# Withholding of Tax on Certain U.S. Source Income Paid to Foreign Persons, Information Reporting and Backup Withholding on Payments Made to Certain U.S. Persons, and Portfolio Interest Treatment

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URL: https://www.frixlaw.com/law-library/documents/fr%3A2014-03991

## Record

- **Collection:** Federal Register
- **Document type:** Rule
- **Published:** March 6, 2014
- **Citation:** 79 FR 12726

## Text

DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1, 31, and 301
[TD 9658]
RIN 1545-BL18
Withholding of Tax on Certain U.S. Source Income Paid to Foreign Persons, Information Reporting and Backup Withholding on Payments Made to Certain U.S. Persons, and Portfolio Interest Treatment

AGENCY:

Internal Revenue Service (IRS), Treasury.

ACTION:

Final and temporary regulations.

SUMMARY:

This document contains final and temporary regulations that revise certain provisions of the final regulations regarding withholding of tax on certain U.S. source income paid to foreign persons, information reporting and backup withholding with respect to payments made to certain U.S. persons, portfolio interest paid to nonresident alien individuals and foreign corporations, and the associated requirements governing collection, refunds, and credits of withheld amounts under these rules. The revisions are necessary to coordinate these regulations with the documentation, withholding, and reporting provisions included in regulations regarding information reporting by foreign financial institutions (FFIs) with respect to U.S. accounts and withholding on certain payments to FFIs and other foreign entities under chapter 4 of Subtitle A of the Internal Revenue Code (Code). The temporary regulations also revise certain provisions of the final regulations relating to the statutory exemption for portfolio interest in light of amendments to the statute. Moreover, these temporary regulations remove certain transitional documentation rules from the regulations relating to withholding of tax on certain U.S. source income paid to foreign persons. These temporary regulations affect persons making payments of U.S. source income to foreign persons, persons making payments to certain U.S. persons subject to reporting, and foreign persons making claims for refund or credit of income tax withheld or claiming the exclusion from tax provided for portfolio interest. The text of these temporary regulations also serves as the text of the proposed regulations (REG-134361-12) set forth in the Proposed Rules section in this issue of the
Federal Register
.

DATES:

Effective Date:
These regulations are effective on March 6, 2014.

Applicability Dates:
For dates of applicability, see §§ 1.1441-1(g), 1.1441-3(j), 1.1441-4(g)(3), 1.1441-5(g)(3), 1.1441-6(i)(3), 1.1441-7(h), 1.1461-1(i), 1.1461-2(e), 1.6041-1(j)(2), 1.6041-4(d)(2), 1.6042-3(b)(5)(ii), 1.6045-1(c)(3)(xv), 1.6049-4(h), 1.6049-5(g)(2).

FOR FURTHER INFORMATION CONTACT:

John Sweeney, (202) 317-6942 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

This document contains amendments to the Income Tax Regulations (26 CFR part 1) under sections 871, 1441, 1461, 6041, 6042, 6045, and 6049 of the Code, the Employment Tax Regulations (26 CFR part 31) under section 3406 of the Code, and the Procedure and Administration Regulations (26 CFR part 301) under section 6402 of the Code. These temporary regulations are necessary to coordinate the final regulations under chapters 3 and 61 with the final regulations under chapter 4. Certain of the revisions to the final regulations under chapters 3 and 61 contained in these temporary regulations were previewed in Notice 2013-69, 2013-46 IRB 503 (November 12, 2013), Rev. Proc. 2014-13, 2014-3 IRB 419 (January 13, 2014), and draft forms related to chapter 4.

Information Reporting and Withholding Regimes

A. Chapters 3 and 61

On October 14, 1997, the IRS and the Treasury Department published final and temporary regulations (TD 8734) in the
Federal Register
(62 FR 53387) dealing with the withholding of tax under sections 1441, 1442, and 1443 (contained in chapter 3 of Subtitle A of the Code) on certain U.S. source income paid to foreign persons, the related tax deposit and reporting requirements under section 1461, and the statutory exemptions for portfolio interest under sections 871(h) and 881(c) (1997 final regulations). In addition, the 1997 final regulations finalized changes that were included in proposed regulations applicable to the reporting provisions of sections 6041, 6042, 6044, 6045, and 6049 under chapter 61 of the Code. On May 22, 2000, the IRS and the Treasury Department published final regulations (TD 8881) in the
Federal Register
(65 FR 32152) amending certain provisions of the 1997 final regulations under sections 1441, 1442, 1443, 6041, 6041A, 6042, 6045, and 6049 (collectively the final regulations under chapters 3 and 61 are referred to herein as the final regulations).

1. Chapter 3

Generally, under sections 871(a) and 881(a), foreign persons are subject to tax at a 30-percent rate on the gross amount of certain payments of U.S. source fixed or determinable annual or periodical (FDAP) income, which includes, among other things, interest, dividends, and other similar types of investment income, unless the beneficial owner of the payment is entitled to a reduced rate of, or exemption from, withholding tax under domestic law, including an income tax treaty. This substantive tax liability generally is collected through a withholding tax imposed at source pursuant to chapter 3 and the regulations under chapter 3. The chapter 3 regulations provide comprehensive rules for withholding agents to identify the proper treatment of a payee for information reporting and withholding tax purposes based on documentation provided by the payee. The regulations under chapter 3 generally allow withholding agents to rely on a withholding certificate (for example, Form W-8BEN, “Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding”) furnished by a payee that certifies the payee's status as a foreign person, and whether such person is entitled to a reduction in or exemption from withholding. The chapter 3 regulations recognize that foreign intermediaries and flow-through entities that receive U.S. source FDAP income payments on behalf of their customers, partners, or beneficiaries may have privacy and competitiveness concerns about sharing beneficial ownership information with other intermediaries (or chains of intermediaries) and competing financial institutions. Accordingly, the chapter 3 regulations permit certain types of foreign persons to assume primary withholding and reporting responsibility with respect to U.S. source FDAP income that is subject to chapter 3 withholding by becoming, respectively, qualified intermediaries, withholding foreign partnerships, or withholding foreign trusts.

A withholding agent generally is required to file an annual income tax return on Form 1042, “Annual Withholding Tax Return for U.S. Source Income of Foreign Persons,” to report amounts that are actually withheld under chapter 3, or that would have been withheld but for an applicable exception, and, with respect to each recipient, to file an information return on Form 1042-S, “Foreign Person's U.S. Source Income Subject to Withholding,”

to report each recipient's identifying information, the amount paid, and tax withheld, if any. A copy of Form 1042-S generally is required to be furnished to the recipient. The withholding and information reporting rules under chapter 3 facilitate the compliance of foreign persons with their U.S. tax obligations.

2. Chapter 61 and Section 3406

U.S. persons are subject to U.S. income tax at graduated rates on their worldwide income, regardless of source, and irrespective of whether such U.S. persons reside within or without the United States. Generally, under chapter 61, a payor must report to the IRS certain payments or transactions with respect to U.S. persons that are not exempt recipients (U.S. non-exempt recipients, generally U.S. individuals, partnerships, estates, and trusts) using the appropriate form in the 1099 series (Form 1099) and furnish a copy to the payee. The scope of payments subject to reporting under chapter 61 depends, in part, on whether the payor is a U.S. payor (as defined in § 1.6049-5(c)(5), which generally includes U.S. persons and their foreign branches, as well as controlled foreign corporations within the meaning of section 957(a)) or non-U.S. payor (which is a payor other than a U.S. payor). For a U.S. payor, payments subject to reporting generally include certain gross income, such as dividends and interest (including short-term original issue discount and bank deposit interest), from U.S. and non-U.S. sources, and gross proceeds from, among other things, the disposition of certain securities through a broker. A non-U.S. payor generally is required to report only on payments of certain U.S. source income and, under narrow circumstances, foreign source income and gross proceeds from broker transactions.

Similar to the chapter 3 information reporting and withholding regime, the chapter 61 regime provides comprehensive rules for a payor to identify the proper treatment of a payee for information reporting purposes, which generally are based on documentation or information about the payee. Additionally, a payor that does not have sufficient information with respect to a payee to satisfy its reporting obligations under chapter 61, such as a U.S. taxpayer identification number (TIN), may be required to backup withhold on a payment made to the payee at the statutory backup withholding rate (currently 28 percent) under section 3406.

A payor must file an annual income tax return on Form 945, “Annual Return of Withheld Federal Income Tax,” to report amounts withheld under section 3406. A payor must also file a Form 1099 to report payments made to a U.S. non-exempt recipient and any amounts withheld under section 3406. A copy of the Form 1099 must be furnished to the payee.

These information reporting rules assist U.S. taxpayers in complying with their income tax obligations. The information reported under chapter 61 and section 3406 is also an integral part of IRS compliance efforts to identify U.S. taxpayers who fail to properly report income.

B. Chapter 4

On March 18, 2010, the Hiring Incentives to Restore Employment Act of 2010, Public Law 111-147 (the HIRE Act), added to the Code chapter 4 of Subtitle A, comprised of sections 1471 through 1474 (commonly known as FATCA). Chapter 4 generally requires withholding agents to withhold 30 percent on withholdable payments (as defined in § 1.1471-1(b)(136) and sometimes referred to herein as chapter 4 withholdable payments) made to FFIs that do not agree to report certain information to the IRS regarding their U.S. accounts (as defined in § 1.1471-1(b)(134), which generally includes accounts held by specified U.S. persons and U.S. owned foreign entities, as defined in § 1.1471-1(b)(141) and § 1.1471-1(b)(138), respectively), and on withholdable payments made to passive non-financial foreign entities (passive NFFEs, as defined in § 1.1471-1(b)(94)) that do not provide information on their substantial U.S. owners (as defined in § 1.1471-1(b)(128)) to withholding agents. Chapter 4 thus extends the scope of the U.S. information reporting regime to include FFIs that maintain U.S. accounts. In order to avoid withholding tax under chapter 4, FFIs generally must agree to perform prescribed due diligence procedures to identify the chapter 4 status of their account holders, report information on U.S. accounts, and, in certain circumstances, withhold tax on certain account holders. Chapter 4 also imposes on withholding agents certain withholding, documentation, and information reporting requirements with respect to withholdable payments made to passive NFFEs. Amounts withheld under chapter 4 generally may be credited against the U.S. income tax liability of the beneficial owner of the payment to which the withholding is attributable, or refunded to the extent there is an overpayment of tax.

On February 15, 2012, the IRS and the Treasury Department published a notice of proposed rulemaking (REG-121647-10) in the
Federal Register
(77 FR 9022) addressing FATCA's due diligence, withholding, reporting, and associated requirements. On October 24, 2012, the IRS and the Treasury Department advance released Announcement 2012-42, 2012-47 IRB 561 (November 19, 2012) which announced the intention to amend certain provisions of the proposed chapter 4 regulations in final regulations. On January 28, 2013, the IRS and the Treasury Department published final regulations under chapter 4 (TD 9610) in the
Federal Register
(78 FR 5874), and on September 10, 2013, published correcting amendments to these regulations (78 FR 55202) (final chapter 4 regulations). The final chapter 4 regulations include comprehensive due diligence, withholding, and reporting requirements for withholding agents and FFIs that were to begin on January 1, 2014. On July 12, 2013, the IRS and the Treasury Department published Notice 2013-43, 2013-31 I.R.B. 113, which announced, among other things, that withholding agents generally will be required to begin chapter 4 withholding on withholdable payments made after June 30, 2014, and that the requirements of participating FFIs (as defined in § 1.1471-1(b)(91), which includes reporting Model 2 FFIs) under the agreement described in § 1.1471-4 (FFI agreement) will begin after June 30, 2014. On October 29, 2013, the IRS and the Treasury Department published Notice 2013-69 containing a draft of the FFI agreement, which an FFI may enter into with the IRS in order to be treated as a participating FFI that is generally exempt from FATCA withholding under chapter 4. Notice 2013-69 also previewed some of the changes to the final regulations that, among other things, would coordinate the information reporting and backup withholding rules in chapter 61 and section 3406 with the rules under chapter 4. On January 13, 2014, the IRS and the Treasury Department published the final FFI agreement in Revenue Procedure 2014-13. In addition, temporary regulations (temporary chapter 4 regulations) amending the final chapter 4 regulations are being published contemporaneously with these temporary regulations. The temporary chapter 4 regulations amend and revise the final chapter 4 regulations, in part, to coordinate with these temporary regulations.

