Revisions to Regulations Relating to Withholding of Tax on Certain U.S. Source Income Paid to Foreign Persons and Revisions of Information Reporting Regulations, 13003-13008 [06-2443]
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Federal Register / Vol. 71, No. 49 / Tuesday, March 14, 2006 / Rules and Regulations
agent for the group with respect to the
entire consolidated return year
(including the portion of the year
preceding the date on which the new
common parent became the common
parent)) and the former Domestic
Substitute Agent will no longer be the
agent for the group for any part of that
year.
(B) Years preceding the year the new
common parent becomes the common
parent. If after the Commissioner’s
designation of a Domestic Substitute
Agent the group remains in existence
with a new common parent, and such
new common parent is a domestic
corporation (determined without regard
to section 7874, a section 953(d)
election, or section 269B), the
Commissioner may designate the new
common parent as the agent for the
group for any of the group’s prior
taxable years (for which the due date
(without extensions) for filing returns is
after March 14, 2006) in which the new
common parent was a member of the
group. For this purpose, the new
common parent is treated as having
been a member of the group for any
taxable year it is primarily liable for the
group’s income tax liability.
(v) Replacement of Domestic
Substitute Agent by the Commissioner.
The Commissioner may at any time,
with or without a request from any
member of the group, designate a
replacement for a Domestic Substitute
Agent (or a successor to such agent).
(5) Deemed § 1.1502–77(d)
designation—(i) Section 1.1502–78
adjustments. If the Commissioner
designates a Domestic Substitute Agent
under this paragraph (j), it will be
treated as a designation of a substitute
agent under § 1.1502–77(d) for the
purposes of § 1.1502–78.
(ii) Default Substitute Agent. If the
Domestic Substitute Agent goes out of
existence and has a single successor that
is eligible to be a Domestic Substitute
Agent, such successor becomes the
Domestic Substitute Agent and is
treated as a default substitute agent
under § 1.1502–77(d)(2). See § 1.1502–
77(d)(4) regarding the consequences of
the successor’s failure to notify the
Commissioner of its status as a default
substitute agent. The default substitute
agent shall use procedures in section 9
of Rev. Proc. 2002–43 (2002–2 C.B. 99)
or a corresponding provision of a
successor revenue procedure for
notification. (See § 601.601(d)(2)(ii) of
this chapter.)
(6) Request that IRS designate a
Domestic Substitute Agent—(i) Original
designation. If the common parent of the
group is a Foreign Common Parent, and
the IRS has not designated a Domestic
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Substitute Agent, one or more members
of the group may request the IRS to
make a designation for taxable years for
which the due date (without extensions)
for filing returns is after March 14, 2006.
Such request is deemed to be a request
under § 1.1502–77(d)(3)(i). Members of
the group shall use the procedures in
section 10 of Rev. Proc. 2002–43 (2002–
2 C.B. 99) or a corresponding provision
of a successor revenue procedure for
this purpose. (See § 601.601(d)(2)(ii) of
this chapter.)
(ii) Request that IRS replace a
previously designated substitute agent.
If the IRS designates a Domestic
Substitute Agent pursuant to this
paragraph (j), one or more members of
the group may request that the IRS
replace the designated Domestic
Substitute Agent with another member
(or successor to another member). Such
a request is deemed to be a request
pursuant to § 1.1502–77(d)(3)(ii).
Members of the group shall use the
procedures in section 11 of Rev. Proc.
2002–43 (2002–2 C.B. 99) or a
corresponding provision of a successor
revenue procedure for this purpose. (See
§ 601.601(d)(2)(ii) of this chapter.)
(7) Effective Date. This paragraph (j)
applies to taxable years for which the
due date (without extensions) for filing
returns is after March 14, 2006. The
applicability of this paragraph (j)
expires on or before March 9, 2009.
Mark E. Matthews,
Deputy Commissioner for Services and
Enforcement.
Approved: March 9, 2006.
Eric Solomon,
Acting Deputy Assistant Secretary of the
Treasury (Tax Policy).
[FR Doc. 06–2438 Filed 3–9–06; 4:15 pm]
BILLING CODE 4830–01–P
13003
of 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 final regulations
under sections 6049 and 6114. These
regulations affect persons making
payments of U.S. source income to
foreign persons and foreign persons
claiming benefits under a U.S. income
tax treaty.
DATES: Effective date: These regulations
are effective March 14, 2006. The
removal of § 1.1441–1(e)(4)(vii)(G) is
effective as of January 1, 2001.
FOR FURTHER INFORMATION CONTACT:
Ethan Atticks, (202) 622–3840 (not a toll
free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collections of information
contained in this final rule 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.
DEPARTMENT OF THE TREASURY
Background
Internal Revenue Service
In Treasury Decision 8734 (1997–2
C.B. 109 [62 FR 53387]), the Treasury
Department and the IRS issued
comprehensive regulations under
chapter 3 (sections 1441–1464) and
subpart B of Part III of Subchapter A of
chapter 61 (sections 6041 through
6050T) of the Internal Revenue Code
(Code). Those 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])
(collectively the current regulations).
The current regulations are generally
effective as of January 1, 2001.
In Notice 2001–4 (2001–1 C.B. 267),
Notice 2001–11 (2001–1 C.B. 464), and
26 CFR Parts 1 and 301
[TD 9253]
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
Internal Revenue Service (IRS),
Treasury.
