Regulations Reducing Burden Under FATCA and Chapter 3, 64757-64768 [2018-27290]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 83, Number 242 (Tuesday, December 18, 2018)]
[Proposed Rules]
[Pages 64757-64768]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-27290]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-132881-17]
RIN 1545-BO30


Regulations Reducing Burden Under FATCA and Chapter 3

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations eliminating 
withholding on payments of gross proceeds, deferring withholding on 
foreign passthru payments, eliminating withholding on certain insurance 
premiums, and clarifying the definition of investment entity. This 
notice of proposed rulemaking also includes guidance concerning certain 
due diligence requirements of withholding agents and guidance on 
refunds and credits of amounts withheld.

DATES: Written or electronic comments and requests for a public hearing 
must be received by February 19, 2019.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-132881-17), Internal 
Revenue Service, Room 5203, P.O. Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may also be hand-delivered Monday 
through Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR 
(REG-132881-17), Courier's Desk, Internal Revenue Service, 1111 
Constitution Avenue NW, Washington, DC 20224; or sent electronically 
via the Federal eRulemaking Portal at https://www.regulations.gov (IRS 
REG-132881-17).

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
John Sweeney, Nancy Lee, or Subin Seth, (202) 317-6942; concerning 
submissions of comments and/or requests for a public hearing, Regina 
Johnson, (202) 317-6901 (not toll free numbers).

SUPPLEMENTARY INFORMATION:

Background

    This document contains amendments to the Income Tax Regulations (26 
CFR part 1) under chapter 4 (sections 1471 through 1474) commonly known 
as the Foreign Account Tax Compliance Act (FATCA). This document also 
contains amendments to the Income Tax Regulations (26 CFR part 1) under 
sections 1441 and 1461.
    On January 28, 2013, the Department of the Treasury (Treasury 
Department) and the IRS published final regulations under chapter 4 in 
the Federal Register (TD 9610, 78 FR 5873), and on September 10, 2013, 
corrections to the final regulations were published in the Federal 
Register (78 FR 55202). The regulations in TD 9610 and the corrections 
thereto are collectively referred to in this preamble as the 2013 final 
chapter 4 regulations. On March 6, 2014, the Treasury Department and 
the IRS published temporary regulations under chapter 4 (TD 9657, 79 FR 
12812) that clarify and modify certain provisions of the 2013 final 
chapter 4 regulations, and corrections to the temporary regulations 
were published in the Federal Register on July 1, 2014, and November 
18, 2014 (79 FR 37175 and 78 FR 68619, respectively). The regulations 
in TD 9657 and the corrections thereto are referred to in this preamble 
as the 2014 temporary chapter 4 regulations. A notice of proposed 
rulemaking cross-referencing the 2014 temporary chapter 4 regulations 
was published in the Federal Register on March 6, 2014 (79 FR 12868).
    On March 6, 2014, the Treasury Department and the IRS published 
temporary regulations under chapters 3 and 61 in the Federal Register 
(TD 9658, 79 FR 12726) to coordinate with the regulations under chapter 
4, and corrections to those temporary regulations were published in the 
Federal Register (79 FR 37181) on July 1, 2014. Collectively, the 
regulations in TD 9657 and the corrections thereto are referred to in 
this preamble as the 2014 temporary coordination regulations. A notice 
of proposed rulemaking cross-referencing the 2014 temporary 
coordination regulations was published in the Federal Register on March 
6, 2014 (79 FR 12880).
    On January 6, 2017, the Treasury Department and the IRS published 
final and temporary regulations under chapter 4 in the Federal Register 
(TD 9809, 82 FR 2124), and corrections to those final regulations were 
published on June 30, 2017 in the Federal Register (82 FR 27928). 
Collectively, the regulations in TD 9809 and the corrections thereto 
are referred to in this preamble as the 2017 chapter 4 regulations. A 
notice of proposed rulemaking cross-referencing the temporary 
regulations in TD 9809 and proposing regulations under chapter 4 
relating to verification requirements for certain entities was 
published in the Federal Register on January 6, 2017 (82 FR 1629). Also 
on January 6, 2017, the Treasury Department and the IRS published final 
and temporary regulations under chapters 3 and 61 in the Federal 
Register (TD 9808, 82 FR 2046), and corrections to those final 
regulations were published on June 30, 2017 in the Federal Register (82 
FR 29719). Collectively, the regulations in TD 9808 and the corrections 
thereto are referred to in this preamble as the 2017 coordination 
regulations. A notice of proposed rulemaking cross-referencing the 
temporary regulations in TD 9808 was published in the Federal Register 
on January 6, 2017 (82 FR 1645).
    Pursuant to Executive Order 13777, Presidential Executive Order on 
Enforcing the Regulatory Reform Agenda (82 FR 9339), the Treasury 
Department is responsible for conducting a broad review of existing 
regulations. In a Request for Information published on June 14, 2017 
(82 FR 27217), the Treasury Department invited public comment 
concerning regulations that should be modified or eliminated in order 
to reduce unnecessary burdens. In addition, in Notice 2017-28 (2017-19 
I.R.B. 1235), the Treasury Department and the IRS invited public 
comment on recommendations for the 2017-2018 Priority Guidance Plan for 
tax guidance, including recommendations relating to Executive Order 
13777. In response to the invitations for comments in the Request for 
Information and Notice 2017-28, the Treasury Department and the IRS 
received comments suggesting modifications to the regulations under 
chapters 3 and 4. See also Executive Order 13789, Identifying and 
Reducing Tax Regulatory Burdens, issued on April 21, 2017 (82 FR 19317) 
and the second report issued in response (82 FR 48013) (stating that 
the Treasury Department continues to analyze all recently issued 
significant regulations and is considering possible reforms of recent 
regulations, which include regulations under chapter 4).
    Based on public input, and taking into account the burden-reducing 
policies described in Executive Orders 13777 and 13789, these 
regulations propose certain amendments to the regulations under 
chapters 3 and 4, including certain refund related issues for which 
comments were received. The Explanation of Provisions section of this 
preamble describes these proposed amendments and addresses public 
comments received in response to the Request for Information and Notice 
2017-28, other than comments that would require a statutory change or

