[Federal Register Volume 70, Number 60 (Wednesday, March 30, 2005)]
[Proposed Rules]
[Pages 16189-16195]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-6060]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 301
[REG-125443-01]
RIN 1545-AY92
Revisions to Regulations Relating to Withholding of Tax on
Certain U.S. Source Income Paid to Foreign Persons and Revisions of
Information Reporting Regulations
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
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SUMMARY: This document contains amendments to final regulations
relating to the withholding of income tax under sections 1441 and 1442
on certain U.S. source income paid to foreign persons and related
requirements governing collection, deposit, refunds, and credits of
withheld amounts under sections 1461 through 1463. Additionally, this
document contains amendments to final regulations under sections 6041,
6049, and 6114. These regulations affect persons making payments of
U.S. source income to foreign persons.
DATES: Written or electronic comments must be received by June 28,
2005. Requests to speak (with outlines of oral comments to be
discussed) at the public hearing scheduled for July 13, 2005, at 10 AM
must be received by June 22, 2005.
ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-125443-01), room
5203, Internal Revenue Service, POB 7604, Ben Franklin Station,
Washington, DC 20044. Submissions also may be hand-delivered Monday
through Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR
(REG-125443-01), Courier's Desk, Internal Revenue Service 1111
Constitution Avenue, NW., Washington, DC, or sent electronically, via
the IRS Internet site http://www.irs.gov/regs or via the Federal
eRulemaking Portal site at http://www.regulations.gov (IRS and REG-
125443-01). The public hearing will be held in the IRS Auditorium,
Seventh Floor, Internal Revenue Building, 1111 Constitution Avenue,
NW., Washington, DC.
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
Ethan Atticks, (202) 622-3840 (not a toll free number); concerning
submissions of comments, the hearing, and/or to be placed on the
building access list to attend the hearing, Robin Jones, (202) 622-7180
(not a toll free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collections of information contained in this notice of proposed
rulemaking have been previously reviewed and approved by the Office of
Management and Budget in accordance with the Paperwork Reduction Act of
1995 (44 U.S.C. 3507(d)) under control number 1545-1484.
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless the collection of
information displays a valid control number assigned by the Office of
Management and Budget.
Books or records relating to a collection of information must be
retained as long as their contents may become material in the
administration of any internal revenue law. Generally, tax returns and
tax return information are confidential, as required by 26 U.S.C. 6103.
Background
In Treasury Decision 8734 (1997-2 C.B. 109 [62 FR 533871]), the
Treasury Department and the IRS issued
[[Page 16190]]
comprehensive regulations (final regulations) under chapter 3 (sections
1441-1464) and subpart G of Subchapter A of chapter 61 (sections 6041
through 6050S) of the Internal Revenue Code. Those final regulations
were amended by TD 8804 (1999-1 C.B. 793 [63 FR 72183]), TD 8856 (2000-
1 C.B. 298 [64 FR 73408]), TD 8881 (2000-1 C.B. 1158 [65 FR 32152]),
and TD 9023 (2002-2 C.B. 955 [67 FR 70310]).
In Notice 2001-4 (2001-1 C.B. 267), Notice 2001-11 (2001-1 C.B.
464), and Notice 2001-43 (2001-2 C.B. 72), the Treasury Department and
the IRS announced the intention to amend the final regulations to
address the matters discussed in those notices. These proposed
regulations would implement certain changes announced in those notices
and other changes.
Under section 1441 of the Internal Revenue Code (Code), as amended
by the American Jobs Creation Act of 2004 (Public Law 108-357, 118
Stat. 1418), ``interest-related dividends'' and ``short-term capital
gain dividends'' paid by regulated investment companies are exempt from
withholding. These proposed regulations would amend the withholding
rules in order to reflect the treatment of these new categories of
dividends.
Explanation of Provisions
I. Notice 2001-4
A. TIN Requirement for Certain Foreign Grantor Trusts
The final regulations provide that a withholding certificate that
specifies certain payee information and that meets certain requirements
may be used for a variety of purposes, including certifying a payee's
status as a foreign person or foreign intermediary. Section 1.1441-
1(e)(4)(vii)(G) of the final regulations provides that a taxpayer
identification number (TIN) must be stated on a withholding certificate
from a person representing to be a foreign grantor trust with 5 or
fewer grantors.
