Information Reporting and Backup Withholding

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1, 31 and 602

[TD 8664]

RIN 1545-AL99

Information Reporting and Backup Withholding

Agency: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations that provide rules

regarding the reporting on Form 1042-S of certain bank deposit interest

paid with respect to a United States bank account to an individual who

is a nonresident alien of the United States and a resident of Canada.

The IRS has determined that information concerning those deposits would

be of significant use in furthering its compliance efforts, which

include exchange of tax information with Canada.

EFFECTIVE DATE: January 1, 1997.

FOR FURTHER INFORMATION CONTACT: Teresa Burridge Hughes, (202) 622-3880

(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information contained in this final regulation

has been reviewed and approved by the Office of Management and Budget

in accordance with the requirements of the Paperwork Reduction Act (44

U.S.C. 3507) under control number 1545-0096. Responses to this

collection of information are mandatory.

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 estimated annual burden per respondent/recordkeeper is

approximately .10 hour, depending on individual circumstances.

Comments concerning the accuracy of this burden estimate and

suggestions for reducing this burden should be directed to the Internal

Revenue Service, Attn: IRS Reports Clearance Officer, PC:FP, Washington

DC 20224, and the Office of Management and Budget, Attn: Desk Officer

for the Department of the Treasury, Office of Information and

Regulatory Affairs, Washington, DC 20503.

Books or records relating to this collection of information must be

retained as long as their contents may become material in the

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

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

Background

This document contains final regulations to be added to the Income

Tax Regulations (26 CFR part 1) under section 6049 of the Internal

Revenue Code (Code). The final regulations provide rules regarding

reporting on Form 1042-S of certain bank deposit interest paid with

respect to a United States bank account to a nonresident alien

individual who is a resident of Canada.

Proposed regulations on this subject were set forth, at

Secs. 1.6049-5(e)(2), 1.6049-6(e)(6), and 31.3406(a)-3(b)(1), in a

notice of proposed rulemaking published in the Federal Register (53 FR

5991) on February 29, 1988 [INTL-52-86 (1988-1 C.B. 892)]. The IRS

received comments on the proposed regulations and held a public hearing

on June 15, 1989. Having considered the comments and the statements

made at the hearing, the IRS and the Treasury Department adopt the

proposed regulations as modified by this Treasury decision.

Explanation of Provisions

A. Reporting of Payments to Canadians

This Treasury decision requires reporting on a Form 1042-S of

certain interest paid on deposits maintained at a bank's office within

the United States when paid to a nonresident alien individual who is a

resident of Canada. However, interest on certain bearer certificates of

deposit targeted to foreign persons is excepted from the reporting

requirement if the interest is paid outside the United States. This

final regulation makes an exception to the current rule, based on

Sec. 1.6049-5(b), that certain interest amounts paid to non-U.S.

persons is not subject to reporting if a statement certifying non-U.S.

status is furnished to the payor or middleman on a Form W-8

(Certificate of Foreign Status), as described in Sec. 1.6049-

5(b)(2)(iv). However, although bank deposit interest paid to Canadians

is made subject to reporting under this final regulation, backup

withholding

[[Page 17573]]

under section 3406 is not required. Further, in response to suggestions

from commentators that segregating interest amounts on the basis of

residence would be burdensome, this final regulation allows payors

voluntarily to report on a Form 1042-S payments to all foreign persons

receiving bank deposit interest without segregating on the basis of

residency.

The payor determines whether a payee is a Canadian resident based

on the address in the country of permanent residence required to be

provided on the Form W-8. However, if the payor has actual knowledge

that the payee is a U.S. person, Form 1099 reporting provisions apply.

See proposed regulations published elsewhere in this issue of the

Federal Register regarding proposed changes to the notice of proposed

rulemaking published in the Federal Register on February 29, 1988.