[[Page 64758]]

were addressed in prior Treasury decisions. The Explanation of 
Provisions section of this preamble also discusses comments to the 2017 
chapter 4 regulations and 2017 coordination regulations to the extent 
the comments relate to amendments that are included in these proposed 
regulations. The Treasury Department and the IRS continue to study 
other public comments.

Explanation of Provisions

I. Elimination of Withholding on Payments of Gross Proceeds From the 
Sale or Other Disposition of Any Property of a Type Which Can Produce 
Interest or Dividends From Sources Within the United States

    Under sections 1471(a) and 1472, withholdable payments made to 
certain foreign financial institutions (FFIs) and certain non-financial 
foreign entities (NFFEs) are subject to withholding under chapter 4. 
Section 1473(1) states that, except as otherwise provided by the 
Secretary, the term ``withholdable payment'' means: (i) Any payment of 
interest (including any original issue discount), dividends, rents, 
salaries, wages, premiums, annuities, compensations, remunerations, 
emoluments, and other fixed or determinable annual or periodical gains, 
profits, and income, if such payment is from sources within the United 
States; and (ii) any gross proceeds from the sale or other disposition 
of any property of a type which can produce interest or dividends from 
sources within the United States.
    Since the enactment of chapter 4, the Treasury Department and the 
IRS have received comments from withholding agents on the burden of 
implementing a requirement to withhold on gross proceeds. The comments 
have noted in particular the lead time required to implement such a 
requirement and the potential complexity of a sufficient regulatory 
framework. The comments assert that withholding on gross proceeds would 
require significant efforts by withholding agents, including executing 
brokers that do not obtain tax documentation. The comments assert that 
adding this withholding requirement is of limited incremental benefit 
in supporting the objectives of chapter 4 with respect to foreign 
entities investing in U.S. securities. In response to these comments, 
the Treasury Department and the IRS have repeatedly issued guidance 
deferring the date when withholding on gross proceeds would begin. The 
2017 chapter 4 regulations provide that such withholding will begin on 
January 1, 2019.
    Many U.S. and foreign financial institutions, foreign governments, 
the Treasury Department, the IRS, and other stakeholders have devoted 
substantial resources to implementing FATCA withholding on withholdable 
payments. At the same time, 87 jurisdictions have an IGA in force or in 
effect and 26 jurisdictions are treated as having an IGA in effect 
because they have an IGA signed or agreed in substance, which allows 
for international cooperation to facilitate FATCA implementation. The 
Treasury Department and the IRS have determined that the current 
withholding requirements under chapter 4 on U.S. investments already 
serve as a significant incentive for FFIs investing in U.S. securities 
to avoid status as nonparticipating FFIs, and that withholding on gross 
proceeds is no longer necessary in light of the current compliance with 
FATCA. For these reasons, under the authority provided under section 
1473(1) these proposed regulations would eliminate withholding on gross 
proceeds by removing gross proceeds from the definition of the term 
``withholdable payment'' in Sec.  1.1473-1(a)(1) and by removing 
certain other provisions in the chapter 4 regulations that relate to 
withholding on gross proceeds. As a result of these proposed changes to 
the chapter 4 regulations, only payments of U.S. source FDAP that are 
withholdable payments under Sec.  1.1473-1(a) and that are not 
otherwise excepted from withholding under Sec.  1.1471-2(a) or (b) 
would be subject to withholding under sections 1471(a) and 1472.

