidated in this section. New definitions, or cross-references to definitions, have been provided for the terms beneficial owner, payee, intermediary, nonqualified intermediary, qualified intermediary, withholding certificate, documentary evidence, documentation, payor, exempt recipient, non-exempt recipient, reportable amounts, flow-through entity, foreign simple trust, foreign complex trust, foreign grantor trust, partnership, nonwithholding foreign partnership, and withholding foreign partnership.

Paragraph (c)(6)(i) has been changed to state specifically that the definition of beneficial owner does not apply in cases where a reduced rate of withholding is being claimed under an income tax treaty. This change has been made to clarify that a person who is a beneficial owner of an item of income for purposes of these regulations would not necessarily beneficially own the item of income for purposes of an income tax treaty.

Paragraph (c)(6), as originally drafted, did not include rules to determine the beneficial owner of a payment made to a foreign trust or estate. In general, the regulations retained the rules for foreign trusts and estates that existed prior to the publication of TD 8734. The paragraph has been revised to provide specific rules for payments to foreign trusts and estates. Generally, the beneficial owners of a payment to a foreign simple trust are the beneficiaries of the trust. The beneficial owners of a payment made to a foreign grantor trust are the owners of the trust. Foreign complex trusts and foreign estates are considered to be the beneficial owners of income paid to such entities.

Paragraph (c)(12) has been added to clarify the term

payee.

It provides cross-references to those sections under which the payee of income is determined, and emphasizes that foreign intermediaries and flow-through entities are generally not considered the payees of income. A qualified intermediary is, however, a payee to the extent it assumes primary withholding responsibility with respect to a payment, and a flow-through entity is a payee if it is receiving income that is, or is treated as, effectively connected with the conduct of a U.S. trade or business.

The definition of a flow-through entity has been moved from § 1.1441-1(e)(3)(i) to paragraph (c)(23). The definition has also been expanded and clarified. The term

flow-through entity

refers to any entity which has an obligation to transmit documentation to another withholding agent. Therefore, an entity may be a flow-through entity whether or not the income paid to the entity is includible in the gross income of the entity's owners. A flow-through entity includes a nonwithholding foreign partnership, a foreign simple trust, a foreign grantor trust, or an entity that is fiscally transparent under section 894 to the extent it provides documentation on behalf of its interest holders. A withholding foreign partnership and a withholding foreign trust are not flow-through entities. The term flow-through entity has replaced the term partnership in numerous places throughout the regulation.

7. Withholding Certificates

a. Forms W-9.

Section 1.1441-1(d) contains rules for a payee to establish its status as a U.S. payee. Under paragraph (d), a payee that provides a Form W-9 may be treated as a U.S. payee that is not subject to withholding under section 1441. Commentators have noted that under current law, there is no prohibition against a foreign person providing a Form W-9 to establish status as an exempt recipient. They therefore suggest that the regulations should be clarified to specifically state that providing a Form W-9 serves as a representation of U.S. status and should only be furnished by a U.S. person. In response to these comments, paragraph (d)(2) has been amended to state that furnishing a Form W-9 serves as a statement that the person providing the form is a U.S. person. Therefore, a foreign person, including a U.S. branch of a foreign person, should not provide a Form W-9 to a withholding agent. The instructions to Form W-9 will also be modified to make clear that providing a Form W-9 is a declaration of U.S. status.

Paragraph (d)(3) is revised to eliminate the requirement for a permanent residence address. Permanent residence address is a term defined in § 1.1441-1(e)(2)(ii) and is generally the address of a foreign person in the country in which the person is a resident for tax purposes. The term is inapplicable, and potentially misleading, as applied to the address a U.S. person should provide on Form W-9.

Paragraph (d)(4), as originally drafted, provided rules to determine whether a payment was made to a U.S. beneficial owner. Generally, the regulation provided that if a customer of a foreign intermediary provided a Form W-9, the withholding agent could treat such person as a U.S. beneficial owner. A customer of a foreign intermediary could also be treated as a U.S. beneficial owner if it provided a U.S. branch withholding certificate that evidenced its agreement to be treated as a U.S. person. A Form W-9 and a U.S. branch withholding certificate, however, do not establish beneficial ownership. Further, it is not necessary under the regulations to determine whether a U.S. payee is a beneficial owner because a payment to a U.S. payee is not subject to withholding under chapter 3 of the Internal Revenue Code whether or not the payee is the beneficial owner of the income. Thus, the paragraph has been modified to provide that the withholding agent may treat the payee of a payment made to a foreign intermediary or a flow-through entity as a U.S. payee if the payee provides a Form W-9 or a U.S. branch withholding certificate that evidences the branch's agreement to be treated as a U.S. person.

b. Intermediary and flow-through withholding certificates.

Section 1.1441-1(e)(3)(i) provides definitions for the terms intermediary withholding certificate, flow-through withholding certificate, and U.S. branch withholding certificate. That section originally defined a flow-through withholding certificate as a Form W-8 furnished by a partnership (other than a withholding foreign partnership) or a trust or estate. The paragraph has been revised to conform to the definition of flow-through entity contained in § 1.1441-1(c)(23) and the new rules contained in § 1.1441-5(e) regarding foreign trusts and foreign estates, discussed in section E of this Explanation of Provisions. Under paragraph (e)(3)(i), as revised, a flow-through withholding certificate is defined as a withholding certificate on Form W-8 furnished by a nonwithholding foreign partnership, a foreign simple trust, a foreign grantor trust, or a foreign entity presenting claims on behalf of its interest holders for a reduced rate of withholding under an income tax treaty. Foreign complex trusts and foreign estates generally provide beneficial owner withholding certificates.

Section 1.1441-1(e)(3)(ii) provides the requirements for a valid withholding certificate provided by a qualified intermediary. The paragraph has been

modified to reflect the procedures applicable to qualified intermediaries as set forth in Rev. Proc. 2000-12 (2004-4 I.R.B. 1).

Section § 1.1441-1(e)(3)(iii) provides rules relating to a nonqualified intermediary withholding certificate. Paragraph (e)(3)(iii) generally provided that payee documentation provided with a nonqualified intermediary withholding certificate needed to be attached to the certificate. Similar requirements existed for flow-through withholding certificates and U.S. branch withholding certificates. The regulations have been revised to require that payee documentation be associated with, rather than attached to, a nonqualified intermediary, flow-through, or U.S. branch certificate to obviate the need for a new withholding certificate each time payee documentation is provided to a withholding agent. The regulations do not set forth specific requirements for associating documentation. Any reasonable method may be used to associate documentation with its intermediary withholding certificate.

Paragraph (e)(3)(iii), as originally drafted, required a certification that the withholding certificates or other appropriate documentation attached to a nonqualified intermediary withholding certificate represented all of the persons to whom the intermediary withholding certificate related or that the amounts of income allocable to persons for whom no documentation was provided was separately stated. A similar requirement applied to nonwithholding foreign partnership withholding certificates in § 1.1441-5(c)(3)(iii)(D). The requirement for this certification has been eliminated. The persons on whose behalf a nonqualified intermediary acts will frequently change as persons open and close accounts with the intermediary. Thus, any such certification may be true at the time made, but false at a later point, necessitating a new withholding certificate. The elimination of the certification is not an elimination, however, of the requirement to provide payee withholding certificates to a withholding agent prior to a payment. The certification requirement has also been eliminated for nonwithholding foreign partnerships.

Section 1.1441-1(e)(3)(iii) permits a nonqualified intermediary to provide payee documentation either in the form of withholding certificates or in the form of documentary evidence. The withholding agent is required to derive information from the withholding certificates or other documentary evidence and report payments to each specific payee on whose behalf the nonqualified intermediary acts. However, the regulations were silent on how a withholding agent was to determine the status (U.S. or foreign) or classification (

e.g.,

corporate, partnership, trust, or estate) and other information required to report payments on Form 1042-S from documentary evidence, particularly when that documentary evidence was in a foreign language. Further, although the regulations require a nonqualified intermediary to allocate payments to each payee on whose behalf it acts so that a withholding agent can report payments to each payee on Form 1042-S or Form 1099, the regulations provided no detail on how the allocation information was to be provided.

The regulations have been revised to take these considerations into account. Under § 1.1441-1(e)(3)(iv) as revised, a nonqualified intermediary must associate with its nonqualified intermediary withholding certificate a withholding statement which sets forth the information a withholding agent needs to allocate a payment to each payee on whose behalf the nonqualified intermediary acts and to report the payment. Specifically, the withholding statement must contain for each payee the payee's name, address, country of residence, TIN (if any), the payee's recipient type for Form 1042-S reporting, the applicable rate of withholding, the type of withholding exception applied (if any), and the name of any other intermediary or flow-through entity from whom the payee directly receives the income. Additional information is required if a reduced rate of withholding under an income tax treaty is claimed. The withholding statement may be provided in any manner that the withholding agent and nonqualified intermediary agree, including electronically. It must be updated as frequently as necessary to remain accurate prior to each payment. The regulation does not require a nonqualified intermediary to provide information for a payee unless the payee is a U.S. non-exempt recipient. Information regarding U.S. non-exempt recipients must be provided irrespective of any local laws that prohibit disclosure of an account holder or account information. Therefore, a nonqualified intermediary should obtain waivers from non-disclosure provisions from U.S. non-exempt recipients. To the extent payee information is not provided, whether for a U.S. non-exempt recipient or any other payee, the regulation has been clarified to state explicitly that a withholding agent must withhold under the presumption rules. Further, the nonqualified intermediary remains liable for any tax not withheld by a withholding agent and, unless the nonqualified intermediary itself files information returns, will also be held liable for penalties imposed for failure to file information returns under sections 6721 and 6722.

Many commentators have argued that it is not practical to provide information allocating a payment to each payee prior to each payment because the customers of nonqualified intermediaries are constantly acquiring and disposing of investments. Several commentators made suggestions on how the regulations might ease compliance burdens. One commentator suggested that no allocation information should be required except in the case of income subject to reduced rates of withholding under an income tax treaty and payments made to U.S. non-exempt recipients. This suggestion was rejected. The IRS has provided a mechanism for aggregate reporting of payments in the model qualified intermediary agreement in Rev. Proc. 2000-12. It is inappropriate to extend such treatment to nonqualified intermediaries without the safeguards contained in a qualified intermediary agreement. Other commentators suggested that a withholding agent should withhold the difference between 30 percent of a payment and the claimed reduced rate of withholding in escrow and release the amounts when allocation information is provided. This suggestion was also not accepted. Such a system would leave the escrow funds out of the control of both the IRS and the beneficial owners of the payments. Further, because the nonqualified intermediary would have to provide frequent allocations as soon as possible after the time of payment to have the escrow funds released, it appeared to provide little relief from the pressures inherent in providing allocation information prior to a payment. Other commentators argued that a reduced rate of withholding should be provided at the time of payment with allocation information to follow after the close of the year with various disincentives provided for failure to furnish the allocation information. The regulations generally adopt this approach.

Paragraph (e)(3)(iv)(D) provides alternative procedures that permit a nonqualified intermediary to provide information allocating reportable amounts to payees (including U.S. exempt recipients) by January 31 of the year following the calendar year of payment. The alternative procedures do

not apply to payments made to U.S. non-exempt recipients. Therefore, allocation information for those persons must be provided prior to a payment. Under the alternative procedures, only allocation information may be provided after a payment is made: all other information that is required to be included in a withholding statement and appropriate payee documentation must be provided prior to a payment. The nonqualified intermediary may have reduced rates of withholding apply by identifying pools of income subject to a particular withholding rate (withholding rate pools) and identifying the payees with the appropriate withholding rate pools.

Various penalties apply if a nonqualified intermediary fails to provide information to allocate payments in a withholding rate pool to a withholding agent by January 31. First, the withholding agent must commence withholding on all payments in accordance with the presumption rules. Therefore, 30 percent withholding applies to amounts subject to withholding and 31 percent backup withholding applies to payments of deposit interest and original issue discount on original issue discount obligations of 183 days or less. Under a cure provision, the withheld amounts may be returned, and the alternative procedures may continue to be used, if the nonqualified intermediary provides allocation information by February 14. If the nonqualified intermediary fails to provide allocation information by that date, withholding continues for the taxable year, and all subsequent taxable years, unless the withholding agent provides allocation information prior to a payment. Further, because no allocation information has been provided, the payments are considered never to have been reliably associated with valid documentation and the foreign beneficial owners and other payees on whose behalf the nonqualified intermediary is acting are not entitled to a reduced rate of withholding. Therefore, the nonqualified intermediary shall remain liable under section 1461 for the difference between the amount, if any, withheld by the withholding agent and the amount that should have been withheld under the presumption rules. Any tax due because of an allocation failure will be assessed against the nonqualified intermediary and, if necessary, collected from the assets that the nonqualified intermediary has with the withholding agent. Interest and penalties may also be assessed against the nonqualified intermediary. In particular, paragraph (e)(3)(iv)(

7

) states that a failure to provide allocation information will be presumed to be an intentional failure to file information returns and payee statements under sections 6721 and 6722. The IRS will not, however, hold the withholding agent liable for any tax, interest, or penalties, that are due solely to the failure of the nonqualified intermediary to provide allocation information.

The withholding statement rules and alternative allocation procedures have also been made applicable to U.S. branches of certain foreign banks and insurance companies and flow-through entities. This change, together with certain other changes discussed in this Explanation of Provisions, generally results in nonqualified intermediaries, U.S. branches, and flow-through entities being treated similarly.