To address situations where foreign law would prevent an FFI from reporting directly to the IRS the information required by chapter 4, the

Treasury Department, in collaboration with certain foreign governments, developed two alternative model intergovernmental agreements (IGAs) that facilitate the effective and efficient implementation of FATCA information reporting in a manner that removes foreign law impediments to compliance, fulfills the information reporting objectives of chapter 4, and further reduces burdens on FFIs located in partner jurisdictions. Specifically, a partner jurisdiction signing an agreement with the United States based on the first model (Model 1 IGA) generally agrees to adopt rules to require all relevant FFIs located in the jurisdiction (reporting Model 1 FFIs, as defined in § 1.1471-1(b)(114)) to identify U.S. accounts pursuant to due diligence rules specified in the agreement and to report the information required under FATCA for U.S. accounts to the partner jurisdiction, which, in turn, will report the information to the IRS. A partner jurisdiction signing an agreement based on the second model (Model 2 IGA) agrees to direct all relevant FFIs located in the jurisdiction (reporting Model 2 FFIs, as defined in § 1.1471-1(b)(115)) to follow the terms of an FFI Agreement by reporting information about U.S. accounts directly to the IRS in a manner consistent with the final chapter 4 regulations, except as expressly modified by the Model 2 IGA. Under a Model 2 IGA, the information reported to the IRS directly by FFIs is supplemented by government-to-government exchange of information in order to overcome legal impediments to direct FFI reporting with respect to account holders that refuse to consent to having their information reported.

Under the final chapter 4 regulations, a participating FFI (including a reporting Model 2 FFI) generally is required to report information on U.S. accounts to the IRS on Form 8966, “FATCA Report,” including the account number, certain payment information, and account balance and, in the case of an account held by a U.S. person, the U.S. person's name, address, and TIN, or, in the case of an account held by a U.S. owned foreign entity, the name of the entity and the name, address, and TIN of each substantial U.S. owner. With respect to accounts held by a U.S. person, an FFI may instead elect to satisfy its chapter 4 reporting obligations by electing to report on Form 1099 the information required under chapter 61, as modified to include the account number. A payor that makes the election must report under chapter 61 as if it were a U.S. payor and each holder of a U.S. account was a U.S. citizen and without regard to whether a payment was made on the account.

Chapter 4 also requires withholding agents to report on Form 8966 information on withholdable payments to passive NFFEs with substantial U.S. owners. A copy of Form 8966 is not currently required to be furnished to the account holder or passive NFFE. Additionally, a withholding agent that withholds on a payment under chapter 4 generally is required to file an annual income tax return on Form 1042 to report the payment and amount of tax withheld, and an information return on Form 1042-S to report, with respect to each recipient or pool, the payment and amount of tax withheld. A copy of Form 1042-S generally is required to be furnished to the recipient, except in cases where the chapter 4 rules allow pooled reporting on Form 1042-S.

The information reporting regime implemented under the final chapter 4 regulations and the IGAs will enhance IRS compliance efforts by enlisting the FFIs, which are in the best position to provide information on their accounts, to report on offshore accounts held by U.S. persons and by passive foreign entities with substantial U.S. owners. Like the Form 1099 reporting that already occurs primarily with respect to domestic accounts, this new information reporting will help the IRS identify U.S. taxpayers that may have failed to properly report and pay taxes on income earned or hidden offshore. This new enforcement tool will also strengthen the integrity of the U.S. voluntary tax compliance system by reassuring compliant taxpayers that the IRS will be able to enforce our tax laws on those who would attempt to avoid paying their fair share of taxes through the use of offshore accounts or offshore entities.

Explanation of Provisions

I. Overview of Changes To Coordinate Chapter 4 (Including Information Reporting Provided by FFIs Under an IGA) With the Regulations Under Chapters 3 and 61

Payors of payments that are subject to the information reporting and withholding regimes under chapters 3, 4, and 61 and section 3406 play an important role in U.S. tax compliance by providing information about payments made to, and income earned by, U.S. and foreign taxpayers. These temporary regulations provide guidance necessary to coordinate the regulations under chapters 3 and 61 and section 3406 with the final chapter 4 regulations and the IGAs. The preexisting regimes under chapters 3 and 61 were already coordinated to establish an integrated set of rules that enabled payors to identify payments and payees subject to reporting and to determine which of the two information reporting and withholding regimes, chapter 3 (information reporting and withholding on foreign persons) or chapter 61 and section 3406 (information reporting and backup withholding on U.S. non-exempt recipients), applied to a particular payment. The regulations under chapter 4 also provide comprehensive rules for withholding agents and FFIs with respect to the identification of payees and account holders, withholding, and information reporting. The IGAs similarly set forth a framework for FFIs to identify account holders and determine which accounts must be reported as U.S. accounts. These temporary regulations provide guidance coordinating the requirements under chapters 3 and 61 and section 3406 with the requirements under chapter 4 in order to develop a more integrated set of rules that reduces burdens (including certain duplicative information reporting obligations) and conforms the due diligence, withholding, and reporting rules under these provisions to the extent appropriate in light of the separate objectives of each chapter or section.

The remainder of this overview discusses the three main areas in which these temporary regulations revise the final regulations under chapters 3 and 61 and section 3406 in order to coordinate with the final chapter 4 regulations.

A. Identification of Payee Status

The documentation requirements (including the applicable presumption rules in the absence of documentation) for withholding agents, participating FFIs (including reporting Model 2 FFIs), and registered deemed-compliant FFIs (as defined in § 1.1471-1(b)(111), which includes reporting Model 1 FFIs) under the final chapter 4 regulations or an applicable IGA differ in certain respects from the corresponding documentation requirements for withholding agents under the final chapter 3 regulations for determining when chapter 3 withholding is required, and from the documentation requirements of payors and middlemen under the final chapter 61 regulations for determining when payments are made to persons for which reporting is required. These temporary regulations remove inconsistencies in the documentation requirements (including inconsistencies regarding presumption rules in the absence of

valid documentation) based, in part, on stakeholder comments to the final chapter 4 regulations. Examples of such coordination rules, discussed in greater detail in sections II and III later in this preamble, include rules that conform the requirements of a valid withholding certificate by requiring that a global intermediary identification number (GIIN) be included on the form if the payee is an FFI (when applicable); provide for indefinite validity periods for certain withholding certificates and extended periods of validity for certain documentation; conform the rules for electronic transmission of withholding certificates and statements; coordinate rules regarding the required content of a withholding statement provided by an FFI or flow-through entity; revise the presumption rules applicable to joint accounts; and provide uniform limits on when a withholding agent will be treated as having reason to know of a payee's U.S. or foreign status.

B. Information Reporting With Respect to U.S. Persons

The final chapter 4 regulations require participating FFIs (including reporting Model 2 FFIs) and, when applicable, registered deemed-compliant FFIs, but excluding reporting Model 1 FFIs, to report their U.S. accounts on Form 8966, irrespective of the type of payments made to the account holders. This reporting and similar reporting received pursuant to Model 1 IGAs may in some cases be duplicative of the information required to be reported on Form 1099 for payments made to the same account holders if they are U.S. non-exempt recipients under chapter 61. As discussed in the Background section of this preamble, FFIs may be able to mitigate this duplication by electing to satisfy their chapter 4 reporting obligations with respect to such accounts by reporting on Form 1099 the information required under chapter 61, as modified to include certain information required under chapter 4. This election, however, is not expected to relieve burden for FFIs that are required to report on U.S. accounts pursuant to local laws implementing a Model 1 IGA. As previewed in Notice 2013-69, in order to further reduce burdens and mitigate instances of duplicative reporting under chapters 4 and 61 and based, in part, on stakeholder comments requesting relief, these temporary regulations provide that non-U.S. payors that are also participating FFIs (including reporting Model 2 FFIs) or registered deemed-compliant FFIs (including reporting Model 1 FFIs) are excepted from the requirement to report on payments made to accounts held by U.S. non-exempt recipients under chapter 61 to the extent the payor reports on the account under chapter 4 or an applicable IGA.

These temporary regulations do not provide a similar exception to reporting under chapter 61 for U.S. payors that are FFIs required to report under chapter 4. While some of the information reported on Form 8966 and Form 1099 may overlap, there are also significant differences. Most notably, the requirement under chapter 61 to furnish a copy of Form 1099 to the payee facilitates voluntary compliance, and there is no equivalent requirement for payee statements under chapter 4. Moreover, U.S. payors generally have well-established systems for reporting and are subject to reporting on a broader range of payments under chapter 61 than non-U.S. payors. In light of these differences, the benefits of chapter 61 reporting by U.S. payors to the voluntary compliance system outweigh the reduction in burden that would be achieved by eliminating this reporting for U.S. payors that report on the same account under chapter 4 or an applicable IGA.

These temporary regulations do provide a limited exception to reporting under chapter 61 for both U.S. payors and for non-U.S. payors that are FFIs required to report under chapter 4 or an applicable IGA with respect to payments that are not subject to withholding under chapter 3 or section 3406 and that are made to an account holder that is a presumed (but not known) U.S. non-exempt recipient. FFIs that are required to report under chapter 4 or an applicable IGA will provide information regarding account holders who are presumed U.S. non-exempt recipients. Moreover, such presumed U.S. non-exempt recipients may not actually be U.S. persons for whom the recipient copy of Form 1099 would be relevant to facilitate voluntary compliance. As a result, the IRS and the Treasury Department believe that reporting under chapter 61 should be eliminated on payments to account holders who are presumed U.S. non-exempt recipients and for whom there is FATCA reporting.

These temporary regulations also provide a new exception from reporting under chapter 61 that will generally benefit U.S. persons acting as stock transfer agents or paying agents of certain passive foreign investment companies (PFICs). This exception is based, in part, on comments suggesting ways to reduce duplicative reporting with respect to PFIC shareholders without significantly impacting taxpayer compliance. Comments indicated that, due to the manner in which shareholders of PFICs are taxed under sections 1291 through 1298, the current Form 1099 reporting performed by transfer agents or paying agents of a PFIC generally does not assist taxpayers in properly reporting PFIC income on their tax returns, although it could remind taxpayers that they may have had a taxable event with respect to the PFIC. In light of the limited benefit of such 1099 reporting and the burden reduction that would result from its elimination, the IRS and the Treasury Department have concluded that this reporting should be eliminated to the extent the PFIC will report information with respect to the payment (or the account to which the payment is made) under chapter 4 or an applicable IGA.

C. Withholding

In certain cases, the payments subject to withholding under chapter 4 are also payments that could be subject to either withholding under chapter 3 or backup withholding under section 3406. These temporary regulations provide rules to address the potential for overwithholding to ensure that payments are not subject to withholding under both chapters 3 and 4, or under both chapter 4 and section 3406. Additionally, as previewed in Notice 2013-69, these temporary regulations also allow participating FFIs (including reporting Model 2 FFIs) and registered deemed-compliant FFIs to satisfy their chapter 4 withholding requirements by electing to continue to perform backup withholding under section 3406 at the statutory backup withholding rate (28 percent) in certain circumstances. A participating FFI (including a reporting Model 2 FFI) or registered deemed-compliant FFI may make the election to continue to apply backup withholding under section 3406 only if it complies with the requirements of chapter 61 and section 3406 with respect to the payment. Thus, for example, if an FFI is unable to report the information required with respect to a payment because local law prohibits payee specific reporting without the consent of the account holder and such consent is not given, the FFI cannot elect to report under chapter 61 or apply backup withholding with respect to such payment. When available, the election allows payors that have preexisting backup withholding systems to continue to perform backup withholding under such systems rather than to switch between withholding systems under chapter 4 and section 3406.

