General Revision of Regulations Relating to Withholding of Tax on Certain U.S. Source Income Paid to Foreign Persons and Related Collection, Refunds, and Credits; Revision of Information Reporting and Backup Withholding Regulations; and Removal of Regulations Under Part 35a and of Certain Regulations Under Income Tax Treaties

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1, 31, 35a, 301, 502, 503, 509, 513, 514, 516, 517,

520, and 521

[INTL-O62-90; INTL-0032-93; INTL-52-86; INTL-52-94]

RINS 1545-AO27; 1545-AR90; 1545-AL99; 1545-AT00

General Revision of Regulations Relating to Withholding of Tax on

Certain U.S. Source Income Paid to Foreign Persons and Related

Collection, Refunds, and Credits; Revision of Information Reporting and

Backup Withholding Regulations; and Removal of Regulations Under Part

35a and of Certain Regulations Under Income Tax Treaties

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and withdrawal of notice of

proposed rulemaking.

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SUMMARY: This document contains proposed regulations relating to the

withholding of income tax under sections 1441 and 1442 on certain U.S.

source income paid to foreign persons, the related tax deposit and

reporting requirements under section 1461, and the related collection,

refunds, and credits of withheld tax under sections 1461 through 1463

and section 6402. Additionally, this document contains proposed

regulations relating to the statutory exemption under sections 871(h)

and 881(c) for portfolio interest. This document proposes to remove

certain temporary employment tax regulations under the Interest and

Dividend Compliance Act of 1983 and to amend existing regulations under

sections 6041A and 6050N. This document also proposes changes to

proposed regulations contained in project number INTL-52-86, published

on February 29, 1988 (53 FR 5991) under sections 6041, 6042, 6045, and

6049. This document proposes related changes to the regulations under

sections 163(f), 165(j), 3401, 3406, 6114, and 6413 and proposes

further changes to the proposed regulations under section 6109

contained in project number IL-0024-94 published on June 8, 1995 (60 FR

30211). This document proposes to remove certain regulations under

income tax treaties. The IRS and Treasury have reviewed current

withholding and reporting procedures applicable to cross-border flows

of income and have concluded that changes are necessary in view of the

substantial growth in such flows over

[[Page 17615]]

the past 15 years. This document also removes proposed regulations

published on July 12, 1976 (41 FR 28517) and September 10, 1984 (49 FR

355110), respectively.

DATES: Written comments and requests for a public hearing must be

received by July 22, 1996.

ADDRESSES: Send submissions to: CC:DOM:CORP:R ([INTL-0032-93]), room

5228, Internal Revenue Service, POB 7604, Ben Franklin Station,

Washington, DC 20044. In the alternative, submissions may be hand

delivered between the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R

([INTL-0032-93]), Courier's Desk, Internal Revenue Service, 1111

Constitution Avenue NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Philip Garlett, telephone (202) 622-

3880 (not a toll-free number), for questions on proposed regulations

under sections 1441, 1442, 1461, 1462, 1463, 3401, 6402, and 6413;

Gwendolyn A. Stanley, telephone (202) 622-3860 (not a toll-free number)

for questions on payments to partnerships; Carl Cooper, telephone (202)

622-3840 (not a toll-free number) for questions on proposed regulations

under sections 163(f), 165(j), 871(h) and 881(c) and on withholding

agreements; Teresa Burridge Hughes, telephone (202) 622-3880 (not a

toll-free number), for questions on proposed regulations under sections

6041 through 6049, 6050N; Teresa Burridge Hughes, telephone (202) 622-

3880 and Renay France, telephone (202) 622-4910, for questions on

proposed regulations under section 3406; Elissa Shendalman (202) 622-

3870 on proposed regulations under section 6045 and 6049 relating to

the reporting of payments made in a currency other than the U.S. dollar

or transactions subject to section 988; Lilo Hester, telephone (202)

874-1490 (not a toll-free number), for questions on proposed

regulations under section 6109; David F. Bergkuist, telephone (202)

622-3860 (not a toll-free number), for questions on proposed

regulations under section 6114.

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collections of information contained in this notice of proposed

rulemaking have been submitted to the Office of Management and Budget

for review in accordance with the Paperwork Reduction Act of 1995 (44

U.S.C. 3507).

Comments on the collection of information should be sent to the

Office of Management and Budget, Attn: Desk Officer for the Department

of the Treasury, Office of Information and Regulatory Affairs,

Washington, DC 20503, with copies to the Internal Revenue Service,

Attn: IRS Reports Clearance Officer, T:FP, Washington, DC 20224.

Comments on the collections of information should be received by June

21, 1996.

An agency may not conduct or sponsor, and a person is not required

to respond to, a collection of information unless the collection of

information displays a valid control number.

The collections of information relating to foreign persons that

receive payments subject to withholding under sections 1441 or 1442 of

the Internal Revenue Code are in Secs. 1.1441-1(e), 1.1441-4(a)(2),

1.1441-4(b) (1) and (2), 1.1441-4(c), (d) and (e), 1.1441-5(a)(2)(ii),

1.1441-5(b), 1.1441-6(b) and (c), 1.1441-8(b), 1.1441-9(b), 1.1461-1(b)

and (c), 301.6114-1, and 301.6402-3(e), 31.3401(a)(6)-1(e). This

information is required by the IRS to identify and verify the status of

persons to whom payments of U.S. source income is made. This

information will be used to claim foreign person status and, in

appropriate cases, to claim residence in a country with which the

United States has an income tax treaty in effect, so that withholding

at a reduced rate of tax may be obtained at source. The likely

respondents and recordkeepers are individuals, state or local

governments, farms, business or other for-profit institutions, federal

agencies, nonprofit institutions, and small business or organizations.

Responses to this collection of information are mandatory.

Books or records relating to a collection of information must be

retained as long as their contents may become material in the

administration of any internal revenue law. Generally, tax returns and

tax return information are confidential, as required by 26 U.S.C. 6103.

The burden for the reporting requirement contained in Secs. 1.1441-

1(e)(2), 1.1441-4(a)(2), 1.1441-4(b)(2), 1.1441-4(c)(2), 1.1441-4(d),

1.1441-4(e)(1), (2) and (3), 1.1441-6(b), 1.1441-8(b), 1.1441-9(a)(2),

301.6114-1(b)(4), and 301.6402-3(e) will be reflected in the burden of

Form W-8, Form 8833, Form 8233, and the income tax return of a foreign

person filed for purposes of claiming a refund of tax.

The collection of information requirement for corporations

contained in Sec. 1.6049-4(c) will be reflected in the burden of Form

W-8.

The requirement for the recordkeeping requirement in Sec. 1.6049-

5(c)(1) (ii) and (iii) is in an existing regulation, appearing in TD

7966 that was approved under OMB number 1545-0112.

Background

This document contains proposed amendments to the Income Tax

Regulations (CFR parts 1, 31, 35a and 301) under sections 163(f),

165(j), 871, 881, 1441, 1442, 1461, 1462, 1463, 3401, 3406, 6041,

6041A, 6042, 6045, 6049, 6050N, 6109, 6114, 6402, and 6413 of the

Internal Revenue Code (Code). This document also proposes to remove

certain regulations under income tax treaties.

Explanation of Provisions

A. Current Rules

These proposed regulations deal with the withholding of tax under

section 1441, 1442, or 1443 on amounts paid to foreign persons,

procedures for claiming foreign status to avoid backup withholding

under section 3406 on certain payments, and the reporting to the IRS of

payments to foreign persons. Reporting to the IRS may be required under

sections 6011 and 1461 or under the reporting provisions of chapter 61

of the Code, such as sections 6041, 6041A, 6042, 6044, 6045, 6049,

6050H, and 6050N, (the 1099 reporting provisions).

1. U.S. Income Tax on U.S. Source Income of Foreign Persons

Under sections 871(a) and 881(a) of the Code, non-resident alien

individuals and foreign corporations are subject to a 30 percent tax on

most items of income they receive from sources within the United States

that are not effectively connected with the conduct of a trade or

business in the United States. Income taxable under these provisions

includes interest, dividends, royalties, compensation, and other fixed

or determinable annual or periodical income. The tax liability imposed

under section 871(a) and 881(a) is generally collected by way of

withholding at source under section 1441(a) (for payments to non-

resident alien individuals and foreign partnerships) or under section

1442(a) (for payments to foreign corporations). Special withholding

provisions apply under section 1443 to payments of certain income to

foreign tax-exempt entities.

The 30 percent rate is often reduced under the Code or an income

tax treaty. Under current regulations, a withholding agent may

generally rely on a statement furnished by, or on behalf of, the

beneficial owner certifying entitlement to a reduced rate. For example,

the portfolio interest exception under section 871(h) and 881(c) is

conditioned upon the beneficial owner

[[Page 17616]]

of the interest providing a statement of foreign status to the U.S.

withholding agent, which can be provided on a Form W-8. See

Sec. 35a.9999-5(b), A-9. If a reduction is claimed under an income tax

treaty, the withholding agent may generally rely on a Form 1001

provided by, or on behalf of, the beneficial owner claiming residence

in a treaty country. For dividends, however, no certification is

required and the withholding agent may generally rely on the address of

the payee in the treaty country. The procedural requirements for

claiming a reduced rate of withholding may vary depending upon the type

of income, the taxpayer, or whether a treaty is involved.

A withholding agent is generally required to file an annual income

tax return on Form 1042 to report amounts upon which a tax was actually

withheld under chapter 3 of the Code or would have been required to be

withheld but for an exemption under the Code, the regulations, or an

income tax treaty. An information return on a Form 1042-S must be

attached to the Form 1042 and report each recipient's name and address,

amounts paid, and taxes withheld, if any. Section 1.1461-2(b) and (c).

2. Backup Withholding

Under chapter 61 of the Code and section 3406, a reportable

payment, as defined in section 3406(b), is subject to backup

withholding at the rate of 31 percent unless the payor receives a

taxpayer identifying number (TIN), generally on a Form W-9, and, for

reportable interest and dividends, a certification that the payee is

not subject to notified payee underreporting. The payor of a reportable

payment is also generally required to file Form 1099 with the IRS

showing the name, address, and TIN of the payee; the amount of the

payment; and the amount that was withheld, if any. The payor must also

provide a copy of Form 1099 to the payee, who must report the payment

on an income tax return to the extent the payment constitutes gross

income. A payor that fails to obtain a TIN or other required

information or to backup withhold when required under section 3406 may

also be liable under section 3403 for the amount that should have been

withheld. Information reporting by payors is critical to a matching

system that allows the IRS to match information provided by payors with

income reported on a payee's return.

The information reporting provisions of chapter 61 provide guidance

to help payors determine when payments are made to a foreign person

and, therefore, exempt from 1099 reporting and backup withholding.

Generally, depending upon the type of payment involved, a payor may

rely on a certification of foreign status made on Form W-8, Form 1001,

Form 4224, or on documentary evidence. Therefore, even though an amount

is exempt from withholding under chapter 3 of the Code if earned by a

foreign person (e.g., gain from the sale of securities), a payor must

nevertheless comply with specified certification procedures in order to

avoid being subject to backup withholding. Only amounts subject to

reporting under the 1099 reporting provisions can be subject to backup

withholding under section 3406. Therefore, payments to foreign persons

that are exempt from reporting are also exempt from backup withholding.

B. Need for Reform

The IRS and Treasury have reviewed the current withholding and

reporting procedures applicable to cross-border flows of income and

have concluded that changes are necessary in view of the substantial

growth in such flows over the past 15 years. The IRS and Treasury have

concluded that allowing the benefit of the reduced rate at source

continues to be desirable. A system that reduces withholding at source

permits an investor to receive its full income without the

administrative costs and delays that can occur when applying for a

refund of withheld taxes. This advantage, however, is necessarily

accompanied by the need to rely, in part, on withholding agents.

Withholding agents perform an important compliance function as

recipients of the necessary documentation substantiating claims of

foreign status and of reduced rates of withholding and as providers of

information to the IRS.

One of the important objectives of the proposed revisions is to

eliminate unnecessary burdens that the lack of standardization and

coordination of current procedures imposes on withholding agents. For

example, under current rules, different forms must be used for

different purposes; different standards of proof apply for establishing

foreign status for purposes of the 1099 reporting provisions (and the

related backup withholding provisions) and of the Chapter 3 withholding

provisions. Also, the revisions seek to facilitate compliance by

clarifying many of the uncertainties under current procedures (e.g.,

the scope of due diligence standards imposed on withholding agents).

This proposal also addresses the important issue of payments to

intermediaries (nominees, agents, etc.) and whether, in the case of

interest, dividends, and gross proceeds from publicly traded or widely

held obligations or stocks, intermediaries should certify status on

behalf of beneficial owners and, if so, how.

Under current rules, nominee procedures work differently for

different types of income. For example, a U.S. broker redeeming a

short-term obligation held by a foreign financial institution as an

agent may exempt the payment from 1099 reporting and backup withholding

and grant the exemption from the 30 percent tax under section 871(a)

without having to obtain certificates or documentation. If the foreign

financial institution makes a payment to another person offshore then

no certification or documentation is required. On the other hand if,

for example, the foreign financial institution, remitted the amount to

a person in the United States through a U.S. office, it might have to

obtain a Form W-8 or a Form W-9. In contrast, interest on registered

obligations may not qualify as portfolio interest under sections 871(h)

and 881(c) unless the U.S. withholding agent receives a statement that

the beneficial owner of the obligation is not a U.S. person (see

section 871(h)(2)(B)(ii)). Current regulations implement this condition

by requiring that a beneficial owner certification be passed up through

a chain of intermediaries to the U.S. withholding agent. These

procedures have proved difficult to implement in a number of cases and

these proposed regulations offer alternative procedures. The proposed

revisions, therefore, respond to the concerns expressed by various

representatives of the financial community regarding the cost of

complying with current procedures and potential harm to the

competitiveness of U.S. financial institutions in handling investment

transactions in the United States and abroad.

These proposed regulations are also responsive to the Congressional

mandate in section 342 of the Tax Equity and Fiscal Responsibility Act

of 1982 (TEFRA) that Treasury consider a range of options for replacing

the address/self-certification method of administering income tax

treaty benefits. Since 1982, the IRS and Treasury have studied several

options for improving the withholding tax procedures, including a

system of certification of residence in a treaty country and refund

systems. At hearings held in February of 1985 on proposed regulations

issued in 1984 under section 1441, comments from the public and several

U.S. treaty partners made it apparent that certification requirements,

[[Page 17617]]

as proposed, would create too many administrative problems for payments

made through nominees. The proposed revisions take these comments into

account and propose to rely on procedures essentially identical to the

procedures proposed for portfolio interest on registered obligations.

The streamlining of current procedures and the implementation of

workable nominee certification procedures represent a substantial

simplification and reduction of burden. The IRS and Treasury expect

that this, in turn, should result in greater compliance and improve the

ability by withholding agents and the IRS to detect abusive claims

under U.S. income tax treaties or under the Code.

C. Summary of Proposal

1. Changes Affecting Portfolio-Type Investments

The proposed regulations under section 1441 and related Code

provisions would substantially revise some aspects of the current

system for withholding on, and reporting of, amounts paid to foreign

persons. Current certification procedures (i.e., Forms W-8, 1001, 4224,

etc.,) would be unified and reliance standards would be clarified in an

effort to streamline the processing of cross-border payments,

particularly by banks and other financial institutions. Most forms (W-

8, 1001, 4224, 8709) are proposed to be combined into a single form

(Form W-8). In addition, taxpayer identifying numbers are not required

to be stated on withholding certificates, with certain limited

exceptions that do not affect market-based transactions. These changes

are important steps toward reducing the burden on withholding agents

and assisting taxpayer compliance.

The address rule for claiming tax treaty benefits for dividends is

proposed to be eliminated. Instead, dividends would be made subject to

the same beneficial owner and intermediary certification procedures as

are proposed for portfolio interest on registered obligations. It is

also proposed to apply the same procedures to bank deposit interest (as

described in section 871(i)(2)(A)). On the other hand, the documentary

evidence procedures currently in effect for bank deposit interest on

accounts held with foreign branches would be continued and would be

applied as well to offshore payments of dividends on publicly traded

stocks and portfolio interest on registered obligations. Therefore,

documentary evidence would become the general rule for dividends and

interest earned on accounts held with foreign branches. These proposed

changes illustrate the effort by the IRS and Treasury to eliminate

unnecessary procedural differences in order to reduce the burden on

withholding agents.