Paragraph (e)(3)(iv)(E) has been added to permit the IRS to provide a withholding agent with a notice prohibiting the withholding agent from applying the alternative procedures of paragraph (e)(3)(iv)(D) to an identified nonqualified intermediary (or to a flow-through entity or a U.S. branch of a foreign bank or foreign insurance company) thereby requiring allocation information prior to a payment to have a reduced rate of withholding apply. In addition, the IRS may, in appropriate circumstances issue a notice to a withholding agent prohibiting the withholding agent from applying a reduced rate of withholding under any circumstances, even if allocation information is provided prior to a payment. The IRS contemplates issuing these notices in situations where a nonqualified intermediary, flow-through entity, or U.S. branch fails to pay a tax due or is not applying the rules of the regulations in good faith.

c. Reportable amounts.

Foreign intermediaries, flow-through entities, and U.S. branches of foreign banks and insurance companies (other than U.S. branches treated as U.S. persons) are required to provide information with respect to reportable amounts, as defined in § 1.1441-1(e)(3)(vi). Prior to its revision, paragraph (e)(3)(vi) included in the definition of reportable amounts original issue discount or interest (OID) paid on short-term instruments. This definition appeared to include interest and OID regardless of whether those amounts were paid on the redemption of an obligation or from the sale or exchange of an obligation in a transaction other than a redemption. Under the presumption rules, if a withholding agent makes a payment to a foreign intermediary of interest and OID on a short-term obligation and it lacks documentation for such amounts, it must presume that the payee is a U.S. non-exempt recipient and report the income on Form 1099 and backup withhold on the payment. See § 1.6049-5(d)(3)(iii). These rules proved to be impractical for sales of short-term obligations outside the United States. Foreign intermediaries have contended that they do not have the appropriate systems to report gains from sales transactions on Forms 1099 or to provide the proper allocation information to U.S. payors. Moreover, treating the sale or exchange of short-term OID instruments as reportable interest on Form 1099 was inconsistent with rules that treat amounts paid on the sale or exchange, other than redemptions, of such obligations as gross proceeds. See §§ 1.6045-1(d)(3) and 31.3406(b)(2)-2. Because it is more appropriate to treat sales, other than redemptions, of short-term OID instruments as gross proceeds rather than payments of interest or original issue discount, the regulation has been amended to provide that reportable amounts do not include amounts representing interest or OID on the sale or exchange, other than a redemption, of a short-term OID instrument. Therefore, a foreign intermediary, flow-through entity, or U.S. branch is not required to provide information regarding these transactions to a withholding agent as part of its withholding statement.

d. Period of validity.

Section 1.1441-1(e)(4)(ii)(A) states that documentary evidence (i.e., documentation other than a withholding certificate) remains valid until “the earlier of the last day of the third calendar year following the year in which the documentary evidence is created * * * .” Commentators have stated that it is not clear if a document is “created” when it comes into being or when it is provided to a withholding agent. They also stated that basing the validity period on the date a document came into being would be more difficult to administer because they would have to calculate the expiration date in every case rather than assuming that it was valid for three years after it had been received by the withholding agent. In response to these comments, the rule has been amended to permit the validity period to be measured from the date documentation is provided to the withholding agent.

Section 1.1441-1(e)(4)(ii)(B) sets forth the circumstances in which a Form W-8 has an indefinite validity period. Paragraph (e)(4)(ii)(B)(

1

), as originally drafted, provided that a Form W-8 that contained a TIN was valid indefinitely “if the income for which such certificate is furnished is required to be reported”

on Form 1042-S. Commentators noted that a strict reading of this language could preclude the indefinite validity of a Form W-8 with respect to income that was not subject to reporting, even though other income paid to the same beneficial owner by the withholding agent was subject to reporting. The regulation has been amended to provide that if there is annual reporting of at least one item of income paid by a withholding agent to a beneficial owner, the Form W-8 remains valid even for payments that are not subject to reporting. However, if a withholding agent has a Form W-8 with a TIN but does not make any payments of an amount subject to withholding, for example the withholding agent pays only deposit interest, the form remains valid only for 3 calendar years after the year of receipt. In addition, paragraph (e)(4)(ii)(B)(

8

) has been added to provide an indefinite validity period for a withholding certificate provided by a foreign simple trust or foreign grantor trust for the purposes of transmitting withholding certificates or documentary evidence.

e. Electronic transmission of information.

These regulations finalize the regulations proposed in REG-107872-97 (62 FR 53504) relating to the electronic submission of Forms W-8 and make them applicable beginning January 1, 2000. Like the proposed regulations, the final regulations apply only to situations where there is a direct relationship between the withholding agent or payor and the beneficial owner or payee. The final regulations reserve an applicable standard for transmitting forms through tiers of intermediaries. Comments were solicited on this matter in the preamble to the proposed regulations but none were received. The IRS and Treasury recognize the benefits of allowing the electronic transmission of Forms W-8 through one or more intermediaries and continue to solicit comments regarding requirements to ensure the integrity, accuracy, and reliability of electronically transmitted forms through tiers of intermediaries.

f. Requirement of taxpayer identifying number.

Section 1.1441-1(e)(4)(vii) provides guidance for when a TIN is required on a Form W-8. Paragraph (e)(4)(vii), as originally drafted, required TINs on withholding certificates from all trusts or estates or the fiduciaries thereof. A number of commentators stated that the TIN requirement was burdensome and unreasonable when applied to pension trusts and large investment trusts. In addition, commentators noted that nonwithholding foreign partnerships, which are treated similarly to foreign simple trusts and foreign grantor trusts, are not required to have a TIN. In response to these comments, the regulations have been amended by eliminating the TIN requirement for foreign trusts other than foreign grantor trusts with 5 or fewer owners.

Paragraph (e)(4)(vii) has also been modified to state that a TIN is required on a withholding certificate from a beneficial owner that is claiming an exemption based on its claim of tax exempt status under section 501(c) or private foundation status. This does not represent a change in the requirements for a withholding certificate from such a beneficial owner. The regulation, as originally drafted, however, contained the requirement only in § 1.1441-9. The requirement of a TIN has been repeated in this paragraph for convenience. Finally, commentators noted that there was a conflict between paragraph (e)(4)(vii), which did not require a TIN on a withholding certificate from a nonwithholding foreign partnership, and § 1.1441-5(c)(3)(iii)(A), which stated that a TIN was required. It was never intended that a nonwithholding foreign partnership withholding certificate used to transmit documentation and information relating to its partners have a TIN. Section 1.1441-5(c)(3)(iii)(A) has been modified accordingly. TINs are required, however, if the withholding foreign partnership is providing a withholding certificate on which it claims an exemption from withholding because the income is effectively connected with the conduct of a trade or business or when it is entitled to claim treaty benefits under section 894 on income for which a TIN is required under § 1.1441-6(b)(1).

g. Requirement to furnish certificates for each account.

Generally, each withholding agent that makes a payment to a beneficial owner must obtain a separate withholding certificate. In addition, a withholding agent that is a financial institution must obtain withholding certificates or other appropriate documentation on an account-by-account basis from its customers. Under paragraph (e)(4)(ix)(A)(3) of the regulations, a withholding agent may rely on a withholding certificate held at another branch of the same withholding agent or of a person related to the withholding agent if there is a system in place that permits a withholding agent to access data regarding the withholding certificate and to transmit data that affects the validity of the documentation into the system. A commentator noted that the regulations do not contain provisions, however, to let unrelated withholding agents utilize such a system that they maintain in common or that is maintained by another person. New paragraph (e)(4)(ix)(A)(

4

) has been added to permit unrelated withholding agents to rely on such a system.

h. Special rules for brokers.

Section 1.1441-1(e)(4)(ix)(C) provided that a withholding agent may rely on the certification of a broker acting as the agent of a beneficial owner if the broker held a valid beneficial owner withholding certificate or other documentation for that beneficial owner. As originally drafted, the intention of this provision was unclear. It also appeared to be overly broad because it would have permitted a foreign broker to retain beneficial owner documentation and not transmit the documentation to a U.S. withholding agent.

Paragraph (e)(4)(ix)(C) has been redrafted to clarify, and appropriately limit, its application. As redrafted, it applies only to a U.S. broker. It permits such a broker that is acting as an introducing or corresponding broker to provide a clearing broker with a certification that it holds a valid withholding certificate or other appropriate documentation. Without this rule, an introducing or corresponding broker would have to obtain multiple Forms W-8 and provide them to each clearing broker with whom the introducing or corresponding broker executes transactions. In addition, paragraph (e)(4)(ix)(C) has been amended to apply only to readily tradeable instruments, as provided in § 31.3406(h)-3(d), on which it is modeled. An example has been added to illustrate the paragraph.

8. Qualified Intermediary Withholding Certificates

Section 1.1441-1(e)(5) provides rules regarding qualified intermediaries. The rules have been redrafted to more closely conform with the model qualified intermediary agreement published as part of Rev. Proc. 2000-12. The regulation, as originally drafted, contained a requirement that a qualified intermediary disclose U.S. non-exempt recipients “irrespective of local secrecy laws.” The model qualified intermediary agreement has specific provisions contained in section 6.04 of the agreement, as well as other sections, that govern the treatment of U.S. persons whenever foreign law, whether or not a “secrecy” provision, may preclude disclosure of a U.S. non-exempt recipient. Very generally, those provisions require a qualified intermediary to disinvest a U.S. non-exempt recipient who does not waive its

local law non-disclosure privileges and to collect backup withholding on income and sales proceeds paid to such person. Therefore, the language stating that disclosure is required “irrespective of local secrecy laws” has been deleted to avoid creating an inconsistency between the model qualified intermediary agreement and the regulation.

The provisions in paragraph (e)(5) regarding the terms of the withholding agreement a qualified intermediary must enter with the IRS have also been changed to more generally conform with the qualified intermediary agreement as set forth in Rev. Proc. 2000-12. The regulation clarifies the consequences of a qualified intermediary's assumption of primary withholding responsibility. Section 1.1441-1(e)(5)(iv), as originally drafted, stated that a withholding agent making a payment to a qualified intermediary was required to presume full withholding responsibility for that payment unless the qualified intermediary assumed primary withholding responsibility. The regulation was potentially misleading because it could have been interpreted to mean that if a qualified intermediary did not assume primary withholding responsibility, only the U.S. withholding agent was responsible for withholding. Rev. Proc. 2000-12 makes clear, however, that qualified intermediaries are required to withhold in certain circumstances even though they have not assumed primary withholding responsibility. The rule that was initially in paragraph (e)(5)(iv) was intended to relieve a withholding agent making a payment to a qualified intermediary that assumed primary withholding responsibility from the obligation to withhold, not to relieve the qualified intermediary of any withholding requirement. The paragraph has been amended to reflect this intent.

Paragraph (e)(5)(iv) also stated that a qualified intermediary generally would not be permitted to assume withholding and reporting responsibility under section 3406 and chapter 61 of the Internal Revenue Code on a payment made to a U.S. person unless the qualified intermediary was a foreign branch of a U.S. person or a foreign person that had a branch in the United States capable of performing such reporting and withholding. In developing the model qualified intermediary agreement, it became apparent that it was desirable to permit certain qualified intermediaries that did not meet those criteria to assume reporting and withholding responsibility under chapter 61 of the Internal Revenue Code and section 3406. For example, where payments are made through clearing organizations, it may be impractical to require a qualified intermediary to provide information regarding U.S. non-exempt recipients to a U.S. withholding agent. The language that generally limited the ability to assume reporting and withholding responsibility under chapter 61 of the Internal Revenue Code and section 3406 has been eliminated. Whether a qualified intermediary may assume such responsibility is left to the terms of the qualified intermediary agreement. See section 3 of the model qualified intermediary agreement in Rev. Proc. 2000-12.

Section 1.1441-1(e)(5)(v), as originally drafted, required a qualified intermediary to associate a payment with one of three categories of assets: (i) Assets associated with documented foreign persons, (ii) assets associated with documented U.S. payees, and (iii) assets associated with undocumented payees. These three asset categories were subdivided into classes of assets based on withholding rates and reporting requirements. The asset categories did not provide the needed flexibility sought by qualified intermediaries. For example, information regarding U.S. exempt recipient payees, who are not subject to withholding under section 1441, could not be combined with information regarding foreign beneficial owner payees subject to a zero rate of withholding. The model qualified intermediary agreement, as published in Rev. Proc. 2000-12, substituted the withholding rate pool concept for asset classes and this concept has been reflected in the revised regulation. A withholding rate pool is a payment of a single type of income, determined in accordance with the categories of income reported on Form 1042-S or Form 1099, as applicable, that is subject to a single rate of withholding.

Finally, the regulations permit, in accordance with Rev. Proc. 2000-12, a qualified intermediary and a U.S. withholding agent to use a single withholding rate pool for U.S. non-exempt recipients for whom no backup withholding is required and a single withholding rate pool for U.S. non-exempt recipients that are subject to backup withholding provided that the qualified intermediary agreement permits such an arrangement and sufficient information is provided to the withholding agent no later than January 15 following the year of payment that allocates the reportable payments to each U.S. non-exempt recipient account holder. Failure to provide the allocation information timely may result in penalties imposed on the qualified intermediary and the termination of its qualified intermediary agreement. Unlike qualified intermediaries, nonqualified intermediaries and flow-through entities are not permitted to pool payments to U.S. non-exempt recipients. Therefore, information sufficient to allocate the payment to each U.S. non-exempt recipient must be provided before a payment is made or the withholding agent must treat the payment as made to a U.S. payee that has failed to provide a TIN and impose backup withholding.

B. Changes to § 1.1441-2

1. Amounts Subject to Withholding

Section 1.1441-2(a) has been amended to exclude from the definition of amount subject to withholding interest paid as part of the purchase price of an obligation sold between interest payment dates (accrued interest) and an amount representing original issue discount (OID) paid as part of the purchase price of an obligation sold in a transaction other than the redemption of such obligation. The exclusions do not apply, however, if the sale of an obligation is part of a plan the principal purpose of which is to avoid tax and the withholding agent has actual knowledge or reason to know of such plan.