In addition to amending and revising the regulations under chapters 3 and 61

and section 3406 to coordinate with the final chapter 4 regulations, other revisions are included in the temporary regulations. For example, these temporary regulations amend the regulations under section 871 (and make conforming changes to the withholding requirements of the regulations under section 1441) in response to the HIRE Act's repeal of section 163(f)(2)(B) with respect to registration-required obligations and amendment of section 871(h)(2), the regulations under which provided when interest with respect to obligations not in registered form and targeted to foreign markets qualified as deductible interest and portfolio interest.

II. Changes to Chapter 3 Withholding Provisions

A. U.S. Agent of a Foreign Person

Under § 1.1441-1(b)(2)(ii) of the final regulations, a withholding agent making a payment to a U.S. person, and who has actual knowledge that the U.S. person receives the payment on behalf of a foreign person, must treat the payment as made to the foreign person, unless the U.S. person is a financial institution (as defined in § 1.165-12(c)(1)(iv)) and the withholding agent has no reason to believe the financial institution will not comply with its obligation to withhold. A similar payee provision is included in the chapter 4 regulations. These temporary regulations revise the scope of U.S. persons that are financial institutions under § 1.1441-1(b)(2)(ii) and that the withholding agent may treat as payees by defining the term financial institution consistent with the chapter 4 definition of a financial institution, which, in addition to depository and custodial institutions, includes certain investment entities and certain insurance companies.

B. U.S. Branch Treated as a U.S. Person

For purposes of the withholding requirements of chapter 3, a U.S. branch of a regulated foreign bank or foreign insurance company (including a territory financial institution) may agree to be treated as a U.S. person if it meets the requirements of § 1.1441-1(b)(2)(iv) of the final regulations. Under the chapter 4 regulations, a U.S. branch of an FFI may be treated as a U.S. person only if it is also a branch of a participating FFI (including a reporting Model 2 FFI) or registered deemed-compliant FFI (including a reporting Model 1 FFI) and it meets the requirements of § 1.1441-1(b)(2)(iv). To be consistent with the chapter 4 regulations, these temporary regulations add a new requirement in § 1.1441-1(b)(2)(iv) that a U.S. branch of an FFI must be a branch of a participating FFI or registered deemed-compliant FFI in order for it to be treated as a U.S. person for purposes of chapter 3. In addition, these temporary regulations clarify that a territory financial institution that is a flow-through entity receiving a payment on behalf of its owners or partners may also be treated as a U.S. person (in addition to a territory financial institution that is acting as an intermediary on behalf of third-parties). These temporary regulations also provide a requirement that if a U.S. branch is treated as a U.S. person for purposes of chapter 3, it must also be treated as a U.S. person for purposes of chapter 4. Moreover, as a result of the account documentation requirements in the chapter 4 regulations that apply to a participating FFI (including a reporting Model 2 FFI) that is not treated as a U.S. person, these temporary regulations provide that a U.S. branch that agrees to be treated as a U.S. person must be treated as a U.S. person with respect to all withholding agents from which it receives payments.

Under § 1.1441-1(b)(2)(iv)(B)(
3
) of the final regulations, a withholding agent that makes a payment to a U.S. branch of a foreign person must treat the payment as a payment to a foreign person of income effectively connected with a U.S. trade or business if it cannot reliably associate the payment with a withholding certificate from the branch or with other documentation from another person. These temporary regulations add a requirement that a withholding agent obtain an employment identification number (EIN) from a U.S. branch before it may treat a payment to the branch as effectively connected income. For payments to which this presumption does not apply because no EIN is provided, these temporary regulations require that the withholding agent treat the payment as made to a foreign person of income that is not effectively connected with the conduct of a trade or business in the United States. Further, these temporary regulations include a similar provision under § 1.1441-4 that requires a withholding agent to obtain an EIN from a U.S. branch in order to presume the payment to the branch is effectively connected income. The requirement to obtain an EIN from a U.S. branch is consistent with the requirements under chapter 4.

C. Other Payees (Authorized Foreign Agents)

Under § 1.1441-1(b)(2)(vi) of the final regulations, an authorized foreign agent (as described in § 1.1441-7(c)(2) of the final regulations) of a withholding agent is treated as a payee. The chapter 4 regulations do not have a special provision to treat a foreign agent of a withholding agent as a payee with respect to payments it collects on behalf of the withholding agent. See § 1.1474-1(a)(3). Accordingly, these temporary regulations remove the rules under § 1.1441-1(b)(2)(vi) that treat an authorized foreign agent as a payee, consistent with chapter 4, and the person to whom the authorized agent (as defined in § 1.1441-7(c)(2) of these temporary regulations) is making the payment on behalf of the withholding agent is treated as a payee by applying the payee rules under § 1.1441-1(b)(2) to such person. A series of other revisions have been made by these temporary regulations with respect to the use of authorized agents consistent with chapter 4 and are discussed throughout this preamble. In particular, see section II.S of this preamble for a description of changes to a withholding agent's use of an authorized agent.

D. Reliable Association With Documentation

Section 1.1441-1(b)(2)(vii)(A) of the final regulations generally describes the situations in which a withholding agent can reliably associate a payment with valid documentation to determine when withholding applies. Sections 1.1441-1(b)(2)(vii)(B) through (b)(2)(vii)(F) of the final regulations provide special rules for situations in which a withholding agent can reliably associate a payment with documentation for a payment made to a foreign intermediary (including a qualified intermediary). These temporary regulations revise § 1.1441-1(b)(2)(vii)(B) through (b)(2)(vii)(F) and the examples under those sections consistent with the documentation and withholding requirements of chapter 4.

With respect to nonqualified intermediaries, these temporary regulations revise the rules for reliable association to allow a withholding agent to associate a withholdable payment with a chapter 4 withholding rate pool (as defined in § 1.1441-1(c)(48)) consistent with the reliable association requirements of withholding statements provided by nonqualified intermediaries for chapter 4 purposes. Accordingly, these temporary regulations provide that a withholding agent need not associate a payment with documentation for payees included in any chapter 4 withholding rate pool. These temporary regulations also revise the examples relating to when a withholding agent can reliably associate payments to

nonqualified intermediaries with valid documentation and clarify that each example refers to a payment that is not a withholdable payment under chapter 4. These temporary regulations add an example under § 1.1441-1(e)(3)(iv)(C) that illustrates the requirements of a withholding statement provided by a nonqualified intermediary for a withholdable payment under chapter 4 that is also a payment subject to withholding under chapter 3.

With respect to qualified intermediaries, these temporary regulations revise the rules for reliable association to allow a withholding agent to associate a withholdable payment with a chapter 4 withholding rate pool (in addition to the withholding rate pools provided for chapter 3 purposes) consistent with the reliable association requirements of withholding statements provided by qualified intermediaries for chapter 4 purposes. Under the revised rule, a withholding agent may reliably associate a payment with a chapter 4 withholding rate pool of U.S. payees in a case in which the qualified intermediary does not assume primary Form 1099 and backup withholding responsibilities. A withholding agent that makes a payment to a qualified intermediary that does not elect to assume primary Form 1099 and backup withholding responsibilities must continue to reliably associate the payment to the qualified intermediary with Forms W-9, “Request for Taxpayer Identification Number and Certification,” for each U.S. non-exempt recipient not included in a chapter 4 withholding rate pool of U.S. payees on whose behalf the qualified intermediary is receiving the payment. The revised rule further provides that a withholding agent that makes a payment to a qualified intermediary that assumes primary Form 1099 and backup withholding responsibilities and primary withholding responsibility for purposes of both chapters 3 and 4 need not obtain any withholding statement from the qualified intermediary. These temporary regulations also add an example in § 1.1441-1(e)(5)(v)(D) to illustrate when a withholding agent can reliably associate payments made to qualified intermediaries providing chapter 4 withholding rate pools with respect to a withholdable payments under chapter 4.

E. Presumption Rules and Joint Payees

Section 1.1441-1(b)(3) of the final regulations provides presumption rules for withholding agents that apply in the absence of valid documentation and provides that a payment made to an exempt recipient (as determined based on the indicia of such status described in § 1.6049-4(c)(1)(ii) or similar provision under chapter 61 for a payment other than interest) generally is presumed made to a U.S. person unless one of the indicia of foreign status described in § 1.1441-1(b)(3)(iii)(A) is present. These temporary regulations modify what constitutes indicia of foreign status for purposes of the presumption rule applicable to exempt recipients. In particular, these temporary regulations provide that references to the terms
corporation
or
company
in the name of the payee are not indications that the payee is an entity included on the list of per se corporations under § 301.7701-2(b)(8)(i) for purposes of treating the payee as a foreign person. These temporary regulations also remove the term
a payment made outside the U.S.
under new § 1.1441-1(b)(3)(iii)(A)(
1
)(
iv
) and replace it with the term
a payment made with respect to an offshore obligation.
These temporary regulations further coordinate the regulations under chapters 3 and 61 with the regulations under chapter 4 by making a similar change to the term used in § 1.6049-5(c)(1).

In addition, these temporary regulations add a presumption rule under § 1.1441-1(b)(3)(iii)(A)(
2
) consistent with chapter 4 to provide that a payment that is also a withholdable payment under chapter 4 made to specified classes of exempt recipients (that is, generally those without an apparent U.S. status) will be presumed made to a foreign payee absent documentary evidence establishing U.S. status. This presumption will not apply, however, to a withholdable payment made with respect to a preexisting obligation determined by a withholding agent prior to July 1, 2014, to be held by a U.S. exempt recipient. A withholding agent will be allowed to apply this rule to all payments (including payments other than withholdable payments) made with respect to an obligation.

These temporary regulations also modify the presumption rules applicable to payments made to certain payees to coordinate with presumptions that apply under the chapter 4 regulations. These temporary regulations modify § 1.1441-1(b)(3)(iii) to coordinate with the presumptions under § 1.1471-3(f) for withholding agents making withholdable payments subject to the presumption rules of § 1.1441-1(b)(3) and chapter 4. Section 1.1441-1(b)(3)(iii) of the temporary regulations provides that in the case of a withholdable payment under chapter 4, a withholding agent must apply the presumption rules under § 1.1471-3(f) to determine the payee's status for chapter 4 purposes. Furthermore, § 1.1441-1(b)(3)(v)(B) provides that a withholding agent making a withholdable payment to a foreign intermediary should apply the presumption rules of § 1.1471-3(f)(5) to determine whether withholding applies under chapter 4 (instead of applying the presumption rules in § 1.1441-1(b)(3)). For example, if a withholding agent makes a withholdable payment to a foreign intermediary and cannot reliably associate the payment with documentation for a payee, the withholding agent must apply the presumption rule of § 1.1471-3(f)(5) to treat the unidentified payee as a nonparticipating FFI (as defined in § 1.1471-1(b)(82)) and withhold on the payment at a 30-percent rate under chapter 4. Accordingly, no withholding or reporting under chapter 3 would be required to apply with respect to the payment.

Consistent with the chapter 4 presumption rules, these temporary regulations also provide that if a withholding agent makes a withholdable payment to joint payees and one or more of the payees does not appear, by name or other information in the account file, to be an individual, then the payment will be presumed to be made to a nonparticipating FFI. See § 1.1471-3(f)(7).

F. Grace Period

Under § 1.1441-1(b)(3)(iv) of the final regulations, a withholding agent may apply the 90-day grace period provided under § 1.6049-5(d)(2)(ii) to amounts described in §§ 1.1441-6(c)(2) and 1.1441-4(b)(2)(ii) to treat a payee as an undocumented foreign person, and withhold under chapter 3, while waiting for new documentation. The chapter 4 regulations allow a withholding agent to apply a 90-day grace period following a change in circumstances during which the withholding agent may rely on the payee's claimed chapter 4 status. These temporary regulations do not provide a similar allowance for chapter 3 purposes to avoid potential deficits in withholding that could apply during the grace period allowed under chapter 4 because of the different objectives between chapters 3 and 4. These temporary regulations remove the requirement that a withholding agent withhold on payments during the grace period when a form is received by facsimile since these temporary regulations also provide that such forms may be generally relied upon under § 1.1441-1(e)(4)(iv)(C).