II. Deferral of Withholding on Foreign Passthru Payments

    An FFI that has an agreement described in section 1471(b) in effect 
with the IRS is required to withhold on any passthru payments made to 
its recalcitrant account holders and to FFIs that are not compliant 
with chapter 4 (nonparticipating FFIs). Section 1471(d)(7) defines a 
``passthru payment'' as any withholdable payment or other payment to 
the extent attributable to a withholdable payment.
    In Notice 2010-60 (2010-37 I.R.B. 329), the Treasury Department and 
the IRS requested comments on methods a participating FFI could use to 
determine whether payments it makes are attributable to withholdable 
payments. In Notice 2011-34 (2011-19 I.R.B. 765), the Treasury 
Department and the IRS set forth a proposed framework for participating 
FFIs to withhold on such payments based on a methodology for 
determining a ``passthru payment percentage'' to be applied to certain 
payments made by FFIs. After the publication of Notice 2011-34, 
stakeholders noted the burdens and complexities in implementing a 
system for withholding on these payments along the lines of that 
described in the notice. In light of those comments, the framework 
outlined in Notice 2011-34 was not incorporated into the 2013 final 
chapter 4 regulations. In addition, the Treasury Department and the IRS 
have repeatedly issued guidance deferring the date when withholding on 
these payments would begin (referred to in guidance as ``foreign 
passthru payments''). The 2017 chapter 4 regulations provide that such 
withholding will not begin until the later of January 1, 2019, or the 
date of publication in the Federal Register of final regulations 
defining the term ``foreign passthru payment.''
    The Treasury Department and the IRS have received comments noting 
that withholding on foreign passthru payments may not be needed given 
the number of IGAs in effect. One comment also recommended that if the 
Treasury Department and the IRS determine, based on an evaluation of 
the data received from FFIs on payments to nonparticipating FFIs in 
2015 and 2016, that withholding on foreign passthru payments is 
necessary, the Treasury Department and the IRS should develop a more 
targeted solution.
    Both in recognition of the time necessary to implement a system for 
withholding on foreign passthru payments and in recognition of the 
successful engagement of Treasury and partner jurisdictions to conclude 
intergovernmental agreements to implement FATCA, these proposed 
regulations further extend the time for withholding on foreign passthru 
payments. Accordingly, under proposed regulation Sec.  1.1471-4(b)(4), 
a participating FFI will not be required to withhold tax on a foreign 
passthru payment made to a recalcitrant account holder or 
nonparticipating FFI before the date that is two years after the date 
of publication in the Federal Register of final regulations defining 
the term ``foreign passthru payment.'' The proposed regulations also 
make conforming changes to other provisions in the chapter 4 
regulations that relate to foreign passthru payment withholding.
    Notwithstanding these proposed amendments, the Treasury Department 
and the IRS remain concerned about the long-term omission of 
withholding on foreign passthru payments. The Treasury Department and 
the IRS acknowledge the progress made in implementing FATCA. 
Nevertheless, concerns remain regarding account

[[Page 64759]]

holders of participating FFIs that remain recalcitrant account holders 
or nonparticipating FFIs and regarding payments made to 
nonparticipating FFIs. Withholding on foreign passthru payments serves 
important purposes. First, it provides one way for an FFI that has 
entered into an FFI agreement to continue to remain in compliance with 
its agreement, even if some of its account holders have failed to 
provide the FFI with the information necessary for the FFI to properly 
determine whether the accounts are U.S. accounts and perform the 
required reporting, or, in the case of account holders that are FFIs, 
have failed to enter into an FFI agreement. Second, withholding on 
foreign passthru payments prevents nonparticipating FFIs from avoiding 
FATCA by investing in the United States through a participating FFI 
``blocker.'' For example, a participating FFI that is an investment 
entity could receive U.S. source FDAP income free of withholding under 
chapter 4 and then effectively pay the amount over to a 
nonparticipating FFI as a corporate distribution. Despite being 
attributable to the U.S. source payment, the payment made to the 
nonparticipating FFI may be treated as foreign source income and 
therefore not a withholdable payment subject to chapter 4 withholding.
    Accordingly, the Treasury Department and the IRS continue to 
consider the feasibility of a system for implementing withholding on 
foreign passthru payments. The Treasury Department and the IRS request 
additional comments from stakeholders on alternative approaches that 
would serve the same compliance objectives as would foreign passthru 
payment withholding and that could be more efficiently implemented by 
FFIs.