The exclusion of accrued interest and amounts representing OID paid as part of the purchase price of an obligation sold in a transaction other than a redemption were made in response to comments received on § 1.1441-2(b)(3) of the final regulations and proposed regulation § 1.1441-3(b) (REG-114000, 62 FR 53503). Section 1.1441-2(b)(3), as originally drafted, required withholding on OID to the extent the withholding agent had actual knowledge of the amount of the payment that was taxable to the beneficial owner. A withholding agent was treated as having actual knowledge if it had a direct account relationship with the holder of the obligation. Proposed regulation § 1.1441-3(b) would have eliminated the rule that no withholding was required on accrued interest and replaced it with a rule that conformed with the rule applicable to OID on the theory that, from a withholding perspective, the two payments were equivalent. The withholding rules applicable to OID and accrued interest would have required withholding whenever a payment of interest or OID was not subject to an exception, such as the portfolio interest exception, or a payment of OID or accrued interest was presumed made to a foreign person and

the withholding agent could not reliably associate the payment with beneficial owner documentation. Such payments were subject to reporting on Form 1042-S whether or not withholding was imposed.

In Notice 99-8, Treasury and the IRS announced that they would make modifications to the OID and accrued interest rules. The modifications were intended to address criticisms by commentators that the OID and accrued interest rules were unworkable. Commentators argued that debt obligations are often sold in delivery-versus-payment transactions which settle quickly and often involve multiple intermediaries. The requirement to withhold in absence of a beneficial owner withholding certificate would necessarily inhibit the speed with which sales transactions are normally conducted. In addition, they argued that a withholding agent does not necessarily know the amount of OID or accrued interest merely because it has a direct account relationship with the account holder. In addition, custodians stated that sales were often accounted for in systems different from those used to report interest and OID and therefore the reporting requirement of the regulations would require significant systems modifications. They argued that these modifications were not justified because nearly all accrued interest and OID would be from instruments that could qualify for the portfolio interest exception.

Notice 99-8 proposed rules that were intended to require only the withholding agent that had a direct account relationship with a beneficial owner to obtain a Form W-8. Thus, the notice proposed a rule that would require a withholding agent to obtain a withholding certificate only if it received the proceeds from a sale against delivery of the debt obligation or, in the case of a retirement, the withholding agent was the person responsible for paying the owner or crediting its account. The notice would have prevented intermediaries other than the intermediary with the direct account relationship with the beneficial owner from having to obtain a Form W-8 by stating that any withholding agent that effected a transaction for a broker was generally not required to obtain a Form W-8. A broker was defined by reference to § 1.6045-1(a) and generally included a person that makes sales of securities for customers in the ordinary course of that person's trade or business. In addition, the notice proposed to eliminate the rule that presumed knowledge of the amount of OID or interest accrued between interest payment dates merely because there was a direct account relationship with the beneficial owner of an obligation.

Commentators criticized the Notice 99-8 proposal. They argued that the multiple broker exception did not always accomplish its intended purpose because certain participants in a transaction for whom a Form W-8 should not be required could not meet the definition of a broker, particularly since that definition does not include non-U.S. payors that effect sales of obligations at an office outside the United States and certain other persons, such as investment advisors, who might participate in the transaction but did not stand ready to effect sales of securities for others. In addition, the Notice did not solve the problem faced by custodians.

In light of these criticisms, Treasury and the IRS have decided to eliminate the requirement for withholding, and reporting, on accrued interest and an amount representing OID paid on the sale of an OID obligation, other than in a redemption. This change has been effected by eliminating those items from the definition of amounts subject to withholding. Withholding is required, however, if the withholding agent knows or has reason to know that a sale is part of a plan to avoid tax. For example, if a holder of a debt obligation that pays interest that does not qualify for the portfolio interest exception sells the instrument immediately prior to an interest payment date and reacquires the same type of security after the interest payment date and the withholding agent knows, or has reason to know, of this pattern of sales, withholding and reporting of accrued interest is required.

Paragraph (a) has also been amended to state that insurance premiums paid on a contract subject to the section 4371 excise tax are not amounts subject to withholding. As previously drafted, these amounts were excluded from the definition of fixed or determinable annual or periodical (FDAP) income under § 1.1441-1(b)(2)(ii) and therefore were not included in amounts subject to withholding. Excluding insurance premiums from FDAP is inappropriate, however. Insurance premiums fall within the definition of FDAP provided in paragraph (b)(1). Therefore, the better means for exempting premiums subject to the section 4371 excise tax from withholding is to exclude them from the definition of amounts subject to withholding.

2. Fixed or Determinable Annual or Periodical Income

Section 1.1441-2(b)(1)(i) provides the definition of fixed or determinable annual or periodical (FDAP) income. Such income, if from sources within the United States, is generally an amount subject to withholding and therefore also subject to reporting on Form 1042-S if paid to a foreign payee. Paragraph (b)(1)(i) states that amounts that are excluded from gross income under any provision of law “without regard to the identity of the holder” are not FDAP income. This provision was, in part, intended to exclude from FDAP qualified scholarship income under section 117. The language, however, failed to accomplish its intended purpose because the section 117 exclusion is dependent on the identity of the person receiving the income—the recipient must be a candidate for a degree at a certain type of educational organization. The paragraph has been revised to state that amounts that are excluded from gross income without regard to the U.S. or foreign status of the owner of the income is not FDAP. In addition, the paragraph has been changed to clarify that amounts excluded from gross income under sections 892 (income of foreign governments) and 115 (income of a U.S. possession) are not excluded from the definition of FDAP since the foreign status of the owner of the income is determinative of whether the exclusions provided by those sections apply. Amounts subject to the section 892 and section 115 exclusions are, therefore, included in the scope of amounts subject to withholding and therefore are reportable on Form 1042-S under section 1461 even though not taxable under section 871 or 881.

3. Original Issue Discount

Section 1.1441-2(b)(3) provides rules governing the treatment of original issue discount. Paragraph (b)(3)(i) describes the amount of OID subject to taxation in the hands of the owner of an OID obligation. Minor changes have been made to this paragraph to clarify the amount of OID that is taxable to the beneficial owner of the obligation.

Paragraph (b)(3)(ii) describes the amount of OID subject to withholding. To conform paragraph (b)(3)(ii) to the changes discussed in section B.1 of this Explanation of Provisions, the paragraph has been revised to require a withholding agent to withhold on OID only upon the redemption of the original issue discount obligation or in any case where the withholding agent knows that a sale, other than a redemption, is being made with the principal purpose of avoiding tax on the obligation. A withholding agent is required to withhold on the actual amount of OID includible in the gross

income of the owner of an obligation if it has actual knowledge of such amount, or, if actual knowledge is lacking, on the entire amount of OID determined under Publication 1212, “List of Original Issue Discount Instruments” as if the obligation had been held since issuance.

Paragraph (b)(3)(iii) contained a rule that required a withholding agent to withhold on interest and OID paid on an OID obligation even though it did not know the amount of OID subject to taxation if the withholding agent could not reliably associate the payment with valid documentation. The rule was designed to eliminate an exception to withholding that applied if a withholding agent did not have actual knowledge of the amount of OID that accrued to the holder of the obligation up to the date of sale. If the exception were not eliminated, it was feared that the documentation requirement for portfolio interest could be avoided by selling OID obligations through intermediaries that had no knowledge of the accrued amount of OID. The rule is no longer necessary. Under new § 1.1441-2(a)(6), withholding is required if a withholding agent knows, or has reason to know, that an OID obligation is sold with the principal purpose of avoiding tax. Therefore, the rule as originally contained in paragraph (b)(3)(iii) has been removed. New paragraph (b)(3)(iii) contains the transition rule formerly found in paragraph (b)(3)(iv). The rule has been modified, however. As previously drafted, the rule appeared to eliminate any withholding responsibility by the issuer of an OID obligation or its agent, as formerly contained in Rev. Rul. 68-333 (1968-1 CB 390). As revised, issuers and their agents are subject to any applicable withholding requirements on obligations issued before or after December 31, 2000. The rule now states, however, that withholding on OID obligations is only required by persons other than issuers or their agents with respect to obligations issued after December 31, 2000.

C. Changes to § 1.1441-3

1. Accrued Interest

Section 1.1441-3 provides rules to determine the amount subject to withholding. In accordance with the change made in § 1.1441-2(a)(5), which eliminates interest accrued between sales dates from amounts subject to withholding, § 1.1441-3(b)(2) has been modified to eliminate the requirement that a withholding agent that pays accrued interest must report that interest on Form 1042-S.

32. Coordination With REIT Withholding

As originally drafted, § 1.1441-3(c)(4)(i)(C) required withholding under section 1441 on the portion of a Real Estate Investment Trust (REIT) distribution that is not designated as a capital gain dividend or return of basis. Therefore, § 1.1441-3(c)(4)(i)(C) inadvertently required withholding under section 1441 on a distribution in excess of basis, which under section 301(c)(3) is capital gain from the sale or exchange of stock and, therefore, not subject to withholding under section 1441. To correct this error, paragraph (c)(4)(i)(C) has been amended to provide that withholding under section 1441 is not required on a distribution in excess of basis. A distribution in excess of basis is, however, subject to withholding under section 1445 unless the interest in the REIT is not a U.S. real property interest (e.g., an interest in a domestically controlled REIT under section 897(h)(2)).

D. Changes to § 1441-4

1. Notional Principal Contracts

Section 1.1441-4(a)(3)(i) treats a payment of income on a notional principal contract made to a foreign person as income effectively connected with a trade or business within the United States unless the withholding agent can reliably associate a payment with a withholding certificate that certifies that the payment is not effectively connected. This rule is overly broad because it presumes that any notional principal contract payment made to a foreign person is effectively connected even if the foreign person has no nexus to the United States. As a result, § 1.1441-4(a)(3)(i) has been amended to limit the presumption that notional principal contract income is effectively connected to a U.S. trade or business to those situations in which the income is either paid to a U.S. qualified business unit of a foreign person or the withholding agent otherwise knows, or has reason to know, that the income is effectively connected with the conduct of a U.S. trade or business. It is not expected that a withholding agent would be considered to have reason to know that a notional principal contract payment is effectively connected with the conduct of a trade or business within the United States solely because the foreign person receiving the payment has a qualified business unit in the United States to which a portion of the payment may be allocated pursuant to proposed regulation § 1.863-3(h) (the global dealing regulations).

Section 1.1441-4(a)(3)(ii), as originally drafted, stated that a payment to a financial institution was not treated as effectively connected with the conduct of a trade or business within the United States if the financial institution provided a representation in a master agreement that governs transactions in notional principal contracts between the parties (for example, an International Swaps and Derivatives Association (ISDA) Agreement) or in the confirmation on the particular notional principal contract transaction that the counter party was a U.S. person or a non-U.S. branch of a foreign person.

Commentators requested that the master agreement and confirmation exceptions be expanded to apply to persons other than financial institutions. Section 1.1441-4(a)(3)(ii) has been amended (in the table or corrections at the end of the regulation) to allow any payee, not just a financial institution, to provide in a master agreement or confirmation statement a representation that the payee is a U.S. person or a non-U.S. branch of a foreign person.

2. Withholding on Payments From Individual Retirement Accounts

Section 1.1441-4(b)(1)(ii), as originally drafted, provided that section 1441 applied to distributions from any trust described in section 401(a) made to a nonresident alien individual and to certain other retirement distributions. The result of this rule is that section 1441, rather than section 3405, applies to retirement distributions. This rule considerably eases the burdens that would otherwise apply to retirement distributions.

Commentators noted that the regulations did not provide the same rule for distributions from individual retirement accounts and annuities described in section 408. The regulation has been amended so that those distributions will be subject to section 1441 as well.

E. Changes to § 1441-5

Section 1.1441-5 of the regulations concerns payments made to partnerships, trusts, and estates. As originally drafted, the regulations contained extensive rules for payments made to U.S. and foreign partnerships, but applied the rules of the regulations prior to the publication of TD 8734 to trusts and estates. The trust and estate rules, however, were inconsistent with the rules contained in TD 8734 and were also incomplete. For example, § 1.1441-1(c)(6)(ii)(B) required a withholding agent to determine the

beneficial owner of income paid to a trust or estate under § 1.1441-3(f) and (g) of the regulations in effect prior to January 1, 2001. That section, however, did not determine the beneficial owner of income paid to a trust. In addition, § 1.1441-1(e)(3)(i) stated that a trust or estate was to use a flow-through withholding certificate furnished under § 1.1441-5(e), but that section was reserved in the regulation. The regulation has been revised to provide complete trust and estate rules. Except as noted below, the partnership rules remain generally unchanged; however, several changes were made to clarify those rules.

1. Rules Applicable to U.S. Partnerships, Trusts, and Estates

Section 1.1441-5(b), as originally drafted, provided rules regarding payments to U.S. partnerships. The rules of paragraph (b) have been expanded to cover payments to U.S. trusts and U.S. estates as well. Under revised paragraph (b)(1), a payment to a U.S. partnership, U.S. trust, or U.S. estate is treated as a payment to a U.S. person and, therefore, not subject to withholding under chapter 3 of the Internal Revenue Code. United States partnerships, U.S. trusts, and U.S. estates are required, however, to withhold on payments they make to foreign partners, foreign beneficiaries, or, in the case of grantor trusts, foreign owners. Fiduciaries of U.S. trusts and U.S. estates should take particular note that it is the trust or the estate that is the withholding agent, and Forms 1042 and Forms 1042-S must be filed using the name and TIN of the U.S. trust or U.S. estate, not the name and TIN of the fiduciary.