After the final regulations took effect, some taxpayers requested
documentation and reporting relief for simple and grantor trusts that
hold an account with a qualified intermediary (QI). In response to this
request, the Treasury Department and the IRS provided in section III.C
of Notice 2001-4 that, if a foreign simple or grantor trust provides a
QI with a Form W-8IMY, ``Certificate of Foreign Intermediary, Flow-
Through Entity, or Certain U.S. Branches for United States Tax
Withholding,'' and the trust has 5 or fewer owners, the IRS will not
require the trust to provide the QI with a TIN, notwithstanding Sec.
1.1441-1(e)(4)(vii)(G). Section III.C of Notice 2001-4 was superseded
by Rev. Proc. 2003-64 (2003-2 C.B. 306), which provides comprehensive
guidance for withholding partnerships and withholding trusts. However,
Rev. Proc. 2003-64 does not provide any relief from the TIN requirement
of Sec. 1.1441-1(e)(4)(vii)(G) in the QI context.
In addition to requesting reinstatement of the previously granted
relief from the TIN requirement in the QI context, withholding agents
have requested relief from the TIN requirement beyond the QI context.
In light of these requests, the Treasury Department and the IRS have
reexamined the TIN requirement of Sec. 1.1441-1(e)(4)(vii)(G) and have
concluded that the rule is not serving to enhance enforcement
objectives. Therefore, the proposed regulations would reinstate the
relief granted in section III.C of Notice 2001-4 for withholding
certificates provided to a QI by a foreign grantor trust with 5 or
fewer grantors. In addition, the proposed regulations would grant
relief from the TIN requirement for withholding certificates that are
executed after December 31, 2003 and that are provided to a withholding
agent by a foreign grantor trust with 5 or fewer grantors.
B. Reporting Relief for U.S. Payors in U.S. Possessions
U.S. payors that pay foreign source income outside the United
States to U.S. non-exempt recipients generally must report these
payments on Form 1099 and, if required, apply backup withholding. After
the final regulations became effective, withholding agents requested
that the Treasury Department and the IRS reconsider this rule to the
extent it requires Form 1099 reporting and backup withholding with
respect to income from sources within a possession of the United States
paid to a U.S. citizen even if the income is exempt from tax under
section 931, 932, or 933.
In response to this request, the Treasury Department and the IRS
provided in section V.C of Notice 2001-4 that the final regulations
would be amended to provide that income that is derived from sources
within a possession of the United States, that is exempt from taxation
under section 931, 932, or 933, and that a payor reasonably believes to
be paid to a resident of a possession of the United States is not
required to be reported on Form 1099. Section V.C of Notice 2001-4 also
provides that U.S payors will not be required to report such income
until the regulations are amended.
These proposed regulations would amend Sec. 1.6049-5(c) to
implement section V.C. of Notice 2001-4, with modifications. The
proposed regulations would provide that U.S. payors are not required to
report on Form 1099 income from sources within a possession of the
United States that is exempt from tax under section 931, section 932,
or section 933. Under the proposed regulations, this exception from
Form 1099 reporting would be applicable if the payor could reliably
associate the payment of such income with valid documentation that
supports a claim that the beneficial owner of the payment is a resident
of the U.S. possession.
In addition, the proposed regulations would add new Sec. 1.1441-
1(c)(30), which for these purposes would define possessions of the
United States as Guam, American Samoa, the Nothern Mariana Islands,
Puerto Rico, and the Virgin Islands.
C. Use of Documentary Evidence in Possessions of the United States
The final regulations provide certain exceptions from certain
information reporting requirements. One such exception applies in cases
in which, among other things, a payment is made outside the United
States and the payor can rely on appropriate documentation to treat the
payment as made to a foreign person. Section 1.6049-5(c)(1) allows a
payor to rely on documentary evidence instead of an applicable
withholding certificate described in Sec. 1.1441-1(c)(16) (Form W-8)
in the case of a payment made to an offshore account. For this purpose,
the term offshore account means an account maintained at an office or
branch of a U.S. or foreign bank at any location outside the United
States and outside of possessions of the United States.
When the final regulations took effect, taxpayers requested that
the Treasury Department and the IRS consider allowing the use of
documentary evidence for an account in a possession of the United
States. In response to this request, the Treasury Department and the
IRS provided in section V.D of Notice 2001-4 that documentary evidence
may be used in lieu of Form W-8 in a possession of the United States
and announced the intention to amend Sec. 1.6049-5(c)(1) accordingly.
These proposed regulations would implement Section V.D of Notice
2001-4.