III. Elimination of Withholding on Non-Cash Value Insurance Premiums 
Under Chapter 4

    Under Sec.  1.1473-1(a)(1), a withholdable payment generally 
includes any payment of U.S. source FDAP income, subject to certain 
exclusions, such as for ``excluded nonfinancial payments.'' Excluded 
nonfinancial payments do not include premiums for insurance contracts. 
The 2013 final chapter 4 regulations included, however, a transitional 
rule that deferred withholding on payments with respect to offshore 
obligations until January 1, 2017, which was extended in the 2014 
chapter 4 regulations to include premiums paid by persons acting as 
insurance brokers with respect to offshore obligations. Additionally, 
in response to comments noting the burden of providing to withholding 
agents withholding certificates and withholding statements for payments 
of insurance premiums, the chapter 4 regulations provide a rule 
generally allowing a withholding agent to treat as a U.S. payee a U.S. 
broker receiving a payment of an insurance premium in its capacity as 
an intermediary or an agent of a foreign insurer. The IRS also 
generally permits non-U.S. insurance brokers that are NFFEs to become 
qualified intermediaries in order to alleviate burden on the foreign 
brokers and U.S. withholding agents.
    Notwithstanding these allowances, the Treasury Department and the 
IRS continued to receive comments requesting elimination of withholding 
under chapter 4 on premiums for insurance contracts that do not have 
cash value (non-cash value insurance premiums). The comments cited the 
burden on insurance brokers of documenting insurance carriers, 
intermediaries, and syndicates of insurers for chapter 4 purposes, 
noting examples to demonstrate the volume and complexity of placements 
with insurers of the insurance policies typically arranged by the 
brokers for their clients. The comments argued that withholding on non-
cash value insurance premiums is not necessary to further the purposes 
of chapter 4.
    At the same time, certain foreign entities that conducted a 
relatively small amount of insurance business had taken the position 
that they were not passive foreign investment companies (PFICs) under 
section 1297(a). Section 1297(a) generally defines a PFIC as a foreign 
corporation if 75 percent or more of the corporation's gross income for 
the taxable year is passive income or 50 percent or more of its assets 
produce, or are held for the production of, passive income. Section 
1297(b)(2)(B), prior to a recent change in law (described below), 
provided an exception from the U.S. owner reporting and anti-deferral 
rules applicable to PFICs for corporations ``predominantly engaged'' in 
an insurance business. Withholding under chapter 4 on non-cash value 
insurance premiums strengthened the IRS's enforcement efforts, with 
respect to the use of the exception in section 1297(b)(2)(B) by U.S. 
owners of foreign corporations for tax avoidance and evasion, by 
facilitating reporting of the U.S. owners to avoid withholding on 
premiums received by the entity.
    The preamble to the 2017 chapter 4 regulations noted that future 
changes to the PFIC rules may create an opportunity to revise the 
treatment of foreign insurance companies under chapter 4. 82 FR 2140. 
On December 22, 2017, the Tax Cuts and Jobs Act, Public Law 115-97 
(2017) amended section 1297(b)(2)(B) to provide a more limited 
exception to PFIC status by replacing the exception for corporations 
predominantly engaged in an insurance business with a more stringent 
test based generally on a comparison of the corporation's insurance 
liabilities and its total assets. This amendment is expected to 
mitigate the need for reporting on the U.S. owners of these companies 
under chapter 4 because the Treasury Department and the IRS anticipate 
that these entities will either amend their business models on account 
of the change in law or will otherwise comply with the PFIC reporting 
requirements.
    In light of the aforementioned change in law and in furtherance of 
the burden-reducing policies in Executive Orders 13777 and 13789, these 
proposed regulations provide that premiums for insurance contracts that 
do not have cash value (as defined in Sec.  1.1471-5(b)(3)(vii)(B)) are 
excluded nonfinancial payments and, therefore, not withholdable 
payments.

IV. Clarification of Definition of Investment Entity

    Under Sec.  1.1471-5(e)(4)(i)(B), an entity is an investment entity 
(and therefore a financial institution) if the entity's gross income is 
primarily attributable to investing, reinvesting, or trading in 
financial assets and the entity is ``managed by'' another entity that 
is a depository institution, custodial institution, insurance company, 
or an investment entity described in Sec.  1.1471-5(e)(4)(i)(A). 
Section 1.1471-5(e)(4)(v), Example 2, illustrates this rule with an 
example in which a fund is an investment entity because another 
financial institution (an investment advisor) provides investment 
advice to the fund and has discretionary management of the assets held 
by a fund and the fund meets the gross income test. In Example 6 of 
Sec.  1.1471-5(e)(4)(v), a trust is an investment entity because the 
trustee (an FFI) manages and administers the assets of the trust in 
accordance with the terms of the trust instrument and the trust meets 
the gross income test. Section 1.1471-5(e)(4)(v), Example 8, provides 
an example in which an entity is an investment entity because an 
introducing broker (that is, a broker using another broker to clear and 
settle its trades) has discretionary authority to manage the entity's 
assets and provides services as an investment advisor and manager to 
the entity and the entity meets the gross income test.
    The Treasury Department and the IRS received a comment requesting 
that