The proposal does not generally affect other important classes of

investment transactions. Thus, current portfolio interest rules for

bearer obligations (including commercial paper), convertible

obligations, pass-through certificates, as well as rules for broker

proceeds and short term obligations would be retained. In order to

further simplify compliance, the regulations under section 165(j)

(Sec. 1.165-12) are proposed to be revised to eliminate the

requirements that, in connection with delivery of bearer obligations,

holders receive statements and send confirmations. Provisions regarding

foreign-targeted registered obligations are to be retained. However,

because these special procedures have been rarely used, comments are

solicited on their usefulness and whether they should be retained.

Foreign intermediary procedures as currently applicable to

portfolio interest (which are proposed to become applicable to

dividends and bank deposit interest as well) are substantially revised

by providing several options, allowing different taxpayers to comply in

different ways. These options recognize that it is appropriate to adapt

withholding requirements to accommodate different types of transactions

and should provide substantial relief from current requirements.

In order to allow sufficient time for transition, the regulations

are proposed to be generally effective for payments made after 1997. In

addition, withholding agents would be allowed to continue to rely on

existing certificates after that date until their validity expires as

determined under current rules. Comments are solicited on whether these

proposed effective dates leave adequate time to implement necessary

system changes.

The regulations proposed in 1988 regarding the reporting by U.S.

banks of bank deposit interest paid to Canadian residents are

finalized, effective for payments made on or after January 1, 1997 with

respect to Forms W-8 furnished on or after that date. See the Rules and

Regulations section of this issue of the Federal Register.

2. Intermediary Procedures Options for Portfolio Interest, Dividends on

Publicly Traded Stock, and Bank Deposit Interest

The proposed regulations offer intermediary certification options

designed to simplify compliance by withholding agents. These procedures

would be mostly relevant to portfolio interest on registered

obligations, dividends on publicly traded stocks (eliminating the

address rule), and interest paid on bank deposits (as described in

section 871(i)(2)(A)). First, for portfolio interest on registered

obligations, the current certification procedures would be retained, as

an option and are not reproposed. See Sec. 35a.9999-5(b), A-9. These

rules will be included in final regulations in proposed Sec. 1.871-

14(c)(2)(iii) and, accordingly, that section of the proposed

regulations is reserved. Preserving the existing regulations is

designed to accommodate those taxpayers and withholding agents for whom

the current rules work appropriately.

The regulations propose to add two new procedures. First, a

withholding agent would be allowed to rely on an intermediary Form W-8

furnished on behalf of one or more beneficial owners (or other

intermediaries) without having to obtain beneficial owner documentation

if the intermediary has entered into a withholding agreement with the

IRS and, thus, is a ``qualified intermediary.'' In a chain of

intermediaries, an intermediary would be allowed to rely on the

intermediary Form W-8 of another qualified intermediary. If the other

intermediary is not qualified, the qualified intermediary would

generally be required to obtain beneficial owner documentation from the

other non-qualified intermediary. The qualified intermediary would then

pass such documentation up the chain or rely on such documentation when

issuing its intermediary Form W-8.

Under the withholding agreement procedure, a qualified intermediary

would agree with the IRS to obtain such documentation or certifications

as the agreement would specify. It is contemplated that institutions

that are subject to bona fide ``know-your-customer'' procedures under

their domestic laws will generally be permitted to rely on such

procedures. The withholding agreement will generally include provisions

for beneficial owner information to be reported or made available to

the IRS and for the IRS to audit such information. In appropriate

cases, the reporting and audit may be limited to

[[Page 17618]]

the beneficial ownership information pertaining to U.S. source income

(other than gross proceeds) of U.S. customers or to an audit of the

reports prepared by, and the methodology employed by, the approved

external auditors of the qualified intermediary.

The regulations propose a second intermediary procedure permitting

a foreign agent of a U.S. withholding agent to act on behalf of the

withholding agent. While the U.S. withholding agent would remain liable

for the acts (or failures to act) of its agent, the proposed procedure

streamlines the withholding process as the foreign agent would collect

the appropriate documentation on behalf of the U.S. withholding agent

and report beneficial owner information to the IRS without having to

furnish the documentation to the U.S. withholding agent. The

documentation requirements under this procedure would be the same as

those normally applicable to withholding agents.

Lastly, the proposed regulations provide that the U.S. competent

authority may agree to special withholding procedures with a foreign

competent authority under an income tax treaty. The United States

intends to consult with its tax treaty partners before implementing

changes that would affect its relationship with its treaty partners.

3. Use of Taxpayer Identifying Number

A taxpayer identifying number (TIN) is not required to be shown on

withholding documents provided for income on portfolio-type

investments.

A TIN continues to be required for claims of effectively connected

income. A TIN would also be required to support claims of benefits

under an income tax treaty (other than dividends on publicly traded

stocks). Therefore, for example, payments of dividends on non-publicly

traded stocks, royalties, or related party interest would require a TIN

to be shown on the withholding certificate in order for a withholding

agent to rely on a claim of a reduced rate under a tax treaty.

In the case of an individual, a TIN would generally be an IRS

individual taxpayer identifying number (ITIN) issued by the IRS to a

nonresident alien individual who is not otherwise eligible for a Social

Security Number. In the case of a non-individual, a TIN would be an

Employer Identification Number (EIN). Over time, the IRS will issue

EIN's to foreign persons that begin with the two digits ``98'' to

permit instant recognition of foreign status. See regulations proposed

under section 6109 contained in project number INTL-0024-94, published

on June 8, 1995 (60 FR 302111), describing the types of taxpayer

identifying numbers issued to nonresident alien individuals and the

manner in which a number can be obtained. Further revisions to the

regulations under section 6109 are proposed in order to require the

statement of a TIN in appropriate cases.

4. Other Proposed Changes

The regulations propose to clarify the extent of due diligence

expected from certain withholding agents, such as banks and other

financial institutions. Thus, for payments of portfolio-type income,

the withholding agent's due diligence would be limited to an

examination of the address stated on the withholding certificate. If

the address on the certificate were a U.S. address or did not match the

address information in its records, the withholding agent would have to

seek further proof of a claim of foreign status. This change would not

affect the current requirement that a withholding agent cannot ignore

what it actually knows when determining the extent to which it may rely

on a withholding certificate. However, in the case of financial

institutions, knowledge would be limited to information that can be

associated with the account under the same procedures as apply for

purposes of the backup withholding provisions.

As a further burden reduction, the regulations propose to eliminate

the requirement to attach withholding certificates to Forms 1042 and

1042-S. The current reporting requirements are otherwise unchanged

except for clarification of how these requirements apply in the case of

payments to intermediaries. Therefore, even though certification

procedures are proposed to be modified for bank deposit interest, such

interest continues to be exempt from reporting (except for certain

interest on bank deposits paid to Canadian residents).

The period of validity of a certificate of foreign status (Form W-

8) is limited to three years as under current law. However, a Form W-8

stating a beneficial owner's TIN is proposed to be valid indefinitely

if it relates to income required to be reported to the IRS (or if the

TIN is actually reported even though not otherwise required). The

validity period for certificates used to claim a reduced rate for

effectively connected income is proposed to be extended from one year

to three years.

The regulations propose new procedures dealing with payments to

foreign partnerships. These procedures generally would allow looking

through to the partners and reliance on a certification provided for

each partner. Alternatively, in order to facilitate certification for

partnerships with many partners or for tiered partnerships, the

regulations would also allow a foreign partnership to be a qualified

intermediary under an agreement with the IRS. In that case, the

partnership would be allowed to furnish an intermediary certificate for

the partnership. The partnership would be required to withhold under

section 1441 in the same manner as a domestic partnership. In addition,

the regulations would clarify the manner in which a foreign entity and

its interest holders can determine entitlement to benefits under an

income tax treaty with a particular country based upon the principles

in effect under the laws of that country.

The proposed regulations also address the practical difficulties

that exist under current rules due to the lack of clear guidelines on

determining the status of a payee as a U.S. or a foreign person in the

absence of documentation. While some guidelines exist in limited cases

(e.g., Sec. 35a.9999-5(b) A-10), guidance is incomplete. The proposed

regulations offer a comprehensive and uniform set of presumptions to

assist withholding agents with these determinations.

5. Changes to Reporting Rules Under Chapter 61 of the Internal Revenue

Code

On February 29, 1988, the IRS and Treasury published in project

number INTL-52-86 (53 FR 5991) proposed amendments to the 1099

information reporting regulations (the 1988 proposed regulations)

modifying the reporting requirements and the procedures for presenting

a claim of foreign status. The provisions in the 1988 proposed

regulations concerning information reporting of bank deposit interest

paid to persons resident in Canada are finalized. See Sec. 1.6049-

5(e)(2) of the 1988 proposed regulations and the Rules and Regulations

section of this issue of the Federal Register. The 1988 proposed

regulations are not otherwise amended. In order to standardize

procedures, changes are proposed to the procedures for certifying

foreign status that were proposed in 1988 so as to conform them to

those proposed under section 1441. The IRS and Treasury are considering

finalizing the 1988 proposed regulations at the same time that the

proposed regulations under section 1441 are finalized.

Proposed Effective Dates

Unless otherwise provided in the regulations, the regulations are

proposed to be effective for payments made after December 31, 1997. The

[[Page 17619]]

regulations contain a number of transition rules designed to phase out

currently outstanding withholding certificates (e.g., Forms W-8 and

1001)

Section-by-Section Analysis

Section 1.163-5 Denial of Interest Deduction on Certain Obligations

Issued After December 31, 1982, Unless Issued in Registered Form

Section 1.163-5(c) contains foreign targeting procedures applicable

to certain obligations issued in bearer form. Section 1.163-

5(c)(2)(i)(B)(5) would be revised to modify the cross-reference to the

documentary evidence rules since the Q&A regulations under part 35a are

proposed to be eliminated

Section 1.165-12 Denial of Deduction for Losses on Registration-

Required Obligations Not in Registered Form

Section 165(j)(1) and 1.165-12(a) deny a loss deduction to a holder

of a registration-required obligation that is not in registered form

unless the holder meets certain exceptions. Under Sec. 1.165-12(c)(1)

(iii) and (iv), the loss disallowance rule does not apply to a holder

that delivers a registration-required obligation that is in bearer form

and that is offered or sold in the United States if the holder delivers

the obligation to a financial institution, and the financial

institution provides a statement that it is a financial institution

within the meaning of Sec. 1.165-12(c)(1)(v), it is purchasing the

obligation for its own account, the account of another financial

institution, or an exempt organization, that will comply with section

165(j)(3) (A), (B), or (C). The loss disallowance rule also does not

apply if a holder delivers a registration-required obligation in bearer

form that is offered or sold outside the United States if it is

delivered to a financial institution and the holder gives the financial

institution a confirmation stating that any U.S. taxpayer that holds

the obligation in bearer form and that is not exempt under section

165(j)(3) (A), (B), or (C) will be denied a deduction for any loss or

capital gain treatment with respect to the obligation. A holder may

deliver a registration-required obligation in bearer form that is

offered and sold outside the United States to a person other than a

financial institution only if the holder has documentary evidence, as

described in

Section 35a.9999-4T, A-5 That the Person Is Not a U.S. Person

These proposed regulations would revise Sec. 1.165-12(c)(1)(iv) to

eliminate the requirement that the holder receive a statement from a

financial institution for bearer obligations offered or sold in the

United States. The proposed regulations would also eliminate the

requirement that the holder deliver a confirmation to a financial

institution for obligations offered or sold outside the United States.

These changes are proposed to reduce the documentation burden

associated with secondary market transactions. The documentary evidence

requirement for delivery outside the United States to a foreign person

other than a financial institution is retained. The proposed

regulations would clarify that the holder may receive such evidence

electronically

Section 1.871-14 Rules for Portfolio Interest

Under sections 871(h) and 881(c), interest that qualifies as

portfolio interest is generally exempt from tax and is exempt from

withholding at source under section 1441(b)(9). Section 1.871-14

proposes procedures governing whether interest (including original

issue discount) qualifies as portfolio interest described in section

871(h)(2). Section 1.1441-2(d) provides the exemption from withholding.

For interest on bearer obligations, the existing provisions in

Sec. 35a.9999-5(a), A-1 (dealing with portfolio interest on bearer

obligations) and in Sec. 35a.9999-5(c) (dealing with convertible

obligations) will be incorporated in Sec. 1.871-14(b) without

substantive changes and are not reproposed. These rules will be

restated in proposed Sec. 1.871-14 (b)(1) and (b)(2) that are currently

shown as reserved

For interest on registered obligations, section 871(h)(2)(B)(ii)

provides that such interest qualifies as portfolio interest only if the

U.S. withholding agent receives a statement that the beneficial owner

is not a United States person. Paragraph (c)(2)(i) provides that the

statement requirement would be satisfied if the beneficial owner

furnishes the type of documents described in proposed Sec. 1.1441-

1(e)(1)(i) for a withholding agent to rely on a claim of foreign

status. Thus, in the case of a payment to a beneficial owner, the

beneficial owner must provide a beneficial owner withholding

certificate described in proposed Sec. 1.1441-1(e)(2) or, if the

payment is made on an account held at a foreign branch, documentary

evidence may be substituted (see paragraph (c)(2)(ii)). The ability to

use documentary evidence on foreign branch accounts is a significant

change from current law and one that intends to reduce the burden on

transactions outside the United States. Further, as under current

regulations, the withholding certificate would not have to state a

taxpayer identifying number (although one may be provided, if desired).

See Sec. 35a.9999-5(b), A-9.

In the case of a payment to a foreign person that acts as an

intermediary (e.g., an agent, representative, nominee, etc.), the

proposed procedures under section 1441 would require either that the

intermediary furnish an intermediary withholding certificate or, if the

intermediary acts as the agent of the withholding agent, that the

intermediary be an authorized foreign agent. Under proposed

Sec. 1.1441-1(e)(3)(iv) or proposed Sec. 1.871-14(c)(2)(iii), the

certificate could be, as under current rules, a certificate to which

the beneficial owner documentation is attached (see Sec. 35a.9999-5(b),

A-9). Alternatively, under proposed Sec. 1.1441-1(e)(3)(ii), it could

be a certificate by which the intermediary certifies for the beneficial

owner (or other intermediaries) without being required to attach

beneficial owner documentation. The latter certificate could be issued

only by a qualified intermediary, i.e., a person that has an agreement

with the IRS. The qualified intermediary certificate would be issued

based upon certifications or documentation obtained by the qualified

intermediary. The same standards would apply to these documents as are

proposed to be applied to documents that a U.S. withholding agent is

required to obtain when paying directly to a beneficial owner.

Therefore, a taxpayer identifying number is not required to be shown on

a beneficial owner withholding certificate provided to the qualified

intermediary. Alternatively, the qualified intermediary could rely on

documentary evidence for accounts held at foreign branches. In

addition, different procedures may apply under the terms of a qualified

intermediary's agreement with the IRS.

Where a withholding agent acts through an authorized foreign agent,

certificates received by the agent would be deemed to be received by

the withholding agent. In that case, no certificate would be required

from the authorized agent. See proposed Sec. 1.1441-7(c)(2) for the

description of an authorized foreign agent and proposed Sec. 1.1461-1

(b)(2)(iii) and (c)(4)(iii) for the filing of returns by the

withholding agent and its authorized foreign agent. Paragraph

(c)(2)(iv) specifies that other procedures may apply under a competent

authority agreement with a country with which the United States has an

income tax treaty.

[[Page 17620]]

The regulations clarify the consequences of a late-received Form W-

8 or other documentation. Paragraph (c)(3) provides that the

withholding certificate may be received by the withholding agent at any

time before expiration of the beneficial owner's period of limitation

for claiming a refund of tax with respect to the interest. The

applicable period is described in section 6511(a). Under this rule, a

foreign person would be allowed, for example, to provide the required

certificate to a U.S. withholding agent (or its authorized foreign

agent) at any time prior to filing an income tax return and still be

able to qualify the interest as portfolio interest. However, a

withholding agent that does not hold a valid certificate (or other

valid documentation) when paying the interest would be required to

withhold. Failure to do so would make the withholding agent liable for

the tax if the required certification or documentation procedures are

not complied with prior to the expiration of the beneficial owner's

period of limitation. If a withholding agent fails to withhold although

it does not hold a valid certificate, but the documentation procedures

are ultimately complied with, a withholding agent would be liable for

interest pursuant to section 1463 even though there is no underlying

tax liability.

In addition, the withholding agent may be subject to penalties for

failure to withhold tax. See proposed Sec. 1.1441-1(f)(5).

Paragraphs (d) and (e) are reserved. Paragraph (d) will reflect the

rules in Sec. 35a.9999-5(e), regarding pass-through certificates.