D. Information Reporting of Foreign Source Services Income
Under section 6041, a U.S. payor must report certain payments made
for services performed outside the United
[[Page 16191]]
States. However, Sec. 1.6041-4 provides that information reporting is
not required if the payee has provided documentation to establish its
status as a foreign beneficial owner or a foreign payee, or if the
payee is presumed to be a foreign payee under the presumption rules.
Under the presumption rules of Sec. Sec. 1.6049-5(d)(2) and 1.1441-
1(b)(3)(iii), a U.S. payor must presume that the payee is a U.S. payee
if the payee is an individual.
When the final regulations took effect, U.S. payors commented that
these rules were overly burdensome because they require U.S. payors
making payments for services performed outside the United States to ask
all payees to represent that such payees are not U.S. persons.
In response to this comment, the Treasury Department and the IRS
provided in section V.E of Notice 2001-4 that a U.S. payor will not be
required to report, under section 6041, income paid for services
performed outside the United States if (1) the payee of the income is
an individual, (2) the U.S. payor does not know that the payee is a
U.S. citizen or resident, (3) the payor does not know, and has no
reason to know, that the income is (or may be) effectively connected
with the conduct of a trade or business within the United States, and
(4) all of the services for which payment is made were performed by the
payee outside the United States.
The proposed regulations would implement section V.E of Notice
2001-4. The Treasury Department and the IRS are considering whether
there are appropriate circumstances, and if so, an appropriate manner,
in which such an exception could be extended to payments made to
foreign partnerships. Comments are requested on this issue.
II. Notice 2001-11--Reporting/Withholding on Payments to Financial
Institutions in U.S. Possessions
Corporations and partnerships organized in a possession of the
United States generally are treated as foreign persons for purposes of
applying the final regulations. Accordingly, under the final
regulations, a possessions financial institution acting as an
intermediary is treated as a nonqualified intermediary that must
provide documentation and allocation information for the beneficial
owners on whose behalf it acts. In contrast, a U.S. branch of a foreign
financial institution may agree with a withholding agent to be treated
as a U.S. person. See Sec. 1.1441-1(b)(2)(iv)(A) and (E). Under Sec.
1.1441-1(b)(1), if such a U.S. branch agrees to be treated as a U.S.
person, payments of U.S. source income made to it will be treated as
made to a U.S. payee and therefore will not be subject to withholding
under section 1441. Possessions financial institutions generally are
subject to all of the withholding and reporting obligations of a U.S.
withholding agent. Section 7651.
When the final regulations took effect, possessions financial
institutions commented that the requirement to provide a withholding
agent with customer information should not apply to them, because
possessions financial institutions are subject to all of the
withholding and information reporting requirements that apply to U.S.
withholding agents under Chapters 3 and 61 and section 3406 of the
Code, and because they are subject to direct audit supervision by the
Internal Revenue Service.
In response to these comments, the Treasury Department and the IRS
issued Notice 2001-11, which provided that a possessions financial
institution will be treated as a U.S. branch that is subject to the
rules of Sec. 1.1441-1(b)(2)(iv) and announced the intention to amend
the final regulations accordingly.
These proposed regulations would implement Notice 2001-11.
III. Notice 2001-43
A. Reporting of Treaty-Based Return Positions
Section 301.6114-1(a) of the final regulations provides that, if a
taxpayer takes a return position that a tax treaty overrules or
modifies any provision of the Internal Revenue Code and thereby effects
a reduction of any tax at any time, the taxpayer must disclose that
return position, either on a statement attached to the return or on a
return filed for the purpose of making such disclosure. Section
301.6114-1(b) provides that reporting is required unless it is
expressly waived. It further provides a nonexclusive list of particular
positions for which reporting is required. Section 301.6114-1(c)
provides a list of specific exceptions from the general reporting
requirements of Sec. 301.6114-1(a) and (b).
When the final regulations took effect, taxpayers requested
guidance regarding the scope of the reporting required under Sec.
301.6114-1(a) and (b) in the case of claims for treaty-reduced
withholding made by foreign persons that are not individuals or States.
In particular, taxpayers requested the following clarification and
relief.
First, because Sec. 301.6114-1(c)(1)(i) waives reporting only for
individuals and States, clarification was requested regarding whether
taxpayers that are not individuals or States and that do not meet the
requirements to report under Sec. 301.6114-1(b)(4)(ii)(C) are
nevertheless required to disclose treaty-based return positions
described in subparagraph (b)(4)(ii) under the general rules of Sec.
301.6114-1(a) and (b).