ACTION: Final regulations and removal of
temporary regulations.
AGENCY:
SUMMARY: This document contains final
regulations relating to the withholding
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Federal Register / Vol. 71, No. 49 / Tuesday, March 14, 2006 / Rules and Regulations
Notice 2001–43 (2001–2 C.B. 72), the
Treasury Department and the IRS
announced the intention to amend the
current regulations under sections 1441,
6049 and 6114 to address the matters
discussed in those notices.
On March 30, 2005, the IRS and
Treasury published a notice of proposed
rulemaking (REG–125443–01, 2005–16
I.R.B. 912) in the Federal Register (70
FR 16189) (hereinafter the proposed
regulations). The proposed regulations
contained provisions to implement
certain changes announced in those
notices and other changes.
No public hearing regarding the
proposed regulations was requested or
held. However, certain written
comments were received. After
consideration of the comments, the
proposed regulations are adopted as
revised by this Treasury decision.
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Summary of Comments
These final regulations finalize the
provisions of the proposed regulations
with only two areas of modification.
The comments received and the
modifications made in response to those
comments are described below.
A. Taxpayer Identification Number
(TIN) Requirement for Certain Foreign
Grantor Trusts
Section 1.1441–1(e)(4)(vii)(G)
provides that a TIN must be stated on
a withholding certificate from a person
representing to be a foreign grantor trust
with 5 or fewer grantors. Generally, if no
TIN is provided, the withholding
certificate is considered invalid. See
§ 1.1441–1(e)(2)(ii).
The proposed regulations eliminated
this TIN requirement for withholding
certificates provided by such persons to
qualified intermediaries (QIs), but
retained it for withholding certificates
provided by such persons to other
withholding agents if the certificate was
executed on or before December 31,
2003.
Commentators requested that these
final regulations adopt the provisions of
the proposed regulations that remove
the TIN requirement but with an
effective date that applies to certificates
executed and provided to all
withholding agents, not just QIs, on or
after January 1, 2001, the effective date
of the current regulations. The
commentators state that the retroactive
effective date for withholding
certificates provided to the other
withholding agents is consistent with
the IRS and Treasury’s recognition that
the TIN requirement in the current
regulations is not serving to enhance
enforcement objectives. Further, the
commentators state that for
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administrative reasons the effective
dates should be consistent whether or
not the withholding certificate is
provided to a QI or other withholding
agent. The IRS and Treasury agree with
this comment. Accordingly, under these
final regulations, a withholding
certificate executed on or after January
1, 2001, and provided to a QI or other
withholding agent by a person
representing to be a foreign grantor trust
with five or fewer grantors does not
need to state a TIN for such certificate
to be valid.
B. Reporting of Treaty-Based Return
Positions
Section 301.6114–1(a) provides that,
if a taxpayer takes a return position that
a tax treaty overrules or modifies any
provision of the 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. When applicable,
§ 301.6114–1(d) generally requires a
taxpayer to attach Form 8833, Treaty
Based Return Position Disclosure Under
Section 6114 or 7701(b), to its U.S.
Federal income tax return. Section
301.6114–1(b) states that reporting is
required unless it is expressly waived
and provides a nonexclusive list of
particular positions for which reporting
is required. Section 301.6114–1(c) then
provides a list of specific exceptions
from the general reporting requirements
of § 301.6114–1(a) and (b).
The proposed regulations provided
that reporting under § 301.6114–
1(b)(4)(ii) is required only for the
positions specifically described in
paragraphs (b)(4)(ii)(A) and (B), or (C) or
(D) of that section. Further, the
proposed regulations provided that
reporting under § 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 for the taxable year. See
Prop. Reg. § 301.6114–1(c)(1)(i), and (7).
Commentators suggested that the
$10,000 threshold applicable to
taxpayers that are not individuals or
States should be increased to $500,000,
the threshold amount for reporting
under § 301.6114–1(b)(4)(ii)(C)
(addressing payments to a related
foreign person where benefits are
claimed under a treaty that contains a
limitation on benefits article). The
commentators noted that entities
typically have substantially higher
levels of investment as compared to
individuals and therefore a higher
threshold is warranted. The
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commentators concluded that the
administrative burden placed on these
entities by the regulations is not
appropriate when considering the
benefit to the government by the
disclosure. As a result, the
commentators believed that the
exception should be modified.
In addition, the commentators
suggested that reporting be waived for
pension funds and certain other persons
required to report under § 301.6114–
1(b)(4)(ii)(D), which requires reporting
whenever a treaty imposes ‘‘any
condition’’ in addition to a person’s
residence in the treaty country for
entitlement to treaty benefits. The
commentators stated that because, for
example, an income tax treaty may
condition a pension fund’s entitlement
to a reduced rate of taxation on
dividends on the pension fund not
being engaged in a trade or business,
and because a pension fund rarely will
violate such a condition, from a
practical standpoint the sole
requirement for entitlement to treaty
benefits is the residence of the pension
fund. Therefore, the commentators
suggested that requiring the pension
fund to file an income tax return and
make a treaty based disclosure of its
position imposes an unnecessary
administrative burden. Accordingly, the
commentators believed that it was
appropriate to interpret the regulations
such that the trade or business
requirement described above with
respect to pension funds is not ‘‘any
condition’’ described in § 301.6114–
1(b)(4)(ii)(D). To clarify this point, the
commentators requested that the final
regulations waive reporting for pension
funds.