[[Page 64760]]

``discretionary authority'' be more narrowly construed for purposes of 
treating an entity as an investment entity described in Sec.  1.1471-
5(e)(4)(i)(B). The comment suggested that an entity should not be 
treated as an investment entity solely because the entity invests in a 
mutual fund or similar vehicle because the investments made by the 
mutual fund are not tailored to the entity that invests in it. The 
comment requested the same result for a variety of other types of 
investment products and solutions with varying degrees of investor 
involvement and standardization, including an investment in a 
``discretionary mandate.'' According to the comment, a ``discretionary 
mandate'' is an investment product or solution offered by a financial 
institution to certain clients where the financial institution manages 
and invests the client's funds directly (rather than the client 
investing in a separate entity) in accordance with the client's 
investment goals. The comment noted that some discretionary mandate 
clients claim to be passive NFFEs rather than FFIs.
    As described in the examples, the ``managed by'' category of 
investment entities generally covers entities that receive specific 
professional management advice from an advisor that is tailored to the 
investment needs of the entity. A financial institution does not have 
discretionary authority over an entity merely because it sells the 
entity shares in a widely-held fund that employs a predetermined 
investment strategy. These proposed regulations clarify that an entity 
is not ``managed by'' another entity for purposes of Sec.  1.1471-
5(e)(4)(i)(B) solely because the first-mentioned entity invests all or 
a portion of its assets in such other entity, and such other entity is 
a mutual fund, an exchange traded fund, or a collective investment 
entity that is widely held and is subject to investor-protection 
regulation. In contrast, an investor in a discretionary mandate 
described above is ``managed by'' the financial institution under Sec.  
1.1471-5(e)(4)(i)(B).
    The clarification in these proposed regulations is similar to the 
guidance published by the OECD interpreting the definition of a 
``managed by'' investment entity under the Common Reporting Standard.

V. Modifications to Due Diligence Requirements of Withholding Agents 
Under Chapters 3 and 4

A. Treaty Statements Provided With Documentary Evidence for Chapter 3

    Under chapter 3, a withholding agent must generally obtain either a 
withholding certificate or documentary evidence and a treaty statement 
in order to apply a reduced rate of withholding based on a payee's 
claim for benefits under a tax treaty. The 2017 coordination 
regulations added a requirement that when a treaty statement is 
provided with documentary evidence by an entity beneficial owner to 
claim treaty benefits, the statement must identify the specific 
limitation on benefits (LOB) provision relied upon in the treaty. In 
addition, the 2017 coordination regulations added a three-year validity 
period applicable to treaty statements provided with documentary 
evidence and a transition period that expires January 1, 2019, for 
withholding agents to obtain new treaty statements that comply with the 
new LOB requirement for accounts that were documented with documentary 
evidence before January 6, 2017 (preexisting accounts). The QI 
agreement in Revenue Procedure 2017-15, 2017-3 I.R.B. 437 (2017 QI 
agreement) cross-references the 2017 coordination regulations for the 
three-year validity period for treaty statements provided with 
documentary evidence and provides a two-year transition rule for 
accounts documented before January 1, 2017. Similar provisions are 
included in the WP and WT agreements in Revenue Procedure 2017-21, 
2017-6 I.R.B. 791 (2017 WP and WT agreements).
    Comments have noted the burden of complying with the new treaty 
statement requirements, including difficulties in obtaining new treaty 
statements for preexisting accounts within the transitional period 
given the large number of account holders impacted by this requirement. 
The comments requested an additional one-year period for withholding 
agents to obtain new treaty statements for preexisting accounts, and 
the removal of the three-year validity period for a treaty statement 
that meets the LOB requirement. A comment also noted that a three-year 
validity period for a treaty statement is not needed for certain 
categories of entities whose treaty status is unlikely to change, such 
as publicly traded corporations and government entities.
    In response to these comments, these proposed regulations include 
several changes to the rules on treaty statements provided with 
documentary evidence. First, these proposed regulations extend the time 
for withholding agents to obtain treaty statements with the specific 
LOB provision identified for preexisting accounts until January 1, 2020 
(rather than January 1, 2019). Second, these proposed regulations add 
exceptions to the three-year validity period for treaty statements 
provided by tax exempt organizations (other than tax-exempt pension 
trusts or pension funds), governments, and publicly traded 
corporations, entities whose qualification under an applicable treaty 
is unlikely to change. See proposed Sec.  1.1441-1(e)(4)(ii)(A)(2). In 
addition, these proposed regulations correct an inadvertent omission of 
the actual knowledge standard for a withholding agent's reliance on the 
beneficial owner's identification of an LOB provision on a treaty 
statement provided with documentary evidence, the same as the standard 
that applies to a withholding certificate used to make a treaty claim. 
See proposed Sec.  1.1441-6(c)(5)(i). The proposed amendments described 
in this section V.A. will also be incorporated into the 2017 QI 
agreement and 2017 WP and WT agreements, and a QI, WP, or WT may rely 
upon these proposed modifications until such time.