Second, because Sec. 301.6114-1(c)(2) waives reporting only for
individuals who receive less than the threshold amount, a de minimis
exception was requested for taxpayers that are not individuals.
Third, because the representation under Sec. 1.1441-6(b)(1) (that
the beneficial owner will file the statement required under Sec.
301.6114-1(d)) is required when the beneficial owner is related to the
withholding agent within the meaning of section 482, and because the
filing under Sec. 301.6114-1(b)(4)(ii)(C) is required when the
beneficial owner is related to the person obligated to pay the income
within the meaning of sections 267(b) and 707(b), clarification was
requested regarding coordination of the representation requirement with
the filing requirement.
Finally, because Sec. 1.1441-6(b)(1) states that the filing
requirement applies only to amounts received during the calendar year
that exceed $500,000 in the aggregate, and because Sec. 301.6114-
1(a)(1) permits a taxpayer to adopt a taxable year for filing different
from the calendar year, taxpayers requested clarification regarding a
fiscal-year taxpayer's obligation to report such amounts.
In response to these and other comments, Treasury and the IRS
issued Notice 2001-43. Section 2 of Notice 2001-43 provided that the
following rules would apply, effective January 1, 2001.
First, reporting is waived for a treaty-based return position
described in Sec. 301.6114-1(b)(4)(ii), unless the conditions in
paragraph (b)(4)(ii)(A) and (B) of this section, paragraph
(b)(4)(ii)(C) of this section, or paragraph (b)(4)(ii) (D) of this
section are met.
Second, reporting under Sec. 301.6114-1(b)(4)(ii)(D) is waived for
taxpayers that are not individuals or States and that receive amounts
of income subject to withholding that do not exceed $10,000 in the
aggregate.
Third, the related-person test for purposes of applying the
representation requirement of Sec. 1.1441-6(b)(i) was conformed to the
related-person test that applies for purposes of the filing requirement
of Sec. 301.6114-1(b)(4)(ii)(C).
Fourth, the calendar-year rule in Sec. 1.1441-6(b)(1) was replaced
with a taxable-year rule to conform to Sec. 301.6114-1(a)(1).
These proposed regulations would implement Section 2 of Notice
2001-43.
[[Page 16192]]
B. Conversion of Foreign Currency Amounts
Section 1.1441-3(e)(2) of the final regulations provides that if an
amount subject to tax is paid in a currency other than the U.S. dollar,
the amount of withholding under section 1441 shall be determined by
applying the applicable rate of withholding to the foreign currency
amount and by converting the amount withheld into U.S. dollars at the
spot rate on the date of payment. A withholding agent that makes
regular or frequent payments in foreign currency is permitted to use a
month end spot rate or a monthly average spot rate.
After the final regulations took effect, some withholding agents
that make regular and frequent payments in foreign currency commented
that the permitted conversion conventions can expose them to currency
risks that would require management by means of hedging transactions.
Also, they commented that permitted conventions can require multiple
accounting adjustments when payment amounts in the base currency are
adjusted or corrected in the course of processing and settlement. They
requested that they be permitted to use the spot rate on the date the
amount of tax is deposited.
In response to this comment, in Section 3 of Notice 2001-43, the
Treasury Department and the IRS provided that a withholding agent that
makes regular or frequent payments in foreign currency is permitted to
convert the amount withheld into U.S. dollars at the spot rate on the
day the tax is deposited, provided that the deposit is made within
seven days of the date of payment. Section 3 of Notice 2001-43 also
provided that taxpayers using this alternative convention must do so
consistently for all nondollar amounts withheld and from year to year.
It also provided that such convention could not be changed without the
consent of the Commissioner.
These proposed regulations would implement Section 3 of Notice
2001-43.
IV. The American Jobs Creation Act of 2004
The final regulations provide generally that if the amount of
distributions designated by a regulated investment company as being
subject to 852(b)(3)(C) (relating to capital-gain dividends) or
852(b)(5)(A) (relating to exempt-interest dividends) exceeds the amount
that may be designated under those sections for the taxable year, then
no penalties will be asserted for any resulting underwithholding if the
designations were based on a reasonable estimate, as defined in
regulations, and the adjustments to amount withheld are made in
accordance with regulations. Sec. 1.1441-3(c)(3)(i). These proposed
regulations would extend the reasonable-estimate rule to cover
distributions designated as being subject to new section 871(k)(1)(C)
(relating to interest-related dividends) or 871(k)(2)(C) (relating to
short-term capital gain dividends).
Proposed Effective Date
These regulations are proposed to be applicable when final
regulations are published in the Federal Register.