Under paragraph (b)(2), a U.S. partnership is a withholding agent for a foreign partner's distributable share of partnership income that consists of amounts subject to withholding. A U.S. simple trust is a withholding agent for the distributable net income (DNI) includible in the gross income of a foreign beneficiary to the extent the DNI consists of an amount subject to withholding. Similarly, a U.S. complex trust is a withholding agent on DNI includible in the gross income of a foreign beneficiary to the extent the DNI consists of an amount subject to withholding that is, or is required to be, distributed currently. U.S. simple trusts and complex trusts are permitted to make reasonable estimates of the portion of a distribution that constitute DNI consisting of amounts subject to withholding. A U.S. grantor trust must withhold on any income includible in the taxable income of a foreign person that is treated as an owner to the extent the amount includible consists of an amount subject to withholding.

In the case of a partnership, if amounts subject to withholding are not actually distributed, the U.S. partnership must withhold at the earlier of the time the statement required under section 6031(b) (Form K-1) is mailed or otherwise provided to the partner or the due date for furnishing the statement. In addition, if an amount of income is required to be, but is not actually distributed to the foreign beneficiary of a U.S. simple or complex trust, the U.S. trust must withhold at the time the income is required to be reported on Form 1042-S. A U.S. grantor trust is required to withhold at the time the trust receives the payment or the payment is credited to the trust's account.

2. Payments Made to Foreign Partnerships

Section 1.1441-5(c) provides rules for payments made to foreign partnerships. Generally, the payees of a payment made to a nonwithholding foreign partnership are the partners of the partnership. Paragraph (c)(1)(ii), however, contains rules on when the partnership itself will be regarded as the payee of a payment. That paragraph, as originally drafted, permitted a partnership to be treated as the payee of income if the partnership provided a withholding certificate stating that the payment was effectively connected with the conduct of the partnership's U.S. trade or business. A commentator noted that the paragraph did not treat the partnership as the payee, however, to the extent the income was treated as being effectively connected under the presumption rules in the absence of a withholding certificate.

The paragraph has been revised to treat the partnership as the payee if the income is presumed to be effectively connected in the absence of documentation. For example, if a nonwithholding foreign partnership is receiving income on a notional principal contract and the income is treated as effectively connected income under the presumption rule of § 1.1441-4(b)(3)(i), the nonwithholding foreign partnership, and not the partners, is treated as the payee. In addition, the example in paragraph (c)(1)(iv) has been replaced with several less complex examples that better illustrate the operation of the rules of paragraph (c)(1).

Section 1.1441-5(c)(2) contains rules relating to withholding foreign partnerships. Section 1.1441-5(c)(2)(ii)(A), together with § 1.1461-1(c)(2)(ii)(A), required a withholding foreign partnership to file a Form 1065 and Forms K-1 and exempted the partnership from having to file Form 1042 and Forms 1042-S. The rule was incorrect. A withholding foreign partnership is generally required to withhold on payments and therefore must file a Form 1042, which is an income tax return, and not merely report the amounts on Form 1065. Also, because the IRS matches amounts reported on Forms 1042-S with amounts reported on Form 1042, it was incorrect to substitute Forms K-1 for Forms 1042-S. Therefore, the regulation has been amended to require a withholding foreign partnership to file a tax return on Form 1042 and file information returns on Form 1042-S for amounts subject to withholding paid to, or included in the distributive share of, its foreign partners. A withholding foreign partnership may also be required to file a return on Form 1065 and make the statements on Form K-1 under section 6031 for its partners. However, the IRS may agree in the withholding agreement to modify information reporting requirements to avoid double reporting. A rule that was formerly contained in § 1.1441-7(a), which permitted a withholding foreign partnership to arrange with a withholding agent to have the withholding agent impose withholding on a payment has been removed because a withholding foreign partnership is required to assume withholding responsibility.

Section 1.1441-5(c)(3) provides rules relating to nonwithholding foreign partnerships. Paragraph (c)(3)(iv) has been revised to require a nonwithholding foreign partnership to provide a withholding statement in the same manner as a nonqualified intermediary. In addition, paragraph (c)(3)(v) has been revised to conform with revised § 1.1441-1(b)(6), discussed in section A. 5 of this Explanation of Provisions. Thus, the regulation has been changed to make clear that a nonwithholding foreign partnership has an obligation to report payments even though another withholding agent has withheld the appropriate amount if the nonwithholding partnership has failed to provide adequate information for a withholding agent to report the payments appropriately on Form 1042-S and Form 1099 or the nonwithholding foreign partnership knows, or has reason to know, that the payments were not correctly reported.

Paragraph (d) of § 1.1441-5 provides presumption rules that apply to determine the status of a partnership and its partners if a payment cannot be

reliably associated with valid documentation. The rule in paragraph (d)(3)(ii), which permitted a reduced rate of withholding to be applied to a payment to a nonwithholding foreign partnership if the payment could be associated with a group of documented payees all of whom were subject to the same withholding rate has been removed for the reasons stated in connection with the changes made to § 1.1441-1(b)(3)(v)(C). See section A. 4, of this Explanation of Provisions. Under the revised rule, any payment of an amount subject to withholding paid to a foreign partnership that has not been allocated to a specific payee is presumed made to an undocumented foreign payee and subject to 30 percent withholding.

3. Payments to Foreign Trusts and Estates

Treasury Decision 8734 did not include new provisions regarding withholding on payments by and to foreign trusts and foreign estates. The IRS provided interim guidance in the instructions to Forms W-8BEN and W-8IMY so that withholding agents could replace documentation that was expiring under the withholding regulations with documentation that would meet the requirements of TD 8734. In addition, Notice 99-8 announced that Treasury and the IRS intended to issue regulations that would clarify the withholding obligations of income paid to trusts and estates. Under the instructions and the notice, a payment to a foreign fiduciary was treated as a payment to a foreign intermediary and, therefore, the foreign fiduciary was required to furnish an intermediary withholding certificate on Form W-8IMY. If the trust was a trust described in section 651(a) or a trust, all or a portion of which was treated as owned by the grantor or other persons under sections 671 through 679, the fiduciary was required to attach Forms W-8BEN, Forms W-8EXP, or Forms W-9, from the beneficiaries or owners of the trust. In all other cases, the foreign trustee or executor was required to attach a Form W-8BEN, Form W-8EXP, or if required, Form W-9, completed on behalf of the trust or estate.

Several commentators objected to the requirement that a foreign fiduciary of a complex trust or a foreign estate provide an intermediary withholding certificate. They requested that a withholding certificate be required only from the trust or estate itself. Requiring documentation from a fiduciary also was not consistent with the rules under chapter 61, which generally require a Form W-9 from a trust or estate and ignore the status of the fiduciary. Finally, Notice 99-8 did not provide any presumption rules for payments to foreign trusts and foreign estates.

The regulations now contain a comprehensive set of rules for payments made to foreign trusts and foreign estates in § 1.1441-5(e). A foreign complex trust (as defined in paragraph (c)(25)) and a foreign estate are generally considered beneficial owners of income under § 1.1441-1(c)(6). Therefore, under § 1.1441-5(e)(2), a foreign complex trust or a foreign estate may provide a beneficial owner withholding certificate or other beneficial owner documentation for payments for which a reduced rate of withholding is not claimed under a treaty. Whether such a trust or estate can provide a beneficial owner withholding certificate to claim a reduced rate of withholding under an income tax treaty will depend on whether the trust or estate can claim to be a resident of a treaty country, whether it derives the income under section 894, and the regulations thereunder, and whether treaty benefits are denied under a limitation on benefits provision.

Foreign simple trusts and foreign grantor trusts are not payees or beneficial owners under § 1.1441-5(e)(3), unless the payment is an amount that is treated as effectively connected with the conduct of a U.S. trade or business. The payees of payments to a foreign simple trust or a foreign grantor trust are generally the beneficiaries or owners of the trust. This is similar to the treatment accorded to payments to foreign partnerships, where the partners, rather than the partnership, are generally considered the payees of income paid to the partnership. Therefore, the documentation rules applicable to foreign simple trusts and foreign grantor trusts generally accord with those applicable to foreign partnerships. The trust itself provides a flow-through withholding certificate with which it associates the withholding certificates or, if permitted, documentary evidence of its beneficiaries or owners. The foreign simple trust or foreign grantor trust must also associate with its flow-through withholding certificate a withholding statement identical to that provided by foreign partnerships and nonqualified intermediaries. The IRS may permit a foreign trust to function as a withholding foreign trust. A withholding foreign trust would generally be subject to the same provisions as a withholding foreign partnership.

Section 1.1441-1(e)(6) provides presumption rules for payments of amounts subject to withholding to foreign trusts and estates. Whether a payee is a trust or estate is determined under the general presumption rules of § 1.1441-1(b)(3)(ii). A trust or estate is presumed to be U.S. unless there are indicia of foreign status. If a payee is presumed to be a foreign trust, but its status as a complex, simple, or grantor trust is unknown, it will be treated as a complex trust. If the trust is known to be a foreign simple or grantor trust, its beneficiaries or owners will generally be presumed to be foreign with respect to payments of amounts subject to withholding.

F. Changes to § 1441-6

Section 1.1441-6 contains the provisions for claiming a reduced rate of withholding under an income tax treaty. Section 1.1441-6(b) has been revised to clarify the requirements for claiming treaty benefits. Specifically, the provisions of paragraph (b)(2), as originally drafted, which related to use of documentary evidence, have been moved to newly revised paragraphs (c)(1) and (2) so that all the documentary evidence rules appear in the same paragraph. Paragraph (b)(2) now contains the provisions relating to treaty claims made by interest holders of fiscally transparent entities. Clarifying changes to those rules, which appeared in former paragraph (b)(4), have also been made.

Section 1.1441-6(c)(1) and (2), as originally drafted, required a foreign person to establish residency by obtaining a certified taxpayer identification number (certified TIN) from the IRS. Those provisions required a person claiming a reduced rate of withholding to submit either a certificate of residency or certain other prescribed documentation, plus affidavits regarding compliance with the limitation on benefits provisions of a treaty and with the regulations under section 894. In Notice 99-8, the IRS announced that it would not implement the procedures for obtaining certified TINs until January 1, 2002.

The certified TIN procedures have been removed. New paragraph (b)(3), however, provides authority for the IRS to issue guidance on requirements that a treaty claimant must follow to establish residency and compliance with other requirements imposed by treaties and the Internal Revenue Code, such as limitation on benefits provisions and the requirement that the claimant derive the income under section 894. Treasury and the IRS fully intend to implement such procedures. However, Treasury and the IRS determined that it was appropriate to delay

implementation of the requirement while withholding agents and beneficial owners implement other requirements under the regulation. In addition, the IRS will examine ways to more effectively implement the certified TIN requirement.

Paragraphs (c)(3) and (4) prescribe the types of documentation that can be used to claim treaty benefits for income from marketable instruments paid outside the United States to offshore accounts. Former paragraph (b)(2) stated that documentary evidence could be used, in certain cases, to claim treaty benefits if the documentary evidence was accompanied by the certifications required in paragraph (c)(5). Paragraph (c)(5) contained a requirement that a beneficial owner applying for a certified TIN provide the IRS with certifications, made in an affidavit signed under penalties of perjury, that the beneficial owner was in compliance with any applicable limitation on benefits provisions contained in a treaty and that the beneficial owner derives the income for which treaty benefits will be claimed. It was unclear from the regulations, as drafted, whether the certifications that were provided to withholding agents were required to be made in affidavits signed under penalties of perjury or whether the affidavit requirement only applied to obtaining certified TINs. Although Treasury and the IRS believe it is important that statements regarding compliance with limitation on benefits provisions and section 894 be given in conjunction with documentary evidence provided to a withholding agent, a penalties of perjury requirement would impose a burden that undermines the use of documentary evidence. One reason for permitting use of documentary evidence is to eliminate, as much as possible, the need for a penalties of perjury statement. Thus, the affidavit and penalties of perjury requirements have been eliminated with respect to documentary evidence provided to a withholding agent. The IRS may, however, require an affidavit in connection with the certified TIN procedures that it will establish. The affidavit requirement in paragraph (c)(4), stating that the information on documentary evidence is true and complete, has also been eliminated.

G. Changes to § 1.1441-7

Section 1.1441-7 defines the term

withholding agent

and provides various rules relating to the obligations of withholding agents, including certain due diligence requirements regarding the documentation they receive from payees.

1. Withholding Agent Defined

§ 1.1441-7(a) provides the definition of a withholding agent as well as a withholding agent's obligation to withhold the appropriate amount of taxes and file returns. The section has been revised by removing language stating that a withholding foreign partnership does not have to file Forms 1042-S for payments made to foreign partners because it is required to provide Forms K-1. The reason for this change is discussed in section E. 2 of this Explanation of Provisions.

Some U.S. withholding agents commented that foreign persons, including U.S. branches of foreign persons, were taking the position that they were not withholding agents for purposes of chapter 3 of the Internal Revenue Code. Any person, whether U.S. or foreign, that pays, or has control, receipt, custody, or disposal of an amount subject to withholding is a withholding agent. In addition, with respect to a single item of income, each person that handles the payment is a withholding agent. Thus, there may be more than one withholding agent with respect to a payment of an amount subject to withholding. Examples have been added in new paragraph (a)(2) to illustrate these principles. In particular, examples were added to emphasize that foreign persons that pay, or have control, receipt, or custody, of amounts subject to withholding are withholding agents, including U.S. branches of foreign persons.