G. Exemptions From Chapter 3 Withholding

Section 1.1441-1(b)(4) of the final regulations specifies certain types of payments that may be fully or partially exempt from withholding under chapter 3. To distinguish these exemptions from the withholding exemptions that apply for purposes of chapter 4, these temporary regulations add language to clarify that the exemptions specified under § 1.1441-1(b)(4) apply only for purposes of chapter 3 and that withholding under chapter 4 may still apply. In addition, these temporary regulations add the applicable sunset dates to the descriptions of payments that are portfolio interest to coordinate with the elimination of portfolio interest treatment for foreign-targeted bearer obligations under section 502 of the HIRE Act (for obligations issued after March 18, 2012) and the elimination of portfolio interest treatment for foreign-targeted registered obligations under § 1.871-14(e) for obligations issued on or after January 1, 2016.

H. Establishing Foreign Status Under Chapter 61

These temporary regulations add section 6050W to the list of provisions referenced in § 1.1441-1(b)(5) for which the foreign status of a payee may be established for chapter 61 purposes based on the documentation provided for chapter 3 purposes.

I. Curing Late or Incomplete Documentation

Section 1.1441-1(b)(2) of the final regulations provides that a withholding agent must reliably associate a payment with documentation by the date of the payment. Notwithstanding the general rule under § 1.1441-1(b)(2), § 1.1441-1(b)(7) of the final regulations allows a withholding agent to rely on documentation obtained after the date of a payment to avoid liability for underwithholding during the period that the withholding agent had no documentation. The final regulations also specify that the IRS may require a withholding agent to obtain additional documentation, however, when the IRS determines that delays in obtaining the documentation affect its reliability. The chapter 4 regulations specify the documentation that must be obtained by a withholding agent after the date of a payment to determine a payee's chapter 4 status, depending on the length of the delay. Consistent with the chapter 4 regulations, these temporary regulations incorporate the chapter 4 requirements for documentation obtained after the date of the payment (including documentation to support a claim for treaty benefits). These temporary regulations also add a provision consistent with the chapter 4 regulations that permits a withholding agent to cure a withholding certificate containing inconsequential errors with respect to a claim of status for chapter 3 purposes.

J. Definitions

Section 1.1441-1(c) of the final regulations provides definitions used for purposes of the chapter 3 regulations. First, these temporary regulations modify the definitions in § 1.1441-1(c)(1) through (c)(30) as appropriate to provide consistency with certain definitions in the chapter 4 regulations. For example, the term
financial institution
in § 1.1441-1(c)(5) is amended to be consistent the term financial institution in the chapter 4 regulations.

Second, these temporary regulations also add new terms that are referenced for chapter 3 purposes. These terms are added to § 1.1441-1(c) of these temporary regulations in order to help navigate the regulations and to reflect more completely the terms used throughout these regulations. Finally, these temporary regulations also add new definitions adopted from chapter 4 that are relevant for chapter 3 purposes. For example, § 1.1441-1(c)(48) of these temporary regulations incorporates the term
chapter 4 withholding rate pool
(modified as appropriate for chapter 3 purposes with respect to the chapter 4 withholding rate pool of U.S. payees) in order to provide for situations in which intermediaries may provide withholding statements to withholding agents that include these pools rather than the documentation otherwise required for chapter 3 purposes.

K. Withholding Certificates

1. Beneficial Owner Withholding Certificate

Section 1.1441-1(e)(2)(ii) of the final regulations provides the requirements of a valid beneficial owner withholding certificate. For a payment made to an entity that is a beneficial owner of a withholdable payment, these temporary regulations provide that the withholding certificate must also include the chapter 4 status of the entity on the same form to coordinate with the requirements of the certification provided for chapter 4 purposes.

2. Withholding Certificate Provided by a Qualified Intermediary or Nonqualified Intermediary

Sections 1.1441-1(e)(3)(ii) and (e)(3)(iii) of the final regulations provide the requirements of a valid qualified intermediary (QI) or nonqualified intermediary (NQI) withholding certificate, respectively. These temporary regulations amend these sections to include the information required for purposes of chapter 4 with respect to a QI or an NQI that receives a withholdable payment. Additionally, these temporary regulations add a requirement that a QI or an NQI certify its chapter 4 status and provide its GIIN (if applicable) on the withholding certificate. A GIIN will be required, for example, when a QI or an NQI is also a participating FFI (including a reporting Model 2 FFI) or a registered deemed-compliant FFI (including a reporting Model 1 FFI). These temporary regulations also require a QI or an NQI to certify that it is fulfilling its reporting obligations under chapter 4 with respect to any U.S. persons included in a chapter 4 withholding rate pool of U.S. payees on a withholding statement provided to the withholding agent.

3. Withholding Certificate Provided by a U.S. Branch or Territory Financial Institution

As discussed in section II.B of this preamble, the requirements for a U.S. branch or territory financial institution to be treated as a U.S. person under § 1.1441-1(b)(2)(iv) are modified by these temporary regulations consistent with the chapter 4 regulations. To further coordinate with chapter 4, these temporary regulations amend § 1.1441-1(e)(3)(v), which provides the requirements for a valid U.S. branch withholding certificate provided by a U.S. branch (or territory financial institution treated as a U.S. branch under § 1.1441-1(b)(2)(iv)) that is not the beneficial owner of the income, as well as the requirements for when a withholding agent may treat the branch as a U.S. person. For example, a U.S. branch of an FFI will be required to provide a GIIN on the withholding certificate to certify to its chapter 4 status in order to be treated as a U.S. person when receiving a withholdable payment. In addition, a U.S. branch or territory financial institution will be required to provide its EIN on a withholding certificate in order to be treated as a U.S. person.

4. Who May Sign Withholding Certificates

The chapter 4 regulations provide examples in § 1.1471-3(c)(6)(i) of persons authorized to sign a withholding certificate. To clarify the persons authorized to sign a withholding certificate for chapter 3

purposes consistent with the chapter 4 regulations, these temporary regulations incorporate into § 1.1441-1(e)(4)(i) the examples of persons described in § 1.1471-3(c)(6)(i). The list of persons authorized to sign a withholding certificate includes an officer or director of a corporation, a partner of a partnership, a trustee of a trust, an executor of an estate, any foreign equivalent of the foregoing titles, and any other person authorized in writing to sign documentation on behalf of the individual or entity named on the certificate.

5. Period of Validity of Withholding Certificates

Section 1.1441-1(e)(4)(ii)(A) of the final regulations provides that a withholding certificate or documentary evidence generally remains valid until the last day of the third calendar year following the year in which the withholding certificate is signed or documentary evidence is provided to the withholding agent, or until a change in circumstances makes any information on the withholding certificate incorrect.

Under certain circumstances described in § 1.1441-1(e)(4)(ii)(B) of the final regulations, a withholding certificate or documentary evidence may remain valid indefinitely until a withholding agent knows or has reason to know of a change in circumstances that makes any information on the withholding certificate incorrect. These circumstance include when a withholding agent obtains a TIN for a payee and reports a payment to the payee annually on Form 1042-S, as well as withholding certificates provided by certain foreign entities such as intermediaries, flow-through entities, foreign central banks, and integral parts of foreign governments.

These temporary regulations modify § 1.1441-1(e)(4)(ii)(B) in appropriate cases to coordinate the chapter 3 regulations with the chapter 4 regulations and expand the circumstances under which a withholding agent may treat documentation as having indefinite validity for chapter 3 purposes. These temporary regulations also provide that certain types of documentary evidence may remain valid for purposes of establishing a payee's foreign status for a longer period if the documentary evidence contains an expiration date that is beyond the three-year period, in which case the documentary evidence will remain valid until the expiration date. Because of the changes to the rules for indefinite validity, these temporary regulations remove and replace the allowance that permits a withholding agent to treat a withholding certificate with a TIN as being valid indefinitely provided that the withholding agent reports a payment each year on a Form 1042-S with respect to the person providing the certificate.

Consistent with the chapter 4 regulations and in response to comments requesting further transitional relief during the period when withholding agents will be obtaining documentation for preexisting accounts for both chapter 4 and chapter 3 purposes, these temporary regulations provide that a withholding certificate or documentary evidence that would otherwise expire under § 1.1441-1(e)(4)(ii)(A) on December 31, 2013, will not be treated as invalid until January 1, 2015, unless a change in circumstances occurs before that date. See § 1.1441-1(e)(4)(ii)(D).

6. Change in Circumstances

As discussed in section II.K.5 of this preamble, under § 1.1441-1(e)(4)(ii)(D) of the final regulations, a withholding agent may no longer rely on a withholding certificate or documentation when the withholding agent knows or has reason to know of a change in circumstances that makes the withholding certificate or documentation incorrect. The regulations under chapter 4 adopt a similar requirement for documentation provided for chapter 4 purposes and further provide that an intermediary (including a U.S. branch or territory financial institution not treated as a U.S. person) that becomes aware of a change in circumstances with respect to a person for whom it furnishes documentation to a withholding agent must notify the withholding agent within 30 days of the date the intermediary knows or has reason to know of the change in circumstances. Consistent with the chapter 4 regulations, these temporary regulations revise § 1.1441-1(e)(4)(ii)(D) to adopt this 30-day requirement.

7. Retention of Withholding Certificates or Documentary Evidence

Section 1.1441-1(e)(4)(iii) of the final regulations requires a withholding agent to retain a withholding certificate or documentation for as long as it may be relevant for purposes of determining the withholding agent's liability under section 1461. This paragraph is amended to be consistent with retention requirements applicable to a withholding agent under chapter 4 by permitting a withholding agent to retain an original, certified copy, or scanned version of a withholding certificate. A withholding agent may also retain a withholding certificate by other means (such as microfiche) provided that the withholding agent is able to a produce a hard copy of the form or document and maintains a record of the receipt of the document. For documentary evidence, this paragraph cross references the retention requirements provided in § 1.6049-5(c)(1) (as amended by these temporary regulations), which coordinate with chapter 4 by permitting a withholding agent to retain a photocopy of the documentary evidence.

8. Electronic and Other Transmission of Forms and Documentation

The chapter 4 regulations required a withholding agent to authenticate the identity of a person furnishing a withholding certificate or documentary evidence in the form of a facsimile or scanned documentation. In response to comments, these temporary regulations do not incorporate this requirement. These temporary regulations instead provide that a withholding agent may rely on a signed form or a document received by facsimile or scanned and sent by email unless the withholding agent knows that the person transmitting the form or documentary evidence is not authorized to do so. This rule is intended to apply to a withholding agent that does not receive the document as part of a system established by a withholding agent described in § 1.1441-1(e)(4)(iv)(B), the requirements for which are unchanged by these temporary regulations except for a provision clarifying that the IRS may provide written guidance to its examiners regarding the requirements acceptable for the system. This same rule applies for chapter 4 purposes under a revision made by the temporary chapter 4 regulations (to cross-reference this paragraph).

9. Substitute Certification Forms

A withholding agent may substitute its own certification form for an official Form W-8 or Form 8233, “Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual,” so long as the substitute form satisfies the requirements described in § 1.1441-1(e)(4)(vi) of the final regulations. Consistent with the chapter 4 regulations, these temporary regulations allow a withholding agent to use a substitute form written and completed in a language other than English, provided that an English translation is available upon request. In addition, these temporary regulations clarify that, consistent with the current regulations,

a substitute form may omit provisions that are not relevant to the transaction or purpose for which the form is furnished, and specifically provide that a substitute form need not contain a chapter 4 status for a payee when the withholding agent is not required to determine a payee's chapter 4 status. See § 1.1471-3(c)(6)(v). Although the chapter 4 regulations also allow a withholding agent to rely on a non-IRS form in lieu of Forms W-8 or substitute forms for a payee who is an individual, this provision is not incorporated into these temporary regulations for chapter 3 purposes. The IRS and the Treasury Department have determined that an official Form W-8 or Form 8233 (or acceptable substitute form or acceptable documentary evidence when permitted) should be required for a payment subject to chapter 3 withholding.