Special Analyses
It has been determined that this notice of proposed rulemaking is
not a significant regulatory action as defined in Executive Order
12866. Therefore, a regulatory assessment is not required. It has also
been determined that section 553(b) of the Administrative Procedure Act
(5 U.S.C. chapter 5) does not apply to these regulations, and, because
the regulations do not impose a new collection of information on small
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not
apply. Pursuant to section 7805(f) of the Code, this notice of proposed
rulemaking will be submitted to the Chief Counsel for Advocacy of the
Small Business Administration for comment on its impact on small
business.
Comments and 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 (in the manner
described in the ADDRESSES portion of this preamble) to the IRS. The
Treasury Department and the IRS request comments on the clarity of the
proposed rules and how they can be made easier to understand. All
comments will be available for public inspection and copying.
A public hearing has been scheduled for July 13, 2005, beginning at
10 a.m. in the IRS Auditorium (7th Floor), Internal Revenue Building,
1111 Constitution Avenue, NW., Washington, DC. Due to building security
procedures, visitors must enter at the 10th Street entrance, located
between Constitution and Pennsylvania Avenues, NW. In addition, all
visitors must present photo identification to enter the building.
Because of access restrictions, visitors will not be admitted beyond
the immediate entrance area more than 30 minutes before the hearing
starts. For information about having your name placed on the building
access list to attend the hearing, see the FOR FURTHER INFORMATION
CONTACT portion of this preamble.
The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who
wish to present oral comments must submit written comments and an
outline of the topics to be discussed and the time to be devoted to
each topic (a signed original and eight (8) copies) by Wednesday, June
8. A period of 10 minutes will be allotted to each person for making
comments. An agenda showing the scheduling of the speakers will be
prepared after the deadline for reviewing outlines has passed. Copies
of the agenda will be available free of charge at the hearing.
Drafting Information
The principal author of the proposed regulations is Ethan Atticks,
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 301
Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income
taxes, Penalties, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR parts 1 and 301 are proposed to be amended as
follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.1441-1 is amended as follows:
1. Paragraph (b)(2)(iv)(A) is revised.
2. Paragraph (b)(3)(iii)(E) is added.
3. Paragraph (c)(30) is added.
4. Paragraph (e)(4)(vii)(G) is revised.
The revisions and additions read as follows:
Sec. 1.1441-1 Requirement for the deduction and withholding of tax on
payments to foreign persons.
* * * * *
(b) * * *
(2) * * *
(iv) Payments to a U.S. branch of certain foreign banks or foreign
insurance companies--(A) U.S. branch treated as a U.S. person in
certain cases. A payment to a U.S. branch of a foreign
[[Page 16193]]
person is a payment to a foreign person. However, a U.S. branch
described in this paragraph (b)(2)(iv)(A) and a withholding agent
(including another U.S. branch described in this paragraph
(b)(2)(iv)(A)) may agree to treat the branch as a U.S. person for
purposes of withholding on specified payments to the U.S. branch.
Notwithstanding the preceding sentence, a withholding agent making a
payment to a U.S. branch treated as a U.S. person under this paragraph
(b)(2)(iv)(A) shall not treat the branch as a U.S. person for purposes
of reporting the payment made to the branch. Therefore, a payment to
such U.S. branch shall be reported on Form 1042-S under Sec. 1.1461-
1(c). Further, a U.S. branch that is treated as a U.S. person under
this paragraph (b)(2)(iv)(A) shall not be treated as a U.S. person for
purposes of the withholding certificate it may provide to a withholding
agent. Therefore, the U.S. branch must furnish a U.S. branch
withholding certificate on Form W-8 as provided in paragraph (e)(3)(v)
of this section and not a Form W-9. An agreement to treat a U.S. branch
as a U.S. person must be evidenced by a U.S. branch withholding
certificate described in paragraph (e)(3)(v) of this section furnished
by the U.S. branch to the withholding agent. A U.S. branch described in
this paragraph (b)(2)(iv)(A) is any U.S. branch of a foreign bank
subject to regulatory supervision by the Federal Reserve Board or a
U.S. branch of a foreign insurance company required to file an annual
statement on a form approved by the National Association of Insurance
Commissioners with the Insurance Department of a State, a Territory, or
the District of Columbia. In addition, a financial institution
organized in a possession of the United States will be treated as a
U.S. branch for purposes of this paragraph (b)(2)(iv)(A). The Internal
Revenue Service (IRS) may approve a list of U.S. branches that may
qualify for treatment as a U.S. person under this paragraph
(b)(2)(iv)(A) (see Sec. 601.601(d)(2) of this chapter). See Sec.