B. Permanent Residence Address Subject to Hold Mail Instruction for 
Chapters 3 and 4

    In response to comments received on the 2014 temporary coordination 
regulations and the 2014 QI agreement regarding the definition of a 
``permanent residence address,'' the 2017 coordination regulations (and 
the 2017 chapter 4 regulations by cross-reference) allow an address to 
be treated as a permanent residence address despite being subject to a 
hold mail instruction when a person provides documentary evidence 
establishing residence in the country in which the person claims to be 
a resident for tax purposes. Comments noted that the allowance to 
obtain documentary evidence establishing residence in a particular 
country is unnecessarily strict when the person is not claiming treaty 
benefits, and that it is unclear what documentary evidence may be used 
to establish residence for purposes of this allowance.
    These proposed regulations provide that the documentary evidence 
required in order to treat an address that is provided subject to a 
hold mail instruction as a permanent residence address is documentary 
evidence that supports the person's claim of foreign status or, for a 
person claiming treaty benefits, documentary evidence that supports the 
person's residence in the country where the person claims treaty 
benefits. Regardless of whether the person claims treaty benefits, the 
documentary evidence on which a withholding agent may rely is the 
documentary evidence described in

[[Page 64761]]

Sec.  1.1471-3(c)(5)(i), without regard to the requirement that the 
documentation contain a permanent residence address.
    A comment also requested the removal of any limitation on reliance 
on a permanent residence address subject to a hold mail instruction 
because many account holders prefer to receive electronic 
correspondence rather than paper mail. In response to this comment, 
proposed Sec.  1.1471-1(b)(62) adds a definition of a hold mail 
instruction to clarify that a hold mail instruction does not include a 
request to receive all correspondence (including account statements) 
electronically.
    These proposed regulations apply for purposes of chapters 3 and 4. 
A QI, WP, or WT may rely upon these proposed modifications until they 
are incorporated into the 2017 QI agreement and 2017 WP and WT 
agreements.