10. TIN Requirement for Withholding Certificate

In the circumstances described in § 1.1441-1(e)(4)(vii) of the final regulations, a withholding certificate must include a TIN in order for a withholding agent to treat the withholding certificate as valid for purposes of chapter 3, such as a withholding certificate provided for purposes of claiming treaty benefits (other than treaty benefits with respect to publicly traded securities) or a withholding certificate provided by a beneficial owner claiming the income is effectively connected with a U.S. trade or business. To update these circumstances to reflect guidance issued for purposes of chapter 3 after the effective date of the current regulations, these temporary regulations add to the list of withholding certificates requiring a TIN a withholding certificate provided by a withholding foreign trust or by an entity acting as a qualified securities lender with respect to a substitute dividend paid in a securities lending or similar transaction. See Notice 2010-46, 2010-24 IRB 757 (June 14, 2010). These temporary regulations also provide in § 1.1441-6(c)(2) an exception from the TIN requirement for a withholding certificate on which a beneficial owner claims treaty benefits and instead provides its foreign TIN, as an alternative to providing a U.S. TIN for this purpose.

11. Coordinated Account Information Systems

Section 1.1441-1(e)(4)(ix) of the final regulations generally requires a withholding agent that is a financial institution to obtain documentation (including withholding certificates) on an account-by-account basis subject to certain exceptions. Section 1.1441-1(e)(4)(ix)(A) of the final regulations allows a withholding agent to rely on documentation provided by a customer for another account held at the same branch location. If the accounts are not located at the same branch location, § 1.1441-1(e)(4)(ix)(A) of the final regulations allows a withholding agent to rely on documentation for an account held at another branch location of the withholding agent or a related person provided that the withholding agent and related person are part of the same universal account system or a system described in § 1.1441-1(e)(4)(ix)(A)(
3
).

The final chapter 4 regulations generally incorporate the provisions of § 1.1441-1(e)(4)(ix)(A) of the final regulations but modify certain of the requirements for account systems. The final chapter 4 regulations require that the withholding agent treat the accounts as consolidated obligations, a requirement not described in the final regulations, for documentation shared at the same branch location or through a universal account system. For universal account systems and shared account systems, the final chapter 4 regulations require that the withholding agent and the branch with which it is sharing information be part of the same expanded affiliated group (rather than be related persons as under the final regulations). In addition, the final chapter 4 regulations require a withholding agent to produce upon request any documentation upon which it relies for purposes of determining the status of the payee and clarify that a withholding agent is liable for any underwithholding attributable to failing to assign the correct status to the payee based on the available information. Finally, although the final chapter 4 regulations do not require a withholding agent to document how and when it accesses the shared account system, the withholding agent is required to be able to obtain a copy of the documentation.

To provide consistent standards for when withholding agents may share documentation for purposes of both chapters 3 and 4, these temporary regulations delete the existing text of § 1.1441-1(e)(4)(ix) and replace it with a cross-reference to the requirements for documentation sharing in the final chapter 4 regulations. These temporary regulations also replace § 1.1441-1(e)(4)(ix)(A)(
4
) with the rule under the chapter 4 regulations for documentation collected by an agent of the withholding agent. The revised requirements apply to a shared account system other than a shared account system in use by a withholding agent as of July 1, 2014. Section 1.1441-1(e)(4)(ix)(B) allows for a single withholding certificate for shares in multiple mutual funds that have a common investment advisor or common principal underwriter with respect to shares owned or acquired in any of the funds. The chapter 4 regulations address this issue to achieve a similar result through the general principal-agent rule of § 1.1471-3(c)(9)(i), which is incorporated into these temporary regulations.

The final regulations provide other exceptions to the requirement to obtain a withholding certificate for each account that allow a withholding agent to rely on a certification from a U.S. broker stating that the broker holds beneficial owner withholding certificates of payees for which the broker acts as an agent with respect to any readily tradable instrument. The final chapter 4 regulations also provide a similar exception that permits a withholding agent to rely on a certification from a qualified intermediary in addition to a U.S. broker. To coordinate with the final chapter 4 regulations, these temporary regulations add a provision allowing a withholding agent to rely for chapter 3 purposes on a similar certification from a qualified intermediary that receives a payment from the withholding agent.

With respect to accounts acquired in mergers and bulk acquisitions for value, these temporary regulations add a new § 1.1441-1(e)(4)(ix)(D) to clarify that a withholding agent may rely on valid documentation collected by a predecessor or transferor, consistent with the rule that applies for purposes of chapter 4. Also consistent with the chapter 4 regulations, these temporary regulations allow a withholding agent that acquires accounts in a merger or bulk acquisition for value from an unrelated person to rely on the predecessor's or transferor's determination of an account holder's chapter 3 status for a transition period of six months, subject to certain requirements that apply at the end of the transition period. However, this provision is modified to require the predecessor or transferor to be a U.S. withholding agent or qualified intermediary rather than a participating FFI as provided in the chapter 4 regulations in light of the different purposes of chapters 3 and 4.

Finally, the final chapter 4 regulations allow a withholding agent to rely upon documentation collected by a third-party data provider in order to establish the chapter 4 status of an entity. The IRS and the Treasury Department do not believe that this allowance is appropriate for purposes of chapter 3 and instead expect withholding agents

to utilize the other document sharing provisions discussed earlier in this section II.K.11. However, see § 1.1441-7 of these temporary regulations for rules permitting a withholding agent (acting as a principal) to rely on documentation collected by an agent, subject to the qualification that as principal it remains liable for its agent's performance.

L. Withholding Statement of a Nonqualified Intermediary

1. General Requirements Other Than Alternative Procedures

Section 1.1441-1(e)(3)(iv) of the final regulations describes the requirements of a withholding statement provided by an NQI (NQI withholding statement) to a withholding agent with respect to reportable amounts (including amounts subject to chapter 3 withholding). This provision is amended by these temporary regulations to coordinate with the chapter 4 requirements for withholding statements when an NQI receives a withholdable payment by permitting the NQI to include chapter 4 withholding rate pools on the statement in lieu of payee-specific information. To coordinate with the chapter 4 requirements for reporting on Form 1042-S, this provision is further modified to require an NQI receiving a withholdable payment to provide on the withholding statement the chapter 4 status of each payee that is a foreign person not included in a chapter 4 withholding rate pool.

For reportable amounts received by an NQI (including reportable amounts that are not withholdable payments under chapter 4), the requirements for an NQI withholding statement are modified to specify when an NQI may provide to a withholding agent a withholding statement that includes an allocation of the payment to a chapter 4 withholding rate pool of U.S. payees in lieu of providing Forms W-9 for each U.S. non-exempt recipient and identifying each such recipient on the statement. For this purpose, an NQI that is a participating FFI or registered deemed-compliant FFI may include a U.S. payee in the pool to the extent permitted under § 1.6049-4(c)(iii), which coordinates with the allowance for when an NQI that has reporting obligations under chapter 4 need not also report under chapter 61 with respect to a payment.

These temporary regulations also add an example to illustrate when a withholding agent can reliably associate a withholdable payment with a chapter 4 withholding statement that allocates the payment (or portion of the payment) to one or more chapter 4 withholding rate pools.

2. Alternative Procedures for an NQI Withholding Statement

An NQI generally is required to provide payee-specific information (treating a chapter 4 withholding rate pool as a payee) to a withholding agent at the time of payment, as described in section II.L.1 of this preamble. However, the alternative procedures described in § 1.1441-1(e)(3)(iv)(D) of the final regulations permit an NQI to provide a withholding agent with pooled information (by withholding rate) prior to receiving the payment if the NQI will provide information sufficient to allocate the payment to specific payees by January 31 of the year following the payment. These temporary regulations retain the alternative procedures but expand the circumstances under which the procedures may be used in order to coordinate with when a chapter 4 withholding rate pool may be included on a withholding statement provided by an NQI. Section 1.1441-1(e)(3)(iv)(D) of the final regulations is modified in the case of an NQI receiving a reportable amount that is also a chapter 4 withholdable payment to permit the NQI to include payees that are nonparticipating FFIs or recalcitrant account holders includable in a chapter 4 withholding rate pool in a single withholding rate pool that includes payees subject to withholding under chapter 3 at a 30-percent rate for reporting to a withholding agent. Similarly, payees includable in a chapter 4 withholding rate pool of U.S. payees may be included in a zero-percent rate pool with other payees to which no withholding applies. Thus, an NQI may provide withholding rate pools under alternative procedures irrespective of whether withholding is applied under chapter 3 or chapter 4 or when withholding is excepted under chapters 3 and 4 and section 3406.

Because of the allowance to include payees in withholding rate pools under the alternative procedures for purposes of both chapters 3 and 4, these temporary regulations add a provision that, in addition to the allocation information required to be provided by the NQI for each payee for chapter 3 purposes by January 31 following the year of the payment, the NQI must provide the withholding agent with sufficient information to allocate the income to each applicable chapter 4 withholding rate pool and may treat each such pool as a payee for the purpose of determining whether an NQI has provided a withholding agent with sufficient information to allocate the income by such date. See § 1.1441-1(e)(3)(iv)(D)(
3
) and (e)(3)(iv)(D)(
4
). Any payments allocated to a specific payee for whom documentation has not been provided shall be allocated to an undocumented payee in accordance with the presumption rules, and these temporary regulations add a reference to the presumption rule in § 1.1471-3(f)(5) for a case in which an NQI fails to allocate a withholdable payment in the time prescribed.

3. Electronic Transmission of NQI Withholding Statement

As discussed in section II.K.8 of this preamble, these temporary regulations provide new procedures allowing the electronic transmission of withholding certificates and documentary evidence. Section 1.1441-1(e)(3)(iv)(B) is amended to provide that a withholding statement may also be transmitted by email or facsimile under the same procedures provided in § 1.1441-1(e)(4)(iv)(C) for withholding certificates and documentary evidence when the statement is not provided as part of a system established by the NQI or withholding agent.

M. Qualified Intermediaries

1. In General

Section 1.1441-1(e)(5) of the final regulations provides rules for entering into a qualified intermediary agreement (QI agreement) with the IRS, generally describes the requirements of the QI agreement, provides the requirements of a QI withholding statement, and establishes the persons eligible to enter into the QI agreement. Consistent with the intent of chapter 4 that a QI's reporting of U.S. account holders be expanded from the present requirements to report as a payor or middleman for chapter 61 purposes, these temporary regulations provide that, in order to enter into a QI agreement, a QI that is an FFI must assume the chapter 4 reporting obligations of a participating FFI (including a reporting Model 2 FFI), registered deemed-compliant FFI (including a reporting Model 1 FFI), or an FFI treated as certified deemed-compliant pursuant an applicable IGA and that is subject to due diligence and reporting requirements with respect to its accounts similar to those of registered deemed-compliant FFIs under the chapter 4 regulations. Under this new requirement, a QI will be required to report its U.S. accounts without regard to whether the QI designates the account as an account covered by the QI agreement (as applicable under the current QI agreement). Subject to IRS approval, an NFFE may also become a

QI for purposes of presenting claims of benefits under an income tax treaty on behalf of its shareholders or when acting as an intermediary for persons other than its shareholders.

Section 1.1441-1(e)(5)(iii) of these temporary regulations reflects changes to the requirements of the QI agreement. Specifically, these temporary regulations provide that the QI agreement will provide the requirements for a QI acting as a qualified securities lender with respect to the payment of U.S. source substitute dividends. Moreover, to provide compliance procedures generally similar to those applicable to a participating FFI under chapter 4, the QI agreement will provide that the QI must establish procedures to ensure compliance with its agreement, arrange for a periodic review, and provide certain factual information to the IRS. Furthermore, in appropriate cases, the IRS may require that an approved auditor perform review procedures concerning the QI's compliance with its QI agreement in addition to the review procedures performed under the periodic review. In such a case, the IRS may conduct a review of the auditor's findings.

2. Assumption of Primary Withholding Responsibility

The current regulations provide that a QI may assume the primary obligation to withhold, deposit, and report amounts under chapter 3 or under chapter 61 and section 3406 (or under both chapters 3 and 61, including backup withholding under section 3406). These temporary regulations coordinate with chapter 4 with respect to both a QI's chapter 3 and chapter 61 requirements. First, to coordinate with the withholding requirements of chapter 4, a QI assuming primary withholding responsibility under chapter 3 with respect to an account will also be required to assume such responsibility for purposes of chapter 4 with respect to the account. Second, a QI that is an FFI may represent on a withholding certificate provided to a withholding agent that it assumes primary chapter 61 reporting and section 3406 responsibility for an account that it maintains if the QI complies with its obligations as a participating FFI (including a reporting Model 2 FFI) or registered deemed-compliant FFI (including a reporting Model 1 FFI) under the chapter 4 regulations or an applicable IGA. See § 1.6049-4(c)(4)(i) and (c)(4)(ii) of these temporary regulations for when an FFI that reports an account under chapter 4 is not required to report a payment made to the account under chapter 61.