1.6049-5(c)(5)(vi) for the treatment of U.S. branches as U.S. payors if
they make a payment that is subject to reporting under chapter 61 of
the Internal Revenue Code. Also see Sec. 1.6049-5(d)(1)(ii) for the
treatment of U.S. branches as foreign payees under chapter 61 of the
Internal Revenue Code.
* * * * *
(3) * * *
(iii) * * *
(E) Certain payments for services. A payment for services is
presumed to be made to a foreign person if--
(1) The payee is an individual;
(2) The withholding agent does not know, or have reason to know,
that the payee is a U.S. citizen or resident;
(3) The withholding agent does not know, or have reason to know,
that the income is (or may be) effectively connected with the conduct
of a trade or business within the United States; and
(4) All of the services for which the payment is made were
performed by the payee outside of the United States.
* * * * *
(c) * * *
(30) Possessions of the United States. For purposes of the
regulations under chapter 3 and 61 of the Internal Revenue Code,
possessions of the United States means Guam, American Samoa, the
Northern Mariana Islands, Puerto Rico, and the Virgin Islands.
* * * * *
(e) * * *
(4) * * *
(vii) * * *
(G) A withholding certificate executed on or before December 31,
2003 from a person representing to be a grantor trust with 5 or fewer
grantors, except where such withholding certificate is provided to a
qualified intermediary.
* * * * *
Par. 3. Section 1.1441-3 is amended by revising paragraphs (c)(3)
and (e)(2) to read as follows:
Sec. 1.1441-3 Determination of amounts to be withheld.
* * * * *
(c) * * *
(3) Special rules in the case of distributions from a regulated
investment company--(i) General rule. If the amount of any
distributions designated as being subject to section 852(b)(3)(C) or
5(A), or 871(k)(1)(C) or (2)(C), exceeds the amount that may be
designated under those sections for the taxable year, then no penalties
will be asserted for any resulting underwithholding if the designations
were based on a reasonable estimate (made pursuant to the same
procedures as described in paragraph (c)(2)(ii)(A) of this section) and
the adjustments to the amount withheld are made within the time period
described in paragraph (c)(2)(ii)(B) of this section. Any adjustment to
the amount of tax due and paid to the IRS by the withholding agent as a
result of underwithholding shall not be treated as a distribution for
purposes of section 562(c) and the regulations thereunder. Any amount
of U.S. tax that a foreign shareholder is treated as having paid on the
undistributed capital gain of a regulated investment company under
section 852(b)(3)(D) may be claimed by the foreign shareholder as a
credit or refund under Sec. 1.1464-1.
(ii) Reliance by intermediary on reasonable estimate. For purposes
of determining whether a payment is a distribution designated as
subject to section 852(b)(3)(C) or (5)(A), or 871(k)(1)(C) or (2)(C), a
withholding agent that is not the distributing regulated investment
company may, absent actual knowledge or reason to know otherwise, rely
on the designations that the distributing company represents have been
made in accordance with paragraph (c)(3)(i) of this section. Failure by
the withholding agent to withhold the required amount due to a failure
by the regulated investment company to reasonably estimate the required
amounts or to properly communicate the relevant information to the
withholding agent shall be imputed to the distributing company. In such
a case, the IRS may collect from the distributing company any
underwithheld amount and subject the company to applicable interest and
penalties as a withholding agent.
* * * * *
(e) * * *
(2) Payments in foreign currency. If the amount subject to
withholding tax is paid in a currency other than the U.S. dollar, the
amount of withholding under section 1441 shall be determined by
applying the applicable rate of withholding to the foreign currency
amount and converting the amount withheld into U.S. dollars on the date
of payment at the spot rate (as defined in Sec. 1.988-1(d)(1)) in
effect on that date. A withholding agent making regular or frequent
payments in foreign currency may use a month-end spot rate or a monthly
average spot rate. In addition, such a withholding agent may use the
spot rate on the date the amount of tax is deposited (within the
meaning of Sec. 1.6302-2(a)), provided that such deposit is made
within seven days of the date of the payment giving rise to the
obligation to withhold. A spot rate convention must be used
consistently for all non-dollar amounts withheld and from year to year.
Such convention cannot be changed without the consent of the
Commissioner. The U.S. dollar amount so determined shall be treated by
the beneficial owner as the amount of tax paid on the income for
purposes of determining the final U.S. tax liability and, if
applicable, claiming a refund or credit of tax.