2. Reason To Know

Section 1.1441-7(b)(2)(ii), as originally drafted, provided the exclusive rules for determining when a withholding agent that is a financial institution making a payment of income from marketable securities has reason to know that documentation provided to the withholding agent is unreliable. Commentators noted that the language of paragraph (b)(2)(ii) was inconsistent about whether the rules applied only to withholding certificates (i.e., Forms W-8) or also to documentary evidence. In addition, many commentators noted that the rules could not be reasonably applied to documentary evidence received through tiers of intermediaries, because that documentation would often be in a foreign language. They further argued that the rules relating to P.O. box addresses were unreasonable because in some countries P.O. box addresses are standard. Finally, commentators noted that the means for curing otherwise unreliable documentation were, in some instances, too restrictive.

Section 1.1441-7 (b)(3) through (10) have been added to address the comments. Some of the changes made to paragraph (b) reflect rules in the model qualified intermediary agreement contained in Rev. Proc. 2000-12. Paragraphs (b)(4) through (b)(9) relate to the obligations of a withholding agent for account holders that have a direct account relationship with the withholding agent. The rules are limited to direct account relationships because they often rely on account information that will exist only if such a relationship exists. However, under the rules of paragraph (b)(10), which relate to documentation from persons that are not direct account holders, the rules in paragraph (b)(4) through (9) apply to the extent that they rely on information contained on the face of a withholding certificate, documentary evidence, or a withholding statement.

Paragraph (b)(4) contains general rules regarding the reliability of a withholding certificate provided on Form W-8. Paragraph (b)(5) contains rules for when a Form W-8 will be regarded as unreliable to establish a beneficial owner's foreign status and applicable cure provisions. Paragraph (b)(6) contains rules for when a Form W-8 will be regarded as unreliable to establish a beneficial owner's claim of treaty benefits and applicable cure provisions. Paragraph (b)(7) provides general rules relating to documentary evidence. Paragraphs (b)(8) and (b)(9) contain rules regarding documentary evidence that is unreliable to establish a beneficial owner's status as a foreign person or a resident of a treaty country, respectively.

Paragraph (b)(10) provides rules regarding due diligence standards for documentation from payees received through nonqualified intermediaries, flow-through entities, and certain U.S. branches of foreign banks and insurance companies. Under paragraph (b)(10), a withholding agent is required to review the information contained in a withholding statement provided by those entities and may not rely on the information contained in the withholding statement to the extent it does not support the claims made for the payee. A withholding agent must also review each withholding certificate to verify that they support the claims made and are consistent with the information on the withholding statement. Under a transition rule, this review process does not apply to withholding certificates received before December 31, 2001, if the payment is made prior to that date. If a withholding certificate received before December 31, 2001, is relevant to a payment made

after that date, it must be reviewed for accuracy and matched to the information contained in the withholding statement. Finally, a withholding agent must review documentary evidence to determine that there is no obvious indication that the payee is a U.S. non-exempt recipient or no obvious indication that the documentary evidence does not establish the identity of the person who provided the documentation.

H. Changes to § 1.1441-9

Section 1.1441-9 provides the rules for payments made to foreign tax-exempt entities and foreign governments. Paragraph (b)(2) of that section provided that if a tax-exempt organization did not have a determination from the IRS, it could establish its exempt status by attaching to its withholding certificate an opinion of counsel concluding that the organization is described in section 501(c) of the Internal Revenue Code. In addition, if the opinion concluded that the organization was described in section 501(c)(3) and was not a private foundation, an affidavit regarding the operations and support of the organization was required to be attached to the organization's withholding certificate as well. The opinion of counsel and affidavit was required to be renewed whenever the certificate to which it was attached was required to be renewed.

Commentators stated that the requirement that the opinion of tax-exempt status be provided by an attorney was too narrow and that an opinion from any federally authorized tax practitioner, as defined in section 7525(a)(3), should be permitted. In addition, the requirement that the opinion of counsel and the affidavit be renewed whenever the certificate was required to be renewed was confusing because a withholding certificate from a tax-exempt entity requires a TIN and, provided the income paid is subject to reporting, is valid indefinitely absent a change in circumstances.

Treasury and IRS are currently considering whether an opinion issued by a person other than an attorney authorized to practice before the IRS should suffice. Although the Treasury and IRS have not yet concluded that a person other than an attorney should be permitted to provide the opinion, the regulation has been amended to permit that possibility in future guidance. In addition, the requirement to renew the opinion and affidavit has been clarified by stating that it must be renewed if there is a change in facts or circumstances relevant to the organization's status under section 501(c)(3).

I. Changes to § 1.1461-1

Section 1.1461-1 contains requirements regarding the payment and deposit of tax withheld under chapter 3 of the Internal Revenue Code and the filing of a tax return (Form 1042) and information returns (Forms 1042-S) by withholding agents. Generally, the paragraph has been amended to make a withholding agent's obligations clearer.

Paragraphs (b)(2) and (c)(4), as originally drafted, stated that a withholding agent was not required to file a tax return or information return if another withholding agent had done so. Numerous exceptions to the rule were provided. These paragraphs were misleading because they implied that the general rule was that a tax return and information returns were not required if there was another withholding agent in the chain of payment required to file a tax return and information returns. The exceptions to the rule, however, required every withholding agent that made payments of an amount subject to withholding to a foreign person to file a tax return and information returns in every situation, except that a nonqualified intermediary or flow-through entity was not required to file a tax return and information returns for payments that it made provided that it furnished to a withholding agent sufficient information for the withholding agent to correctly withhold and report the payment. Section 1.1461-1(b) and (c) have been clarified to state that a withholding agent that makes a payment of an amount subject to reporting to a recipient must file a Form 1042-S and provide a copy to the recipient. The terms recipient and amount subject to reporting are defined in paragraphs (c)(1)(ii) and (c)(2), respectively. A recipient includes a beneficial owner (including a foreign complex trust and estate), a qualified intermediary, a withholding foreign partnership, a withholding foreign trust, an authorized foreign agent, a U.S. branch treated as a U.S. person, a nonwithholding foreign partnership or foreign simple trust receiving income effectively connected with a U.S. trade or business, any payee presumed to be a foreign person, and any other person for whom a Form 1042-S is required by the instructions to the form. A nonqualified intermediary, a disregarded entity, a flow-through entity, and a U.S. branch that is not treated as a U.S. person are not recipients. Amounts paid to such entities are reported as paid to the persons on whose behalf the entity acts or to the interest holders in the entity. The term amount subject to reporting generally means amount subject to withholding as defined under § 1.1441-2(a).

The regulation has also been clarified by providing a more extensive, but not exhaustive, list of those amounts subject to reporting and those amounts for which there is an exception to reporting. See new § 1.1461-1(c)(2). Paragraph (c)(2)(i)(C), as originally drafted, stated that the amount of effectively connected income that was required to be reported with respect to a notional principal contract was the net income described in § 1.446-3(d). Commentators objected to this requirement because their systems are programmed to report cash payments, not accrued amounts. New paragraph (c)(2)(i)(J) now provides that the amount required to be reported is limited to the amount of cash paid from the notional principal contract.

Finally, the section has been clarified by separately stating the reporting requirements of U.S. withholding agents, qualified intermediaries, nonqualified intermediaries, and flow-through entities. Withholding agents should note, in particular, that information regarding nonqualified intermediaries, flow-through entities, and U.S. branches (other than U.S. branches treated as U.S. persons) in which a recipient is an account holder or an interest holder must be included on Form 1042-S. Such information is important to the IRS's efforts to monitor compliance by such entities and branches with the requirements of the regulations.

J. Changes to the Regulations Under Section 6041

Section 1.6041-1(d) has been revised to require that the amount of a notional principal contract payment reported on Form 1099 is the amount of cash paid on the contract for the calendar year. This change conforms the Form 1099 reporting rule to that under § 1.1461-1(c)(2)(i)(J).

Section 1.6041-4(a)(3) states that a nonqualified intermediary, a qualified intermediary, or certain U.S. branches of foreign banks and insurance companies that receive payments reportable under section 6041 (e.g., rents, notional principal contract income, and other fixed or determinable income) are not required to report the payments on Form 1099 when they, in turn, make the payment to their account holders unless they know the payments are required to be reported and were not so reported. Similar exceptions apply to dividends, gross proceeds from sales of securities, and interest under §§ 1.6042-3(b)(1)(vi),

1.6045-1(g)(v), and 1.6049-5(b)(14), respectively. These provisions have been modified to state that the exception does not apply to a U.S. branch of a foreign bank or insurance company that agrees with a withholding agent to be treated as a U.S. person. The exception is inappropriate in this case because such branches do not provide payee documentation on Form W-9 (or the name, address, TIN, and information allocating the payment to the payee) to a withholding agent. The exception is also inappropriate if a qualified intermediary assumes Form 1099 reporting responsibility. Therefore, the exception has been changed to exclude qualified intermediaries that assume Form 1099 reporting. Finally, the exceptions have been amended to state that a nonqualified intermediary, qualified intermediary, or U.S. branch is deemed to know the required reporting was not done in any case where the intermediary or branch has failed to provide documentation or other information so that another payor can do the reporting.

K. Changes to § 1.6041A-1

Section 1.6041A-1(d)(3)(i)(C) has been added to provide an exception from reporting remuneration for services as a direct seller paid outside the United States. Prior to this change, remuneration for services was subject to reporting in absence of documentation establishing the direct seller's status as a foreign person because the presumption rules of §§ 1.6049-5(d)(2) and 1.1441-1(b)(3)(iii) treated a direct seller as a U.S. non-exempt recipient. Commentators stated that the presumption was inaccurate because most direct sellers abroad are foreign persons. They also argued that obtaining documentation from direct sellers to rebut the presumption was overly burdensome.

L. Changes to § 1.6045-1

Section 1.6045-1(g) provides an exception from Form 1099 reporting for a broker if a customer is considered an exempt foreign person under that section. Under § 1.6045-1(g)(1)(i), a broker may treat a customer as an exempt foreign person if the broker receives a withholding certificate or documentary evidence that establishes the person's status as a foreign person. As originally drafted, the last sentence of § 1.6045-1(g)(1)(i) stated that if a withholding certificate was provided, a withholding agent could rely on the certificate to exempt the customer from reporting only if the certificate included a statement that the beneficial owner had not been, and at the time the certificate was furnished reasonably expected not to be, present in the United States for a period aggregating 183 days or more during each calendar year. The regulation did not state whether the a statement was required if documentary evidence was provided.

Two clarifying changes have been made to § 1.6045-1(g)(1)(i). First, the regulation has been modified to require the statement relating to presence in the United States only from individuals. Second, the regulation states that the statement is not required if documentary evidence is provided. The statement is required on a withholding certificate and not on documentary evidence because a withholding certificate is the documentation required for an account maintained in the United States. Documentary evidence can only be used for amounts paid outside the United States to an offshore account and, therefore, the likelihood that the person may be present in the United States for the relevant period is greatly reduced.

Clarifying changes have also been made to § 1.6045-1(g)(3)(iv). The first sentence of that section stated that a broker could treat an intermediary, as defined in § 1.1441-1(c)(13), as an exempt recipient except when the broker had actual knowledge or reason to know the intermediary was acting on behalf of a U.S. person. The exception should only apply if the intermediary is acting on behalf of a U.S. person who is subject to reporting on Form 1099, that is, a U.S. non-exempt recipient. The regulation has been amended to make this clear. An erroneous cite to nonwithholding foreign partnerships has also been eliminated.

In paragraph (g)(4) of § 1.6045-1,

Example

7 has been amended to reflect the change to the regulations that now generally treats accrued interest as an amount that is not subject to withholding. Under that example, a foreign bank that is a U.S. payor effects a sale of an interest bearing obligation at an office outside the United States on behalf of an undocumented account holder. Under the regulation, as originally drafted, the gross proceeds from the sale, net of accrued interest, were reported on Form 1099 as paid to a payee that was presumed to be a U.S. person. However, because the accrued interest was considered an amount subject to withholding, it was reportable on Form 1042-S. Under the regulation, as revised, accrued interest is treated as an amount that is not subject to withholding. Therefore, both the gross proceeds, net of accrued interest, and the accrued interest are now presumed paid to a U.S. payee and reported on Form 1099 under the presumption rule § 1.6049-5(d)(2). Two additional examples have been added to paragraph (g)(4) to illustrate the operation of the presumption rules on a sale of a short-term original issue discount instrument. These examples were added to make clear that a sale of an OID obligation outside the United States is a gross proceeds transaction and, therefore, under the presumption rule of § 1.6049-5(d)(2), presumed made to a U.S. person. Whether the gross proceeds are reportable depends on whether the exception of § 1.6045-1(a) for sales outside the United States by a non-U.S. payor applies.

M. Changes to § 1.6049-5

Under § 1.6049-5(c)(1), a withholding agent or payor may generally rely on documentary evidence from a foreign payee instead of a beneficial owner withholding certificate on Form W-8 if an amount is paid outside the United States to an offshore account. An offshore account is 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 and outside of a U.S. possession. Under § 1.6049-5(e), an amount is considered paid outside the United States if the payor completes the acts necessary to effect payment outside the United States.

The regulations do not specifically address whether partners of a nonwithholding foreign partnership, foreign beneficiaries of a foreign simple trust, or foreign owners of a foreign grantor trust can use documentary evidence to establish their status as foreign payees. Paragraph (c)(1) has been amended to permit the use of documentary evidence by foreign partners, beneficiaries, and owners in these situations. Documentary evidence can also be used for purposes of chapter 3 of the Internal Revenue Code by virtue of the incorporation of § 1.6049-5(c)(1) in § 1.1441-1(e)(1)(ii)(A)(2). The use of documentary evidence is appropriate because the regulations generally treat payments to foreign nonwithholding foreign partnerships, foreign simple trusts, and foreign grantor trusts similar to payments made to nonqualified intermediaries, and the latter are permitted to provide documentary evidence on behalf of their account holders.