3. Withholding Statement Provided by a QI

Section 1.1441-1(e)(5)(v) of the final regulations provides the requirements of a withholding statement provided by a QI. These temporary regulations permit a QI that assumes primary reporting and withholding responsibility under chapters 3, 4, and 61 and section 3406 to provide an intermediary withholding certificate without attaching a withholding statement (including under the circumstances described above when a QI reports under chapter 4). However, if a QI does not assume primary reporting and withholding responsibility under chapters 3 and 4 or under chapter 61 and section 3406, then the QI is required to provide a withholding statement. A QI may provide a withholding statement to allocate the payment to a chapter 4 withholding rate pool of U.S. payees to the extent permitted for a NQI when the QI does not assume primary chapter 61 reporting and backup withholding responsibilities. See section II.L.1 of this preamble.

These temporary regulations modify the requirements for a withholding statement provided by a QI with respect to a withholdable payment. These temporary regulations permit pooled information (for each chapter 3 withholding rate pool by applicable chapter 4 exemption code based on Form 1042-S and the related instructions) with respect to foreign payees subject to withholding under chapter 3 and not subject to chapter 4 withholding. For payments to which chapter 4 withholding applies, these temporary regulations permit a QI that is an FFI to report chapter 4 withholding rate pools for nonparticipating FFIs and recalcitrant account holders on an FFI withholding statement (as described in 1.1471-3(c)(3)(iii)(B)(
2
)), and, for a QI other than an FFI, permit the QI to provide a chapter 4 withholding statement to report payees that are nonparticipating FFIs in a chapter 4 withholding rate pool. The revised QI agreement will further provide the circumstances in which a QI may provide a chapter 4 withholding rate pool on a withholding statement, including a chapter 4 withholding rate pool provided to the QI by another intermediary or flow-through entity.

4. Electronic Transmission of QI Withholding Statement

These temporary regulations provide the same allowances for the electronic transmission of a QI withholding statement as for an NQI withholding statement. See section II.L.3 of this preamble regarding the electronic transmission of an NQI withholding statement.

N. Coordination of § 1.1441-3 With Chapter 4 Withholding

Section 1.1441-3 of the final regulations provides rules for determining the amount to be withheld for purposes of section 1441. These temporary regulations add provisions to coordinate withholding under chapters 3 and 4 by providing that when a payment is both a chapter 4 withholdable payment and an amount subject to withholding under chapter 3, a withholding agent must apply the withholding provisions of chapter 4 to determine whether withholding is required under chapter 4 (and does not need to withhold under chapter 3 to the extent that it has withheld under chapter 4). The coordination rule cross references § 1.1474-6(b)(1), which allows a withholding agent to credit withholding applied on a payment under chapter 4 against any tax liability due under chapter 3 with respect to such payment, and cross references § 1.1474-6(b)(2) for determining when withholding is considered applied by a withholding agent.

These temporary regulations do not, however, include provisions specifically addressing a credit for taxes withheld under chapter 4 in a series of securities lending transactions using the same underlying security. Notice 2010-46 outlines a proposed regulatory framework to address potential overwithholding that may occur in such transactions and provides transition rules applicable until the issuance of regulations to ensure that the withholding does not exceed 30 percent in the aggregate. Under the transition rules, a withholding agent that is obligated to make a substitute dividend payment pursuant to a securities lending transaction may presume that U.S. tax has been paid in an amount equal to the amount implied by the net payment received by the withholding agent provided certain conditions are satisfied, including that the withholding agent does not know or have reason to know that tax was not withheld and deposited or paid. For purposes of the transition rules and pending further guidance, the IRS will permit a withholding agent to apply this presumption absent information on whether the net payment resulted from taxes withheld under chapter 3 or chapter 4. The IRS will, however, treat a withholding agent as having reason to

know that the tax was not withheld and deposited or paid to the extent that (i) the withholding agent knows that withholding was applied under chapter 4 to a dividend or substitute dividend paid to a nonparticipating FFI (which may be the withholding agent) that is entitled to a refund of the tax, and (ii) the nonparticipating FFI participated in such transaction with a purpose of reducing the aggregate amount of gross basis tax that would have otherwise been due had it not participated in the series of transactions. See section 1474(b)(2).

Section 1.1441-3(c)(4) of the final regulations provides rules that coordinate withholding under section 1441 (or 1442 or 1443) with withholding under section 1445 on distributions by U.S. real property holding companies and real estate investment trusts. Under these temporary regulations, the coordination rules also apply to distributions made by qualified investment entities (as defined under section 897(h)(4)). These temporary regulations also clarify that to the extent a payment is subject to withholding under section 1441 (rather than section 1445) under these coordination rules, a withholding agent must apply the withholding provisions of chapter 4 before determining whether withholding is required under chapter 3 (and, therefore, will not need to withhold under this section if withholding is applied under chapter 4).

Section 1.1441-3(d) of the final regulations permits a withholding agent making a payment of an undetermined amount of income to make a reasonable estimate of the amount from U.S. sources or of the taxable amount and place a corresponding amount in escrow until the amount from U.S. sources or the taxable amount can be determined. To coordinate with the chapter 4 regulations, this rule is modified to state that a withholding agent may retain 30 percent of a payment of an undetermined amount of income in escrow until the earlier of the date that the amount from U.S. sources or the taxable amount can be determined or one year from the date the amount is placed in escrow. Upon such date, the withholding becomes due or, to the extent that withholding under chapter 3 has been determined not to apply, the escrowed amount must be paid to the payee.

O. Presumption Rule for Payments to U.S. Branches and Removal of Transitional Documentation Rules

Section 1.1441-4 of the final regulations provides an exception to withholding under section 1441 on income that is (or is deemed to be) effectively connected with the conduct of a trade or business within the United States. A presumption rule under the final regulations allows a withholding agent to treat a payment of income as effectively connected income when it is made to a U.S. branch of a foreign bank or foreign insurance company described in § 1.1441-2(b)(iv)(A). These temporary regulations revise the presumption rule to require a withholding agent to obtain an EIN for a U.S. branch before it may presume the payment to the U.S. branch is a payment of effectively connected income. In addition, these temporary regulations remove the transitional documentation provisions that applied to payments made before January 1, 2001.

P. Coordination of § 1.1441-5 With Chapter 4 Withholding and Removal of Transitional Documentation Rules

These temporary regulations revise § 1.1441-5 to coordinate with the documentation, withholding, and reporting requirements of chapter 4 that apply to U.S. and foreign partnerships, trusts, and estates, and they remove a transition rule applicable to withholding certificates.

Section 1.1441-5(b) of the final regulations prescribes withholding rules for U.S. partnerships, trusts, and estates with respect to their partners, beneficiaries, and owners. These temporary regulations add a coordination rule in § 1.1441-5(b) to clarify that a U.S. partnership, trust, or estate that makes a payment of U.S. source FDAP income that is a withholdable payment subject to chapter 4 withholding must apply the special rules included in the final chapter 4 regulations for determining when an amount that is a chapter 4 withholdable payment is treated as paid to a partner, beneficiary, or owner. These temporary regulations also cross reference the general rule coordinating withholding under chapter 3 with withholding under chapter 4 to clarify that, for payments included in the gross income of a partner, beneficiary, or owner, a withholding agent must apply the withholding provisions of chapter 4 before determining whether withholding is required under chapter 3 (and, therefore, does not need to withhold under this section when withholding is applied under chapter 4).

Sections 1.1441-5(c) and (e) of the final regulations include requirements for withholding agents to determine the status of a payee of a payment made to a foreign partnership or to a foreign simple or grantor trust, including the requirements for withholding certificates and withholding statements provided by such entities, the requirements for determining when reduced withholding applies with respect to payments made to such entities, and the presumption rules that apply in the absence of reliable documentation. These temporary regulations amend § 1.1441-5(c) and (e) to include revised rules for determining the status of a partner, beneficiary, or owner as a payee of a payment (and when reduced withholding applies). These temporary regulations also amend § 1.1441-5(c) and (e) consistent with the allowance in the chapter 4 regulations for both nonqualified and qualified intermediaries that are foreign partnerships or trusts to provide withholding statements that report chapter 4 withholding rate pools instead of specific payee information. In addition, these temporary regulations amend § 1.1441-5(c) and (e) to coordinate withholding under chapter 3 with withholding applied under chapter 4 on payments made to foreign partnerships and trusts by permitting a withholding agent that has withheld on a withholdable payment made to the partnership or trust under chapter 4 to not also withhold on the payment under chapter 3. The partnership or trust is also not required to withhold with respect to a partner, beneficiary, or owner if withholding under chapter 4 was applied by a withholding agent based on the status of the partnership or trust for chapter 4 purposes.

Sections 1.1441-5(c) and (e) of the final regulations also describe the requirements of withholding foreign partnerships (WPs) and withholding foreign trusts (WTs). These temporary regulations revise these rules to coordinate with the requirements applicable to these entities under the final chapter 4 regulations by requiring WPs and WTs to assume chapter 4 withholding responsibilities (in addition to their chapter 3 withholding responsibilities) with respect to their partners, beneficiaries, and owners. The temporary regulations also add the requirement that a WP or WT that is an FFI obtain status as a participating FFI, registered deemed-compliant FFI, or an FFI treated as a deemed-compliant FFI under an applicable IGA that is subject to due diligence and reporting requirements with respect to its accounts similar to those applicable to a registered deemed-compliant FFI under § 1.1471-5(f)(1). The requirements for withholding certificates provided by WPs and WTs are amended by these temporary regulations to provide that an FFI that

is a WP or WT receiving a withholdable payment must include its chapter 4 status and GIIN (if applicable) on the certificate, in addition to its WP-EIN or WT-EIN. The temporary regulations also reference certain compliance-related provisions that will be included in the revised WP and WT agreements.

The presumption rules for determining a payee's status applicable to foreign partnerships and trusts in § 1.1441-5(c) and (e) of the final regulations are amended by these temporary regulations consistent with the chapter 4 presumption rules that apply to a withholdable payment made to a partnership or trust. Section 1.1441-5(e)(6)(ii) of the final regulations is also amended to provide a revised presumption rule for determining the classification of a foreign trust. The current presumption rule generally provides that a withholding agent may presume a foreign entity to be a complex trust when it cannot determine the status of the trust. Under the revised rule, a withholding agent that has the U.S. TIN and U.S. address for the settlor of a trust must presume such trust to be a U.S. grantor trust when the settlor is a U.S. person. In such a case, the withholding agent would issue an applicable Form 1099 to the U.S. settlor rather than withhold and report the payment under the requirements of chapter 3.

These temporary regulations remove the transition rule in § 1.1441-5(g)(2), for withholding certifications obtained before January 1, 2001.

Q. Coordination With Chapter 4 Withholding for Payments Subject to Reduced Withholding Under an Income Tax Treaty

Section 1.1441-6 of the final regulations specifies the conditions under which withholding under sections 1441, 1442, and 1443 on a payment to a foreign person may be applied at a reduced rate under the terms of an applicable income tax treaty. These temporary regulations add certain provisions to this section to coordinate with withholding and documentation retention requirements applicable under the final chapter 4 regulations.

First, the allowance for reduced withholding at source under § 1.1441-6 of the final regulations is revised to state that even if the requirements of this section are met, withholding under chapter 4 may still apply to payments that are withholdable payments. Second, for payments to fiscally transparent entities, language is added to indicate that a withholding agent must apply the rules of chapter 4 to determine the payee of a withholdable payment for purposes of determining its withholding obligations under chapter 4. This provision clarifies that even when the interest holders of a fiscally transparent entity are eligible for reduced withholding under an applicable treaty, chapter 4 withholding may still apply to a payment made to such entity depending on its chapter 4 status. Finally, based on comments received, the rules regarding the maintenance of documentary evidence for purposes of this section are revised to clarify that a withholding agent maintains the reviewed documents by retaining the original, certified copy, or photocopy of such documents, without regard to whether the withholding agent notes the person who reviewed the documentation. The revised rule conforms to the documentation-maintenance requirements applicable under the final chapter 4 regulations and the new rules in these temporary regulations for maintaining documentary evidence under § 1.6049-5(c).