Commentators also requested that
§ 301.6114–1(c)(6), which waives
reporting for amounts required to be
reported under section 6038A on a Form
5472, ‘‘Information Return of a 25%
Foreign-Owned U.S. Corporation or a
Foreign Corporation Engaged in a U.S.
Trade or Business (under sections
6038A and 6038(c) of the Internal
Revenue Code),’’ to the extent permitted
under the form or accompanying
instructions, be activated by including
such permission in the form or
instructions.
The IRS and Treasury considered the
comments discussed above, as well as
the general bases for requiring reporting
under section 6114. The IRS and
Treasury agree that reporting under
section 6114 should not be required in
certain circumstances where the
payment is properly reported on Form
1042–S, ‘‘Foreign Person’s U.S. Source
Income Subject to Withholding,’’ and
the withholding agent is a U.S. person,
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or a foreign person that has entered into
an agreement that provides for IRS
audit. Thus, in response to the
comments described above, the
following amendments are made to the
waiver provisions of § 301.6114–1(c).
First, rather than activating the
exception for amounts required to be
reported under section 6038A on Form
5472, paragraph (c)(6) of the regulations
is revised to replace this provision
regarding Form 5472 with a provision
waiving reporting for amounts properly
reported on Form 1042–S by a
withholding agent that is a reporting
corporation within the meaning of
section 6038A(a). Second, a new
paragraph (c)(7) is added to provide that
reporting is waived for amounts
properly reported on Form 1042–S by a
withholding agent that is a U.S.
financial institution, a QI, or a
withholding foreign partnership (WP) or
withholding foreign trust (WT) if the
beneficial owner is a direct account
holder of the U.S. financial institution
or QI or a direct beneficiary or owner of
the WP or WT. Third, a new paragraph
(c)(8) is added which replaces the
provision in the proposed regulations
(see Prop. Reg. § 301.6114–1(c)(7))
waiving reporting for taxpayers that are
not individuals or States and that
receive amounts of income subject to
withholding that do not exceed the
$10,000 threshold. New paragraph (c)(8)
contains a waiver for taxpayers that are
not individuals or States that receive
amounts that have been properly
reported on Form 1042–S, do not exceed
$500,000, and are not received through
an intermediary or flow-through entity.
Notwithstanding the discussion
above, the final regulations provide that
the waivers from reporting in paragraph
(c)(6), (7) and (8) do not apply to the
extent that reporting is specifically
required under the instructions to Form
8833.
Finally, these final regulations clarify
that reporting under section 301.6114–
1(b)(4)(ii) is required only for the
positions specifically described in
paragraphs (b)(4)(ii)(A) and (B), or (C) or
(D).
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Effect on Other Documents
Sections (V)(C), (D), and (E) of Notice
2001–4 (2001–1 C.B. 267), Notice 2001–
11 (2001–1 C.B. 464), and Sections 2
and 3 of Notice 2001–43 (2001–2 C.B.
72), are superseded as of March 14,
2006.
Special Analyses
It has been determined that this
Treasury decision is not a significant
regulatory action as defined in
Executive Order 12866. Therefore, a
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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,
the proposed regulations preceding
these regulations were submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment
on their impact on small business.
Drafting Information
The principal author of these
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.
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 1 and 301
are amended as follows:
I
PART 1—INCOME TAXES
Paragraph 1. The authority citation
for part 1 continues to read, in part, as
follows:
I
Authority: 26 U.S.C. 7805 * * *
I Par. 2. Section 1.1441–1 is amended
as follows:
I 1. Paragraph (b)(2)(iv)(A) is revised.
I 2. Paragraph (b)(3)(iii)(E) is added.
I 3. Paragraph (c)(30) is added.
I 4. Paragraph (e)(4)(vii)(G) is removed
and paragraph (e)(4)(vii)(H) and (I) are
redesignated as paragraph (e)(4)(vii)(G)
and (H) respectively.
The revisions and additions read as
follows:
§ 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
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13005
treated as a U.S. person in certain cases.
A payment to a U.S. branch of a foreign
person is a payment to a foreign person.
However, a U.S. branch described in
this paragraph (b)(2)(iv)(A) and a
withholding agent (including another
U.S. branch described in this paragraph
(b)(2)(iv)(A)) may agree to treat the
branch as a U.S. person for purposes of
withholding on specified payments to
the U.S. branch. Notwithstanding the
preceding sentence, a withholding agent
making a payment to a U.S. branch
treated as a U.S. person under this
paragraph (b)(2)(iv)(A) shall not treat the
branch as a U.S. person for purposes of
reporting the payment made to the
branch. Therefore, a payment to such
U.S. branch shall be reported on Form
1042–S under § 1.1461–1(c). Further, a
U.S. branch that is treated as a U.S.
person under this paragraph
(b)(2)(iv)(A) shall not be treated as a
U.S. person for purposes of the
withholding certificate it may provide to
a withholding agent. Therefore, the U.S.
branch must furnish a U.S. branch
withholding certificate on Form W–8 as
provided in paragraph (e)(3)(v) of this
section and not a Form W–9. An
agreement to treat a U.S. branch as a
U.S. person must be evidenced by a U.S.
branch withholding certificate described
in paragraph (e)(3)(v) of this section
furnished by the U.S. branch to the
withholding agent. A U.S. branch
described in this paragraph (b)(2)(iv)(A)
is any U.S. branch of a foreign bank
subject to regulatory supervision by the
Federal Reserve Board or a U.S. branch
of a foreign insurance company required
to file an annual statement on a form
approved by the National Association of
Insurance Commissioners with the
Insurance Department of a State, a
Territory, or the District of Columbia. 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 § 601.601(d)(2) of this
chapter). See § 1.6049–5(c)(5)(vi) for the
treatment of U.S. branches as U.S.
payors if they make a payment that is
subject to reporting under chapter 61 of
the Internal Revenue Code. Also see
§ 1.6049–5(d)(1)(ii) for the treatment of
U.S. branches as foreign payees under
chapter 61 of the Internal Revenue
Code.