* * * * *
Par. 4. In Sec. 1.1441-6, paragraph (b)(1) is revised to read as
follows:
[[Page 16194]]
Sec. 1.1441-6 Claim of reduced withholding under an income tax
treaty.
* * * * *
(b) Reliance on claim of reduced withholding under an income tax
treaty--(1) In general. The withholding imposed under section 1441,
1442, or 1443 on any payment to a foreign person is eligible for
reduction under the terms of an income tax treaty only to the extent
that such payment is treated as derived by a resident of an applicable
treaty jurisdiction, such resident is a beneficial owner, and all other
requirements for benefits under the treaty are satisfied. See section
894 and the regulations thereunder to determine whether a resident of a
treaty country derives the income. Absent actual knowledge or reason to
know otherwise, a withholding agent may rely on a claim that a
beneficial owner is entitled to a reduced rate of withholding based
upon an income tax treaty if, prior to the payment, the withholding
agent can reliably associate the payment with a beneficial owner
withholding certificate, as described in Sec. 1.1441-1(e)(2), that
contains the information necessary to support the claim, or, in the
case of a payment of income described in paragraph (c)(2) of this
section made outside the United States with respect to an offshore
account, documentary evidence described in paragraphs (c)(3), (4), and
(5) of this section. See Sec. 1.6049-5(e) for the definition of
payments made outside the United States and Sec. 1.6049-5(c)(1) for
the definition of offshore account. For purposes of this paragraph
(b)(1), a beneficial owner withholding certificate described in Sec.
1.1441-1(e)(2)(i) contains information necessary to support the claim
for a treaty benefit only if it includes the beneficial owner's
taxpayer identifying number (except as otherwise provided in paragraph
(c)(1) of this section and Sec. 1.1441-6(g)) and the representations
that the beneficial owner derives the income under section 894 and the
regulations thereunder, if required, and meets the limitation on
benefits provisions of the treaty, if any. The withholding certificate
must also contain any other representations required by this section
and any other information, certifications, or statements as may be
required by the form or accompanying instructions in addition to, or in
place of, the information and certifications described in this section.
Absent actual knowledge or reason to know that the claims are incorrect
(and subject to the standards of knowledge in Sec. 1.1441-7(b)), a
withholding agent may rely on the claims made on a withholding
certificate or on documentary evidence. A withholding agent may also
rely on the information contained in a withholding statement provided
under Sec. Sec. 1.1441-1(e)(3)(iv) and 1.1441-5(c)(3)(iv) and
(e)(5)(iv) to determine whether the appropriate statements regarding
section 894 and limitation on benefits have been provided in connection
with documentary evidence. If the beneficial owner is related to the
person obligated to pay the income, within the meaning of section
267(b) or 707(b), the withholding certificate must also contain a
representation that the beneficial owner will file the statement
required under Sec. 301.6114-1(d) of this chapter (if applicable). The
requirement to file an information statement under section 6114 for
income subject to withholding applies only to amounts received during
the taxpayer's taxable year that, in the aggregate, exceed $500,000.
See Sec. 301.6114-1(d) of this chapter. The Internal Revenue Service
(IRS) may apply the provisions of Sec. 1.1441-1(e)(1)(ii)(B) to notify
the withholding agent that the certificate cannot be relied upon to
grant benefits under an income tax treaty. See Sec. 1.1441-
1(e)(4)(viii) regarding reliance on a withholding certificate by a
withholding agent. The provisions of Sec. 1.1441-1(b)(3)(iv) dealing
with a 90-day grace period shall apply for purposes of this section.
* * * * *
Par. 5. Section 1.6049-5 is amended as follows:
1. Paragraph (c)(1) is revised.
2. Paragraphs (c)(5)(i), (ii), (iii), (iv), (v) and (vi) are
redesignated as paragraphs (c)(5)(i)(A), (B), (C), (D), (E), and (F),
respectively.
3. A new heading is added to paragraph (c)(5)(i).
4. New paragraph (c)(5)(ii) is added.
The revisions and additions read as follows:
Sec. 1.6049-5 Interest and original issue discount subject to
reporting after December 31, 1982.