B. Comments on Canadian Reporting Provisions

Commentors stated that imposing information reporting with respect

to deposits of nonresident aliens may undercut the competitiveness of

U.S. banks. The IRS and Treasury considered these comments but, in

light of our obligations under the United States-Canada income tax

treaty and the reporting by Canadian banks of U.S. depositor interest

to Canadian tax authorities, have decided to finalize these proposed

regulations.

In response to comments that the reporting requirement be delayed,

or at least that a transition period be allowed, because of the time

required to identify Canadian account holders and to modify processing

systems for reporting purposes, the new reporting requirement will be

phased in over a three-year period, starting with payments made on or

after January 1, 1997. On or after that date, payors will identify

Canadian account holders as Forms W-8 are received from new depositors

or renewed by existing depositors. Upon identifying account holders as

Canadians, payors must begin reporting bank deposit interest paid to

those persons.

Commentors also requested that the IRS develop and permit Form

1042-S reporting on magnetic diskette, as is allowed for Form 1099

filings; permit the Form 1042-S to be the transmittal document for the

Form 1042-S filing; and allow financial institutions to file separate

tapes or diskettes for each area of the bank, rather than bank-wide.

These filing changes have previously been made by the IRS and require

no further action.

Special Analyses

It has been determined that this Treasury decision is not a

significant regulatory action as defined in EO 12866. Therefore, a

regulatory assessment is not required. It also has 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.

Drafting Information

The principal author of these regulations is Teresa Burridge

Hughes, Office of Associate Chief Counsel (International). However,

other personnel from the IRS and Treasury Department participated in

their development.

List of Subjects

26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 31

Employment taxes, Income taxes, Penalties, Pensions, Railroad

retirement, Reporting and recordkeeping requirements, Social security,

Unemployment compensation.

26 CFR Part 602

Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

Accordingly, 26 CFR parts 1, 31 and 602 are amended as follows:

PART 1--INCOME TAXES

Paragraph 1. The authority for part 1 is amended by adding entries

in numerical order to read as follows:

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

Sections 1.6049-4 also issued under 26 U.S.C. 6049 (a), (b),

(c), and (d).

Section 1.6049-5 also issued under 26 U.S.C. 6049 (a), (b), (c),

and (d). * * *

Par. 2. Section 1.6049-4 is amended by:

1. Removing the reference ``(b)(3)'' and adding ``(b)(3) and

(b)(5)'' in its place in the first sentence of paragraphs (b)(1) and

(b)(2) introductory text.

2. Revising the first sentence of paragraphs (b)(3) and (b)(4).

3. Adding paragraph (b)(5).

4. Removing the authority citation at the end of the section.

The revisions and addition read as follows:

Sec. 1.6049-4 Return of information as to interest paid and original

issue discount includible in gross income after December 31, 1982.

* * * * *

(b) * * *

(3) * * * Except as provided in paragraph (b)(5) of this section,

every person acting as a middleman (as defined in paragraph (f)(4) of

this section) shall make an information return on Forms 1096 and 1099

for the calendar year. * * *

(4) * * * Except as provided in paragraph (b)(5) of this section,

every person carrying on the banking business who makes payments of

interest to another person (whether or not aggregating $10 or more)

during a calendar year with respect to a certificate of deposit issued

in bearer form shall make an information return on Forms 1096 and 1099.

* * *

(5) Interest payments to Canadian nonresident alien individuals--

(i) General rule. In the case of interest paid to a Canadian

nonresident alien individual (as described in Sec. 1.6049-8(a)), the

payor or middleman shall make an information return on Form 1042-S for

the calendar year in which the interest is paid. The payor or middleman

shall prepare and transmit Form 1042-S at the time and in the manner

prescribed by section 1461 and the regulations under that section and

by the form and its accompanying instructions. See Sec. 1.6049-6(e)(4)

for furnishing a copy of the Form 1042-S to the payee. To determine

whether an information return is required for original issue discount,

see Secs. 1.6049-5(c) and 1.6049-8(a).

(ii) Effective date. Paragraph (b)(5)(i) of this section shall be

effective for payments made after December 31, 1996 with respect to a

Form W-8 (Certificate of Foreign Status) furnished to the payor or

middleman after that date.