R. U.S. TIN Requirement and Removal of Transitional Documentation Rules

For payments of certain types of income, § 1.1441-6 of the final regulations provides that a withholding agent can reliably associate a payment with a beneficial owner withholding certificate to support a claim for treaty benefits only if the certificate contains the beneficial owner's U.S. TIN. These temporary regulations revise this rule to allow a withholding agent to rely on a withholding certificate that contains the beneficial owner's foreign TIN issued by a country with which the United States has in effect an income tax treaty or tax information exchange agreement. The Treasury and the IRS believe that, in such cases, a foreign TIN is an effective alternative to a U.S. TIN for purposes of supporting a claim for treaty benefits with respect to income for which a TIN is required. In addition, these temporary regulations remove the transitional documentation provisions that applied to payments made before January 1, 2001.

S. Coordination of § 1.1441-7 With Chapter 4 Withholding

Section 1.1441-7 of the final regulations provides general provisions regarding when a withholding agent has reason to know that it cannot rely on a claim of status for chapter 3 purposes. These temporary regulations revise § 1.1441-7, primarily to coordinate with the standards of knowledge applicable to withholding agents and participating FFIs for purposes of determining the foreign status of a payee under chapter 4.

Section 1.1441-7(b)(3) of the final regulations provides reason to know standards for financial institutions, which limit when a withholding agent that is a financial institution has a reason to know that documentation is unreliable or incorrect to when certain U.S. indicia are associated with the account holder based on the institution's account information. These temporary regulations define a financial institution for this purpose by reference to the definition of financial institution that applies for chapter 4 purposes. In addition, the temporary regulations define account information to include documentation collected for purposes of AML due diligence (as defined under § 1.1471-1(b)(4)), but provide that a withholding agent will not be considered to have reason to know that documentation collected for AML due diligence conflicts with the account holder's claim until the date that is 30 days after the obligation is executed (or the account is opened, in the case of an obligation that is an account with a financial institution). These temporary regulations also add § 1.1441-7(b)(3)(ii) to provide that a withholding agent that has previously documented a preexisting obligation for purposes of chapter 3 or chapter 61 before July 1, 2014 will not be required to review such documentation or the account information associated with the obligation to search for U.S. indicia. If, however, a withholding agent reviews such documentation and it contains a U.S. place of birth for the account holder, or if there is a change in circumstances, the withholding agent will then have reason to know as of the date of the review or change in circumstances that the documentation is unreliable or incorrect and that it must cure such U.S. indicia in order to continue to treat the account holder as a foreign person. This rule therefore provides withholding agents a transition period to address new U.S. indicia, such as a U.S birthplace for an account holder, which were added in the chapter 4 regulations and are incorporated in these temporary regulations.

Sections 1.1441-7(b)(5) through (b)(9) of the final regulations describe the scope of review by a withholding agent that is a financial institution of withholding certificates and documentary evidence, and are revised to incorporate the same U.S. indicia referenced in the final chapter 4 regulations and the same cures specified in those regulations in order for a withholding agent to continue to treat a

payee as a foreign person notwithstanding such U.S. indicia. Section 1.1441-7(b)(5) of the final regulations describes when a withholding certificate furnished by a direct account holder is unreliable or incorrect for establishing foreign status and is revised to add new U.S. indicia for this purpose. The new indicia are a withholding agent's classification of the account holder as a U.S. person in the withholding agent's account files and a current telephone number for the person in the United States (and no telephone number for the person outside of the United States). The cures to treat a payee as a foreign person notwithstanding these indicia conform to the cures provided under chapter 4 and are the same cures that are applicable to a U.S. address. Specifically, § 1.1441-7(b)(5)(i)(A) and (b)(5)(i)(B) are revised to adopt the chapter 4 definition of documentary evidence required to treat a payee as a foreign person notwithstanding U.S. indicia. For a payment made with respect to an offshore obligation, these temporary regulations modify § 1.1441-7(b)(5)(i)(A)(
2
) to coordinate with the chapter 4 cure rules pertaining to participating FFIs (including reporting Model 2 FFIs) by adding that a withholding agent may treat an account holder as a foreign person if the withholding agent obtains documentary evidence establishing foreign status, even if the documentary evidence contains a U.S. address.

These temporary regulations add § 1.1441-7(b)(5)(ii) to provide that a withholding agent has reason to know that a withholding certificate claiming foreign status provided by an individual is unreliable or incorrect if the withholding agent has an unambiguous indication of a place of birth for the individual in the United States. Section 1.1441-7(b)(5)(ii) is consistent with the chapter 4 rules in providing the same documentation requirements as those provided in § 1.1471-4(c)(5)(iv)(B)(
2
)(
ii
) applicable to a participating FFI (including a reporting Model 2 FFI) to cure a U.S. place of birth in order to treat an account holder as a foreign person.

To coordinate with the chapter 4 regulations, § 1.1441-7(b)(5)(iii) of these temporary regulations (formerly § 1.1441-7(b)(5)(ii)) is revised to allow documentary evidence establishing foreign status as an alternative to providing a reasonable explanation to cure standing instructions with respect to an offshore obligation directing the withholding agent to pay amounts to an address or an account maintained in the United States. Similarly, for purposes of an account holder's claim for treaty benefits, § 1.1441-7(b)(6)(iii) is revised to add documentary evidence establishing residence in a treaty country as a cure for standing instructions provided with respect to an offshore obligation directing the withholding agent to pay amounts to an address or an account maintained outside the country in which the account holder claims benefits under an income tax treaty.

Section 1.1441-7(b)(8) of the final regulations provides the standards of knowledge applicable to documentary evidence used to establish a payee's foreign status. Under § 1.1441-7(b)(8) of the final regulations, a withholding agent may not rely on documentary evidence to treat a payee as a foreign person if the withholding agent has U.S. indicia for the payee. These temporary regulations revise § 1.1441-7(b)(8)(ii), consistent with the chapter 4 regulations, to include as U.S. indicia: (i) a classification in the withholding agent's account files that the recipient is a U.S. person, and (ii) a current telephone number for the person in the United States as part of the withholding agent's customer information, provided that the customer information does not include a telephone number for the person outside of the United States. In addition, these temporary regulations revise § 1.1441-7(b)(8)(iii) to add a U.S. place of birth as U.S. indicia. Section 1.1441-7(b)(8)(iii) also provides the same documentation requirements as those in the chapter 4 regulations for treating an account holder as a foreign person notwithstanding a U.S. place of birth. These temporary regulations also add § 1.1441-7(b)(8)(iv) (formerly § 1.1441-7(b)(8)(iii) of the final regulations) and (b)(9)(ii), which treat standing instructions to pay amounts to an address or account maintained in the United States or outside of a treaty country as U.S. indicia, to coordinate with the chapter 4 regulations by allowing the account holder to cure the U.S. indicia by providing a valid beneficial owner withholding certificate to establish foreign status or residence in a treaty country (as applicable).

These temporary regulations add § 1.1441-7(b)(11) to provide limits on reason to know for withholding agents that are financial institutions in the case of multiple obligations belonging to a single person, which limits are consistent with those provided in the chapter 4 regulations. Also, in response to comments seeking clarification, § 1.1441-7(b)(12) is added to define what constitutes a reasonable explanation supporting a claim of foreign status (which also applies under the chapter 4 regulations).

Section 1.1441-7(c) of the final regulations provides that a withholding agent may designate an agent to fulfill its obligations under chapter 3. These temporary regulations revise § 1.1441-7(c) to harmonize with the chapter 4 regulations for the requirements of a withholding agent's use of an agent to fulfill its withholding obligations. The revised rules allow a withholding agent to appoint an agent (including a foreign person) if there is a written agreement between the withholding agent and the person acting as agent, the books and records of the agent are available to the withholding agent, and the agent files Form 8655, “Reporting Agent Authorization,” with the IRS if the agent (including any sub-agent) is acting as a reporting agent for purposes of filing Form 1042 or making tax deposits and payments. These rules replace the rules that pertained to authorized foreign agents, which required that the foreign agent's books and records be available to the IRS for examination and that the withholding agent notify the IRS of its appointment of a foreign agent. Under the new rules, the withholding agent remains liable for the acts of its agent (including a foreign agent) and thus the withholding agent, rather than its agent, is required to substantiate its compliance with its withholding obligations.

T. Coordination of § 1.1461-1 With Chapter 4 Withholding

Section 1.1461-1(b) of the final regulations provides requirements for making an income tax return on Form 1042 for income paid that the withholding agent is required to report on an information return on Form 1042-S. These temporary regulations revise § 1.1461-1(b) consistent with chapter 4 to allow a withholding agent to file a single Form 1042 to report amounts under chapters 3 and 4.

Section 1.1461-1(c)(1)(i) of the final regulations provides requirements regarding the manner in which withholding agents report information about payments made to foreign persons for purposes of chapter 3. This section states that the Form 1042-S shall be prepared in such manner as the form and accompanying instructions prescribe. The instructions to Form 1042-S (as previewed in draft form on November 1, 2013) are being revised to incorporate the requirements for reporting on Form 1042-S for chapter 4 purposes and to remove language that currently permits a withholding agent to include more than one type of income or other payment on a recipient copy of

the Form 1042-S. To allow sufficient time for withholding agents to adapt to these requirements, however, a withholding agent will be permitted to include more than one type of income or other payment on the recipient copy of the Form 1042-S for calendar year 2014. Starting with calendar year 2015, the Form 1042-S and accompanying instructions will require a separate Form 1042-S for each type of income or other payment.

Section 1.1461-1(c)(1)(ii) of the final regulations lists categories of persons that are treated as recipients with respect to amounts subject to chapter 3 reporting and other categories of persons that are not treated as recipients of such amounts. These temporary regulations amend § 1.1461-1(c)(1)(ii) consistent with chapter 4 to add as recipients: (i) territory financial institutions treated as U.S. persons under § 1.1441-1(b)(2)(iv)(A); (ii) foreign intermediaries and nonwithholding foreign partnerships and trusts that are participating FFIs (including reporting Model 2 FFIs) or registered deemed-compliant FFIs (including reporting Model 1 FFIs) with respect to a chapter 4 withholding rate pool of U.S. payees; and (iii) participating FFIs (including reporting Model 2 FFIs) or registered deemed-compliant FFIs (including reporting Model 1 FFIs) that are recipients of withholdable payments under § 1.1474-1(d)(1)(ii)(A)(
1
)(
iii
). These temporary regulations amend § 1.1461-1(c)(1)(ii) consistent with chapter 4 to treat as persons that are not recipients: (i) payees included in chapter 3 and chapter 4 withholding rate pools; (ii) authorized foreign agents (to coordinate with revised rules for authorized agents under § 1.1441-7(c) of these temporary regulations); (iii) NQIs and flow-through entities unless they are FFIs treated as recipients under § 1.1474-1(d)(1)(ii)(A)(
1
)(
iii
) (because they have identified the payment as allocable to a chapter 4 withholding rate pool); and (iv) certain territory financial institutions that are not treated as U.S. persons under § 1.1441-1(b)(2)(iv)(A). These temporary regulations also add new § 1.1461-1(c)(1)(ii)(C), which provides that, with respect to the reporting of a chapter 4 reportable amount, a withholding agent must report the chapter 4 status of the recipient consistent with § 1.1474-1(d)(1)(ii)(A).

Section 1.1461-1(c)(3) of the final regulations describes the specific information required to be reported on Form 1042-S. These temporary regulations revise § 1.1461-1(c)(3)(i) to require the reporting of a withholding agent's chapter 3 status code. The chapter 3 status codes are listed in the instructions to Form 1042-S for calendar year 2014 and, with respect to an entity, the chapter 3 status code is generally the entity's classification for U.S. tax purposes. These temporary regulations also revise § 1.1461-1(b)(3)(iii) to require that, in the case of a payment subject to withholding under chapter 3 but not subject to withholding under chapter 4, a withholding agent must report the basis for exempting the payment from withholding under chapter 4. The instructions to Form 1042-S for calendar year 2014 will add chapter 4 exemption codes to Form 1042-S for this purpose.