VI. Revisions Related to Credits and Refunds of Overwithheld Tax

A. Withholding and Reporting in a Subsequent Year

    Under Sec.  1.1441-5(b)(2)(i)(A), a U.S. partnership is required to 
withhold on an amount subject to chapter 3 withholding (as defined in 
Sec.  1.1441-2(a)) that is includible in the gross income of a partner 
that is a foreign person. A U.S. partnership satisfies this requirement 
by withholding on distributions to the foreign partner that include an 
amount subject to chapter 3 withholding. To the extent a foreign 
partner's distributive share of income subject to chapter 3 withholding 
is not actually distributed to the partner, the U.S. partnership must 
withhold on the partner's distributive share of the income on the 
earlier of the date that the statement required under section 6031(b) 
(Schedule K-1, Partner's Share of Income, Deductions, Credits, etc.) is 
mailed or otherwise provided to the partner or the due date for 
furnishing the statement. Under section 6031(b), a partnership that 
files its return for a calendar year (calendar-year partnership) must 
generally furnish to each partner a Schedule K-1 on or before March 15 
following the close of the taxable year, a due date that may be 
extended up to six months. See Sec. Sec.  1.6031(b)-1T(b) and 1.6081-
2T(a). Similar requirements apply to a foreign partnership that has 
entered into an agreement with the IRS to act as a WP. See the 2017 WP 
agreement. A foreign partnership other than a WP generally satisfies 
its withholding requirement in the same manner for amounts received 
from a withholding agent that failed to withhold to the extent 
required. See Sec.  1.1441-5(c)(2) and (c)(3)(v). For purposes of 
chapter 4, similar withholding rules apply to a partnership that 
receives a withholdable payment allocable to a foreign partner. See 
Sec.  1.1473-1(a)(5)(ii) and (vi).
    Under Sec.  1.1461-1(c)(1) and (2), a partnership is required to 
report on Form 1042-S, Foreign Person's U.S. Source Income Subject to 
Withholding, any amount subject to withholding that is allocable to a 
foreign partner for a calendar year. The partnership must file Form 
1042-S (and furnish a copy to the partner) by March 15 of the calendar 
year following the year in which it receives the amount subject to 
withholding. The due date for filing a Form 1042-S may be automatically 
extended by 30 days (and an additional 30 days at the discretion of the 
IRS). See Sec.  1.6081-8T(a). Amounts that are reportable on Forms 
1042-S are also required to be reported on a withholding agent's income 
tax return, Form 1042, Annual Withholding Tax Return for U.S. Source 
Income of Foreign Persons. The due date for Form 1042 is March 15, 
which may be automatically extended for six months. See Sec.  1.6081-
10. Similar reporting rules apply to a partnership that receives a 
withholdable payment and withholds under chapter 4. See Sec.  1.1474-
1(c) and (d)(1).
    Because the extended due date for filing a Form 1042-S generally 
occurs before the extended due date for furnishing a Schedule K-1 to a 
foreign partner, a partnership may be required to report an amount 
subject to withholding on a Form 1042-S before it performs all of the 
withholding required on such amount under Sec.  1.1441-5(b)(2)(i)(A) or 
Sec.  1.1473-1(a)(5)(ii) and (vi). To address this case, the 
Instructions for Form 1042 require a domestic partnership to report any 
withholding that occurs with respect to an amount that a partnership 
received but did not distribute to a partner in a calendar year 
(preceding year) on the partnership's Form 1042 for the following 
calendar year (subsequent year) (referred to as the ``lag method'' of 
reporting). In this case, the partnership would deposit the amount in 
the subsequent year and designate the deposit as made for that year for 
reporting on Form 1042. To correspond to the timing of the reporting on 
Form 1042, the partnership must also report this withholding on Forms 
1042-S filed and issued for the subsequent year. For example, a 
calendar year domestic partnership that receives U.S. source dividends 
in 2017 (but does not make a distribution to its foreign partners), 
must withhold on the foreign partners' share of the dividend income by 
the time the partnership issues Schedules K-1 to the foreign partners, 
which could be as late as September 15, 2018. The lag method of 
reporting requires the partnership to report the withholding on the 
Forms 1042-S and 1042 for the 2018 year (which are issued and filed in 
2019). The WP agreement includes a similar requirement to that 
described in this paragraph when a WP withholds after the due date for 
Form 1042-S (including extensions). The Instructions for Form 1042 
provide a similar reporting rule for a domestic trust that withholds in 
a subsequent year on income of the trust that it is required to 
distribute but has not actually distributed to a foreign beneficiary. 
See Sec.  1.1441-5(b)(2)(ii) and (iii). The WT agreement includes a 
similar requirement for a WT.
    Apart from the cases described in the preceding paragraph, in 
certain other cases, a withholding agent is permitted to withhold an 
amount in a subsequent year that relates to the preceding year. For 
example, a withholding agent adjusting underwithholding under Sec.  
1.1461-2(b) or Sec.  1.1474-2(b) may withhold the additional amount by 
the due date (without extensions) of Form 1042. In these cases, the 
Instructions for Form 1042 provide that, in contrast to the reporting 
required by partnerships and certain trusts described in the preceding 
paragraph, a withholding agent withholding in a subsequent year must 
designate the deposit and report the tax for the preceding year.
    Comments have noted issues that arise under the lag method when a 
partner files an income tax return to report the partnership income 
allocated to the partner and to claim credit under section 33 (or a 
refund) based on the partnership's withholding. When a partnership 
applies the lag method, it issues a Form 1042-S for the subsequent year 
(and the related withholding) that generally reflects the income 
received by the partnership in the preceding year. However, the income 
is reported to the partner on Schedule K-1 for the preceding year, thus 
resulting in a mismatch between the income allocated to the partner and 
the withholding on that income. Because a partner must attach to its 
income tax return a Form 1042-S that it receives from a partnership to 
claim a credit or refund of overwithholding under Sec.  301.6402-3(e), 
the partner cannot support the claim with the Form 1042-S until after 
the year in which the partner is required to report the income shown on 
the Schedule K-1.
    These proposed regulations generally require a withholding agent 
(including a partnership or trust) that withholds in a