Paragraph (e) will reflect the rules in 35a.9999-5(b) A-12 through A-15

regarding foreign-targeted registered obligations. These rules are not

reproposed. Under Sec. 1.871-14(g), the rules contained in proposed

regulation Sec. 1.871-14 are proposed to be effective for payments of

interest after December 31, 1997. However, withholding agents may

continue to rely on valid Forms W-8 that they hold on the date that is

60 days after the regulations become final until the forms expire under

the rules as in effect on April 22, 1996.

Section 1.1441-1 Requirement for the Withholding of Tax on Payments to

Foreign Persons

This section states the general rules concerning withholding on

payments to foreign persons. Paragraph (a) provides the general purpose

and scope of the section. Paragraph (b) states the general rule that a

withholding agent must withhold 30 percent of the gross amount of

income subject to withholding if paid to a foreign person unless the

beneficial owner of the income is a U.S. person or is a foreign person

entitled to a reduced rate of tax. A withholding agent may grant a

reduced rate at source in the case of a payment to a foreign person

only if, before payment, it can associate the appropriate documentation

with the payment. Therefore, actual knowledge that the beneficial owner

is a foreign person would not excuse the obligation to obtain

appropriate documentation. A withholding agent failing to act in

accordance with these rules may ultimately be relieved from the

liability for the tax under section 1461, but would, in any event, be

liable for interest, and possibly, penalties. See paragraph (f)(5). For

this purpose, payment to a foreign person includes a payment to a U.S.

person if the withholding agent has actual knowledge or reason to know

that the U.S. person is acting as the agent of a foreign person. These

rules restate current law. See Secs. 1.1441-1 and 1.1441-7(a)(1) of the

existing regulations.

Paragraph (c) defines terms, including payee and beneficial owner.

Paragraph (c)(3) defines a payee as the person to whom the payment is

made. This definition has significance for purposes of coordinating the

section 1441 withholding provisions with the 1099 reporting and backup

withholding rules under chapter 61 of the Code and section 3406,

respectively (the 1099 reporting and backup withholding provisions

determine consequences of payments based on payees; in contrast, the

section 1441 withholding provisions determine consequences of payments

based on beneficial owner). In the case of a payment to a foreign

partnership, paragraph (c)(3)(ii) provides that the partners, and not

the partnership, are considered to be the payees. However, a foreign

partnership could be considered a payee if it certified to the

withholding agent that it is a qualified intermediary (see paragraph

(e)(5) regarding qualified intermediaries) or if it certified that the

income is effectively connected with a U.S. trade or business (in which

case, the partnership must itself withhold the tax required under

section 1446). The provisions specify how these rules would apply on a

look-through basis to tiered partnership structures.

Under paragraph (c)(6), a beneficial owner is defined as the person

who, under U.S. tax principles, would be required to include the amount

paid in gross income. Therefore, under these principles, partners, and

not partnerships, are the beneficial owners (unless the partner is

itself a partnership, in which case, one looks through to the partners

of the highest tier foreign partnership). Therefore, the identification

of a beneficial owner is influenced by the classification of the entity

to which the payment is made. This proposed rule revises Sec. 1.1441-

3(f) of the existing regulations that, in effect, treats a partnership

as a beneficial owner for purposes of the withholding provisions. This

provision has created difficulties for partners of a foreign

partnership who wish to claim the benefit of a reduced rate at source

based on their status, but may not do so because the entity does not

qualify for the reduced rate. The proposed regulations would alleviate

these difficulties by permitting beneficial owner information to be

passed to the withholding agent or by permitting the partnership to be

a qualified intermediary.

The IRS and Treasury are aware that some large investment

partnerships hold significant amounts of U.S. portfolio type

investments. The IRS and Treasury understand that generally these

entities are treated as corporations under the provisions of section

7704(c)(3) and the regulations under that section. Therefore, the

proposed revisions requiring beneficial owner documentation for

partners would not adversely affect these entities. The IRS and

Treasury solicit comments on this point.

Generally, the determination of the classification of an entity,

including an entity organized in a foreign country, is made under U.S.

tax rules. Because U.S. and foreign laws may differ on classification

principles, the U.S. tax classification of an entity as a partnership

or a corporation may differ from the tax treatment of that entity under

the laws of a foreign country. Therefore, in the case of income paid to

a foreign entity, the entity might be considered the beneficial owner

under U.S. tax principles (because it is classified as an association

taxable as a corporation under U.S. tax principles), but, if foreign

tax principles are applied, its interest holders, rather than the

entity, might be considered the beneficial owners. This dual

characterization may give rise to difficulties in the application of

income tax treaties. In order to alleviate these difficulties,

paragraph (c)(6)(ii)(B) proposes that foreign tax principles, rather

than U.S. tax principles, apply to identify the beneficial owner of

income for which a claim of a reduced rate of withholding is made based

upon a tax treaty. Under this proposed rule, when a benefit is claimed

under a tax treaty with a particular country, the tax principles that

govern the determination

[[Page 17621]]

of who the beneficial owner is for purposes of obtaining benefits under

that treaty would be the principles in effect under the laws of that

country. This clarification is intended to address the significant

uncertainties resulting from the current lack of guidance on these

issues. The IRS and Treasury intend to consult with treaty partners in

order to promote uniformity in this area. Paragraph (c)(6)(iii)

provides that the beneficial owner rules in the proposed regulations

would not apply to trusts. Until further guidance is provided, the

rules in the current regulations would continue to apply trusts. See

Sec. 1.1441-3 (f) and (g) of the existing regulations.

While different procedures would apply depending upon whether a

payment is made to a corporation or a partnership, a withholding agent

would not be required to determine the classification of an entity when

making a payment to a foreign person. Rather, a withholding agent would

be allowed to rely on the classification claimed by the entity, unless

it had actual knowledge or reason to know otherwise.

Paragraph (d) deals with procedures that would enable a withholding

agent to determine the circumstances in which it could consider that

the payment is made to a U.S. person and is, therefore, exempt from

section 1441 withholding. This paragraph replaces Sec. 1.1441-5 of the

existing regulations and proposes to replace Form 1078 with Form W-9,

consistent with the manner in which a U.S. payee must generally provide

a taxpayer identifying number under section 3406. In the case of a

payment to an exempt recipient or a payment of scholarship, grant,

pension, or annuities, for which no Form W-9 is required under section

3406, a person also would be permitted to use a Form W-9 to establish

its U.S. status. The regulations specify the information that must be

stated on such a certificate, which parallels that required under

Sec. 31.3406(h)-3(e)(2) in order for a payor to reasonably rely on a

Form W-9. If no, or insufficient, documentation is provided, the

presumptions in Sec. 1.1441-1(f) would apply to determine whether the

beneficial owner should be treated as a foreign or U.S. person.

In the case of a payment to a foreign person acting as an

intermediary (e.g., agent, representative, or nominee) for a U.S.

person, paragraph (d)(3) provides that the intermediary may transmit a

Form W-9 for the U.S. person to claim U.S. status and avoid section

1441 withholding. If the U.S. person is not an exempt recipient, the

withholding agent would then have to comply with the 1099 reporting

requirements under chapter 61 of the Code, because, under these rules,

the U.S. person would be treated as a payee. Similarly, as a result of

the payee rules set forth in paragraph (c)(3)(ii) dealing with payments

to foreign partnerships, a withholding agent may treat a payment to a

foreign partnership as a payment made to a U.S. person to the extent of

the U.S. partner's distributive share of that payment. Similarly, the

withholding agent would have to comply with the 1099 reporting

requirements.

Paragraph (e) describes the conditions for a withholding agent to

rely upon a beneficial owner's claim of foreign status. Paragraph

(e)(1) provides that a withholding agent may rely upon a claim of

foreign status if, prior to making the payment, the withholding agent

(1) Holds a beneficial owner withholding certificate or an intermediary

withholding certificate, (2) complies with on-line confirmation

procedures when prescribed by the IRS, and (3) has not received a

notification from the IRS that the withholding certificate is incorrect

or unreliable. The withholding agent's reliance on the withholding

certificate is subject to the withholding agent's actual knowledge or

reason to know otherwise. See standards of knowledge in proposed

Sec. 1.1441-7(b).

Paragraph (e)(2) sets forth the requirements for a beneficial owner

withholding certificate. Generally, a withholding certificate would be

a Form W-8 or, in the case of certain compensation for personal

services, a Form 8233 (or an acceptable substitute) that is signed

under penalties of perjury by the beneficial owner and contains certain

required information. The certificate serves as a representation that

the beneficial owner is not a U.S. person and that the conditions for

claiming a reduced rate of withholding tax are satisfied. These

conditions may vary depending upon the nature of the income or the type

of exemption claimed.

Required information on a beneficial owner Form W-8 would include

the beneficial owner's name, permanent residence address, the type of

income to be received, and the basis for any reduced rate claimed.

Generally, the Form W-8 would not be required to state the beneficial

owner's taxpayer identifying number (``TIN''), except in limited cases

(see paragraph (e)(4)(vii), below).

Paragraph (e)(3) sets forth the requirements for an intermediary

withholding certificate. Intermediary withholding certificates may be

provided by one of three types of persons: (1) A qualified

intermediary, (2) a foreign partnership, or (3) an agent, nominee, or

other representative that is not a qualified intermediary.

Information required from a qualified intermediary on a Form W-8

would include similar information as that required for the beneficial

owner Form W-8 except that the information would relate to the

intermediary. In addition, the Form W-8 would have to state a TIN and

certify that the issuer is a qualified intermediary and has obtained

the appropriate certificates or documentation with respect to the

account holders covered by the Form W-8. A foreign partnership that is

not a withholding agent (because it is not a qualified intermediary or

acting for the account of others) would have to provide the same

information about itself, and attach the partners' withholding

certificates. In addition, the partnership would be required to state

an EIN on the withholding certificate. See proposed Sec. 1.1441-5(b)

for the certificates required to be attached in the case of tiered

partnerships. See also, proposed Sec. 1.1461-1(c)(4)(v) for Form 1042-S

filing requirements for the withholding agent.

An agent, nominee, or representative furnishing an intermediary

certificate would have to provide information about itself, state an

EIN for the intermediary (or an SSN or ITIN in the case of an

individual) and certify that it is not acting for its own account and

is using the Form W-8 to transmit beneficial owner certification for

the payment to which the Form W-8 relates. These procedures are

essentially similar to those in effect for portfolio interest on

registered obligations under Sec. 1.9999-5(b), A9 and that are proposed

to be retained in proposed Sec. 1.871-14(c)(2)(iii).

Paragraph (e)(4)(i) requires that, in the case of joint owners,

each owner provide a withholding certificate. This rule would parallel

the requirements for backup withholding purposes. See Sec. 31.3406(h)-

2(a).

Paragraph (e)(4)(ii)(A) provides the general rule that a

withholding certificate would be valid for a period of three years or

until the circumstances of the beneficial owner changed, making an item

of information on the certificate incorrect. However, under paragraph

(e)(4)(ii)(B), a withholding certificate that includes a TIN would be

valid indefinitely if the income (or, under special procedures, the

TIN) with which the certificate is associated were reported to the IRS.

For example, a bank may rely on a claim of foreign status by an account

holder if it holds a Form W-8 for the account holder even without a

TIN. In that case, the certificate would be valid for a period of three

years only.

[[Page 17622]]

If, however, the account holder were to state a TIN on the form and the

bank adopted procedures by which it reports the TIN to the IRS as

provided in proposed Sec. 1.1461-1(d), the certificate would be valid

indefinitely until a change in circumstances of the account holder made

the information on the form incorrect.

Second, certificates furnished to claim a reduced rate of

withholding on income that is effectively connected with the conduct of

a trade or business within the United States would also be limited to

three years in all circumstances. This is a change from existing

regulations under Sec. 1.1441-4(a)(2) that require that a new

certificate be filed each year. This change would relieve the burden

associated with annual renewal of these certificates and simplify

compliance by providing uniform validity period rules. The 3-year

period of validity for this certificate would extend from the date it

is signed to the last day of the third succeeding calendar year. This

change would insure a full 3-year validity period in all cases (and up

to four years where the certificate is furnished at the beginning of

the calendar year).

Under paragraph (e)(4)(iii), withholding certificates must be

retained for as long as they are relevant for the determination of the

withholding agent's liability under proposed Sec. 1.1461-1. This rule

would replace the 4-year retention period under current law and conform

the rules under section 1441 to the retention period required for Forms

W-9 under section 3406. This change is necessary because the Form W-8,

like Form W-9, is proposed to be made valid indefinitely in certain

circumstances. Paragraph (e)(4)(iv) anticipates the possibility that,

in the future, a withholding agent may rely on electronically

transmitted information otherwise required to be stated on a

withholding certificate.

Paragraph (e)(4)(v) provides for on-line confirmation procedures

for TIN's required to be stated on withholding certificates in order to

verify their correctness and the claim that it belongs to a foreign

person. Such procedures are being developed by the IRS and, when the

system becomes operational, the IRS may require certain categories of

withholding agents handling large volumes of payments to foreign

persons (such as certain teaching institutions) to perform on-line

confirmation of such TIN's. These procedures would be similar to those

currently in use under section 3406 in order to notify payors of an

incorrect TIN.

Paragraph (e)(4)(vi) defines an acceptable substitute form. As

under section 3406, these regulations would permit the use of

substitute forms provided the information furnished is the same as is

required under the regulations and is certified to be correct under

penalties of perjury. See Sec. 31.3406(h)-3(c)(1).

Paragraph (e)(4)(vii) provides all of the circumstances in which a

taxpayer is required to furnish a TIN on a withholding certificate for

purposes of the regulations under sections 1441, 1442, and 1443.

Taxpayers would be required to furnish a TIN when claiming the benefit

of a reduced rate under an income tax treaty (other than with respect

to dividends on publicly traded stocks) or because income is

effectively connected with a U.S. trade or business. In addition,

intermediaries, partnerships, foreign organizations claiming to be tax-

exempt under section 501(c), and private foundations would be required

to furnish a TIN. A TIN would be an IRS Individual Taxpayer

Identification Number (ITIN), a Social Security Number (SSN), or an

Employer Identification Number (EIN). A nonresident alien individual

not eligible for a social security number would be able to obtain an

ITIN from the IRS. See proposed regulations under section 6109

describing procedures for obtaining an ITIN.

Paragraph (e)(5)(i) provides that a qualified intermediary may

furnish a single intermediary withholding certificate to a withholding

agent on behalf of beneficial owners, other intermediaries, and U.S.

payees. The qualified intermediary would have to obtain certification

or documentation from these persons on whose behalf the intermediary

withholding certificate is provided. Generally, the certification and

documentation would be the same as that which a withholding agent is

required to obtain, subject to such modifications as the intermediary's

agreement with the IRS would provide. It is anticipated that the terms

of the agreement would be flexible enough to accommodate the individual

circumstances of a particular qualified intermediary, including any

locally applicable know-your-customer rules or practices. Therefore,

the agreement might acknowledge certain documentary evidence procedures

already in place and not require additional documentation. Paragraph

(e)(5)(ii) provides that a qualified intermediary is a foreign person

that is a party to a withholding agreement with the IRS and is a

clearing organization as defined in Sec. 1.163-5(c)(2)(i)(D)(8), a

financial institution as defined in Sec. 1.165-12(c)(1)(iv), a

partnership, or any other person acceptable within the discretion of

the IRS. A qualified intermediary would be able to either assume

primary responsibility for withholding and reporting to the IRS (if so

permitted under its agreement with the IRS) or leave that

responsibility to the withholding agent. A qualified intermediary that

assumes primary withholding responsibility would present an

intermediary withholding certificate to the withholding agent or

another qualified intermediary representing that it will withhold all

appropriate amounts and comply with all applicable reporting

requirements. The withholding agent or other qualified intermediary

would be allowed to rely on such a certificate and not withhold.

However, the withholding agent would have to file Forms 1042 and 1042-S

under section 1461 to report the payment to the qualified intermediary

and the qualified intermediary's EIN. See proposed Sec. 1.1461-

1(b)(2)(ii) and (c)(4)(ii).

A qualified intermediary that does not assume primary withholding

responsibility would present an intermediary withholding certificate to

a U.S. withholding agent or another qualified intermediary representing

that beneficial owners of U.S. income payments (other than gross

proceeds) are not U.S. persons and, if applicable, qualify for a

reduced rate of withholding. It is anticipated that a qualified

intermediary would establish separate accounts for income subject to

different withholding rates. A single intermediary withholding

certificate should serve as documentation for all these separate

accounts. In addition, the qualified intermediary would provide a Form

W-9 for each beneficial owner that is a U.S. person to whom payments of

income otherwise subject to withholding are made and for whom reporting

is required under chapter 61 of the Code.