These temporary regulations also add provisions in § 1.1461-1(c)(4)(i) and (c)(4)(ii) to coordinate the reporting requirements for payments to intermediaries and flow-through entities when a withholding agent is provided information for a chapter 4 withholding rate pool. Also, § 1.1461-1(c)(4)(i)(D) is removed by these temporary regulations to coordinate with the removal of the rules pertaining to authorized foreign agents in § 1.1441-7 of these temporary regulations.

Section 1.1461-1(c)(5) of the final regulations provides the magnetic media filing requirements for withholding agents filing Forms 1042-S. These temporary regulations revise this rule for financial institutions consistent with chapter 4 to require financial institutions to file information reports on magnetic media without regard to whether the financial institution files 250 or more information returns annually. See § 301.1474-1(a).

III. Changes to Information Reporting Provisions Under Chapter 61

A. General Coordination of Information Reporting Under § 1.6049-4 With Chapter 4

Section 1.6049-4 of the final regulations provides rules for determining whether an information return is required under section 6049 for a payment of interest or for certain original issue discount (OID) and includes definitions of terms used for purposes of section 6049 and other sections of chapter 61.

1. Exceptions to Reporting Under § 1.6049-4(c)(4) To Coordinate With Information Reporting Under FATCA

Section 1.6049-4(c) of the final regulations provides exceptions with respect to whether an information return is required with respect to a payment of interest or certain OID. These temporary regulations add a new exception in § 1.6049-4(c)(4)(i) for a non-U.S. payor that is also a participating FFI (including a reporting Model 2 FFI) or a registered deemed-compliant FFI (including a reporting Model 1 FFI) that reports an account holder of a U.S. account pursuant to the requirements under chapter 4 (or an applicable IGA), provided that such information includes the account holder's TIN. For the requirements to report an account as a U.S. account, see the FFI agreement for participating FFIs (including reporting Model 2 FFIs), § 1.1471-5(f)(1) for registered deemed-compliant FFIs, and the applicable Model 1 IGA for reporting Model 1 FFIs.

These temporary regulations also add a new exception in § 1.6049-4(c)(4)(ii) for a participating FFI (including a reporting Model 2 FFI) or registered deemed-compliant FFI (including a reporting Model 1FFI), regardless of whether the FFI is a U.S. payor or non-U.S. payor, from the requirement to report a payment of interest for the year in which the interest is paid. The exception applies if the account holder of an account maintained by the FFI receives a payment of interest that is not subject to withholding under chapter 3 or backup withholding under section 3406 and either the FFI reports the account consistent with the pools described in § 1.1471-4(d)(6) (referring to recalcitrant account pools) or, in the case of a reporting Model 1 FFI, the account holder has not provided information sufficient for the FFI to confirm the U.S. or non-U.S. status of the account holder and the FFI treats and reports the account as a U.S. reportable account under an applicable IGA. This new exception to reporting may apply to payments made by an FFI to an account holder that it must presume to be a U.S. non-exempt recipient if the payment is not subject to withholding under chapter 3 and is not subject to backup withholding under section 3406 because the amount is paid outside the United States with respect to an offshore obligation.

Finally, the temporary regulations add § 1.6049-4(c)(4)(iii) to specify the circumstances in which an FFI may, on a withholding statement provided to a payor, allocate an interest payment to a U.S. non-exempt recipient within a pool (referred to as a “U.S. payee pool”), in lieu of providing payee-specific information with respect to each U.S. non-exempt recipient, for purposes of applying the exceptions described in paragraphs § 1.6049-4(c)(4)(i) and (c)(4)(ii). These temporary regulations provide that a participating FFI (including a reporting Model 2 FFI) or registered deemed-compliant FFI

(including a reporting Model 1 FFI) may allocate a payment to a chapter 4 withholding rate pool of U.S. payees on an applicable withholding statement to the extent the FFI is excepted from reporting the payment under § 1.6049-4(c)(4)(i) or both the FFI is excepted from reporting under § 1.6049-4(c)(4)(ii) and the payment is not subject to withholding under chapter 4.

The coordination rules in § 1.6049-4(c)(4) that provide an exception from the requirement to report information with respect to certain account holders of an FFI also apply for purposes of information reporting under sections 6041, 6042, and 6045.

2. Additions and Revisions to Definitions in § 1.6049-4(f) Related to Interest Reporting Under §§ 1.6049-4 and 1.6049-5

Section 1.6049-4(f) of the final regulations provides definitions that apply for purposes of section 6049 and that are also relevant for other sections of chapter 61. These temporary regulations amend certain of the definitions and add additional definitions to coordinate with terms used under chapter 4. First, these temporary regulations add to § 1.6049-4(f) the terms
chapter 4 withholding rate pool, participating FFI, registered deemed-compliant FFI, reporting Model 1 FFI, reporting Model 2 FFI, recalcitrant account holder, non-consenting U.S. account,
and
intergovernmental agreement (IGA)
to coordinate and provide helpful cross-references to navigate these rules.

Second, these temporary regulations add the term
offshore obligation,
which includes accounts of banks and other financial institutions and obligations (other than such accounts) maintained outside the United States, in § 1.6049-5(c)(1) (as discussed in section III.D of this preamble).

Finally, these temporary regulations add to § 1.6049-4(f)(16) the term
paid and received outside the United States
. The definition of paid and received outside the United States is relevant for purposes of determining the circumstances under which (i) a payment of interest from non-U.S. sources is reportable by a non-U.S. payor, (ii) the exception to backup withholding under § 31.3406(g)-1(e) applies with respect to a payment of interest, and (iii) an agent of a payee (other than a U.S. middleman) is excluded from reporting a payment of interest on an obligation described in § 1.6049-5(b)(10). This new term is largely based on the description of amounts paid outside the United States in § 1.6049-5(e) of the final regulations. Section 1.6049-5(e) (as modified by these temporary regulations) describes when a payment is made outside the United States, which is relevant for determining cases in which a payor may rely upon documentary evidence in lieu of an applicable withholding certificate to establish a payee's foreign status for a payment made with respect to an offshore obligation.

The new definition of an amount paid and received outside the United States under § 1.6049-4(f)(16) also applies for purposes of information reporting rules under sections 6041 and 6042 and for determining whether the exception to backup withholding under section 3406 applies to payments reportable under sections 6041 and 6042 and to gross proceeds reportable under section 6045.

B. Further Coordination of Interest Reporting Under § 1.6049-5(b) With Chapter 4

Section 1.6049-5(b) of the final regulations describes payments that are not treated as interest or OID for purposes of section 6049. Accordingly, payments described in § 1.6049-5(b) of the final regulations are not subject to reporting under section 6049. These temporary regulations modify the rule for payments with respect to foreign intermediaries (which has been renumbered as new § 1.6049-5(b)(15)) and add a new exception in § 1.6049-5(b)(14) for certain payments that a payor or middleman can reliably associate with documentation or certain other information provided by a foreign intermediary or flow-through entity.

1. Exception to Reporting Interest Payments Made to Foreign Intermediary or Flow-Through Entity Under New § 1.6049-5(b)(14)

These temporary regulations add a new exception from reporting in § 1.6049-5(b)(14). The exception applies to payments made by a payor or middleman that can be reliably associated with documentation to treat the payments as made to a foreign intermediary or flow-through entity, provided that the payor or middleman has obtained a withholding statement from the foreign intermediary or flow-through entity allocating the payment (or portion thereof) to a chapter 4 withholding rate pool or to specific payees to which withholding under chapter 4 applies. This exception for payments made to a chapter 4 withholding rate pool coordinates with the requirements under the chapter 4 regulations describing the circumstances under which a withholding agent may, with respect to a chapter 4 withholdable payment, rely on an FFI withholding statement (described in § 1.1471-3(c)(3)(iii)(B)(
2
)) that allocates the payment to a chapter 4 withholding rate pool of nonparticipating FFIs and recalcitrant account holders or a chapter 4 withholding statement that allocates the payment to a chapter 4 withholding rate pool of nonparticipating FFIs, instead of requiring payee-specific information with respect to such payees and account holders. For purposes of applying this exception, these temporary regulations also provide that a payor or middleman may reliably associate a payment with a chapter 4 withholding rate pool of U.S. payees on a withholding statement provided by an FFI if the payor or middleman identifies the intermediary or flow-through entity receiving the payment as either a participating FFI (including a reporting Model 2 FFI) or a registered deemed-compliant FFI (including a reporting Model 1 FFI) (by applying the due diligence requirements described in § 1.1471-3(d)(4)).

The exception to reporting added by these temporary regulations in § 1.6049-5(b)(14) shall also apply for purposes of information reporting under sections 6041 and 6042.

2. Exception to Reporting Interest Payments Made by a Foreign Intermediary Under Renumbered § 1.6049-5(b)(15)

These temporary regulations renumber the exception from reporting that was included in § 1.6049-5(b)(14) of the final regulations as new § 1.6049-5(b)(15) for a foreign intermediary (or a U.S. branch not treated as a U.S. person under § 1.1441-1(b)(2)(iv)) receiving a payment from a payor, if the intermediary furnishes to the payor or middleman the information required for the payor or middleman to report the payment under section 6049. This exception does not apply to a foreign intermediary that knows that the payments are required to be reported by the payor or middleman under § 1.6049-4 and were not so reported. These temporary regulations also clarify that a territory financial institution that is not treated as a U.S. person under § 1.1441-1(b)(2)(iv) is excepted from reporting under this paragraph if it provides the information required for the payor or middleman from which it is receiving a payment to report. These temporary regulations incorporate by cross-reference the exception from reporting provided in § 1.6049-4(c)(4) (referring to rules that exempt certain FFIs that are non-U.S. payors from reporting under chapter 61 if the payments are made to account holders that will be reported by the FFI and, in

narrower circumstances, rules that exempt certain FFIs that are U.S. or non-U.S. payors from reporting under chapter 61 on certain presumed U.S. non-exempt recipients), such that an intermediary need not report under this paragraph if the payment is not required to be reported under § 1.6049-4(c)(4).

The exception to reporting in § 1.6049-5(b)(15) also applies for purposes of information reporting under sections 6041, 6042, and 6045. (For a discussion of the applicable exemptions from reporting under sections 6041, 6042, and 6045 for certain FFIs that report information about their account holders under chapter 4 or an applicable IGA, see the discussion of the coordination rules under § 1.6049-4(c)(4) in section III.A.1 of this preamble.)

C. Exceptions to Reporting for Certain Payments Made on Behalf of a PFIC

These temporary regulations add two new exceptions to reporting that apply to paying agents and stock transfer agents making certain payments on behalf of a corporation described in section 1297(a) (a passive foreign investment company or PFIC). The first exception relates to dividend payments made by a paying agent on behalf of a PFIC as described in § 1.6042-2(a)(1)(i)(B). The second exception relates to certain payments made by a stock transfer agent with respect to a redemption of PFIC stock as described in § 1.6045-1(c)(3)(xiv). Both exceptions apply if the agent (that is, the paying agent or stock transfer agent, as applicable) satisfies four requirements. First, the agent must obtain, for each year that the agent relies on this exception, a written statement from the PFIC that states that the corporation is described in section 1297(a). This written certification from the PFIC must be signed by an officer of the corporation, and the agent must have no reason to know that the written certification is unreliable or incorrect. Second, the agent must identify, prior to payment, the PFIC as a participating FFI (including a reporting Model 2 FFI) or a reporting Model 1 FFI in accordance with the requirements of § 1.1471-3(d)(4) (as if, for purposes of that section, the paying agent or stock transfer agent were a withholding agent and as if the PFIC were a payee). Third, the agent must obtain, before the year the payment would otherwise be reported, a written certification representing that the PFIC will report information with respect to the payment (or the account to which the p

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2014-03991. Public record. Not legal advice.