*
*
*
*
*
(3) * * *
(iii) * * *
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(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
chapters 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.
*
*
*
*
*
Par. 3. Section 1.1441–3 is amended
by revising paragraphs (c)(3) and (e)(2)
to read as follows:
§ 1.1441–3
withheld.
Determination of amounts to be
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*
*
*
*
*
(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 § 1.1464–1.
(ii) Reliance by intermediary on
reasonable estimate. For purposes of
determining whether a payment is a
distribution designated as subject to
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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
§ 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
§ 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.
*
*
*
*
*
I Par. 4. In § 1.1441–6, paragraph (b)(1)
is revised to read as follows:
§ 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
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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 § 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 § 1.6049–5(e) for the
definition of payments made outside the
United States and § 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 § 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 § 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
§ 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 § 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
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Federal Register / Vol. 71, No. 49 / Tuesday, March 14, 2006 / Rules and Regulations
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 § 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 § 301.6114–1(d) of this
chapter. The Internal Revenue Service
(IRS) may apply the provisions of
§ 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
§ 1.1441–1(e)(4)(viii) regarding reliance
on a withholding certificate by a
withholding agent. The provisions of
§ 1.1441–1(b)(3)(iv) dealing with a 90day grace period shall apply for
purposes of this section.
*
*
*
*
*
I Par. 5. Section 1.6049–5 is amended
as follows:
I 1. Paragraph (c)(1) is revised.
I 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.
I 3. A new heading is added to
paragraph (c)(5)(i).
I 4. New paragraph (c)(5)(ii) is added.
The revisions and additions read as
follows:
§ 1.6049–5 Interest and original issue
discount subject to reporting after
December 31, 1982.
sroberts on PROD1PC70 with RULES
*
*
*
*
*
(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
§ 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 § 1.6045–1(c)(2),
in the case of a sale effected outside the
United States (as defined in § 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
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16:18 Mar 13, 2006
Jkt 208001
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 § 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 Internal Revenue Code
must contain all of the information that
is necessary to complete a Form 1042S 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 § 1.1441–1(c)(28), the foreign
beneficiaries of a foreign simple trust, as
defined in § 1.1441–1(c)(24), or foreign
owners of a foreign grantor trust, as
defined in § 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
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
PO 00000
Frm 00017
Fmt 4700
Sfmt 4700
13007
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
I Par. 6. The authority citation for part
301 continues to read, in part, as
follows:
Authority: 26 U.S.C. 7805 * * *
Par. 7. In § 301.6114–1 is amended as
follows:
I 1. Paragraphs (c)(1)(i) through
(c)(1)(vii) are redesignated as paragraphs
(c)(1)(ii) through (c)(1)(viii),
respectively.
I 2. New paragraph (c)(1)(i) is added.
I 3. Paragraph (c)(6) is revised.
I 4. Paragraphs (c)(7) and (8) are added.
The additions and revision read as
follows:
I
§ 301.6114–1
positions.
*
Treaty-based return
*
*
*
*
(c) * * * (1) * * *
(i) For amounts received on or after
January 1, 2001, reporting under
paragraph (b)(4)(ii) is waived, unless
reporting is specifically required under
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;
*
*
*
*
*
(6)(i) For taxable years ending after
December 31, 2004, except as provided
in paragraph (c)(6)(ii) of this section,
reporting under paragraph (b)(4)(ii) of
this section is waived for amounts
received by a related party, within the
meaning of section 6038A(c)(2), from a
withholding agent that is a reporting
corporation, within the meaning of
section 6038A(a), and that are properly
reported on Form 1042–S.
(ii) Paragraph (c)(6)(i) of this section
does not apply to any amounts for
which reporting is specifically required
under the instructions to Form 8833.
(7)(i) For taxable years ending after
December 31, 2004, except as provided
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14MRR1
sroberts on PROD1PC70 with RULES
13008
Federal Register / Vol. 71, No. 49 / Tuesday, March 14, 2006 / Rules and Regulations
in paragraph (c)(7)(iv) of this section,
reporting under paragraph (b)(4)(ii) of
this section is waived for amounts
properly reported on Form 1042–S (on
either a specific payee or pooled basis)
by a withholding agent described in
paragraph (c)(7)(ii) of this section if the
beneficial owner is described in
paragraph (c)(7)(iii) of this section.
(ii) A withholding agent described in
this paragraph (c)(7)(ii) is a U.S.
financial institution, as defined in
§ 1.1441–1(c)(5) of this chapter, a
qualified intermediary, as defined in
§ 1.1441–1(e)(5)(ii) of this chapter, a
withholding foreign partnership, as
defined § 1.1441–5(c)(2)(i) of this
chapter, or a withholding foreign trust,
as defined in § 1.1441–5(e)(5)(v) of this
chapter.