A qualified intermediary would generally have to agree to be

subject to the same reporting requirements as apply to withholding

agents under proposed Sec. 1.1461-1(b) and (c), to allow periodic

inspection of its records, and to pay any amount of tax liability

determined to be due. The IRS intends to agree to arrangements with the

qualified intermediary so that, for example, inspection of records may

be minimized where the IRS otherwise gets sufficient access to

beneficial ownership information, through annual reporting of TIN's,

review of know-your-customer rules, and selection of appropriate

account information, or through an exchange of information program

under a tax treaty. In appropriate cases, the IRS may rely on audits

performed by an

[[Page 17623]]

institution's approved external auditors where, for example, under an

income tax treaty or local laws, the IRS would be given access to

appropriate auditor's records to verify compliance. Records may include

workpapers of, reports prepared by, and methodology employed by, the

approved external auditors.

A proposed revenue procedure providing guidance with respect to

withholding agreements has been published as Announcement 96-23

simultaneously with the publication of this document in the Federal

Register.

Paragraph (e)(5)(v) specifies that a foreign partnership that is a

qualified intermediary acting for its partners is a withholding agent

with respect to its partners' distributive shares of income paid to the

partnership. In that case, the partnership is subject to the same

withholding and reporting procedures as would apply to a domestic

partnership. Thus, any arrangement whereby the partnership would seek

to shift primary withholding responsibility to the withholding agent

under the provisions of paragraph (e)(5)(iv)(B) would not be

recognized.

Paragraph (f) contains a set of presumptions upon which a

withholding agent (for purposes of section 1441) and a payor (for

purposes of the 1099 reporting provisions) would rely to determine

whether to treat a person as U.S. or foreign if, at the time of

payment, the withholding agent or payor does not have actual knowledge

of the status of the person to whom the payment is made and lacks the

required documentation or knows or has reason to know that the

documentation it holds is incorrect or unreliable. A presumption under

this paragraph (f) could be rebutted by providing or correcting the

required documentation to the withholding agent or payor. Thus, these

presumptions would assist the payor in determining whether the income

paid is subject to the 1099 reporting and backup withholding regime (if

paid to a U.S. person that is not an exempt recipient) or to the

section 1441 withholding regime (if paid to a foreign person).

Presumptions of foreign status resulting from the application of

these provisions would, when applied for purposes of section 1441, only

affect whether the withholding agent should withhold 30 percent from

the payment on the ground that the payment may, under the provisions,

be treated as made to a foreign beneficial owner. However, the

presumptions could not operate to deem the payee as having established

proof of foreign status for purposes of claiming a reduced rate of tax

under the Code or an income tax treaty.

Paragraph (f)(2)(i) addresses reportable payments to a non-exempt

recipient (a non-exempt recipient is a person for whom the payor must

file a Form 1099; see proposed Sec. 1.6049-4(c)(1)(ii) for a list of

exempt recipients). Where a withholding agent lacks the required

documentation, it would presume that the payee is a U.S. individual.

Accordingly, the withholding agent would withhold 31 percent under

section 3406. Paragraph (f)(2)(ii) incorporates the concept of the 30-

day grace period under Sec. 31.3406(d)-3(a) for a payee to furnish a

Form W-9 to the payor. Because it may take longer to obtain the

required documentation from a foreign person than from a U.S. person,

the proposed regulations allow a withholding agent to treat a payee as

a beneficial owner that is a foreign person for up to 90 days from the

date the agent credits the payee's account (or until the end of the

calendar year if earlier) if the withholding agent has the name and a

foreign address for the account holder or a facsimile copy or an

electronic transmission of the information on a withholding

certificate. This special rule would defer the obligation to backup

withhold under section 3406 because there are sufficient indicia of

foreign status, but does not defer the obligation to withhold under

section 1441, if applicable. If the required documentation were

provided or corrected within the 90-day grace period, the amount

withheld may be refunded to the payee under the adjustment procedures

described in proposed Sec. 1.1461-2. The 90-day grace period would be

terminated if any part of the proceeds in the account that are subject

to the grace period were withdrawn (other than for purposes of

withholding an amount of tax). If the required documentation were not

provided or corrected by the expiration of the grace period, the payee

would be presumed to be a U.S. payee for purposes of section 3406 and

chapter 61 of the Code from the date the account was first credited.

A special rule for joint owners or payees is provided in paragraph

(f)(2)(iii) that would permit a withholding agent to presume that a

payment made to joint owners or payees for whom it does not hold the

required documentation is made to U.S. payees. The grace period would

apply to joint payees if each payee qualified for its application. If

any one of them withdrew any portion of the funds in the account, then

additional withholding under paragraph (f)(2)(ii)(A) would be required.

Paragraph (f)(2)(iv) addresses reportable payments to an exempt

recipient. In that case, the withholding agent could presume that the

payee is a foreign person if it knew the payee's TIN and the TIN began

with the two digits ``98.'' The withholding agent also could presume

that the payee is a foreign person if the payee had a foreign mailing

address or the payment were made outside of the United States (as

defined in proposed Sec. 1.6049-5(e)). In other cases, the withholding

agent could presume that the exempt recipient is a U.S. person. Thus,

for example, a U.S. withholding agent making a payment of interest on a

registered obligation to a corporation with an EIN beginning with the

digits ``98'' would not have to backup withhold under section 3406

(because the corporation is an exempt recipient). However, it should

withhold a 30 percent tax under section 1442 because the condition

under Sec. 1.871-14(c)(1)(iii) that a certificate of foreign status be

received by the U.S. withholding agent for the interest to qualify as

portfolio interest would not be satisfied. Thus, the withholding agent

should treat the interest as not qualified for the portfolio interest

exemption for purposes of section 1441(b)(9). Adjustments to the tax

may be made at a later time in accordance with proposed Sec. 1.1461-2

if the required documentation described in proposed Sec. 1.871-14(c)(2)

is later furnished. See proposed Secs. 1.871-14(c)(3) and 1.1441-

1(f)(5) for rules addressing late received documentation.

Paragraph (f)(3) contains special presumption provisions for

certain payments that are not subject to backup withholding:

scholarship and pension income. In the case of scholarship and grant

income, the withholding agent or payor may generally treat the payee as

a U.S. person unless it has U.S. visa information in its records

concerning the payee. For pension and annuities, the payment would be

presumed to be made to a U.S. person if the payor had the payee's

Social Security number and the payment were made either to a U.S.

mailing address or to a mailing address in a foreign country with which

the United States has an income tax treaty in effect that exempts

residents of the country from U.S. tax on that income. In all other

cases, the payor could presume that the payee is a foreign person. A

withholding agent may use these presumptions as a safe harbor or may,

at its option, choose to withhold at a higher rate if it were unsure of

the application of the presumption in a particular case.

[[Page 17624]]

Paragraph (f)(4) provides special rules for pass-through entities.

Paragraph (f)(4)(i) provides rules for determining whether to treat a

partnership as foreign or domestic. The withholding agent or payor

could presume that the partnership is a foreign partnership if the

withholding agent or payor actually knows that the partnership's EIN

begins with the digits ``98,'' if the mailing address of the

partnership is in a foreign country, if the payment is made outside of

the United States (as defined in proposed Sec. 1.6049-5(e)), or if the

withholding agent or payor knows or had reason to know that the

partnership is foreign.

Under paragraph (f)(4)(ii), a withholding agent or payor that makes

a reportable payment to a person determined to be a foreign partnership

could presume that any partner for which it does not hold the required

documentation is a U.S. individual. In that case, the payee would be

treated as a U.S. payee that is not an exempt recipient and the payment

would be subject to reporting under chapter 61 of the Code and to

backup withholding under section 3406.

Paragraph (f)(4)(iii) provides rules for partners' distributive

shares. A domestic partnership could treat a partner as a U.S. payee

if, at the time it is required to withhold on a reportable payment, it

did not hold all of the required documentation for that partner. A

foreign partnership that is a qualified intermediary under proposed

Sec. 1.1441-1(e)(5)(ii) could treat a partner as a foreign payee if, at

the time it were required to withhold on a reportable payment, it could

not associate the payment with the required documentation.

Paragraph (f)(5) clarifies that a withholding agent that does not

act in accordance with the presumptions and fails to withhold the

required amount may be liable under section 1461 or 3403 for the tax

that should have been withheld based upon the presumptions in paragraph

(f), unless the withholding agent can demonstrate either that the

correct amount of tax was, in fact, withheld or that the beneficial

owner paid the tax due. Proof of payment of tax could be established on

the basis of a Form 4669 furnished by the beneficial owner certifying

the amount of tax paid to the IRS. Proof that the correct amount of tax

was, in fact, withheld, could be based upon obtaining the required

documentation. Late-received documentation could be accepted as proof

of status and entitlement to a reduced rate of tax. However, if the

delays involved in obtaining this documentation affected its

reliability, the IRS could require further proof of status or

entitlement to a reduced rate. Further, pursuant to section 1463 or

section 3403, the withholding agent would be liable for interest under

section 6601, even though, ultimately, there is no underlying tax

liability. Penalties may also apply.

Under paragraph (f)(6), a reportable payment is an amount

reportable under section 3406(b) (without regard to any exception to

reporting under section 6041, 6041A, 6042, 6045, 6049, 6050A, or

6050N).

Paragraph (f)(7) provides that if overwithholding occurs under

section 1441 as a result of application of the presumptions in

paragraph (f), adjustments may be made in accordance with proposed

Sec. 1.1461-2(a). Appropriate refunds and credits may be claimed under

section 1464 or 6414. Amounts overwithheld under section 3406 are

subject to adjustments pursuant to Sec. 31.6413(a)-3(a)(1).

Paragraph (g) provides that these rules are effective for payments

made after December 31, 1997. However, transition rules are provided so

that valid certificates (as determined under current rules) that are

outstanding on the date that is 60 days after these regulations are

published as final regulations may continue to be relied upon for their

period of validity. In addition, dividends on publicly traded stocks

are given special transition relief. See proposed Sec. 1.1441-6(b)(2).

section 1.1441-2 Income Subject to Withholding

Paragraph (a) restates the rules in Secs. 1.1441-1 and -3(a) of the

existing regulations limiting withholding to items of income from

sources within the United States. Paragraph (b) simplifies Sec. 1.1441-

2(a) of the existing regulations by providing that, for purposes of

chapter 3 of the Code, fixed or determinable, annual or periodical

(FDAP) income is any income includable in income under section 61,

subject to enumerated exceptions in paragraph (b)(2) (including certain

exceptions for original issue discount and capital gains, including

option premiums). Under these proposed rules, income paid under a

national principal contract would be FDAP, but see proposed

Sec. 1.1441-4(a)(3) for an exemption from withholding.

Paragraph (b)(3) reflects the position adopted by the IRS in TIR-

877 (December 27, 1966) and in Rev. Rul. 68-333, 1968-1 C.B. 390 that

FDAP includes original issue discount paid by an original issuer of

bonds or other obligations with original issue discount. However, under

the authority of section 1441(c)(8), only certain items of original

issue discount are currently subject to withholding of tax under

Chapter 3. The lack of rules in this area in the past reflects the

difficulties in determining the amount of OID upon which withholding

should be applied. These proposed regulations, however, identify

transactions in which information about the amount of original issue

discount would generally be known or available to the withholding

agent. Therefore, the proposed regulations require withholding on

amounts paid upon sale by an obligor that is related to the original

issuer. In addition, amounts that fail to qualify for the portfolio

interest exemption under section 871(h) or 881(c) (because, for

example, the statement described in section 871(h)(5) has not been

furnished to the U.S. withholding agent) would also be subject to

withholding, regardless of whether it is possible for the withholding

agent to determine precisely the amount of OID. See proposed

Sec. 1.871-14(c)(2). If the required documentation were not furnished,

the amounts could be treated as paid to a U.S. or foreign payee based

upon the presumptions in proposed Sec. 1.1441-1(f). If the amounts are

presumed paid to a U.S. payee, backup withholding under section 3406

might apply. See Sec. 31.3406(b)(2)-(2). If the amounts are presumed

paid to a foreign payee, withholding under section 1441 would apply

(unless the OID instrument had a maturity not exceeding 183 days from

the date of issue).

Under these rules, the entire amount of OID (as determined on the

date of issue) would have to be reported as taxable if the exact amount

of OID were not known. Any amount of overwithholding may be adjusted or

refunded in accordance with the procedures in proposed Sec. 1.1461-2(a)

or Sec. 1.1464-1.

The proposed changes to the OID rules would be effective for OID on

obligations issued after a date that is 60 days after these regulations

are published as final regulations.

Paragraph (c) restates Sec. 1.1441-2(b) of the existing regulations

to eliminate the reference to pre-1967 payments. It also eliminates the

reference to items of income under section 402(a)(2) and 403(a)(2),

relating to payments from certain employees trusts or under employee

annuities, in order to conform to the amendment made to sections

1441(b) and (c)(5) by Public Law 102-318 that deleted these sections

from the requirement of withholding under section 1441.

Paragraph (d) lists exemptions from withholding for certain items

that

[[Page 17625]]

otherwise constitute FDAP income. Paragraph (d)(1) lists the exceptions

that are not conditioned upon furnishing documentation (e.g., interest

on bearer or foreign targeted registered obligations, short-term

obligations). However, documentation may be required under the 1099

reporting provisions in order to avoid reporting under sections 6041 or

6049 and backup withholding under section 3406. Paragraph (d)(2) lists

two other exceptions, but those exceptions are conditioned upon

furnishing documentation described in proposed Sec. 1.871-14(c)(2). The

exceptions are portfolio interest on registered obligations described

in section 871(h)(2)(B) or 881(c)(2)(B) (other than foreign targeted

obligations) and bank deposit interest described in section

871(i)(2)(A). Because bank deposit interest is not subject to

beneficial owner documentation requirements under current rules, the

regulations propose a transition rule that would allow interest paid on

accounts in existence on or before a date that is 60 days after these

regulations are published as final regulations to continue to be

subject to current rules until December 31, 1999.

Paragraph (e) clarifies the meaning of payment for purposes of

withholding. An amount would be considered paid when it is includable

in income under the cash basis method of accounting. Under paragraph

(e)(2), income reallocated under section 482 from a U.S. person to a

related foreign person would be considered a payment for withholding

tax purposes. A payment would also be considered to be made if income

arose as a result of a secondary adjustment made after income is

allocated under section 482, unless the taxpayer entered into a

repatriation agreement that eliminated the liability for withholding.

Paragraph (e)(3) provides that income is not considered paid if it is

blocked under certain executive authority, but is considered paid on

the date the blocking restriction is removed and, therefore, subject to

withholding as of that date. Paragraph (e)(4) provides special payment

rules for dividends. These rules are similar to those in effect for

purposes of backup withholding. See Sec. 31.3406(b)(2)-4. Paragraph

(e)(5) coordinates the payment election for branch interest tax under

Sec. 1.884-4(c)(1) with section 6049 and the withholding provisions

under section 1441.

Section 1.1441-3 Amounts Subject to Withholding

Paragraph (a) restates the rule in Sec. 1.1441-2(a)(1) of the

existing regulations that withholding is generally imposed on the gross

amount of income. Paragraph (b) provides for special withholding rules

for interest. Paragraph (b)(1) restates the rule in Sec. 1.1441-3(c)(3)

of the existing regulations that requires withholding on the entire

amount of stated interest owed on an interest-bearing obligation,

regardless of the character of the amounts paid. The heading is

modified to eliminate any inference that this rule is limited to

payments on defaulted interest coupons. Paragraph (b)(2) restates the

exemption from withholding in Sec. 1.1441-4(h) of the existing

regulations regarding sales of obligations between interest payment

dates. An anti-abuse rule is added that would require withholding where

the withholding agent knew or had reason to know that the sale

transaction was part of a plan the principal purpose of which was to

avoid withholding through a pattern of sales and repurchases.

Paragraph (c) provides rules relating to corporate distributions

and substantially relieves the withholding burden imposed under

Sec. 1.1441-3(b) of the existing regulations on these distributions.

Under the proposed regulations, a corporation could determine the

amount of a distribution subject to withholding based on a reasonable

estimate of available earnings and profits for the taxable year. A

corporation that made a reasonable estimate, but nonetheless

underwithheld, would remain liable for the amount of tax underwithheld

(and interest), but not penalties. These proposed regulations adopt the

same ``reasonable estimate'' standard as is provided under

Sec. 31.3406(b)(2)-4(c)(2). Under paragraph (c)(2)(ii), an intermediary

could rely on a reasonable estimate represented by the distributing

corporation. The distributing corporation would be made liable for any

amount of underwithholding where the withholding agent had relied on

the representation and the estimate had not been reasonably determined.