* * * * *

Par. 3. Section 1.6049-5 is amended by:

1. Revising the introductory text of paragraph (b)(1).

2. Revising the last sentence in paragraph (c).

3. Removing authority citation at the end of the section.

The revisions read as follows:

Sec. 1.6049-5 Interest and original issue discount subject to

reporting after December 31, 1982.

* * * * *

(b) * * * (1) * * * Subject to the provisions of Sec. 1.6049-8, the

term interest does not include:

* * * * *

[[Page 17574]]

(c) * * * Original issue discount on an obligation (including an

obligation with a maturity of not more than 6 months from the date of

original issue) held by a nonresident alien individual or foreign

corporation is interest described in paragraph (b)(1)(vi) (A) or (B) of

this section and, therefore is not interest subject to reporting under

section 6049 unless it is described in Sec. 1.6049-8(a) (relating to

bank deposit interest paid to a Canadian nonresident alien individual).

Par. 4. Section 1.6049-6 is amended by:

1. Redesignating paragraph (e)(4) as paragraph (e)(5).

2. Adding new paragraph (e)(4).

The addition reads as follows:

Sec. 1.6049-6 Statements to recipients of interest payments and

holders of obligations for attributed original issue discount.

* * * * *

(e) * * *

(4) Special rule for amounts described in Sec. 1.6049-8(a) paid

after December 31, 1996. In the case of amounts described in

Sec. 1.6049-8(a) (relating to payments of interest to Canadian

nonresident alien individuals) paid after December 31, 1996, any person

who makes a Form 1042-S under section 6049(a) and Sec. 1.6049-4(b)(5)

shall furnish a statement to the recipient. The statement shall include

a copy of the Form 1042-S required to be prepared pursuant to

Sec. 1.6049-4(b)(5) and a statement to the effect that the information

on the Form is being furnished to the United States Internal Revenue

Service and may be furnished to Canada.

* * * * *

Par. 5. Section 1.6049-8 is added to read as follows:

Sec. 1.6049-8 Interest and original issue discount paid to residents

of Canada.

(a) Interest subject to reporting requirement. For purposes of

Secs. 1.6049-4, 1.6049-6 and this section and except as provided in

paragraph (b) of this section, the term interest means interest paid to

a Canadian nonresident alien individual after December 31, 1996, where

the interest is described in section 871(i)(2)(A) with respect to a

deposit maintained at an office within the United States. For purposes

of the regulations under section 6049, a Canadian nonresident alien

individual is an individual who resides in Canada and is not a United

States citizen. The payor or middleman may rely upon the permanent

residence address (as defined in section 1441 and the regulations under

that section) as stated on the Form W-8 (described in section 6049 and

the regulations under that section) in order to determine whether the

payment is made to a Canadian nonresident alien individual. Amounts

described in this paragraph (a) are not subject to backup withholding

under section 3406. See Sec. 31.3406(g)-1(d) of this chapter.

(b) Interest excluded from reporting requirement. The term interest

does not include an amount that is paid by the issuer or its agent

outside the United States with respect to an obligation that is

described in paragraph (b) (1) or (2) of this section.

(1)(i) The obligation is not in registered form (within the meaning

of section 163(f) and the regulations thereunder); is part of a larger

single public offering of securities; and is described in section

163(f)(2)(B).

(ii) Unless it has actual knowledge to the contrary, a middleman

may treat an obligation as if it is described in section 163(f)(2)(B)

if the obligation or coupon therefrom, whichever is presented for

payment, contains the statement described in section

163(f)(2)(B)(ii)(II) and the regulations thereunder.

(2)(i) The obligation has a face or principal amount of not less

than $500,000, and satisfies the requirements described in paragraphs

(b)(2)(i) (A), (B), and (C) of this section.

(A) The obligation satisfies the requirements of sections

163(f)(2)(B) (i) and (ii)(I) and the regulations thereunder (as if it

were a registration-required obligation within the meaning of section

163(f)(2)(A)) and is issued in accordance with the procedures of

Sec. 1.163-5(c)(2)(i)(D)).