(iii) A beneficial owner described in
this paragraph (c)(7)(iii) of this section
is a direct account holder of a U.S.
financial institution or qualified
intermediary, a direct partner of a
withholding foreign partnership, or a
direct beneficiary or owner of a simple
or grantor trust that is a withholding
foreign trust. A beneficial owner
described in this paragraph (c)(7)(iii)
also includes an account holder to
which a qualified intermediary has
applied section 4A.01 or 4A.02 of the
qualified intermediary agreement,
contained in Revenue Procedure 2000–
12 (2000–1 C.B. 387), (as amended by
Revenue Procedure 2003–64, (2003–2
C.B. 306); Revenue Procedure 2004–21
(2004–1 C.B. 702); Revenue Procedure
2005–77 (2005–51 I.R.B. 1176) (see
§ 601.601(b)(2) of this chapter) a partner
to which a withholding foreign
partnership has applied section 10.01 or
10.02 of the withholding foreign
partnership agreement, and a
beneficiary or owner to which a
withholding foreign trust has applied
section 10.01 or 10.02 of the
withholding foreign trust agreement,
contained in Revenue Procedure 2003–
64, (2003–2 C.B. 306), (as amended by
Revenue Procedure 2004–21 (2004–1
C.B. 702); Revenue Procedure 2005–77
(2005–51 I.R.B. 1176); (see
§ 601.601(b)(2) of this chapter).
(iv) Paragraph (c)(7)(i) of this section
does not apply to any amounts for
which reporting is specifically required
under the instructions to Form 8833.
(8)(i) For taxable years ending after
December 31, 2004, except as provided
in paragraph (c)(8)(ii) of this section,
reporting under paragraph (b)(4)(ii) of
this section is waived for taxpayers that
are not individuals or States and that
receive amounts of income that have
been properly reported on Form 1042–
S, that do not exceed $500,000 in the
aggregate for the taxable year and that
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16:18 Mar 13, 2006
Jkt 208001
are not received through an account
with an intermediary, as defined in
§ 1.1441–1(c) (13), or with respect to
interest in a flow-through entity, as
defined in § 1.1441–1(c)(23), (ii) The
exception contained in paragraph
(c)(8)(i) of this section does not apply to
any amounts for which reporting is
specifically required under the
instructions to Form 8833.
*
*
*
*
*
Mark E. Matthews,
Deputy Commissioner for Services and
Enforcement.
Approved: February 27, 2006.
Eric Solomon,
Acting Deputy Assistant Secretary of the
Treasury (Tax Policy).
[FR Doc. 06–2443 Filed 3–13–06; 8:45 am]
BILLING CODE 4830–01–P
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
[TD 9254]
RIN 1545–BB25
Guidance Under Section 1502;
Suspension of Losses on Certain
Stock Dispositions
Internal Revenue Service (IRS),
Treasury.
ACTION: Final rule and removal of
temporary regulations.
AGENCY:
SUMMARY: This document contains final
regulations under section 1502 of the
Internal Revenue Code of 1986. The
regulations apply when a member of a
consolidated group transfers subsidiary
stock at a loss. They also apply when a
member holds loss shares of subsidiary
stock and the subsidiary ceases to be a
member of the group. These regulations
finalize § 1.1502–35T without
substantive change.
DATES: Effective Date: These regulations
are effective March 9, 2006.
Applicability Date: For dates of
applicability, see §§ 1.1502–21(h)(8),
1.1502–32(h)(6), 1.1502–35(f), and
1.1502–35(j).
FOR FURTHER INFORMATION CONTACT:
Theresa Abell (202) 622–7700 or Martin
Huck (202) 622–7750 (not toll-free
numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information
contained in these final regulations has
been reviewed and approved by the
Office of Management and Budget in
PO 00000
Frm 00018
Fmt 4700
Sfmt 4700
accordance with the Paperwork
Reduction Act of 1995 (44 U.S.C.
3507(d)) under control number 1545–
1828.
The collection of information in these
regulations is in §§ 1.1502–35(c),
1.1502–35(c)(5)(iii), and 1.1502–
35(g)(3). This information is required by
the IRS to verify compliance with
section 1502 of the Code. This
information will be used to determine
whether the amount of tax has been
calculated correctly. The collection of
information is required to properly
determine the amount permitted to be
taken into account as a loss. The
respondents are corporations filing
consolidated returns. The collection of
information is required to obtain a
benefit.
Estimated average annual burden per
respondent and/or recordkeeper: 2
hours.
Comments concerning the accuracy of
this burden estimate and suggestions for
reducing this burden should be directed
to the Office of Management and
Budget, Attn: Desk Officer for the
Department of Treasury, Office of
Information and Regulatory Affairs,
Washington, DC 20503, with copies to
the Internal Revenue Service, Attn: IRS
Reports Clearance Officer,
SE:W:CAR:MP:T:T:SP, Washington, DC
20224.
An agency may not conduct or
sponsor, and a person is not required to
respond to, a collection of information
unless it displays a valid control
number.