* * * * *
(c) Applicable rules--(1) Documentary evidence for offshore
accounts and for possessions accounts. A payor may rely on documentary
evidence described in this paragraph (c)(1) instead of a beneficial
owner withholding certificate described in Sec. 1.1441-1(e)(2)(i) in
the case of a payment made outside the United States to an offshore
account, in the case of a payment made to a U.S. possessions account
or, in the case of broker proceeds described in Sec. 1.6045-1(c)(2),
in the case of a sale effected outside the United States (as defined in
Sec. 1.6045-1(g)(3)(iii)(A)). For purposes of this paragraph (c)(1),
an offshore account means an account maintained at an office or branch
of a U.S. or foreign bank or other financial institution at any
location outside the United States (i.e., other than in any of the
fifty States or the District of Columbia) and outside of possessions of
the United States. Thus, for example, an account maintained in a
foreign country at a branch of a U.S. bank or of a foreign subsidiary
of a U.S. bank is an offshore account. For purposes of this paragraph
(c)(1), a U.S. possessions account means an account maintained at an
office or branch of a U.S. or foreign bank or other financial
institution located within a possession of the United States. For the
definition of a payment made outside the United States, see paragraph
(e) of this section. A payor may rely on documentary evidence if the
payor has established procedures to obtain, review, and maintain
documentary evidence sufficient to establish the identity of the payee
and the status of that person as a foreign person (including, but not
limited to, documentary evidence described in Sec. 1.1441-6(c)(3) or
(4)); and the payor obtains, reviews, and maintains such documentary
evidence in accordance with those procedures. A payor maintains the
documents reviewed by retaining the original, certified copy, or a
photocopy (or microfiche or similar means of record retention) of the
documents reviewed and noting in its records the date on which and by
whom the document was received and reviewed. Documentary evidence
furnished for the payment of an amount subject to withholding under
chapter 3 of the Code must contain all of the information that is
necessary to complete a Form 1042-S for that payment. A payor may also
rely on documentary evidence associated with a flow-through withholding
certificate for payments treated as made to foreign partners of a
nonwithholding foreign partnership, as defined in Sec. 1.1441-
1(c)(28), the foreign beneficiaries of a foreign simple trust, as
defined in Sec. 1.1441-1(c)(24), or foreign owners of a foreign
grantor trust, as defined in Sec. 1.1441-1(c)(26), even though the
partnership or trust account is maintained in the United States.
* * * * *
(5) * * * (i) Definition. * * *
(ii) Reporting by U.S. payors in U.S. possessions. U.S. payors are
not required to report on Form 1099 income that is from sources within
a possession of the United States and that is exempt from taxation
under section 931, 932, or 933, each of which sections exempts
[[Page 16195]]
certain income from sources within a possession of the United States
paid to a bona fide resident of that possession. For purposes of this
paragraph (c)(5)(ii), a U.S. payor may treat the beneficial owner as a
bona fide resident of the possession of the United States from which
the income is sourced if, prior to payment of the income, the U.S.
payor can reliably associate the payment with valid documentation that
supports the claim of residence in the possession of the United States
from which the income is sourced. This paragraph (c)(5)(ii) shall not
apply if the U.S. payor has actual knowledge or reason to know that the
documentation is unreliable or incorrect or that the income does not
satisfy the requirements for exemption under section 931, 932, or 933.
For the rules determining whether income is from sources within a
possession of the United States, see section 937(b) and the regulations
thereunder.
* * * * *
PART 301--PROCEDURE AND ADMINISTRATION
Par. 6. The authority citation for part 301 continues to read, in
part, as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 7. In Sec. 301.6114-1 is amended as follows:
1. Paragraphs (c)(1)(i) through (c)(1)(vii) are redesignated as
paragraphs (c)(1)(ii) through (c)(1)(viii), respectively.
2. New paragraph (c)(1)(i) is added.
3. Paragraph (c)(7) is added.
The additions and revision read as follows:
Sec. 301.6114-1 Treaty-based return positions.
* * * * *
(c) * * * (1) * * *
(i) For amounts received on or after January 1, 2001, return
positions described in paragraph (b)(4)(ii) of this section, unless the
conditions in paragraphs (b)(4)(ii)(A) and (B) of this section,
paragraph (b)(4)(ii)(C) of this section, or paragraph (b)(4)(ii)(D) of
this section are met;
* * * * *
(7) Reporting under paragraph (b)(4)(ii)(D) of this section is
waived with respect to a taxable year for taxpayers that are not
individuals or states and that, on or after January 1, 2001, receive
amounts of income subject to withholding that do not exceed $10,000 in
the aggregate for such taxable year.
* * * * *
Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 05-6060 Filed 3-29-05; 8:45 am]
BILLING CODE 4830-01-P