Section 1.6049-5(c)(4) provides rules that apply to U.S. payors that make payments outside the United States of amounts not subject to withholding (e.g., foreign source income and gross proceeds from the sale of securities) other than deposit interest and interest

or OID on short-term OID instruments. Non-U.S. payors are generally exempt from reporting these payments. There were several issues under paragraph (c)(4) as originally drafted. First, the paragraph was internally inconsistent. Paragraph (c)(4)(i) stated that a bank or other financial institution could establish a payee's status as a foreign person by relying on a written declaration made on an account opening statement that the payee was not a U.S. person in two circumstances: (i) If it was not customary in a country to obtain documentary evidence to establish a person's identity, or (ii) if it was customary to obtain documentary evidence but it was not customary to renew it. Paragraph (c)(4)(iv), however, stated that a bank or financial institution could not rely on a declaration if it was customary to obtain documentary evidence but not customary to renew it. Second, paragraph (c)(4)(i) did not permit a bank or financial institution to rely on documentary evidence to establish a person's foreign status if there was indicia of U.S. status, including employment by a U.S.-based multinational organization. A commentator noted that prohibiting use of documentary evidence merely because an account holder worked for a U.S.-based multinational organization was overly broad because such organizations commonly employ local employees and a withholding agent may not know whether a particular multinational is U.S. based. Finally, paragraph (c)(4)(iii) required a bank or financial institution that relied upon a declaration of foreign status or non-renewable documentary evidence to send a negative confirmation statement each year to the account holder stating that the account holder was being treated as a foreign payee and that the account holder was obligated to notify the bank or financial institution if it became a U.S. citizen or U.S. resident. A commentator argued that the expense of such a requirement was not justified. The commentator argued that if an account holder legitimately establishes foreign status, it is unlikely that the account holder will become a U.S. citizen or resident and that if it does, there are factors, such as a change of address, that will indicate a change in the person's status.

Paragraph (c)(4) has been amended to remove the inconsistency and to take the commentators' comments into account. Under paragraph (c)(4)(ii), as revised, a declaration of foreign status may be used only if it is not customary to obtain documentary evidence. The declaration may be relied upon only if there is no address or other indicia of U.S. status. If it is customary in the country where a bank or financial institution maintains a branch or office to obtain, but not renew, documentary evidence, then the bank or financial institution may rely on the documentary evidence without the need to renew it provided that it may rely on the documentation to establish foreign status under the due diligence rules of § 1.1441-7(b)(7) and (8). The restriction on using such documentation in the case of a U.S. based multinational employee has been removed. If, however, the bank or financial institution may rely on the documentary evidence as establishing foreign status even though there are indicia of U.S. status, it can rely on the documentary evidence only for a period of three full calendar years after the calendar year in which it is received. Finally, neither the documentation rule of paragraph (c)(4)(i) nor the declaration rule of paragraph (c)(4)(ii) requires a payor to send a negative confirmation.

Section 1.6049-5(d) contains presumption rules that generally apply for chapter 61 reporting if a payor lacks required documentation from a payee. Paragraph (d)(2) governs payments other than payments to intermediaries or flow-through entities. Paragraph (d)(2)(i) has been clarified to state that the presumption rules of § 1.1441-1(b)(3)(iii)(D) (payments to offshore accounts) do not apply to amounts that are not subject to withholding. As originally drafted, paragraph (d)(2)(i) stated that the rules of § 1.1441-1(b)(3)(iii) applied to all payments, irrespective of whether they were subject to withholding. Section 1.1441-1(b)(3)(iii)(D), however, stated that it did not apply to amounts that were not subject to withholding. Revised paragraph (d)(2)(i) eliminates the inconsistency. Therefore, payments of deposit interest, and interest or OID arising from the redemption of an obligation described in section 871(g)(1)(B)(i) paid to an offshore account are presumed paid to a U.S. payee. In addition, gross proceeds, which are not amounts subject to withholding, are also treated as paid to U.S. persons under § 1.6045-1(g)(1)(i). Under the exceptions of §§ 1.6045-1(a)(1) and 1.6045-1(g)(3), however, gross proceeds from the sale of a security by a non-U.S. payor effected outside the United States are not subject to reporting.

The grace period rule in § 1.6049-5(d)(2)(ii), as originally drafted, did not cover the same payments as were covered under the grace period rule of § 1.1441-1(b)(3)(iv) even though the latter regulation cross-references § 1.6049-5(d)(2)(ii). For example, the rule under the 1441 regulations, but not the rule under section 6049, covered dividends from any redeemable security issued by an investment company and amounts paid with respect to loans of securities. Paragraph 5(d)(2)(ii) has been amended to cover the same payments as are covered by the grace period rule of § 1.1441-1(b)(3)(iv). In addition, paragraph (d)(2)(ii) prior to amendment stated that the grace period expired on the earlier of the of the 90th day after the grace period began, the date on which documentation is provided, or the last day of the calendar year. Commentators stated that terminating the grace period at the end of a calendar year complicated systems programming because there was a shrinking grace period for payments made within 90 days of the end of the year. The requirement to terminate the grace period as of the close of a calendar year has been eliminated because it is not necessary.

Paragraph (d)(3) provides presumption rules for payments made to foreign intermediaries. With exceptions for deposit interest and interest and OID on short-term obligations, payments to foreign intermediaries are presumed made to foreign payees. Paragraph (d)(4) provided different presumptions for payments to partnerships. Under that paragraph, payments made to foreign partnerships were generally presumed made to U.S. payees, even if the partnership established its status as a foreign partnership. Commentators argued that the disparate treatment between intermediaries and partnerships was not justified because they are treated similarly for other purposes under the regulations. The differences also complicated payors' information systems. In response to these comments, the presumption rules of paragraph (d)(3) have been revised to apply to payments made to all flow-through entities (nonwithholding foreign partnerships, foreign simple trusts, and foreign grantor trusts).

Paragraph (d)(3)(ii) provides rules for payments of amounts that are not subject to withholding (

e.g.

, foreign source income and gross proceeds from the sales of securities) other than deposit interest and interest and OID on short-term obligations paid to foreign intermediaries and flow-through entities. The paragraph required a payor to presume that a payment was made to an exempt recipient unless the payor had actual knowledge that any person for whom the intermediary was collecting the payment was a U.S. non-

exempt recipient. In that case, the payment was treated as made to the U.S. non-exempt recipient. The last sentence of the paragraph, however, also appeared to require a payor to presume that a payment was made to a U.S. non-exempt recipient if it appeared that the payment might be collected on behalf of a U.S. non-exempt payee, because, for example, an intermediary provided Forms W-9 for some payees but did not allocate a payment to any particular payee. The application of the last sentence of the paragraph, however, was uncertain.

Paragraph (d)(3)(ii) has been revised to generally reflect the principle that a payment of an amount that is not subject to withholding (other than short-term OID and deposit interest) made to an intermediary should not be subject to Form 1099 reporting by a payor if the payment would not be subject to Form 1099 reporting if made to a U.S. non-exempt recipient by an intermediary that is not a U.S. payor. Thus, the general rule is that a payment covered by the paragraph (i.e., foreign source income or gross proceeds) is presumed paid to an exempt recipient unless the payor has actual knowledge that the amount is attributable to a U.S. non-exempt recipient.

As originally drafted, § 1.6049-5(d)(3)(iii) provided special presumption rules for payments of deposit interest and interest or OID from short-term original issue discount obligations to foreign intermediaries. It was not clear whether the presumption rule of the paragraph applied to the portion of the sale proceeds representing OID from the sale or exchange of short-term OID instrument in a transaction other than a redemption.

Under paragraph (d)(3)(iii) as revised, a payment of deposit interest or interest or OID on the redemption of a short-term original issue discount obligation paid to an intermediary or flow-through entity is presumed paid to a U.S. payee. The paragraph does not apply to sales or exchanges (other than redemption) of short-term OID instruments. Such sales or exchanges are treated as gross proceeds transactions, in conformance with the rules in §§ 1.6045-1(c) and (d)(3) and 31.3406(b)(2)-2, and are subject to the general presumption rule for payments made to foreign intermediaries under § 1.6049-5(d)(3)(ii). Therefore, gross proceeds from the sale or exchange (other than a redemption) of a short-term OID instrument will generally be presumed paid as made to an exempt recipient. Intermediaries that are U.S. payors, however, may themselves be required to report such gross proceeds under § 1.6045-1(c) and (1)(g)(i) and the presumption rule of § 1.6049-5(d)(2), which applies to payments made to persons other than an intermediary because under that section gross proceeds are generally considered paid to U.S. payees under that section.

Paragraph (d)(3)(iii)(B) contained a presumption rule for payments made to exempt recipients that had not provided documentation that they were acting as intermediaries. The scope and application of this rule were unclear. Paragraph (d)(3)(iii)(B) has been completely revised and now states that a payment made to an exempt recipient that the payor knows, or has reason to know, is acting as an intermediary is subject to the presumptions that apply to intermediaries.

N. Withholding Certificate Transitional Issues

The changes made by this regulation will require revisions to instructions to the withholding certificates issued on Form W-8 and certain minor changes to the forms themselves. Until Forms W-8, and the instructions, are revised withholding agents may rely on Forms W-8BEN, W-8ECI, W-8EXP, and W-8IMY as currently in effect but should take into account, particularly with respect to Form W-8IMY used by intermediaries and flow-through entities, that the instructions to the form do not reflect the withholding statement requirements contained in this regulation. In particular, withholding agents and providers of Form W-8IMY should furnish a withholding statement in connection with the form that conforms to § 1.1441-1(e)(3)(iv).

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. Finally, it has been determined that the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply to these regulations because the regulations do not impose a collection of information on small entities. Pursuant to 7805(f) of the Internal Revenue Code, the notice of proposed rulemaking preceding these regulations (61 FR 17614) was submitted to the Small Business Administration for comment on its impact on small business.

Drafting Information

The principal authors of these regulations are Carl Cooper, Laurie Hatten-Boyd, and Kate Hwa of the Office of Associate Chief Counsel (International).

List of Subjects

26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 31

Employment taxes, Income taxes, Penalties, Pensions, Railroad retirement, Reporting and recordkeeping requirements, Social security, Unemployment compensation.

Adoption of Amendments to Regulations

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

PART 1—INCOME TAXES

Paragraph 1.

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

Authority:

26 U.S.C. 7805 * * *

Par. 2.

Effective January 1, 2001, § 1.1441-0 is amended by:

1. Revising the entry for § 1.1441-1(b)(2)(vii).

2. Adding entries for § 1.1441-1(b)(2)(vii)(A) through (F).

2a. Revising the entry for § 1.1441-1(b)(3)(ii).

3. Adding entries for § 1.1441-1(b)(3)(ii)(A) through (C).

4. Revising the entry for § 1.1441-1(b)(3)(iv).

5. Revising entry for § 1.1441-1(b)(3)(v)(B).

6. Revising the entry for § 1.1441-1(b)(3)(vi).

7. Adding entries for § 1.1441-1(b)(3)(vii)(A) and (B).

8. Adding entries for § 1.1441-1(b)(6)(i) and (ii).

9. Revising the entries for § 1.1441-1(c)(6)(ii), (c)(6)(ii)(B), (c)(6)(ii)(C), and adding a new entry for § 1.1441-1(c)(6)(ii)(D).

10. Adding entries for § 1.1441-1(c)(12) through (29).

11. Revising the entry for § 1.1441-1(d)(4).

12. Revising the entry for § 1.1441-1(e)(3)(iii), (e)(3)(iv), and (e)(3)(iv)(A) through (C).

13. Adding entries for § 1.1441-1(e)(3)(iv)(D) and (E).

14. Adding entries for § 1.1441-1(e)(4)(iv)(A), (B), and (C).

15. Revising the entries for § 1.1441-1(e)(5)(v) and (e)(5)(v)(B) and (C).

16. Revising the entries for § 1.1441-2(b)(3)(i) and (ii).

17. Removing the entries for § 1.1441-2(b)(3)(iii) and (iv).

18. Revising the entry for § 1.1441-5(a).

19. Revising the entries for § 1.1441-5(b), (b)(1), (b)(2), and (b)(2)(i), adding entries for § 1.1441-5(b)(2)(i)(A) and (b)(2)(i)(B), and revising entries for § 1.1441-5(b)(2)(ii), (b)(2)(iii), (b)(2)(iv), and (b)(2)(v).

20. Revising the entry for § 1.1441-5(c)(1)(iv).

21. Removing the entries for § 1.1441-5(c)(2)(ii)(A) and (B).

21. Revising the entry for § 1.1441-5(c)(3).

22. Revising the entries for § 1.1441-5(c)(3)(iii).

23. Revising the entries for § 1.1441-5(c)(3)(iv) and (v).

24. Revising the entry for § 1.1441-5(d).

25. Removing the entries for § 1.1441-5(d)(3)(i) through (d)(3)(iv).

26. Revising the entry for § 1.1441-5(d)(4).

27. Revising the entry for § 1.1441-5(e).

28. Adding entries for § 1.1441-5(e)(1), (e)(2), (e)(3), (e)(3)(i), (e)(3)(ii), (e)(4), (e)(5), (e)(5)(i), (e)(5)(ii), (e)(5)(iii), (e)(5)(iv), (e)(5)(v), (e)(6), (e)(6)(i), (e)(6)(ii) and (e)(6)(iii).