Books or records relating to the
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
On September 19, 1991, the IRS and
Treasury Department published
§ 1.1502–20 (the loss disallowance rule,
or LDR). See TD 8364, 56 FR 47379. The
LDR addressed two problems arising in
the consolidated return context: the
circumvention of General Utilities
repeal and the duplication of loss.
On July 6, 2001, in Rite Aid Corp. v.
United States, 255 F.3d 1357 (Fed. Cir.
2001), the Court of Appeals for the
Federal Circuit held that the duplicated
loss provisions of the LDR were an
invalid exercise of regulatory authority.
In response to the court’s decision, the
IRS and Treasury Department
promulgated two regulations to replace
the LDR. The first, § 1.337(d)–2T
(temporary General Utilities regulation),
E:\FR\FM\14MRR1.SGM
14MRR1
]]>Agencies
[Federal Register Volume 71, Number 49 (Tuesday, March 14, 2006)]
[Rules and Regulations]
[Pages 13003-13008]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 06-2443]
-----------------------------------------------------------------------
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 301
[TD 9253]
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: Final regulations and removal of temporary regulations.
-----------------------------------------------------------------------
SUMMARY: This document contains final regulations relating to the
withholding of 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 final
regulations under sections 6049 and 6114. These regulations affect
persons making payments of U.S. source income to foreign persons and
foreign persons claiming benefits under a U.S. income tax treaty.
DATES: Effective date: These regulations are effective March 14, 2006.
The removal of Sec. 1.1441-1(e)(4)(vii)(G) is effective as of January
1, 2001.
FOR FURTHER INFORMATION CONTACT: Ethan Atticks, (202) 622-3840 (not a
toll free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collections of information contained in this final rule 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 53387]), the
Treasury Department and the IRS issued comprehensive regulations under
chapter 3 (sections 1441-1464) and subpart B of Part III of Subchapter
A of chapter 61 (sections 6041 through 6050T) of the Internal Revenue
Code (Code). Those 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])
(collectively the current regulations). The current regulations are
generally effective as of January 1, 2001.
In Notice 2001-4 (2001-1 C.B. 267), Notice 2001-11 (2001-1 C.B.
464), and
[[Page 13004]]
Notice 2001-43 (2001-2 C.B. 72), the Treasury Department and the IRS
announced the intention to amend the current regulations under sections
1441, 6049 and 6114 to address the matters discussed in those notices.
On March 30, 2005, the IRS and Treasury published a notice of
proposed rulemaking (REG-125443-01, 2005-16 I.R.B. 912) in the Federal
Register (70 FR 16189) (hereinafter the proposed regulations). The
proposed regulations contained provisions to implement certain changes
announced in those notices and other changes.
No public hearing regarding the proposed regulations was requested
or held. However, certain written comments were received. After
consideration of the comments, the proposed regulations are adopted as
revised by this Treasury decision.
Summary of Comments
These final regulations finalize the provisions of the proposed
regulations with only two areas of modification. The comments received
and the modifications made in response to those comments are described
below.
A. Taxpayer Identification Number (TIN) Requirement for Certain Foreign
Grantor Trusts
Section 1.1441-1(e)(4)(vii)(G) provides that a TIN must be stated
on a withholding certificate from a person representing to be a foreign
grantor trust with 5 or fewer grantors. Generally, if no TIN is
provided, the withholding certificate is considered invalid. See Sec.
1.1441-1(e)(2)(ii).
The proposed regulations eliminated this TIN requirement for
withholding certificates provided by such persons to qualified
intermediaries (QIs), but retained it for withholding certificates
provided by such persons to other withholding agents if the certificate
was executed on or before December 31, 2003.
Commentators requested that these final regulations adopt the
provisions of the proposed regulations that remove the TIN requirement
but with an effective date that applies to certificates executed and
provided to all withholding agents, not just QIs, on or after January
1, 2001, the effective date of the current regulations. The
commentators state that the retroactive effective date for withholding
certificates provided to the other withholding agents is consistent
with the IRS and Treasury's recognition that the TIN requirement in the
current regulations is not serving to enhance enforcement objectives.
Further, the commentators state that for administrative reasons the
effective dates should be consistent whether or not the withholding
certificate is provided to a QI or other withholding agent. The IRS and
Treasury agree with this comment. Accordingly, under these final
regulations, a withholding certificate executed on or after January 1,
2001, and provided to a QI or other withholding agent by a person
representing to be a foreign grantor trust with five or fewer grantors
does not need to state a TIN for such certificate to be valid.
B. Reporting of Treaty-Based Return Positions
Section 301.6114-1(a) provides that, if a taxpayer takes a return
position that a tax treaty overrules or modifies any provision of the
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. When applicable, Sec. 301.6114-1(d) generally
requires a taxpayer to attach Form 8833, Treaty Based Return Position
Disclosure Under Section 6114 or 7701(b), to its U.S. Federal income
tax return. Section 301.6114-1(b) states that reporting is required
unless it is expressly waived and provides a nonexclusive list of
particular positions for which reporting is required. Section 301.6114-
1(c) then provides a list of specific exceptions from the general
reporting requirements of Sec. 301.6114-1(a) and (b).
The proposed regulations provided that reporting under Sec.
301.6114-1(b)(4)(ii) is required only for the positions specifically
described in paragraphs (b)(4)(ii)(A) and (B), or (C) or (D) of that
section. Further, the proposed regulations provided that 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 for the taxable
year. See Prop. Reg. Sec. 301.6114-1(c)(1)(i), and (7).