(B) If the obligation is in registered form, it is registered in

the name of an exempt recipient described in Sec. 1.6049-4(c)(1)(ii).

(C) The obligation has on its face and on any detachable coupons

the following statement (or a similar statement having the same

effect): ``By accepting this obligation or coupon, the holder

represents and warrants that it is not a United States person (other

than an exempt recipient described in the regulations under section

6049(b)(4) of the Internal Revenue Code and the regulations thereunder)

and that it is not acting for or on behalf of a United States person

(other than an exempt recipient described in the regulations under

section 6049(b)(4) of the Internal Revenue Code and the regulations

thereunder).''

(ii) Unless the middleman has actual knowledge to the contrary, it

may treat an obligation as satisfying the requirements of sections

163(f)(2)(B) (i) and (ii)(I) and the regulations thereunder if the

obligation or a coupon therefrom, whichever is presented for payment,

contains the statement in paragraph (b)(2)(i)(C) of this section.

PART 31--EMPLOYMENT TAXES AND COLLECTION OF INCOME TAX AT SOURCE

Par. 5a. The authority for part 31 continues to read in part as

follows:

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

Par. 6. Section 31.3406(g)-1 is amended by adding paragraph (d) to

read as follows:

Sec. 31.3406(g)-1 Exception for payments to certain payees and certain

other payments.

* * * * *

(d) Reportable payments made to Canadian nonresident alien

individuals. A payment of interest made to a Canadian nonresident alien

individual under Sec. 1.6049-8(a) of this chapter is not subject to

withholding under section 3406.

PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

Par. 7. The authority for part 602 continues to read as follows:

Authority: 26 U.S.C. 7805.

Par. 8. Section 602.101, paragraph (c) is amended by removing the

entry ``Sec. 31.3406(a)-1-Sec. 31.3406(i)-1'' and adding entries to the

table in numerical order to read as follows:

Sec. 602.101 OMB Control numbers.

* * * * *

(c) * * *

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Current OMB

CFR part or section where identified and described control No.

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* * * * *

1. 6049-6.................................................. 1545-0096

* * * * *

31.3406(a)-1............................................... 1545-0112

31.3406(a)-2............................................... 1545-0112

31.3406(a)-3............................................... 1545-0112

31.3406(a)-4............................................... 1545-0112

31.3406(b)(2)-1............................................ 1545-0112

31.3406(b)(2)-2............................................ 1545-0112

31.3406(b)(2)-3............................................ 1545-0112

31.3406(b)(2)-4............................................ 1545-0112

31.3406(b)(2)-5............................................ 1545-0112

31.3406(b)(3)-1............................................ 1545-0112

31.3406(b)(3)-2............................................ 1545-0112

31.3406(b)(3)-3............................................ 1545-0112

31.3406(b)(3)-4............................................ 1545-0112

31.3406(b)(4)-1............................................ 1545-0112

31.3406(c)-1............................................... 1545-0112

31.3406(d)-1............................................... 1545-0112

31.3406(d)-2............................................... 1545-0112

31.3406(d)-3............................................... 1545-0112

31.3406(d)-4............................................... 1545-0112

[[Page 17575]]

31.3406(e)-1............................................... 1545-0112

31.3406(f)-1............................................... 1545-0112

31.3406(g)-1............................................... 1545-0096

1545-0112

31.3406(g)-2............................................... 1545-0112

31.3406(g)-3............................................... 1545-0112

31.3406(h)-1............................................... 1545-0112

31.3406(h)-2............................................... 1545-0112

31.3406(h)-3............................................... 1545-0112

31.3406(i)-1............................................... 1545-0112

* * * * *

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Margaret Milner Richardson,

Commissioner of Internal Revenue.

Approved: March 27, 1996

Leslie Samuels,

Assistant Secretary of the Treasury.

[FR Doc 96-9456 Filed 4-15-96; 10:14 am]

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