29. Revising the entries for § 1.1441-6(b)(2), (b)(2)(i) and (b)(2)(ii).

30. Adding entries for § 1.1441-6(b)(2)(iii) and (b)(2)(iv).

31. Revising the entry for § 1.1441-6(b)(3).

32. Revising the entry for § 1.1441-6(b)(4).

33. Removing the entries for § 1.1441-6(b)(4)(i), (b)(4)(ii), (b)(4)(ii)(A), (b)(4)(ii)(B), (b)(4)(iii), and (b)(4)(iv).

34. Removing the entry for § 1.1441-6(b)(5).

35. Revising the entry for § 1.1441-6(c).

36. Revising the entry for § 1.1441-6(c)(2).

37. Removing the entries for § 1.1441-6(c)(2)(i), (c)(2)(ii), and (c)(2)(iii).

38. Revising the entries for § 1.1441-6(c)(5), (c)(5)(i) and (c)(5)(ii).

39. Revising the entry for § 1.1441-6(e).

40. Adding entries for § 1.1441-7(a)(1) and (2).

41. Removing the entries for § 1.1441-7(b)(2)(i) and (b)(2)(ii).

42. Revising the entry for § 1.1441-7(b)(3).

43. Adding entries for § 1.1441-7(b)(4), (b)(4)(i), (b)(4)(ii), and (b)(5) through (b)(11).

The additions and revisions read as follows.

§ 1.1441-0

Outline of regulation provisions for section 1441.

§ 1.1441-1

Requirement for the deduction and withholding of tax on payments to foreign persons.

(b) * * *

(2) * * *

(vii) Rules for reliably associating a payment with a withholding certificate or other appropriate documentation.

(A) Generally.

(B) Special rules applicable to a withholding certificate from a nonqualified intermediary or flow-through entity.

(C) Special rules applicable to a withholding certificate provided by a qualified intermediary that does not assume primary withholding responsibility.

(D) Special rules applicable to a withholding certificate provided by a qualified intermediary that assumes primary withholding responsibility under chapter 3 of the Internal Revenue Code.

(E) Special rules applicable to a withholding certificate provided by a qualified intermediary that assumes primary Form 1099 reporting and backup withholding responsibility but not primary withholding under chapter 3.

(F) Special rules applicable to a withholding certificate provided by a qualified intermediary that assumes primary withholding responsibility under chapter 3 and primary Form 1099 reporting and backup withholding responsibility and a withholding certificate provided by a withholding foreign partnership.

(3) * * *

(ii) Presumptions of classification as individual, corporation, partnership, etc.

(A) In general.

(B) No documentation provided.

(C) Documentary evidence furnished for offshore account.

(iv) Grace period.

(v) * * *

(B) Beneficial owner documentation or allocation information is lacking or unreliable.

(vi) U.S. branches.

(vii) * * *

(A) In general.

(B) Special rule for offshore accounts.

(6) * * *

(i) In general.

(ii) Example.

(c) * * *

(6) * * *

(ii) Special rules.

(B) Foreign partnerships.

(C) Foreign simple trusts and foreign grantor trusts.

(D) Other foreign trusts and foreign estates.

(12) Payee.

(13) Intermediary.

(14) Nonqualified intermediary.

(15) Qualified intermediary.

(16) Withholding certificate.

(17) Documentary evidence; other appropriate documentation.

(18) Documentation.

(19) Payor.

(20) Exempt recipient.

(21) Non-exempt recipient.

(22) Reportable amounts.

(23) Flow-through entity.

(24) Foreign simple trust.

(25) Foreign complex trust.

(26) Foreign grantor trust.

(27) Partnership.

(28) Nonwithholding foreign partnership.

(29) Withholding foreign partnership.

(d) * * *

(4) When a payment to an intermediary or flow-through entity may be treated as made to a U.S. payee.

(e) * * *

(3) * * *

(iii) Intermediary withholding certificate from a nonqualified intermediary.

(iv) Withholding statement provided by nonqualified Intermediary.

(A) In general.

(B) General requirements.

(C) Content of withholding statement.

(D) Alternative procedures.

(E) Notice procedures.

(4) * * *

(iv) * * *

(A) In general.

(B) Requirements.

(C) Special requirements for transmission of Forms W-8 by an intermediary. [Reserved]

(5) * * *

(v) Withholding statement.

(B) Content of withholding statement.

(C) Withholding rate pools.

§ 1.1441-2

Amounts subject to withholding.

(b) * * *

(3) * * *

(i) Amount subject to tax.

(ii) Amounts subject to withholding.

§ 1.1441-5

Withholding on payments to partnerships trusts, and estates.

(a) In general.

(b) Rules applicable to U.S. partnerships, trusts, and estates.

(1) Payments to U.S. partnerships, trusts, and estates.

(2) Withholding by U.S. payees.

(i) U.S. partnerships.

(A) In general.

(B) Effectively connected income of partners.

(ii) U.S. simple trusts.

(iii) U.S. complex trusts and U.S. estates.

(iv) U.S. grantor trusts.

(v) Subsequent distribution.

(c) * * *

(1) * * *

(iv) Examples.

(3) Nonwithholding foreign partnerships.

(iii) Withholding certificate from a nonwithholding foreign partnership.

(iv) Withholding statement provided by nonwithholding foreign partnership.

(v) Withholding and reporting by a foreign partnership.

(d) Presumption rules.

(4) Determination by a withholding foreign partnership of the status of its partners.

(e) Foreign trusts and estates.

(1) In general.

(2) Payments to foreign complex trusts and estates.

(3) Payees of payments to foreign simple trusts and foreign grantor trusts.

(i) Payments for which beneficiaries and owners are payees.

(ii) Payments for which trust is payee.

(4) Reliance on claim of foreign complex trust or foreign estate status.

(5) Foreign simple trust and foreign grantor trust.

(i) Reliance on claim of foreign simple trust or foreign grantor trust status.

(ii) Reliance on claim of reduced withholding by a foreign simple trust or foreign grantor trust for its beneficiaries or owners.

(iii) Withholding certificate from foreign simple trust or foreign grantor trust.

(iv) Withholding statement provided by a foreign simple trust or foreign grantor trust.

(v) Withholding foreign trusts.

(6) Presumption rules.

(i) In general.

(ii) Determination of status as U.S. or foreign trust or estate in the absence of documentation.

(iii) Determination of beneficiary or owner's status in the absence of certain documentation.

§ 1.1441-6

Claim of reduced withholding under an income tax treaty.

(b) * * *

(2) Payment to fiscally transparent entity.

(i) In general.

(ii) Certification by qualified intermediary.

(iii) Dual treatment.

(iv) Examples.

(3) Certified TIN.

(4) Claim of benefits under an income tax treaty by a U.S. person.

(c) Exemption from requirement to furnish a taxpayer identifying number and special documentary evidence rules for certain income.

(2) Income to which special rules apply.

(5) Statements regarding entitlement to treaty benefits.

(i) Statement regarding conditions under a limitation on benefits provision.

(ii) Statement regarding whether the taxpayer derives the income.

(e) Competent authority.

§ 1.1441-7

General provisions relating to withholding agents.

(a) * * *

(1) In general.

(2) Examples.

(b) * * *

(3) Financial institutions—limits on reason to know.

(4) Rules applicable to withholding certificates.

(i) In general.

(ii) Examples.

(5) Withholding certificate—establishment of foreign status.

(6) Withholding certificate—claim of reduced rate of withholding under treaty.

(7) Documentary evidence.

(8) Documentary evidence—establishment of foreign status.

(9) Documentary evidence—claim of reduced rate of withholding under treaty.

(10) Limits on reason to know—indirect account holders.

(11) Additional guidance.

Par. 3.

Effective January 1, 2001, section 1.1441-1 is amended by:

1. Revising the first sentence of paragraph (b)(2)(i).

2. Revising paragraphs (b)(2)(iv)(A), (b)(2)(iv)(B)(

3

), and (b)(2)(iv)(C).

3. Revising paragraphs (b)(2)(v)(A) and (b)(2)(v)(B).

4. Revising paragraph (b)(2)(vii).

5. Revising the first sentence of paragraph (b)(3)(i).

6. Revising paragraph (b)(3)(ii).

7. Revising paragraphs (b)(3)(iii)(C) and (b)(3)(iii)(D).

8. Revising paragraph (b)(3)(iv).

9. Revising paragraph (b)(3)(v).

10. Revising paragraphs (b)(3)(vi) and (b)(3)(vii).

11. Revising paragraph (b)(6).

12. Revising paragraph (c)(2).

13. Revising paragraph (c)(6).

14. Adding paragraphs (c)(12) through (c)(29).

15. Revising paragraphs (d)(2) through (d) (4).

16. Revising paragraphs (e)(1)(ii)(A)(

1

), (e)(1)(ii)(A)(

3

), and (e)(1)(ii)(A)(

4

).

17. Revising paragraph (e)(3).

18. Revising paragraph (e)(4)(ii)(A).

19. Revising paragraphs (e)(4)(ii)(B)(

1

) through (e)(4)(ii)(B)(

4

) and (e)(4)(ii)(B) (

6

), and adding paragraph (e)(4)(ii)(B)(

8

).

20. Revising paragraph (e)(4)(iv).

21. Revising paragraph (e)(4)(vii).

22. Adding paragraph (e)(4)(ix)(A)(

4

) and revising paragraph (e)(4)(ix)(C).

23. Revising paragraph (e)(5)(i) and (e)(5)(iii) through (e)(5)(v).

The additions and revisions read as follows:

§ 1.1441-1

Requirement for the deduction and withholding of tax on payments to foreign persons.

(b) * * *

(2)

Determination of payee and payee's status—

(i)

In general

. Except as otherwise provided in this paragraph (b)(2) and § 1.1441-5(c)(1) and (e)(3), a payee is the person to whom a payment is made, regardless of whether such person is the beneficial owner of the amount (as defined in paragraph (c)(6) of this section). * * *

(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 § 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. 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 § 601.601(d)(2) of this chapter). See § 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 § 1.6049-5(d)(1)(ii) for the treatment of

U.S. branches as foreign payees under chapter 61 of the Internal Revenue Code.

(B) * * *

(

3

) As a payment to a foreign person of income that is effectively connected with the conduct of a trade or business in the United States if the withholding agent cannot reliably associate the payment with a withholding certificate from the U.S. branch or any other certificate or other appropriate documentation from another person. See § 1.1441-4(a)(2)(ii).

(C)

Consequences to the U.S. branch.

A U.S. branch that is treated as a U.S. person under paragraph (b)(2)(iv)(A) of this section shall be treated as a separate person solely for purposes of section 1441(a) and all other provisions of chapter 3 of the Internal Revenue Code and the regulations thereunder (other than for purposes of reporting the payment to the U.S. branch under § 1.1461-1(c) or for purposes of the documentation such a branch must furnish under paragraph (e)(3)(v) of this section) for any payment that it receives as such. Thus, the U.S. branch shall be responsible for withholding on the payment in accordance with the provisions under chapter 3 of the Internal Revenue Code and the regulations thereunder and other applicable withholding provisions of the Internal Revenue Code. For this purpose, it shall obtain and retain documentation from payees or beneficial owners of the payments that it receives as a U.S. person in the same manner as if it were a separate entity. For example, if a U.S. branch receives a payment on behalf of its home office and the home office is a qualified intermediary, the U.S. branch must obtain a qualified intermediary withholding certificate described in paragraph (e)(3)(ii) of this section from its home office. In addition, a U.S. branch that has not provided documentation to the withholding agent for a payment that is, in fact, not effectively connected income is a withholding agent with respect to that payment. See paragraph (b)(6) of this section and § 1.1441-4(a)(2)(ii).

(v)

Payments to a foreign intermediary

—(A)

Payments treated as made to persons for whom the intermediary collects the payment.

Except as otherwise provided in paragraph (b)(2)(v)(B) of this section, the payee of a payment to a person that the withholding agent may treat as a foreign intermediary in accordance with the provisions of paragraph (b)(3)(ii)(C) or (b)(3)(v)(A) of this section is the person or persons for whom the intermediary collects the payment. Thus, for example, the payee of a payment that the withholding agent can reliably associate with a withholding certificate from a qualified intermediary (defined in paragraph (e)(5)(ii) of this section) that does not assume primary withholding responsibility or a payment to a nonqualified intermediary are the persons for whom the qualified intermediary or nonqualified intermediary acts and not to the intermediary itself. See paragraph (b)(3)(v) of this section for presumptions that apply if the payment cannot be reliably associated with valid documentation. For similar rules for payments to flow-through entities, see § 1.1441-5(c)(1) and (e)(3).

(B)

Payments treated as made to foreign intermediary.

The payee of a payment to a person that the withholding agent may treat as a qualified intermediary is the qualified intermediary to the extent that the qualified intermediary assumes primary withholding responsibility under paragraph (e)(5)(iv) of this section for the payment. For example if a qualified intermediary assumes primary withholding responsibility under chapter 3 of the Internal Revenue Code but does not assume primary reporting or withholding responsibility under chapter 61 or section 3406 of the Internal Revenue Code and therefore provides Forms W-9 for U.S. non-exempt recipients, the qualified intermediary is the payee except to the extent the payment is reliably associated with a Form W-9 from a U.S. non-exempt recipient.

(vii)

Rules for reliably associating a payment with a withholding certificate or other appropriate documentation

—(A)

Generally.