Commentators suggested that the $10,000 threshold applicable to
taxpayers that are not individuals or States should be increased to
$500,000, the threshold amount for reporting under Sec. 301.6114-
1(b)(4)(ii)(C) (addressing payments to a related foreign person where
benefits are claimed under a treaty that contains a limitation on
benefits article). The commentators noted that entities typically have
substantially higher levels of investment as compared to individuals
and therefore a higher threshold is warranted. The commentators
concluded that the administrative burden placed on these entities by
the regulations is not appropriate when considering the benefit to the
government by the disclosure. As a result, the commentators believed
that the exception should be modified.
In addition, the commentators suggested that reporting be waived
for pension funds and certain other persons required to report under
Sec. 301.6114-1(b)(4)(ii)(D), which requires reporting whenever a
treaty imposes ``any condition'' in addition to a person's residence in
the treaty country for entitlement to treaty benefits. The commentators
stated that because, for example, an income tax treaty may condition a
pension fund's entitlement to a reduced rate of taxation on dividends
on the pension fund not being engaged in a trade or business, and
because a pension fund rarely will violate such a condition, from a
practical standpoint the sole requirement for entitlement to treaty
benefits is the residence of the pension fund. Therefore, the
commentators suggested that requiring the pension fund to file an
income tax return and make a treaty based disclosure of its position
imposes an unnecessary administrative burden. Accordingly, the
commentators believed that it was appropriate to interpret the
regulations such that the trade or business requirement described above
with respect to pension funds is not ``any condition'' described in
Sec. 301.6114-1(b)(4)(ii)(D). To clarify this point, the commentators
requested that the final regulations waive reporting for pension funds.
Commentators also requested that Sec. 301.6114-1(c)(6), which
waives reporting for amounts required to be reported under section
6038A on a Form 5472, ``Information Return of a 25% Foreign-Owned U.S.
Corporation or a Foreign Corporation Engaged in a U.S. Trade or
Business (under sections 6038A and 6038(c) of the Internal Revenue
Code),'' to the extent permitted under the form or accompanying
instructions, be activated by including such permission in the form or
instructions.
The IRS and Treasury considered the comments discussed above, as
well as the general bases for requiring reporting under section 6114.
The IRS and Treasury agree that reporting under section 6114 should not
be required in certain circumstances where the payment is properly
reported on Form 1042-S, ``Foreign Person's U.S. Source Income Subject
to Withholding,'' and the withholding agent is a U.S. person,
[[Page 13005]]
or a foreign person that has entered into an agreement that provides
for IRS audit. Thus, in response to the comments described above, the
following amendments are made to the waiver provisions of Sec.
301.6114-1(c).
First, rather than activating the exception for amounts required to
be reported under section 6038A on Form 5472, paragraph (c)(6) of the
regulations is revised to replace this provision regarding Form 5472
with a provision waiving reporting for amounts properly reported on
Form 1042-S by a withholding agent that is a reporting corporation
within the meaning of section 6038A(a). Second, a new paragraph (c)(7)
is added to provide that reporting is waived for amounts properly
reported on Form 1042-S by a withholding agent that is a U.S. financial
institution, a QI, or a withholding foreign partnership (WP) or
withholding foreign trust (WT) if the beneficial owner is a direct
account holder of the U.S. financial institution or QI or a direct
beneficiary or owner of the WP or WT. Third, a new paragraph (c)(8) is
added which replaces the provision in the proposed regulations (see
Prop. Reg. Sec. 301.6114-1(c)(7)) waiving reporting for taxpayers that
are not individuals or States and that receive amounts of income
subject to withholding that do not exceed the $10,000 threshold. New
paragraph (c)(8) contains a waiver for taxpayers that are not
individuals or States that receive amounts that have been properly
reported on Form 1042-S, do not exceed $500,000, and are not received
through an intermediary or flow-through entity.
Notwithstanding the discussion above, the final regulations provide
that the waivers from reporting in paragraph (c)(6), (7) and (8) do not
apply to the extent that reporting is specifically required under the
instructions to Form 8833.
Finally, these final regulations clarify that reporting under
section 301.6114-1(b)(4)(ii) is required only for the positions
specifically described in paragraphs (b)(4)(ii)(A) and (B), or (C) or
(D).
Effect on Other Documents
Sections (V)(C), (D), and (E) of Notice 2001-4 (2001-1 C.B. 267),
Notice 2001-11 (2001-1 C.B. 464), and Sections 2 and 3 of Notice 2001-
43 (2001-2 C.B. 72), are superseded as of March 14, 2006.
Special Analyses
It has been determined that this Treasury decision is not a
significant regulatory action as defined in Executive Order 12866.
Therefore, a regulatory assessment is not required. It has also been
determined that section 553(b) of the Administrative Procedure Act (5
U.S.C. chapter 5) does not apply to these regulations, 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, the proposed
regulations preceding these regulations were submitted to the Chief
Counsel for Advocacy of the Small Business Administration for comment
on their impact on small business.
Drafting Information
The principal author of these 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.