Paragraph (c)(3) proposes special procedures for withholding on

certain distributions made by a Regulated Investment Company (RIC). In

order to determine whether a withholding obligation arises in that

case, a RIC would benefit from the same exceptions that would apply to

other corporations for distributions payable in stock or stock rights

or distributions treated in part or in full as in exchange for stock.

In addition, the proposed regulations provide that no withholding is

required for a distribution that is a capital gain dividend defined in

section 852(b)(3)(C) or an exempt interest dividend defined in section

852(b)(5)(A). Special procedures are proposed for implementing these

exemptions, however, because a RIC must specifically designate the

extent to which a distribution falls under one of these provisions.

Under applicable rules, the designation may be made as late as 60 days

after the close of the RIC's taxable year, and after making the

designation, the RIC may find that the amount so designated exceeds

what the Code and the regulations allow. This presents special

difficulties under section 1441, which assumes that the amounts subject

to withholding are fixed at the time they are paid.

To address these special difficulties, paragraph (c)(3) would allow

a RIC to designate interim distributions as being subject to section

852(b)(3)(C) or 852(b)(5)(A). If it later determined that the

designation was in excess of what was permitted and, as a result, had

underwithheld, the RIC would have to satisfy the tax liability and

could adjust the withholding pursuant to proposed Sec. 1.1461-2(b). A

RIC would not be subject to penalties for failure to withhold timely,

provided the designation was based upon a reasonable estimate when

made. However, interest would apply under section 6601. In addition,

the RIC might be liable for penalties if the IRS determined that the

estimates were not reasonably determined.

Paragraph (d) restates, without significant changes, the rule in

Sec. 1.1441-3(d) of the existing regulations regarding withholding on

the full amount realized from the sale of property where the

withholding agent does not know the amount of gain subject to

withholding. A withholding agent may, however, determine gain based on

the beneficial owner's withholding certificate if it indicates the

beneficial owner's basis in the property sold. This rule is of limited

application as most capital gains are exempt from withholding under

section 1441.

Paragraph (e) restates the rule in Sec. 1.1441-7(c) of the existing

regulations pertaining to payments in kind. The property conversion

requirement under current rules would be made optional. Instead, the

withholding agent could choose to obtain payment from another source.

The regulations further propose to clarify that the amount of a payment

in kind is measured by the fair market value of the property

transferred or of the services provided. Payments made in foreign

currency require a conversion of the amount of tax using the spot rate

(as defined in Sec. 1.988-1(d)(1)) or a reasonable spot rate

convention. Paragraph (e)(3) provides guidance

[[Page 17626]]

where the withholding agent's satisfaction of the beneficial owner's

tax liability constitutes additional income to the beneficial owner

that is subject to withholding. In that case, the final withholding tax

liability would be calculated under a gross-up formula.

The provisions currently stated under Sec. 1.1441-3(j), relating to

conduit financing arrangements, are proposed to be incorporated without

change into a new paragraph (f). These provisions are not reproposed.

The address rule in Sec. 1.1441-3(b)(3) of the existing regulations

would be eliminated and replaced by requirements to furnish appropriate

documentation or to establish foreign status and, if applicable,

residence in a treaty country. See proposed Sec. 1.1441-1(e) and

1.1441-6. Section Sec. 1.1441-3(c)(1) requiring withholding in the case

of interest paid on obligations issued by the U.S. government would be

deleted as unnecessary given the provisions in Sec. 1.1441-2(a)

describing income subject to withholding. Section Sec. 1.1441-3(c)(4)

addressing unknown owners would also be deleted because the presumption

provisions in Sec. 1.1441-1(f) provide guidance. The special rules for

tax-free covenant bonds issued prior to 1934 are proposed to be

deleted. Comments are solicited as to whether these rules are still

necessary.

Section 1.1441-4 Certain Exemptions From Withholding

Paragraph (a)(1) restates, without significant change, the

provisions in Sec. 1.1441-4(a) of the existing regulations regarding

the exemption from withholding for certain income effectively connected

with the conduct of a trade or business within the United States. The

regulations clarify that the exemption under this section does not

apply to claim an exemption under an income tax treaty (i.e., income

not attributable to a permanent establishment). Claims of treaty

benefit must be made under the procedures described in proposed

Sec. 1.1441-6.

Under paragraph (a)(2)(i), a withholding agent could rely on a

claim that income is effectively connected with the conduct of a trade

or business within the United States if it held a withholding

certificate so stating. The regulations do not permit a withholding

agent to rely on a qualified intermediary withholding certificate to

grant a reduced rate of withholding for income claimed to be

effectively connected, except in the case of a qualified intermediary

that is a partnership acting for its own account. A partnership that

does not claim to be a qualified intermediary could also furnish an

intermediary withholding certificate described in proposed Sec. 1.1441-

1(e)(3)(iii) (i.e., the transmittal certificate normally required from

a partnership transmitting its partners' documentation under the

procedures described in proposed Sec. 1.1441-5(b)). For purposes of

claiming an effectively connected income exemption, it would not be

necessary to attach the partners' documentation to the certificate

since the exemption is available regardless of the status of the

partners and, under section 1446, the partnership is required to

withhold. The validity period of a withholding certificate used to

claim an effectively connected exemption is proposed to be extended

from one year to three years (subject to amendment if a change in

circumstances affected the character of the income that the beneficial

owner anticipated would be effectively connected). This rule should

significantly ease the burden on continuing transactions that generate

effectively connected income every year.

The regulations propose to eliminate the requirement that the

certificate be attached to the Form 1042-S; the withholding agent would

be required to state the beneficial owner's TIN on the Form 1042-S. See

proposed Sec. 1.1461-1(c)(1)(i). If the withholding certificate were

silent as to whether the income is effectively connected or if the

required documentation were lacking, incorrect, or unreliable, the

withholding agent should presume that the income is not effectively

connected.

The rules provided in Sec. 1.1441-4(f) of the existing regulations

are proposed to be restated in a new paragraph (a)(2)(ii) and are not

reproposed. Paragraph (a)(2)(iii) provides for special rules for

payments made to joint owners that would require each joint owner to

provide a withholding certificate certifying that the income is

effectively connected with a trade or business in the United States.

These rules are consistent with the joint owners rules provided under

the section 3406 regulation. See Sec. 31.3406(h)-2(a).

Paragraph (a)(3) provides that no withholding is required on income

from national principal contracts regardless of whether a withholding

certificate is provided. However, such income would have to be reported

on a Form 1042 and 1042-S. This rule would significantly simplify the

paper flows currently associated with these transactions.

Paragraph (a)(4) parallels the rule in proposed Sec. 1.1441-1(f)(5)

regarding the consequences of acting in a manner contrary to prescribed

presumptions. Late received documentation could relieve the withholding

agent from the tax liability. However, an interest charge would apply

under section 6601 on the amount that should have been withheld even

if, ultimately, there is no underlying tax liability. In addition,

penalties might apply.

Paragraph (b) of the existing regulations concerning compensation

for personal services of an individual is substantially unchanged. A

new paragraph (b)(1)(ii) is added to require that withholding on

distributions from certain qualified pension plans and annuities occur

under section 1441 rather than under section 3405 as was required under

Sec. 1.1441-4T(b)(ii) (which expired on February, 1993). A new

paragraph (b)(1)(vi) is also added that would allow employers to wage

withhold on compensation that is otherwise exempt from wage withholding

by reason of section 3402(e). This rule provides relief for employers

of nonresident alien individuals who derive income from sources partly

within and partly without the United States on a regular basis (e.g.,

crew members working on cruise ships). Without this rule, employers

would have to withhold at the 30 percent rate instead of the lower wage

withholding rate.

The provisions under paragraph (b)(2) of the existing regulations

(dealing with a claim of reduced rate of withholding on personal

service income under an income tax treaty) are unchanged with one

exception. The 10-day review rule in paragraphs (b)(2)(i) and (iv)

would be extended to 20 days. This extension is necessary because of

the increase in the number of Forms 8233 that the IRS receives.

Paragraph (b)(6) is added to eliminate the requirement in

Sec. 1.1441-3(e) of the existing regulations to pro-rate the personal

exemption based on the period during which a nonresident alien

individual is present in the United States during the taxable year.

Therefore, the entire personal exemption amount could be taken into

account to determine the base amount on which to withhold.

Paragraph (c) incorporates the provisions in Sec. 1.1441-2(c) of

the existing regulations dealing with participants in certain exchange

or training programs and provides additional guidance with respect to

payments of scholarship or fellowship grants to nonresident alien

individuals. It reflects 1988 and 1994 statutory amendments to section

1441 concerning certain visa holders. Such income is subject to a lower

withholding rate of 14 percent under section 871(c). The regulations

propose an alternate withholding election so that taxpayers

[[Page 17627]]

may choose to be subject to the withholding rates applicable to wages,

which in many cases are likely to result in a lower rate. Also,

individuals who receive both scholarship or grants and compensation

income from the same withholding agent could choose to combine all

income on Form 8233 to claim a reduced rate under a tax treaty for both

types of income.

Paragraphs (d) (dealing with annuities) and (e) (dealing with

central banks of issue and the Bank of International Settlement) merely

reflect conforming changes regarding the proposed documentation

requirements.

Section 1.1441-5 Withholding on Payments to Pass-Through Entities

The existing regulations in Sec. 1.1441-5 address claims of U.S.

status. These provisions are restated, with modifications, in proposed

Sec. 1.1441-1(d).

This section, as revised, would provide special withholding

procedures for payments to partnerships. Paragraph (a) deals with

domestic partnerships. As under current regulations, payments to

domestic partnerships would not require withholding, even if the

partners were foreign persons. A domestic partnership is the

withholding agent for items of income included in the distributive

share of a partner that is a foreign person. Paragraph (b) proposes to

modify the current rules for payments to foreign partnerships to permit

a look-through approach, so that claims of reduced rate could be

presented by the partnership on behalf of the partners (including

partners that are U.S. persons). The look-through approach would apply

through tiers of foreign partnerships. In the alternative, a foreign

partnership could, under an agreement with the IRS, become a qualified

intermediary so that the partners' documentation would not have to be

furnished to the withholding agent. See proposed Sec. 1.1441-1(e)(5)

for rules applicable to qualified intermediaries. Paragraph (b)(2)

clarifies how the look-through approach would operate in the case of a

tiered partnership. Generally, the partnership would have to look

through tiers until it reached the beneficial owner (as determined

under proposed Sec. 1.1441-1(c)(6)). However, it could stop at any

level in the chain that constitutes a payee (as defined in proposed

Sec. 1.1441-1(c)(3)).

Section 1.1441-6 Claim of a Reduced Rate Under an Income Tax Treaty

The proposed regulations eliminate the ``address'' rule in

Sec. 1.1441-6(c)(1) of the existing regulations and in regulations

under several income tax treaties, which permits a withholding agent to

grant a reduced rate of tax under a treaty based upon the address of

the payee (including a nominee). Paragraph (b)(1) provides general

procedures for reliance by a withholding agent on a claim for a reduced

rate of withholding under a treaty based upon the documentation

requirements described in proposed Sec. 1.1441-1(e)(1)(i). A

withholding agent could rely upon a beneficial owner withholding

certificate described in proposed Sec. 1.1441-1(e)(2) as establishing

both foreign status and residence in the treaty country provided a TIN

is stated on the certificate. In addition, in the case of dividends

with respect to which an advance ruling is required in order to secure

the reduced rate of tax under the tax treaty, the withholding

certificate would have to state that the beneficial owner has obtained

such a ruling. Such rulings are currently required under a very limited

number of tax treaties: Austria, Denmark, Ireland, and Switzerland. See

paragraph (e) regarding the procedures for obtaining such a ruling.

Further, for amounts exceeding $500,000 in the aggregate for the

taxable year paid to a beneficial owner related to the withholding

agent, the beneficial owner would have to indicate on the certificate

that it will file a Form 8833 under section 6114. The regulations under

section 6114 are proposed to be modified accordingly. Claims of treaty

benefit could also be made on the basis of an intermediary withholding

certificate described in proposed Sec. 1.1441-1(e)(3). Further, a U.S.

withholding agent could act through an authorized foreign agent

described in proposed Sec. 1.1441-7(c)(2).

Paragraph (b)(2) provides special rules for certain dividends paid

on stock that is traded on a U.S. established market. For these

dividends, the withholding agent could grant treaty benefits based upon

the same documentation procedures as are proposed to apply to portfolio

interest on registered obligations (e.g., no TIN is required on a

beneficial owner withholding certificate). See proposed Sec. 1.871-

14(c)(2). Paragraph (b)(3) provides that the competent authorities may

agree to different certification procedures under an applicable tax

treaty.

Paragraph (b)(4) clarifies the manner in which beneficial owners

could claim benefits under a tax treaty where foreign law principles

apply to identify the beneficial owner of a payment made to a foreign

entity. Under proposed Sec. 1.1441-1(c)(6)(ii)(B), the beneficial owner

would be determined based upon the laws of the country whose tax treaty

with the United States is invoked to claim a reduced rate of tax.

These procedures are intended to apply in a reciprocal manner.

Therefore, paragraph (b)(4)(iv) provides that, if the IRS determined

that a treaty partner is not identifying beneficial owners in a similar

manner and, as a result, denies benefits under an otherwise applicable

treaty to an entity organized in the United States or to interest

holders residing in the United States, the benefits of these procedures

could be suspended for entities organized, or interest holders

residing, in that country until the competent authorities reached a

reciprocal agreement on the application of treaty benefits in such

cases. Suspension of benefits under this provision would be effective

on a prospective basis only.

Paragraph (c) states the rules regarding certification of a TIN by

the IRS. These procedures would apply to payments for which a Form W-8

is furnished with a TIN. They are directed to beneficial owners (or

their agents) and are designed to ensure that the IRS can verify the

beneficial owner's status as a resident of a treaty country based upon

the information return later filed by the withholding agent on Form

1042-S. If the IRS determined that the TIN does not support the

beneficial owner's claim of residence in the treaty country, it would

so notify the withholding agent. The IRS could waive the requirement

that a taxpayer certify its TIN with the IRS when it implements

procedures to verify a taxpayer's status directly with a foreign

competent authority. The IRS could also certify a TIN based upon

representations made by a qualified intermediary.

The IRS would certify a TIN based upon a certificate of residence

or documentary evidence. Paragraph (c)(3) describes a certificate of

residence as a certificate issued by the tax authorities of the treaty

country certifying that the taxpayer files income tax returns as a

resident of that country and is current on his filing obligations.

Paragraph (c)(4) describes documentary evidence as a document that is

no more than three-years old and sufficiently identifies the person and

the residence of that person in the treaty country.

Paragraph (e) incorporates the provisions in existing regulations

that condition the benefit of the reduced five-percent rate on related

party dividends to an advance ruling from the IRS determining that the

parent-subsidiary relationship is not established or maintained with

the principal purpose to secure the reduced rate. The ruling would be

required only

[[Page 17628]]

if so required under an applicable treaty. It must be requested prior

to the payment of the dividend. While a request made after payment

would not disqualify the dividend from the benefit of the reduced rate

if a favorable ruling is later obtained, the withholding agent would

nevertheless withhold. Failure to do so would subject the withholding

agent to an interest charge under section 6601. Also, the withholding

agent would be liable for the tax and related penalties if a favorable

ruling were not issued. See proposed Sec. 1.1441-1(f)(5) regarding the

consequences to the withholding agent when it does not withhold the

full amount even though it does not hold the required documentation

prior to payment.

The regulations are proposed to be effective for payments made

after December 31, 1997. However, certificates issued on or before the

date that is 60 days after these regulations are published as final

regulations will continue to be valid until they expire, based upon

existing regulations. In addition, because no documentation is

currently required for dividends, the regulations propose a transition

rule that would allow dividends paid on publicly-traded stock to

accounts in existence on or before a date that is 60 days after these

regulations are published as final regulations to continue to be

subject to the current address rule until December 31, 1999.

Section 1.1441-7 General Provisions Relating to Withholding Agents

This section modifies Sec. 1.1441-7 of the existing regulations

dealing with withholding agents. Paragraph (a) clarifies that a

withholding agent is any person that has the control, receipt, custody,

disposal, or payment of an item of income and not merely a person that

pays or causes an amount to be paid. If there are several withholding

agents with respect to one payment, only one tax should be withheld and

only one return should be filed.