The presumption rules of paragraph (b)(3) of this section and §§ 1.1441-5(d) and (e)(6) and 1.6049-5(d) apply to any payment, or portion of a payment, that a withholding agent cannot reliably associate with valid documentation. Generally, a withholding agent can reliably associate a payment with valid documentation if, prior to the payment, it holds valid documentation (either directly or through an agent), it can reliably determine how much of the payment relates to the valid documentation, and it has no actual knowledge or reason to know that any of the information, certifications, or statements in, or associated with, the documentation are incorrect. Special rules apply for payments made to intermediaries, flow-through entities, and certain U.S. branches. See paragraph (b)(2)(vii)(B) through (F) of this section. The documentation referred to in this paragraph (b)(2)(vii) is documentation described in paragraphs (c)(16) and (17) of this section upon which a withholding agent may rely to treat the payment as a payment made to a payee or beneficial owner, and to ascertain the characteristics of the payee or beneficial owner that are relevant to withholding or reporting under chapter 3 of the Internal Revenue Code and the regulations thereunder. For purposes of this paragraph (b)(2)(vii), documentation also includes the agreement that the withholding agent has in effect with an authorized foreign agent in accordance with § 1.1441-7(c)(2)(i). A withholding agent that is not required to obtain documentation with respect to a payment is considered to lack documentation for purposes of this paragraph (b)(2)(vii). For example, a withholding agent paying U.S. source interest to a person that is an exempt recipient, as defined in § 1.6049-4(c)(1)(ii), is not required to obtain documentation from that person in order to determine whether an amount paid to that person is reportable under an applicable information reporting provision under chapter 61 of the Internal Revenue Code. The withholding agent must, however, treat the payment as made to an undocumented person for purposes of chapter 3 of the Internal Revenue Code. Therefore, the presumption rules of paragraph (b)(3)(iii) of this section apply to determine whether the person is presumed to be a U.S. person (in which case, no withholding is required under this section), or whether the person is presumed to be a foreign person (in which case 30-percent withholding is required under this section). See paragraph (b)(3)(v) of this section for special reliance rules in the case of a payment to a foreign intermediary and § 1.1441-5(d) and (e)(6) for special reliance rules in the case of a payment to a flow-through entity.

(B)

Special rules applicable to a withholding certificate from a nonqualified intermediary or flow-through entity.

(

1

) In the case of a payment made to a nonqualified intermediary, a flow-through entity (as defined in paragraph (c)(23) of this section), and a U.S. branch described in paragraph (b)(2)(iv) of this section (other than a branch that is treated as a U.S. person), a withholding agent can reliably associate the payment with valid documentation only to the extent that, prior to the payment, the withholding agent can allocate the

payment to a valid nonqualified intermediary, flow-through, or U.S. branch withholding certificate; the withholding agent can reliably determine how much of the payment relates to valid documentation provided by a payee as determined under paragraph (c)(12) of this section (i.e., a person that is not itself an intermediary, flow-through entity, or U.S. branch); and the withholding agent has sufficient information to report the payment on Form 1042-S or Form 1099, if reporting is required. See paragraph (e)(3)(iii) of this section for the requirements of a nonqualified intermediary withholding certificate, paragraph (e)(3)(v) of this section for the requirements of a U.S. branch certificate, and §§ 1.1441-5(c)(3)(iii) and (e)(5)(iii) for the requirements of a flow-through withholding certificate. Thus, a payment cannot be reliably associated with valid documentation provided by a payee to the extent such documentation is lacking or unreliable, or to the extent that information required to allocate and report all or a portion of the payment to each payee is lacking or unreliable. If a withholding certificate attached to an intermediary, U.S. branch, or flow-through withholding certificate is another intermediary, U.S. branch, or flow-through withholding certificate, the rules of this paragraph (b)(2)(vii)(B) apply by treating the share of the payment allocable to the other intermediary, U.S. branch, or flow-through entity as if the payment were made directly to such other entity. See paragraph (e)(3)(iv)(D) of this section for rules permitting information allocating a payment to documentation to be received after the payment is made.

(

2

) The rules of paragraph (b)(2)(vii)(B)(

1

) of this section are illustrated by the following examples:

Example 1

.

WH, a withholding agent, makes a payment of U.S. source interest to NQI, an intermediary that is a nonqualified intermediary. NQI provides a valid intermediary withholding certificate under paragraph (e)(3)(iii) of this section. NQI does not, however, provide valid documentation from the persons on whose behalf it receives the interest payment, and, therefore, the interest payment cannot be reliably associated with valid documentation provided by a payee. WH must apply the presumption rules of paragraph (b)(3)(v) of this section to the payment.

Example 2

.

The facts are the same as in

Example 1

, except that NQI does attach valid beneficial owner withholding certificates (as defined in paragraph (e)(2)(i) of this section) from A, B, C, and D establishing their status as foreign persons. NQI does not, however, provide WH with any information allocating the payment among A, B, C, and D and, therefore, WH cannot determine the portion of the payment that relates to each beneficial owner withholding certificate. The interest payment cannot be reliably associated with valid documentation from a payee and WH must apply the presumption rules of paragraph (b)(3)(v) of this section to the payment. See, however, paragraph (e)(3)(iv)(D) of this section providing special rules permitting allocation information to be received after a payment is made.

Example 3

.

The facts are the same as in Example 2, except that NQI does provide allocation information associated with its intermediary withholding certificate indicating that 25 percent of the interest payment is allocable to A and 25 percent to B. NQI does not provide any allocation information regarding the remaining 50 percent of the payment. WH may treat 25 percent of the payment as made to A and 25 percent as made to B. The remaining 50 percent of the payment cannot be reliably associated with valid documentation from a payee, however, since NQI did not provide information allocating the payment. Thus, the remaining 50 percent of the payment is subject to the presumption rules of paragraph (b)(3)(v) of this section.

Example 4

.

WH makes a payment of U.S. source interest to NQI1, an intermediary that is not a qualified intermediary. NQI1 provides WH with a valid nonqualified intermediary withholding certificate as well a valid beneficial owner withholding certificates from A and B and a valid nonqualified intermediary withholding certificate from NQI2. NQI2 has provided valid beneficial owner documentation from C sufficient to establish C's status as a foreign person. Based on information provided by NQI1, WH can allocate 20 percent of the interest payment to A, and 20 percent to B. Based on information that NQI2 provided NQI1 and that NQI1 provides to WH, WH can allocate 60 percent of the payment to NQI 2, but can only allocate one half of that payment (30 percent) to C. Therefore, WH cannot reliably associate 30 percent of the payment made to NQI2 with valid documentation and must apply the presumption rules of paragraph (b)(3)(v) of this section to that portion of the payment.

(C)

Special rules applicable to a withholding certificate provided by a qualified intermediary that does not assume primary withholding responsibility

. (

1

) If a payment is made to a qualified intermediary that does not assume primary withholding responsibility under chapter 3 of the Internal Revenue Code or primary Form 1099 reporting and backup withholding responsibility under chapter 61 and section 3406 of the Internal Revenue Code for the payment, a withholding agent can reliably associate the payment with valid documentation only to the extent that, prior to the payment, the withholding agent has received a valid qualified intermediary withholding certificate and the withholding agent can reliably determine the portion of the payment that relates to a withholding rate pool, as defined in paragraph (e)(5)(v)(C) of this section. In the case of a withholding rate pool attributable to a U.S. non-exempt recipient, a payment cannot be reliably associated with valid documentation unless, prior to the payment, the qualified intermediary has provided the U.S. person's Form W-9 (or, in the absence of the form, the name, address, and TIN, if available, of the U.S. person) and sufficient information for the withholding agent to report the payment on Form 1099. See paragraph (e)(5)(v)(C)(

2

) of this section for special rules regarding allocation of payments among U.S. non-exempt recipients.

(

2

) The rules of this paragraph (b)(2)(vii)(C) are illustrated by the following examples:

Example 1

.

WH, a withholding agent, makes a payment of U.S. source dividends to QI. QI provides WH with a valid qualified intermediary withholding certificate on which it indicates that it does not assume primary withholding responsibility under chapter 3 of the Internal Revenue Code or primary Form 1099 reporting and backup withholding responsibility under chapter 61 and section 3406 of the Internal Revenue Code. QI does not provide any information allocating the dividend to withholding rate pools. WH cannot reliably associate the payment with valid payee documentation and therefore must apply the presumption rules of paragraph (b)(3)(v) of this section.

Example 2

.

WH makes a payment of U.S. source dividends to QI. QI has 5 customers: A, B, C, D, and E. QI has obtained documentation from A and B establishing their entitlement to a 15 percent rate of tax on U.S. source dividends under an income tax treaty. C is a U.S. person that is an exempt recipient as defined in paragraph (c)(20) of this section. D and E are U.S. non-exempt recipients who have provided Forms W-9 to QI. A, B, C, D, and E are each entitled to 20 percent of the dividend payment. QI provides WH with a valid qualified intermediary withholding certificate as described in paragraph (e)(2)(ii) of this section with which it associates the Forms W-9 from D and E. QI associates the following allocation information with its qualified intermediary withholding certificate: 40 percent of the payment is allocable to the 15 percent withholding rate pool, and 20 percent is allocable to each of D and E. QI does not provide any allocation information regarding the remaining 20 percent of the payment. WH cannot reliably associate 20 percent of the payment with valid documentation and, therefore, must apply the presumption rules of paragraph (b)(3)(v) of this section to that portion of the payment. The 20 percent of the payment allocable to the 15 percent withholding rate pool, and the portion of the payments allocable to D and E are payments that can be reliably associated with documentation.

(D)

Special rules applicable to a withholding certificate provided by a qualified intermediary that assumes primary withholding responsibility under chapter 3 of the Internal Revenue

Code.

(

1

) In the case of a payment made to a qualified intermediary that assumes primary withholding responsibility under chapter 3 of the Internal Revenue Code with respect to that payment (but does not assume primary Form 1099 reporting and backup withholding responsibility under chapter 61 and section 3406 of the Internal Revenue Code), a withholding agent can reliably associate the payment with valid documentation only to the extent that, prior to the payment, the withholding agent has received a valid qualified intermediary withholding certificate and the withholding agent can reliably determine the portion of the payment that relates to the withholding rate pool for which the qualified intermediary assumes primary withholding responsibility under chapter 3 of the Internal Revenue Code and the portion of the payment attributable to withholding rate pools for each U.S. non-exempt recipient for whom the qualified intermediary has provided a Form W-9 (or, in absence of the form, the name, address, and TIN, if available, of the U.S. non-exempt recipient). See paragraph (e)(5)(v)(C)(

2

) of this section for alternative allocation procedures for payments made to U.S. persons that are not exempt recipients.

(

2

)

Examples.

The following examples illustrate the rules of paragraph (b)(2)(vii)(D)(

1

) of this section:

Example 1.

WH makes a payment of U.S. source interest to QI, a qualified intermediary. QI provides WH with a withholding certificate that indicates that QI will assume primary withholding responsibility under chapter 3 of the Internal Revenue Code with respect to the payment. In addition, QI attaches a Form W-9 from A, a U.S. non-exempt recipient, as defined in paragraph (c)(21) of this section, and provides the name, address, and TIN of B, a U.S. person that is also a non-exempt recipient but who has not provided a Form W-9. QI associates a withholding statement with its qualified intermediary withholding certificate indicating that 10 percent of the payment is attributable to A, and 10 percent to B, and that QI will assume primary withholding responsibility with respect to the remaining 80 percent of the payment. WH can reliably associate the entire payment with valid documentation. Although under the presumption rule of paragraph (b)(3)(v) of this section, an undocumented person receiving U.S. source interest is generally presumed to be a foreign person, WH has actual knowledge that B is a U.S. non-exempt recipient and therefore must report the payment on Form 1099 and backup withhold on the interest payment under section 3406.

Example 2.

The facts are the same as in

Example 1

, except that no Forms W-9 or other information have been provided for the 20 percent of the payment that is allocable to A and B. Thus, QI has accepted withholding responsibility for 80 percent of the payment, but has provided no information for the remaining 20 percent. In this case, 20 percent of the payment cannot be reliably associated with valid documentation, and WH must apply the presumption rule of paragraph (b)(3)(v) of this section.

(E)

Special rules applicable to a withholding certificate provided by a qualified intermediary that assumes primary Form 1099 reporting and backup withholding responsibility but not primary withholding under chapter 3.

(

1

) If a payment is made to a qualified intermediary that assumes primary Form 1099 reporting and backup withholding responsibility for the payment (but does not assume primary withholding responsibility under chapter 3 of the Internal Revenue Code), a withholding agent can reliably associate the payment with valid documentation only to the extent that, prior to the payment, the withholding agent has received a valid qualified intermediary withholding certificate and the withholding agent can reliably determine the portion of the payment that relates to a withholding rate pool or pools provided as part of the qualified intermediary's withholding statement and the portion of the payment for which the qualified intermediary assumes primary Form 1099 reporting and backup withholding responsibility.

(

2

) The following example illustrates the rules of paragraph (b)(2)((vii)(D)(

1

) of this section:

Example.

WH makes a payment of U.S. source dividends to QI, a qualified intermediary. QI has provided WH with a valid qualified intermediary withholding certificate. QI states on its withholding statement accompanying the certificate that it assumes primary Form 1099 reporting and backup withholding responsibility but does not assume primary withholding responsibility under chapter 3 of the Internal Revenue Code. QI represents that 15 percent of the dividend is subject to a 30 percent rate of withholding, 75 percent of the dividend is subject to a 15 percent rate of withholding, and that QI assumed primary Form 1099 reporting and backup withholding for the remaining 10 percent of the payment. The entire payment can be reliably associated with valid documentation.

(F)

Special rules applicable to a withholding certificate provided by a qualified intermediary that assumes primary withholding responsibility under chapter 3 and primary Form 1099 reporting and backup withholding responsibility and a withholding certificate provided by a withholding foreign partnership.

If a payment is made to a qualified intermediary that assumes both pr

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