Adoption of Amendments to the Regulations
0
Accordingly, 26 CFR parts 1 and 301 are amended as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 continues to read, in
part, as follows:
Authority: 26 U.S.C. 7805 * * *
0
Par. 2. Section 1.1441-1 is amended as follows:
0
1. Paragraph (b)(2)(iv)(A) is revised.
0
2. Paragraph (b)(3)(iii)(E) is added.
0
3. Paragraph (c)(30) is added.
0
4. Paragraph (e)(4)(vii)(G) is removed and paragraph (e)(4)(vii)(H) and
(I) are redesignated as paragraph (e)(4)(vii)(G) and (H) respectively.
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 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) * * *
[[Page 13006]]
(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 chapters 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.
* * * * *
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.
* * * * *
0
Par. 4. In Sec. 1.1441-6, paragraph (b)(1) is revised to read as
follows:
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. 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
[[Page 13007]]
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.
* * * * *
0
Par. 5. Section 1.6049-5 is amended as follows:
0
1. Paragraph (c)(1) is revised.
0
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.
0
3. A new heading is added to paragraph (c)(5)(i).
0
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 Internal Revenue 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 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
0
Par. 6. The authority citation for part 301 continues to read, in part,
as follows:
Authority: 26 U.S.C. 7805 * * *
0
Par. 7. In Sec. 301.6114-1 is amended as follows:
0
1. Paragraphs (c)(1)(i) through (c)(1)(vii) are redesignated as
paragraphs (c)(1)(ii) through (c)(1)(viii), respectively.
0
2. New paragraph (c)(1)(i) is added.
0
3. Paragraph (c)(6) is revised.
0
4. Paragraphs (c)(7) and (8) are 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, reporting
under paragraph (b)(4)(ii) is waived, unless reporting is specifically
required under 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;
* * * * *
(6)(i) For taxable years ending after December 31, 2004, except as
provided in paragraph (c)(6)(ii) of this section, reporting under
paragraph (b)(4)(ii) of this section is waived for amounts received by
a related party, within the meaning of section 6038A(c)(2), from a
withholding agent that is a reporting corporation, within the meaning
of section 6038A(a), and that are properly reported on Form 1042-S.
(ii) Paragraph (c)(6)(i) of this section does not apply to any
amounts for which reporting is specifically required under the
instructions to Form 8833.
(7)(i) For taxable years ending after December 31, 2004, except as
provided
[[Page 13008]]
in paragraph (c)(7)(iv) of this section, reporting under paragraph
(b)(4)(ii) of this section is waived for amounts properly reported on
Form 1042-S (on either a specific payee or pooled basis) by a
withholding agent described in paragraph (c)(7)(ii) of this section if
the beneficial owner is described in paragraph (c)(7)(iii) of this
section.
(ii) A withholding agent described in this paragraph (c)(7)(ii) is
a U.S. financial institution, as defined in Sec. 1.1441-1(c)(5) of
this chapter, a qualified intermediary, as defined in Sec. 1.1441-
1(e)(5)(ii) of this chapter, a withholding foreign partnership, as
defined Sec. 1.1441-5(c)(2)(i) of this chapter, or a withholding
foreign trust, as defined in Sec. 1.1441-5(e)(5)(v) of this chapter.
(iii) A beneficial owner described in this paragraph (c)(7)(iii) of
this section is a direct account holder of a U.S. financial institution
or qualified intermediary, a direct partner of a withholding foreign
partnership, or a direct beneficiary or owner of a simple or grantor
trust that is a withholding foreign trust. A beneficial owner described
in this paragraph (c)(7)(iii) also includes an account holder to which
a qualified intermediary has applied section 4A.01 or 4A.02 of the
qualified intermediary agreement, contained in Revenue Procedure 2000-
12 (2000-1 C.B. 387), (as amended by Revenue Procedure 2003-64, (2003-2
C.B. 306); Revenue Procedure 2004-21 (2004-1 C.B. 702); Revenue
Procedure 2005-77 (2005-51 I.R.B. 1176) (see Sec. 601.601(b)(2) of
this chapter) a partner to which a withholding foreign partnership has
applied section 10.01 or 10.02 of the withholding foreign partnership
agreement, and a beneficiary or owner to which a withholding foreign
trust has applied section 10.01 or 10.02 of the withholding foreign
trust agreement, contained in Revenue Procedure 2003-64, (2003-2 C.B.
306), (as amended by Revenue Procedure 2004-21 (2004-1 C.B. 702);
Revenue Procedure 2005-77 (2005-51 I.R.B. 1176); (see Sec.
601.601(b)(2) of this chapter).
(iv) Paragraph (c)(7)(i) of this section does not apply to any
amounts for which reporting is specifically required under the
instructions to Form 8833.
(8)(i) For taxable years ending after December 31, 2004, except as
provided in paragraph (c)(8)(ii) of this section, reporting under
paragraph (b)(4)(ii) of this section is waived for taxpayers that are
not individuals or States and that receive amounts of income that have
been properly reported on Form 1042-S, that do not exceed $500,000 in
the aggregate for the taxable year and that are not received through an
account with an intermediary, as defined in Sec. 1.1441-1(c) (13), or
with respect to interest in a flow-through entity, as defined in Sec.
1.1441-1(c)(23), (ii) The exception contained in paragraph (c)(8)(i) of
this section does not apply to any amounts for which reporting is
specifically required under the instructions to Form 8833.
* * * * *
Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
Approved: February 27, 2006.
Eric Solomon,
Acting Deputy Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 06-2443 Filed 3-13-06; 8:45 am]
BILLING CODE 4830-01-P