Paragraph (b) restates the ``actual knowledge or reason to know''

standards applicable to a withholding agent as in effect under current

law. The IRS and Treasury are aware that the application of a ``reason

to know'' standard without limitation may be impractical in the case of

financial institutions handling large volumes of transactions for many

customers. Therefore, the regulations propose to limit the due

diligence expected from withholding agents paying portfolio interest,

deposit interest, or dividends on publicly traded stock. Under

paragraph (b)(2)(ii), a withholding agent's due diligence regarding a

beneficial owner certificate would be limited to examining the address

stated on the certificate. If this information indicated that the

beneficial owner might be a U.S. taxpayer or conflicted with

information that the withholding agent otherwise had in its records for

that account, the withholding agent would have to obtain specified

documentation to verify the beneficial owner's claim of foreign status

or residence. Paragraph (b)(3) proposes to incorporate rules consistent

with those under section 3406 dealing with universal accounts.

Therefore, if the withholding agent used a system of universal

accounts, it would be required to use that system to determine the

scope of its due diligence under the regulations.

Paragraph (c) restates and expands the provisions in Sec. 1.1441-

7(b) of the existing regulations pertaining to authorized agents and

adds provisions regarding an authorized foreign agent. This new concept

is intended to facilitate compliance by U.S. withholding agents that

make payments through their agent abroad. By imputing the acts of a

foreign agent to a U.S. withholding agent, the required documentation

could remain with the foreign agent and would not have to be provided

to the U.S. withholding agent. However, the regulations require that

the agent be ``authorized'' in order to insure that the IRS can verify

the foreign agent's compliance with the withholding procedures, which,

in turn, would determine whether the U.S. withholding agent has itself

complied. See proposed Sec. 1.1461-1 (b)(2)(iii) and (c)(4)(iii)

regarding corresponding filing requirements.

Section Sec. 1.1441-7(b)(3) of the Existing Regulations is Proposed

to be Deleted, Pending Comments on the Continuing Necessity of

Providing Guidance on Tax-Free Covenant Bonds

Paragraph (d) restates without changes the provisions in

Sec. 1.1441-7(a)(2) of the existing regulations dealing with the United

States as a withholding agent. Paragraph (e) restates without changes

the provisions in Sec. 1.1441-3(c)(2) of the existing regulations

dealing with assumed obligations. Section Sec. 1.1441-7(c) of existing

regulations dealing with payments other than money would be deleted and

restated in proposed Sec. 1.1441-3(f) dealing with withholding

procedures for payments in kind.

Section 1.1441-8T Foreign Government and International Organization

Exemption From Withholding

This section exempts from withholding certain types of income

excluded from gross income under section 892 that are paid to foreign

governments and international organizations. Revisions are proposed to

paragraph (b) of the existing regulations to conform the certification

procedures to the proposed withholding certificate procedures described

in proposed Sec. 1.1441-1(e)(1)(i). Therefore, Form 8709 would be

replaced by the standard withholding certificate (Form W-8), meaning

that foreign governments and international organizations would be

relieved from the requirement to furnish annual certification. A

foreign government or an international organization would not be

required to furnish a tax identifying number. However, if it did, the

certificate would be valid indefinitely for income required to be

reported on Form 1042 or for which the withholding agent reports the

TIN to the IRS. See proposed Sec. 1.1441-1(e)(4)(ii).

Section 1.1441-9 Exemption From Withholding on Exempt Income of

Foreign Tax-Exempt Corporations and Foreign Private Foundations

This new section provides that income paid to a foreign

organization described in section 501(c) would not be subject to

withholding under section 1442 if the income were not subject to tax as

unrelated business income under section 511 and the entity were exempt

from tax under section 501(a). For purposes of granting a reduced rate,

a withholding agent could rely on a withholding certificate satisfying

the requirements of proposed Sec. 1.1441-1(e)(1). A beneficial owner

certificate must include a taxpayer identifying number and must certify

that it will not be subject to tax under section 511, and that the IRS

has issued a determination letter. In the absence of such a letter, the

beneficial owner should provide an opinion of counsel stating that the

organization meets the conditions for a tax exemption under section

501(c). Since the affidavit requirement for foreign foundations is

proposed to be eliminated, foreign tax-exempt organizations would be

subject to the same documentation requirements as would apply to

foreign foundations under proposed Sec. 1.1443-1(b).

[[Page 17629]]

Section 1.1461-1 Deposit and Return of Tax Withheld

The provisions in Sec. 1.1461-1 of the existing regulations

pertaining to ownership certificates for bond interest are proposed to

be deleted. Interest on bonds described in this section would be

subject to the regular procedures provided in the regulations under

sections 1441 and 1443. The special rules would no longer be necessary

in view of the substitute procedures provided in the proposed

regulations. Comments are solicited as to the continuing need for

provisions governing tax-free covenant bonds.

Section 1.1461-1 contains proposed procedures for withholding

agents to pay the withheld tax and file the annual income tax return

and information returns with respect to payments of income subject to

section 1441 withholding. Paragraph (a) restates Sec. 1.1461-3 of the

existing regulations regarding the payment of amounts withheld. The

provisions regarding pre-1973 years are proposed to be deleted as

obsolete. Paragraph (b) revises Sec. 1.1461-2(b) of the existing

regulations on the filing of returns of amounts withheld. Paragraph

(b)(1) clarifies that the Form 1042 must include the total amount of

income paid during the preceding calendar year. Also, the filing date

is changed from March 15 to February 28 in order to conform with the

filing dates for Form 1099. The proposed regulations would eliminate

the requirement to attach the Forms 1042-S to the return. Instead, the

Forms 1042-S would have to be filed separately with a transmittal form.

See paragraph (c)(1)(i).

Paragraph (b)(2) describes applicable return requirements for

multiple withholding agents. Generally, as under current rules, only

one Form 1042 would have to be filed for an item of income. Exceptions

to this general rule are provided for payments to qualified

intermediaries where the U.S. withholding agent would have to file a

return, regardless of whether the qualified intermediary assumed

primary withholding responsibility for the payment and regardless of

whether the qualified intermediary were also required to file a return

under its agreement with the IRS. Another exception would be provided

for payments to an authorized foreign agent. In that case, the U.S.

withholding agent and the authorized foreign agent would each be

required to make a return. The return of the withholding agent would

report amounts paid to the authorized foreign agent. The return of the

authorized foreign agent would report amounts paid to the beneficial

owner or its intermediaries.

Paragraph (b)(3) requires that changes to the originally filed Form

1042 be filed on an amended return on a new Form 1042X. This change is

designed to facilitate the processing of returns by the IRS and would

be consistent with the procedures for filing other amended returns.

Paragraph (c) revises the provisions in Sec. 1.1461-2(c) of the

existing regulations regarding the filing of information returns on

Form 1042-S. As under existing regulations, any income subject to

withholding must be reported on an information return on Form 1042-S

and a return would be due irrespective of the fact that no tax was

withheld (e.g., the beneficial owner claimed an exemption or the

withholding agent failed to withhold).

The provisions of Sec. 1.1461-2(c)(3) of the existing regulations

requiring that the name of the beneficial owner be reported on Form

1042-S would be retained. However, more detailed guidance is provided

regarding reporting of income paid to intermediaries. See paragraph

(c)(4) below dealing with multiple agents. The proposed regulations

eliminate as unnecessary the requirements under existing regulations to

attach any certificate, form, or statement to the return.

Paragraph (c)(1)(ii) proposes new rules pertaining to joint owners.

A single Form 1042-S may be provided to one of the joint owners. In

that case, the withholding agent should provide the Form 1042-S to the

joint owner whose status determines the tax withheld. Further, any one

owner may request a separate Form 1042-S, but the total amounts of

income and tax reported paid and withheld on all the forms 1042-S may

not exceed the total amount of income actually paid and tax actually

withheld.

Paragraph (c)(2) replaces Sec. 1.1461-2(c)(1) of the existing

regulations and states that the items of income that are subject to

reporting on Form 1042-S are those items of income subject to

withholding, income from a notional principal contract, and amounts

described in sections 6041 through 6050P that are paid to a foreign

person and are not exempt from reporting under those sections or the

corresponding regulations. This provision is intended to standardize

reports of payments to foreign persons to the IRS and should simplify

compliance by withholding agents. Paragraph (c)(2)(ii) lists the

exceptions to reporting on a Form 1042-S. As under current regulations,

items of income exempt from reporting include portfolio interest on a

bearer obligation and original issue discount on short-term

obligations. An explicit exception for reporting on deposits described

in section 871(i)(2)(A) would be added. However, bank deposit interest

that is subject to withholding under section 1441 (because, for

example, documentation was not furnished but payments were made to a

foreign address; see special grace period provisions under proposed

Sec. 1.1441-1(f)(2)(i)(B)) would have to be reported. Also, interest on

bank deposit interest paid to Canadian residents would have to be

reported based upon provisions under final regulations under section

6049 published in the Rules and Regulations section of this issue of

the Federal Register. In addition to the items excepted from reporting

under existing Sec. 1.1461-1(c)(1), other items are added that prevent

duplicative reporting. Finally, the proposed regulations would clarify

that to the extent group-term life insurance and other items of income

required to be reported pursuant to the provisions in Secs. 1.6041-2

and 1.6052-1 can be associated with wages required to be reported on a

Form W-2, then such items may also be reported on a Form W-2 instead of

a Form 1042-S.

Paragraph (c)(3) restates the provisions of Sec. 1.1461-2(c)(2) of

the existing regulations regarding the types of information to be

included on Form 1042-S. It clarifies that the information could be

based on the information furnished by or on behalf of the beneficial

owner, as corrected based on the withholding agent's actual knowledge

if necessary. In addition, the Form 1042-S would have to include the

TIN of the beneficial owner if required to be shown on the withholding

certificate. Also, a beneficial owner's TIN that the beneficial owner

is not required to furnish but which is actually known to the

withholding agent would have to be reported on Form 1042-S.

Paragraph (c)(4) is added to provide rules for filing Form 1042-S

where there are multiple withholding agents. Generally, as with the

Form 1042, only one Form 1042-S must be filed with respect to an item

of income. Current rules requiring the withholding agent to identify

the beneficial owners of payments made to agents, nominees, or

representatives, if known, would be eliminated for payments to an

intermediary that either claims to be a qualified intermediary or is an

authorized foreign agent. In all other cases, the information on a Form

1042-S must be reported for each beneficial owner. This would modify

Sec. 1.1461-

[[Page 17630]]

2(c)(3)(i) of the existing regulations providing that beneficial owner

information be reported only if known. For payments made to a person

claiming to be a qualified intermediary or is an authorized foreign

agent, each withholding agent in the chain would be permitted to report

on one Form 1042-S reflecting the payment made to the next qualified

intermediary or authorized foreign agent in the chain. In the case of a

payment to an authorized foreign agent, however, the withholding agent

would be excused from the requirement to report the beneficial owner

information only to the extent that the authorized foreign agent

actually complies with the filing requirements under paragraph

(c)(4)(iv).

Paragraph (c)(5) is added to cross-reference the magnetic media

filing requirements applicable to Forms 1042-S under Sec. 1.6011-1(c).

Generally, a filer of 250 or more Forms 1042-S must file on magnetic

media, unless a waiver is granted.

Paragraph (d) would allow a withholding agent to provide a list of

taxpayer identifying numbers furnished by or on behalf of beneficial

owners to the extent the agent has relied upon such number to grant a

reduced rate of withholding tax. This is a special filing procedure

under which the reporting of the associated amount of income would not

be have to be reported.

Finally, paragraph (e) clarifies the provisions regarding

indemnification of withholding agents. Section 1461 indemnifies a

withholding agent from the claim of any person for the amount of any

payments made in accordance with the provisions of chapter 3 of the

Code. Some commentators and withholding agents have expressed concerns

that section 1461 could be interpreted to limit indemnification to

amounts that were required to be withheld. The proposed regulations

clarify that a withholding agent that withheld based upon a reasonable

belief that such amount was withheld in accordance with chapter 3 of

the Code would be treated for purposes of section 1461 as having

withheld in accordance with chapter 3 (even though it is later

determined that the withholding agent's application of the rules was

incorrect). Additionally, a withholding agent would be indemnified

against any claim of any person for the amount of any withholding made

in accordance with the grace period provisions under proposed

Sec. 1.1441-1(f)(2)(ii).

Paragraph (f) restates without changes Sec. 1.1461-2(f) of the

existing regulations dealing with amounts that may not constitute gross

income, in whole or in part. This rule would apply to amounts subject

to withholding under proposed Secs. 1.1441-3(b)(1) or 1.1441-3(d).

Paragraph (g) is added to provide guidance on requests of

extensions of time to file Form 1042, Forms 1042-S, and to furnish

Forms 1042-S to recipients. The rules with respect to such requests

would parallel those under section 6081. A change would be made,

however, to the form to be used for making a request for an extension

of time to file Forms 1042-S.

Currently, these requests are made on Form 2758; the proposed

regulations require such a request to be made on Form 8809.

Section 1.1461-2 Adjustments for Overwithholding and Underwithholding

of Tax

This section has also been renumbered and, although the rules are

the same as those of the current regulations in Sec. 1.1461-4, it has

been redrafted to simplify the language and to update the examples.

Specifically, the rule for reimbursements remains the same, but the

rule in proposed Sec. 1.1461-4(b) with respect to the adjustment of tax

payments or deposits is now titled ``set-offs,'' which more accurately

describes the adjustment process.

Section 1.1462-1 Withheld Tax as Credit to Recipient of Income

Section 1.1462-1(a) is clarified by stating that the amount of

income from which the tax is required to be withheld includes the

amount calculated under the gross-up formula in proposed Sec. 1.1441-

3(e)(3).

Section 1.1463-1 Tax Paid by Recipient of Income

This section provides that if the income tax for which the

beneficial owner and the withholding agent have joint liability under

section 1461 has been paid by either one of them, the IRS may not

collect from the other, regardless of the original liability for the

tax. This section has been changed to reflect the 1989 statutory

amendment (Pub. L. 101, 239, Sec. 7743(a)) that provides for the

imposition of interest and penalties on the party that fails to

withhold.

Prior Proposed Regulations Under Section 871 and Chapter 3 of the Code

In 1976, proposed regulations were published relating primarily to

withholding and original issue discount. In 1984, proposed regulations

were published relating primarily to claims of benefits under income

tax treaties. These proposed regulations were contained in project

number LR-2043, published on July 12, 1976 (41 FR 28517) and project

number LR-271-83, published on September 10, 1984 (49 FR 35511). Both

proposed regulations are being withdrawn on April 22, 1996.

Regulations Under Sections 6041, 6041A, 6042, 6045, 6049, and 6050N

These proposed regulations provide exceptions from information

reporting and backup withholding under sections 3406, 6041, 6041A,

6042, 6045, 6049, and 6050N for payments to foreign beneficial owners

and for income paid by certain foreign payors or middlemen.

Generally the regulations clarify and simplify the regulations

under sections 3406, 6041, 6042, 6045, and 6049 that were proposed on

February 29, 1988, at 53 FR 5991 (1988) (the 1988 proposed

regulations). In addition, the regulations under these sections are

proposed to be revised. The regulations also would add new exceptions

from reporting (including the addition of middleman rules) to sections

6041, 6041A, and 6050N. These proposed revisions and new exceptions

from reporting parallel the exceptions under these proposed regulations

under sections 6042 and 6049. Further, parallel provisions are found in

each section for: definitions of terms (such as non-U.S. payor or non-

U.S. middleman); presumptions as to whether a payee is U.S. or foreign

where the required documentation is lacking, incorrect, or unreliable;

rules for payments to joint owners; and rules for converting into U.S.

dollars amounts paid in foreign currency. In addition, the proposed

regulations specify that the standard of knowledge applicable to payors

and middlemen would be actual knowledge. Thus, the ``reason to know''

standard would not apply for purposes of the reporting provisions.

The subparagraphs under proposed Sec. 1.6042-3(a) (dealing with the

definition of dividends for purposes of information reporting under

that section) are proposed to be restated with changes in drafting

only. The substantive rules in that paragraph would be unchanged and

are, therefore, not reproposed. Also, Sec. 1.6042-3(b) (3) and (4) of

the 1988 proposed regulations (relating to capital gain dividends from

regulated investment companies and payments to exempt recipients) would

be redesignated as subparagraphs (vii) and (viii), respectively, of

proposed Sec. 1.6042-3(b)(1). These rules are not reproposed.

This document also proposes to revise the definition of an exempt

recipient in the case of a corporation. Section Sec. 1.6049-

4(c)(1)(ii)(A) of the 1988 proposed regulations provides that a person

would be treated as a corporation, and therefore as an exempt

[[Page 17631]]

recipient not subject to information reporting, if the name of the

payee or a corporate resolution provided to the payor clearly indicates

corporate status (the eyeball test). These proposed regulations retain

the eyeball test of the 1988 proposed regulations for payments (1)

other than interest, dividends and broker proceeds paid to accounts

established after a date that is 60 days after the date that these

regulations are published as final regulations in the Federal Register

and (2) other than interest, dividends and broker proceeds that are not

paid to a person to whom the payor has an account relationship. For

interest and dividends paid to a new account, the entity would be

required to provide either a corporate resolution or similar document

that clearly indicates corporate status, a Form W-9 with an EIN, or a

Form W-8. For interest and dividends paid where an account relationship

does not exist, the payor may continue to rely on the eyeball test if

the payor also has a mailing address of the payee in the United States.

The IRS and Treasury understand that financial institutions routinely

request a corporate resolution when opening accounts for entities.

Therefore, requiring such a document would not significantly increase

burden and would improve compliance. This proposed rule is reflected in

paragraph (c)(1)(ii)(A). In addition, the list of international

organizations under paragraph (c)(1)(ii)(G) is proposed to be

eliminated as a simplification measure.

In addition, the 1988 proposed regulations under Sec. 1.6049-5 are

proposed to be substantially redrafted, although without significant

substantive changes. Paragraph (b)(6) provides an exception from

reporting for amounts from sources outside the United States paid

outside the United States by a non-U.S. payor or non-U.S. middleman.

This provision duplicates that found in the 1988 proposed regulations

at proposed Secs. 1.6049-5(b)(8) and 1.6049-5(d)(3) (i), (ii), and the

foreign source portion of proposed Sec. 1.6049-5(d)(3)(iii).

Paragraph (b)(7) (which corresponds to Sec. 1.6049-5(c)(6) of the

1988 proposed regulations) would except portfolio interest paid on

bearer obligations if paid outside the United States. In these proposed

regulations, this exception would not apply where a U.S. middleman acts

as a custodian, nominee, or other agent of the payee and collects the

amount for, or on behalf of, the payee, whether or not the middleman is

also acting as agent of the payor. Paragraph (b)(8) (which corresponds

to Sec. 1.6049-5(c)(6) of the 1988 proposed regulations) provides an

exception for portfolio interest paid on registered obligations.

The provisions of Sec. 1.6049-5(b)(9) of the 1988 proposed

regulations, which excepted from reporting amounts paid by an

international organization (or its agent) on an obligation issued by

the international organization are proposed to be incorporated in

paragraph (b)(9) of these new proposed regulations. These rules are not

reproposed.

Paragraph (b)(10) (which corresponds to Sec. 1.6049-5(c)(5)(ii) of

the 1988 proposed regulations) provides an exception for certain short-

term foreign targeted obligations. Paragraph (b)(11) (which corresponds

to Sec. 1.6049-5(e)(1) (the parenthetical language) and Sec. 1.6049-

5(e)(2) (i) and (ii) of the proposed 1988 proposed regulations)

provides an exception for certain foreign-targeted obligations issued

by persons engaged in the banking business. Although the 1988 proposed

regulations limited the exceptions at Sec. 1.6049-5(e)(2) (i) and (ii)

to Canadians, these proposed regulations expand the scope of the

exceptions to apply to all beneficial owners. However, as under the

1988 proposed regulations, the exception would not apply where a U.S.

middleman acts as an agent of the payee.

Paragraph (b)(12) (which corresponds to Secs. 1.6049-5(b)(7) and

(c) (1), (2), and (3) of the 1988 proposed regulations) would except

any amount of U.S. source interest subject to withholding under section

1441. Such interest would be required to be reported on a Form 1042-S

under proposed Sec. 1.1461-1(c). This exception would replace

Sec. 1.6049-5(b)(1)(vi), (b)(1)(vi)(B)(1) and (b)(2)(iv) of the

existing regulations, which provide an exception for reporting for bank

deposit interest paid to a foreign person, but only if a Form W-8 (or

documentary evidence in appropriate cases) is provided to the payor.

The withholding certificate requirement for bank deposit interest is

now found at proposed Sec. 1.1441-2(d)(2).

Paragraph (b)(13) provides a new exception for assets blocked

pursuant to an executive order.

Paragraph (b)(14) provides the general rule for exempting any other

amount of otherwise reportable interest based on specified

documentation furnished to the payor or middleman. The standards of

documentation are described in paragraph (c) and would generally

parallel the documentation standards proposed for purposes of claiming

a reduced rate of withholding under section 1441. Therefore, the payor

could rely on a beneficial owner or intermediary withholding

certificate described in proposed Sec. 1.1441-1(e)(1)(i) provided it

complied with the procedures described in proposed Sec. 1.1441-1(e)(4)

(iv) and (v) (dealing with on-line confirmation and notification

procedures). No taxpayer identifying number is required to be stated on

a beneficial owner withholding certificate. These proposed regulations

retain the permission under current regulations to furnish documentary

evidence instead of a certificate for payments made to an off-shore

account. The on-shore and off-shore distinction is similar to that

found in the 1988 proposed regulations. The provisions of the 1988

proposed regulations contained in paragraphs (d), (e), (f), (g), (h),

(i), and (l) are withdrawn. Proposed paragraphs (j) (relating to

payments outside the United States) and (k) (dealing with original

issue discount) of the 1988 proposed regulations would be renumbered as

paragraphs (e) and (f), respectively. The provisions in these

paragraphs are not restated.

Section 31.3401(a)(6)-1(e)--Income Exempt From Income Tax

This section is amended to reflect the new certification procedures

under proposed Secs. 1.1441-1(e).

Backup Withholding Regulations Under Section 3406

Several changes to the backup withholding regulations under section

3406 are proposed to conform those regulations to the proposed

information reporting and chapter 3 withholding regulations. Section

31.3406(d)-3 (c) would be amended to extend to 90 days the current 30-

day grace period applicable to readily tradeable instruments acquired

directly from a payor if the payment were made to a person for whom

indicia of foreign status existed, as described in proposed

Sec. 1.1441-1(f)(2)(i)(B).

Section 31.3406(g)-1(e) would revise the proposed regulations

contained in project number IA-224-82 published in the Federal Register

on September 27, 1990 (55 FR 39427) to restate the principles that no

backup withholding applies under section 3406 to reportable payments

made outside the United States even though documentary evidence of non-

U.S. status may be required in order to exempt the payment from 1099

reporting, unless the payor has actual knowledge that the payee is a

United States person. The regulations propose to add an exception for

notional principal contract payments that are made outside the United

States.

Amendments to Sec. 31.6413(a)-3

The regulations under Sec. 31.6413(a)-3 are proposed to be amended

in order to

[[Page 17632]]

allow payers to refund backup withholding in certain circumstances.

Those regulations currently prohibit a refund of backup withholding

except when erroneous withholding has occurred. It is proposed to

expand the definition of erroneous withholding to a situation where the

withholding agent backup withholds because the payee fails to provide

sufficient documentation as required under section 3406 and 1441 and

the regulations under these sections. Where an appropriate withholding

certificate is later provided, the withholding agent could treat the

earlier withholding as erroneous withholding. However, the withholding

certificate should to be received prior to the end of the calendar year

in which the payment is made and prior to the time the payor furnishes

a Form 1099 to the payee with respect to the payment for which the

withholding erroneously occurred. The amount refunded would be the

amount actually withheld less the amount required to be withheld, if

any, under chapter 3 of the Code.

Removal of Q&A Regulations

The existing regulations under part 35a are proposed to be removed

in order to reflect the proposed revisions in this document.

Amendments to Sec. 301.6109-1

Amendments to the regulations under this section are currently

pending to authorize the IRS to issue taxpayer identifying numbers to

certain foreign persons and to require a taxpayer to state a TIN on any

tax return filed (other than an information return). These regulations

are proposed to be further amended to require that a TIN be stated on

withholding certificates as may be required under the regulations

proposed under sections 1441, 1442, and 1443.

Amendments to Sec. 301.6114-1

The regulations under section 6114 are proposed to be amended to

require certain foreign entities to file a Form 8833 if they are

claiming to be qualified under a limitation of benefits provision under

an income tax treaty, even though the income is also reported on a Form

1042 by the withholding agent. The filing requirement would be limited

to payments between related parties that exceed $500,000 for the

taxable year. See proposed Sec. 1.1441-6(b)(1).

Amendments to Sec. 301.6402-3(e)

Paragraph (e) of the regulations under Sec. 301.6402-3 is proposed

to be amended to require that returns filed to claim a refund of tax

include the taxpayer's TIN. In addition, the Form 1042-S would have to

be attached to the return and also show the taxpayer's TIN.

Removal of Certain Regulations Under Tax Conventions

This document proposes to remove certain regulations issued under

income tax conventions between the United States and Greece, Germany,

Switzerland, Ireland, France, Austria, Pakistan, Sweden and Denmark.

Removal of these regulations will be done in consultation with the

competent authorities of these countries.

Special Analyses

It has been determined that this notice of proposed rulemaking is

not a significant regulatory action as defined in EO 12866. Therefore,

a regulatory assessment is not required. It has also been determined

that section 553(b) of the Administrative Procedure Act (5 U.S.C.

chapter 5) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do

not apply to these regulations, and, therefore, a Regulatory

Flexibility Analysis is not required. Pursuant to section 7805(f) of

the Internal Revenue Code, these regulations will be submitted to the

Chief Counsel for Advocacy of the Small Business Administration for

comment on their impact on small business.

Comments and Requests for a Public Hearing

Before these proposed regulations are adopted as final regulations,

consideration will be given to any written comments (a signed original

and eight (8) copies) that are submitted timely to the IRS. All

comments will be available for public inspection and copying. A public

hearing will be scheduled on a date, time, and place as will be

published in the Federal Register.

List of Subjects

26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 31

Employment taxes, Income taxes, Penalties, Pensions, Railroad

retirement, Reporting and recordkeeping requirements, Social security,

Unemployment compensations.

26 CFR Part 35a

Employment taxes, Income taxes, Reporting and recordkeeping

requirements.

26 CFR Part 301

Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income

taxes, Penalties, Reporting and recordkeeping

26 CFR 502

Greece, Reporting and recordkeeping requirements, Tax treaties.

26 CFR Part 503

Germany, reporting and recordkeeping requirements, Tax treaties.

26 CFR Part 509

Switzerland, Reporting and recordkeeping requirements, Tax

treaties.

26 CFR Part 513

Ireland, Reporting and recordkeeping requirements, Tax treaties.

26 CFR Part 514

France, Reporting and recordkeeping requirements, Tax treaties.

26 CFR 516

Austria, Reporting and recordkeeping requirements, Tax treaties.

26 CFR Part 517

Pakistan, Reporting and recordkeeping requirements, Tax treaties.

26 CFR Part 520

Sweden, Reporting and recordkeeping requirements, Tax treaties.

26 CFR Part 521

Denmark, Reporting and recordkeeping requirements, Tax treaties.

Proposed Amendment to the Regulations

Accordingly, under the authority of 26 U.S.C. 7805, 26 CFR chapter

I is proposed to be amended as follows:

PART 1--INCOME TAXES

Paragraph 1. The authority citation for part 1 is amended by adding

entries in numerical order and removing the entry for Sec. 1.1441-4T to

read as follows:

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

Section 1.1441-2 also issued under 26 U.S.C. 1441(c)(4) and 26

U.S.C. 3401(a)(6).

Section 1.1441-3 also issued under 26 U.S.C. 1441(c)(4) and 26

U.S.C. 3401(a)(6). * * *

Section 1.1441-6 also issued under 26 U.S.C. 1441(c)(4) and 26

U.S.C. 3401(a)(6).

Section 1.1441-7 also issued under 26 U.S.C. 1441(c)(4) and 26

U.S.C. 3401(a)(6). * * *

[[Page 17633]]

Sec. 1.163-5 [Amended]

Par. 2. In Sec. 1.163-5 paragraph (c)(2)(i)(B)(5) is amended by

removing the language ``subdivision (iii) of A-5 of Sec. 35a.9999-4T''

in the last sentence and adding ``Sec. 1.6049-5(c)(2)(ii)'' in its

place.

Par. 3. Section 1.165-12(c) is amended by:

1. Removing paragraph (c)(1)(iii).

2. Redesignating paragraphs (c)(1)(iv) and (c)(1)(v) as paragraphs

(c)(1)(iii) and (c)(1)(iv), respectively.

3. Amending paragraphs (c)(1)(i) and (c)(1)(ii) by removing the

language ``(c)(1)(v)'' and adding ``(c)(1)(iv)'' in its place.

4. Revising newly designated paragraph (c)(1)(iii). The revision

reads as follows:

Sec. 1.165-12 Denial of deduction for losses on registration-required

obligations not in registered form.

* * * * *

(c) * * *

(1) * * *

(iii) The holder may deliver an obligation in bearer form that is

offered or sold inside the United States only if the holder delivers it

to a financial institution that is purchasing for its own account, the

account of another foreign institution, or an exempt organization that

will comply with the requirements of section 165(j)(3) (A), (B), or

(C). The holder may deliver a registration-required obligation in

bearer form that is offered and sold outside the United States to a

person other than a financial institution only if the holder has

evidence in its records that such person is not a U.S. citizen or

resident and does not have actual knowledge that such evidence is

false. Such evidence may include a statement by that person that is

delivered electronically. For purposes of this paragraph (c), the term

deliver includes a transfer of an obligation evidenced by a book entry

including a book entry notation by a clearing organization evidencing

transfer of the obligation from one member of the organization to

another member. For purposes of this paragraph (c), the term deliver

does not include a transfer of an obligation to the issuer or its agent

for cancellation or extinguishment.

* * * * *

Par. 4. Section 1.871-14 is added to read as follows:

Sec. 1.871-14 Rules relating to repeal of tax on interest of

nonresident alien individuals and foreign corporations received from

certain portfolio debt investments.

(a) General rule. No tax shall be imposed under sections

871(a)(1)(A), 871(a)(1)(C), 881(a)(1) or 881(a)(3) on any portfolio

interest as defined in sections 871(h)(2) and 881(c)(2) received by a

foreign person. But see section 871(h) or 882(a) if such interest is

effectively connected with the conduct of a trade or business within

the United States.

(b) Rules concerning obligations not in registered form--(1) In

general. [Reserved] For further guidance, see Sec. 35a.9999-5(a),

Answer 1.

(2) Convertible obligations. [Reserved] For further guidance, see

Sec. 35a.9999-5(c), Answers 18 and 19.

(3) Coordination with withholding and reporting rules. See

Sec. 1.1441-2(d)(1)(i) for an exception from documentation requirements

otherwise applicable for purposes of section 1441. See section 6049 and

Sec. 1.6049-5(b)(7) for rules relating to an exemption from Form 1099

reporting and backup withholding under section 3406.

(c) Rules concerning obligations in registered form--(1) In

general. In the case of interest paid on an obligation that is in

registered form, the term portfolio interest means any interest

(including original issue discount)--

(i) That is paid on an obligation issued after July 18, 1984;

(ii) That would be subject to tax under section 871(a)(1)(A),

871(a)(1)(C), 881(a)(1) or 881(a)(3) but for section 871(h) or 881(c);

and

(iii) With respect to which a United States (U.S.) person otherwise

required to deduct and withhold tax under section 1441(a) or 1442(a)

receives a statement that meets the requirements of section 871(h)(5)

that the beneficial owner of the obligation is not a U.S. person.

(2) Required statement. A U.S. person will be considered to have

received a statement that meets the requirements of section 871(h)(5)

if either it complies with one of the procedures described in this

paragraph and does not have actual knowledge or reason to know that the

beneficial owner is a U.S. person or it complies with the procedures

described in paragraph (d) or (e) of this section.

(i) The U.S. person (or its authorized foreign agent described in

Sec. 1.1441-7(c)(2)) complies with the withholding certificate

procedures described in Sec. 1.1441-1(e)(1).

(ii) The U.S. person complies with the documentary evidence

procedures described in Sec. 1.6049-5(c)(2)(ii) (but only if payments

are made outside the United States with respect to offshore accounts).

See Sec. 1.6049-5(e) for determining the place of payment and

Sec. 1.6049-5(d)(3) for a definition of offshore accounts.

(iii) [Reserved] For further guidance, see Sec. 35a.9999-5(b),

Answer 9, sentences 5 through 13.

(iv) The U.S. person complies with procedures that the U.S.

competent authority may agree to with the competent authority of a

country with which the United States has an income tax treaty in

effect.

(3) Time for providing certificate or documentary evidence.

Interest on a registered obligation shall qualify as portfolio interest

if the withholding certificate or documentary evidence that must be

provided is furnished before expiration of the beneficial owner's

period of limitation for claiming a refund of tax with respect to such

interest. See, however, Sec. 1.1441-1(f)(5) for consequences to a

withholding agent that makes a payment without withholding even though

it cannot associate the payment with the required documentation prior

to the payment.

(4) Coordination with withholding and reporting rules. For an

exemption from withholding under section 1441 with respect to

obligations described in this paragraph (c), see Sec. 1.1441-2(d)(2).

For rules applicable to withholding certificates, see Sec. 1.1441-

1(e)(4). For application of presumptions when the U.S. person cannot

associate the payment with the required documentation, see Sec. 1.1441-

1(f). For standards of knowledge applicable to withholding agents, see

Sec. 1.1441-7(b). For rules relating to an exemption from Form 1099

reporting and backup withholding under section 3406, see section 6049

and Sec. 1.6049-5(b)(8). For rules relating to reporting on Forms 1042

and 1042-S, see Sec. 1.1461-1(b) and (c).

(d) Application of repeal of 30 percent withholding to pass-through

certificates. [Reserved] For further guidance, see Sec. 35a.9999-5(e),

Answers 21 and 22.

(e) Foreign-targeted registered obligations. [Reserved] For further

guidance, see Sec. 35a.9999-5(b), Answers 12 through 15.

(f) Definitions. For purposes of this section, the terms foreign

person and beneficial owner have the meaning set forth in Sec. 1.1441-

1(c)(2) and (c)(6), respectively; the term withholding agent has the

meaning set forth in Sec. 1.1441-7(a); and the term payment has the

meaning set forth in Sec. 1.1441-2(e).

(g) Effective date--(1) In general. This section shall apply to

payments of interest made after December 31, 1997.

(2) Transition rule. For purposes of paragraph (c)(2)(i) of this

section, a withholding agent that holds a valid Form W-8 on a date that

is 60 days after these regulations are published as final regulations

in the Federal Register may

[[Page 17634]]

treat it as a valid withholding certificate until its validity expires

under applicable provisions as in effect on April 22, 1996.

Par. 5. Section 1.1441-0 is added to read as follows:

Sec. 1.1441-0 Outline of regulation provisions for section 1441.

This section lists captions contained in Secs. 1.1441-1, 1.1441-2,

1.1441-3, 1.1441-4, 1.1441-5, 1.1441-6, 1.1441-7, 1.1441-8T, and

1.1441-9.

Sec. 1.1441-1 Requirement for the deduction and withholding of tax

on payments to foreign persons.

(a) Purpose and scope.

(b) General rule of withholding.

(c) Definitions.

(1) Withholding.

(2) Foreign person.

(3) Payee.

(4) Individual.

(5) Foreign corporations.

(6) Beneficial owner.

(7) Chapter 3 of the Internal Revenue Code.

(d) Claim of U.S. status by payee or beneficial owner.

(1) In general.

(2) Payments to a payee that is a U.S. person.

(3) Payments to a foreign person acting for a U.S. payee.

(e) Beneficial owner's claim of foreign status.

(1) Withholding agent's reliance.

(2) Beneficial owner withholding certificate.

(3) Intermediary withholding certificate.

(4) Applicable rules.

(5) Qualified intermediaries.

(f) Presumptions.

(1) In general.

(2) Reportable payments to non-exempt recipients.

(3) Special rules for scholarships, grants, pensions, annuities,

etc.

(4) Special rules for pass-through entities.

(5) Failure to act in accordance with presumptions.

(6) Reportable payment.

(7) Adjustment, refund, or credit of overwithheld tax.

(g) Effective date.

(1) In general.

(2) Transition rules.

Sec. 1.1441-2 Income subject to withholding.

(a) In general.

(b) Fixed or determinable annual or periodical income.

(1) In general.

(2) Exceptions.

(3) Original issue discount.

(4) Securities lending transactions.

(c) Other income subject to withholding.

(d) Items of income not subject to withholding under section

1441.

(1) Exemptions for which no withholding certificate or

documentation is required.

(2) Exemptions for portfolio interest and income on bank, etc.

deposits requiring a withholding certificate or documentation.

(e) Payment.

(1) General rule.

(2) Income allocated under section 482.

(3) Blocked income.

(4) Special rules for dividends.

(5) Certain interest accrued by a foreign corporation.

(6) Payments other than in U.S. dollars.

(f) Effective date.

Sec. 1.1441-3 Amounts subject to withholding.

(a) Withholding on gross amount.

(b) Withholding on payments on certain obligations.

(1) Withholding at time of payment of interest.

(2) No withholding between interest payment dates.

(c) Corporate distributions.

(1) General rule.

(2) Determination of accumulated and current earnings and

profits on the date of payment.

(3) Special rules in the case of distributions from a regulated

investment company.

(4) Overwithholding of tax.

(d) Withholding on certain gains.

(e) Payments other than in U.S. dollars.

(1) In general.

(2) Payments in foreign currency.

(3) Tax liability of beneficial owner satisfied by withholding

agent.

(f) Conduit financing arrangements.

(g) Effective date.

Sec. 1.1441-4 Certain exemptions from withholding.

(a) Certain income connected with a U.S. trade or business.

(1) In general.

(2) Withholding agent's reliance on a claim of effectively

connected income.

(3) Income on notional principal contracts.

(4) Failure to act in accordance with presumption.

(b) Compensation for personal services of an individual.

(1) Exemption from withholding.

(2) Manner of obtaining withholding exemption under tax treaty.

(6) Personal exemption.

(c) Special rules for scholarship and fellowship income.

(1) In general.

(2) Alternate withholding election.

(d) Annuities received under qualified plans.

(e) Income of foreign central bank of issue or the Bank for

International Settlements.

(f) Effective date.

(1) General rule.

(2) Transition rules.

Sec. 1.1441-5 Withholding on payments to pass-through entities.

(a) Domestic partnerships.

(1) Exemption from withholding on payment to domestic

partnerships.

(2) Withholding by a domestic partnership.

(b) Foreign partnerships.

(1) In general.

(2) Special rules in the case of tiered partnerships.

(3) Presumptions.

(4) Example.

(c) Trusts and estates. [Reserved]

(d) Effective date.

(1) General rule.

(2) Transition rules.

Sec. 1.1441-6 Claim of a reduced rate of tax under an income tax

treaty.

(a) In general.

(b) Reliance on claim of treaty benefits.

(1) In general.

(2) Special rules for certain dividends.

(3) Competent authorities agreement.

(4) Special rules for payments to certain foreign entities.

(c) Proof of tax residence in a treaty country.

(1) In general.

(2) Certification of taxpayer identifying number.

(3) Certificate of residence.

(4) Documentary evidence establishing residence in the treaty

country.

(d) Joint owners.

(e) Related party dividends under certain treaties.

(f) Effective date.

(1) General rule.

(2) Transition rules.

Sec. 1.1441-7 General provisions relating to withholding agents.

(a) Withholding agent defined.

(b) Standards of knowledge.

(1) In general.

(2) Reason to know.

(3) Universal accounts.

(c) Authorized agent.

(1) In general.

(2) Authorized foreign agent.

(3) Notification.

(4) Liability of U.S. withholding agent.

(5) Filing of returns.

(d) United States obligations.

(e) Assumed obligations.

(f) Conduit financing arrangements. [Reserved]

(g) Effective date.

Sec. 1.1441-8T Foreign government and international organization

exemption from withholding (temporary).

(a) Foreign governments.

(b) Statement claiming exemption.

(c) Effective date.

(1) In general.

(2) Transition rules.

Sec. 1.1441-9 Exemption from withholding on exempt income of a

foreign tax-exempt organization and foreign private foundations.

(a) Income not subject to tax under section 511.

(b) Statement claiming exemption.

(c) Effective date.

(1) In general.

(2) Transition rules.

Par. 6. Section 1.1441-1 is revised to read as follows:

Sec. 1.1441-1 Requirement for the deduction and withholding of tax on

payments to foreign persons.

(a) Purpose and scope. This section and Secs. 1.1441-2 through

1.1441-9 provide rules for withholding under section 1441 when a

payment is made to a foreign person. This section provides definitions

of terms used in

[[Page 17635]]

chapter 3 of the Internal Revenue Code and regulations under that

chapter. It prescribes procedures to determine whether a tax must be

withheld under chapter 3 of the Internal Revenue Code, including

presumptions for determining whether a withholding agent should treat a

payee as a United States (U.S.) person or a foreign person. Special

procedures regarding payments to foreign persons that act as

intermediaries are also provided. Section 1.1441-2 describes the income

subject to withholding under section 1441. Section 1.1441-3 provides

rules regarding the amount subject to withholding. Section 1.1441-4

provides exemptions from withholding for certain income effectively

connected with the conduct of a trade or business in the United States,

including certain compensation for the personal services of an

individual. Section 1.1441-5 provides rules regarding withholding on

payments made to pass-through entities. Section 1.1441-6 provides rules

regarding claiming a reduced rate of withholding under an income tax

treaty. Section 1.1441-7 defines the term withholding agent and

provides rules regarding withholding agents' obligations to withhold.

Section 1.1441-8T provides rules for income received by a foreign

government that is excluded from gross income under section 892.

Section 1.1441-9 provides rules for payments to foreign tax exempt

organizations and foreign private foundations.

(b) General rule of withholding. A withholding agent (as defined in

Sec. 1.1441-7(a)) must withhold 30 percent of the gross amount of a

payment (as defined in Sec. 1.1441-2(e)) of income subject to

withholding made to a payee that is a foreign person unless the

beneficial owner of the income is a foreign person entitled to a

reduced rate of tax and for the withholding agent holds an appropriate

withholding certificate or documentation or unless the beneficial owner

of the income is a U.S. person. For this purpose, a payment to the U.S.

agent of a foreign person is treated as a payment to a foreign person

if the withholding agent has actual knowledge or reason to know of the

agency relationship. For the documentation upon which a withholding

agent may rely in order to treat a payee or beneficial owner as a U.S.

person, see paragraph (d) of this section. For the documentation upon

which a withholding agent may rely in order to treat a payee or a

beneficial owner as a foreign person, see paragraph (e) of this

section. For applicable presumptions if the withholding agent cannot

associate the payment with the required documentation at the time of

payment, see paragraph (f) of this section. For definitions of foreign

person, payee, and beneficial owner, see paragraphs (c)(2), (3), and

(6) of this section, respectively. For the determination of income

subject to withholding, see Sec. 1.1441-2(a). For a definition of an

offshore account, see Sec. 1.6049-5(d)(3). For withholding procedures

applicable to payments to U.S. and foreign partnerships, respectively,

see Sec. 1.1441-5(a) and (b). For withholding procedures applicable to

payments to U.S. and foreign trusts and estates, see Sec. 1.1441-5(c).

(c) Definitions--(1) Withholding. The term withholding means the

deduction and withholding of tax at the applicable rate from the

payment of income.

(2) Foreign person. The term foreign person means a nonresident

alien individual, a foreign corporation, a foreign partnership, a

foreign trust, a foreign estate, and any other person that is not a

United States person for purposes of chapter 3 of the Internal Revenue

Code. A United States person is a person described in section

7701(a)(30), the U.S. government (including an agency or

instrumentality thereof), or a State and the District of Columbia

(including an agency or instrumentality thereof).

(3) Payee--(i) General rule. Except as otherwise provided in

paragraph (c)(3)(ii) of this section, a payee is the person to whom a

payment is made. See Sec. 1.1441-2(e) for the determination of when a

payment is considered made. Treatment of a person as a payee has

consequences for purposes of withholding under chapter 3 of the

Internal Revenue Code (see paragraph (b) of this section (relating to

the general rule of withholding)) as well as for purposes of reporting

income under the provisions of chapter 61 of the Internal Revenue Code

and backup withholding under section 3406. See paragraph (d)(3) of this

section for when a withholding agent may treat a payment to a foreign

person as a payment made to a payee that is a U.S. person if the

foreign person is acting for or representing the U.S. person.

(ii) Payments to a foreign partnership. For purposes of chapter 3

of the Internal Revenue Code, section 3406, and chapter 61 of the

Internal Revenue Code, a payment made to a foreign partnership shall be

treated as a payment made to the partners rather than to the

partnership. A withholding agent may, however, treat a payment to a

foreign partnership as made to the partnership (rather than to its

partners) if, with respect to the partnership, it holds an intermediary

withholding certificate described in paragraph (e)(3)(ii) of this

section (relating to a certificate from a qualified intermediary) or an

intermediary withholding certificate described in paragraph (e)(3)(iii)

of this section (relating to a certificate from a foreign partnership)

representing that the income to which the certificate relates is

effectively connected with the conduct of a trade or business in the

United States. In addition, if the withholding agent holds an

intermediary withholding certificate described in paragraph (e)(3)(iv)

of this section (relating to a certificate from an agent, nominee,

representative, etc.), then the payee shall be the person on whose

behalf the partnership is receiving the payment. In the case of tiered

foreign partnerships that are not treated as payees under the

provisions of this paragraph (c)(3)(ii), the payees shall be the

partners of the next higher-tier foreign partnership. Thus, the rules

of this paragraph (c)(3) shall apply through any number of tiers of

foreign partnerships in order to determine which partner is treated as

the payee. For example, if a payment is made to a foreign partnership

(second tier) and one of the partners of the second tier partnership is

another foreign partnership (first tier) with two individual partners,

the payment to the second tier is treated as made to the individual

partners of the first tier (unless the second tier partnership has

furnished one of the intermediary withholding certificates referred to

in this paragraph (c)(3)(ii)). If one of the partners in the first tier

is a domestic partnership, the domestic partnership is treated as the

payee under the provisions of paragraph (c)(3)(i) of this section, even

though one of the partners of the domestic partnership might be a

foreign partnership. If the first tier foreign partnership is a nominee

and furnishes an intermediary withholding certificate described in

paragraph (e)(3)(iv) of this section, the person on whose behalf the

first tier partnership receives the payment is treated as the payee.

See Sec. 1.1441-5(b) for rules regarding procedures applicable to

beneficial owners' claims of reduced rate of withholding under chapter

3 of the Internal Revenue Code.

(4) Individual--(i) Alien individual. The term alien individual

means an individual who is not a citizen or a national of the United

States. See Sec. 1.1-1(c).

(ii) Nonresident alien individual. The term nonresident alien

individual means a person described in section 7701(b)(1)(B), an alien

individual who is

[[Page 17636]]

a resident of a foreign country under the residence article of an

income tax treaty and Sec. 301.7701(b)-7(a)(1) of this chapter, or an

alien individual who is a resident of Puerto Rico, Guam, the

Commonwealth of Northern Mariana Islands, the U.S. Virgin Islands, or

American Samoa as determined under Sec. 301.7701(b)-1(d) of this

chapter. An alien individual who has made an election under section

6013(g) or (h) to be treated as a resident of the United States is

nevertheless treated as a nonresident alien individual for purposes of

withholding under chapter 3 of the Internal Revenue Code.

(5) Foreign corporations. For purposes of this section, a

corporation created or organized in Guam, the Commonwealth of Northern

Mariana Islands, the U.S. Virgin Islands, and American Samoa, is not

treated as a foreign corporation if the requirements of subparagraphs

(A), (B), and (C) of section 881(b)(1) are met for such corporation.

Further, a payment made to a foreign government or an international

organization shall be treated as a payment made to a foreign

corporation for purposes of withholding under chapter 3 of the Internal

Revenue Code.

(6) Beneficial owner--(i) General rule. In the case of a payment of

income, the term beneficial owner means the person required under U.S.

tax principles to include the amount paid in gross income under section

61 (determined without regard to an exclusion or exemption from gross

income under the Internal Revenue Code). Thus, a nominee, agent,

custodian, or any person acting in a similar capacity is not the

beneficial owner. In the case of a scholarship, the student receiving

the scholarship is the beneficial owner of that scholarship.

(ii) Special rules for certain entities--(A) General rule. The

beneficial owners of income paid to a partnership are those persons

that, under U.S. tax principles, are the taxpayers with respect to that

income in their separate or individual capacities. For example, a

partnership (first tier) that is a partner in another partnership

(second tier) is not the beneficial owner of income paid to the second

tier partnership since the first tier partnership is not liable for

income tax under U.S. tax principles. See, however, Sec. 1.1441-5(a)

for applicable withholding procedures for payments to a domestic

partnership. See also Sec. 1.1441-5(b)(2) for applicable withholding

procedures for payments to a foreign partnership where one of the

partners (at any level in the chain of tiers) is a domestic

partnership.

(B) Special rules when an income tax treaty applies. For purposes

of claiming a reduction in the rate of withholding on income paid to a

foreign entity based on an income tax treaty between the United States

and a foreign country, the tax principles in effect under the laws of

that foreign country shall apply to determine w

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