[[Page 64762]]

subsequent year to designate the deposit as attributable to the 
preceding year and report the amount on Forms 1042 and 1042-S for the 
preceding year. This proposed rule incorporates the existing rule for 
withholding agents (other than partnerships and trusts) from the form 
instructions, and extends the rule to partnerships and trusts. An 
exception to this requirement for a partnership that is not a calendar-
year partnership (a fiscal-year partnership) provides that such 
partnership may designate a deposit as made for the subsequent year and 
report the amount on Forms 1042 and 1042-S for the subsequent year. 
This exception allows a fiscal-year partnership flexibility to 
determine the year for reporting that will result in the best matching 
of the income and the related withholding.
    These proposed regulations also provide a revised due date for a 
partnership to file and furnish Form 1042-S when it withholds the tax 
after March 15 of the subsequent year that it designates as deposited 
for the preceding year. Under this new rule, the due date for a 
partnership to file and furnish a Form 1042-S in such a case will be 
September 15 of the subsequent year. This revised due date corresponds 
to the due date for a partnership to file Form 1042 with an extension 
and the due date for a calendar-year partnership to furnish a Schedule 
K-1 to a partner with an extension so that the partnership has 
sufficient time to determine the amount of withholding due and to 
coordinate with the extended due date for furnishing the Schedule K-1.
    Based on the revisions included in these proposed regulations, the 
IRS intends to amend the Instructions for the 2019 Form 1042 to remove 
the requirement that a partnership or trust apply the lag method and to 
incorporate these proposed regulations. The IRS also intends to amend 
the Instructions to the 2019 Form 1042-S to require that in a case when 
a partnership is filing Form 1042-S after March 15 for a partner's 
distributive share of an amount received by the partnership in the 
preceding year, the partnership must file and issue a separate Form 
1042-S for such amount for the preceding year (in addition to any Forms 
1042-S filed and issued to the partner for amounts that are withheld 
when distributed to the partner before March 15 and reported for the 
preceding year).
    The Treasury Department and the IRS intend to amend the WP and WT 
agreements to the extent necessary to incorporate the proposed 
regulations, and until such time a WP or WT may rely on these proposed 
modifications for purposes of its filing and deposit requirements.

B. Adjustments to Overwithholding Under the Reimbursement and Set-Off 
Procedures

    Under Sec.  1.1461-2(a), a withholding agent that has overwithheld 
and deposited the tax may adjust the overwithheld amount under either 
the reimbursement procedure or the set-off procedure. Under the 
reimbursement procedure, a withholding agent may repay the beneficial 
owner or payee the amount of tax overwithheld and then reimburse itself 
by reducing, by the amount of such repayment, any deposit of 
withholding tax otherwise required to be made before the end of the 
calendar year following the year of overwithholding. The withholding 
agent must make any repayment to the beneficial owner or payee before 
the earlier of the due date for filing Form 1042-S (without extensions) 
for the calendar year of overwithholding or the date on which the Form 
1042-S is actually filed with the IRS, and must state on a timely filed 
Form 1042 (without extensions) for the calendar year of overwithholding 
that the filing constitutes a claim for credit in accordance with Sec.  
1.6414-1.
    Under the set-off procedure, a withholding agent may apply the 
overwithheld amount against any amount which would otherwise be subject 
to withholding that is paid to the beneficial owner or payee before the 
earlier of the due date for filing Form 1042-S (without extensions) for 
the calendar year of overwithholding or the date that the Form 1042-S 
is actually filed with the IRS. Similar rules for adjusting 
overwithholding apply for purposes of chapter 4. See Sec.  1.1474-
2(a)(3) and (4).
    If a withholding agent cannot apply the reimbursement or set-off 
procedure, a beneficial owner or payee must file a claim for credit or 
refund with the IRS in order to recover the overwithheld tax. Informal 
comments have requested to expand the cases in which a withholding 
agent may apply the reimbursement and set-off procedures in order to 
limit the need for a beneficial owner or payee to claim a credit or 
refund. These proposed regulations respond to these comments by 
modifying the reimbursement procedure to allow a withholding agent to 
use the extended due date for filing Forms 1042 and 1042-S to make a 
repayment and claim a credit. These proposed regulations also include 
revisions to conform the requirements for the set-off procedures to 
those that apply to the reimbursement procedures. In addition, these 
proposed regulations remove the requirement that a withholding agent 
include with its Form 1042 a statement that the filing constitutes a 
claim for credit when it applies reimbursement in the year following 
the year of the overwithholding. This statement is no longer necessary 
because Form 1042 was revised in 2016 to provide separate fields for 
adjustments to overwithholding and underwithholding.
    These proposed regulations also provide that a withholding agent 
may not apply the reimbursement and set-off procedures after the date 
on which Form 1042-S has been furnished to the beneficial owner or 
payee (in addition to, under the current regulations, after the date a 
Form 1042-S has been filed). Because of the liberalizing amendments 
described in the preceding paragraph, this change is needed to ensure 
that a Form 1042-S furnished to a beneficial owner or payee reflects 
any repayments made pursuant to these adjustment procedures and is 
consistent with the associated Form 1042-S that is filed with the IRS. 
A QI, WP, or WT may rely upon the proposed modifications described in 
this section VI.B until they are incorporated into the 2017 QI 
agreement and 2017 WP and WT agreements.

C. Reporting of Withholding by Nonqualified Intermediaries

    A withholding agent that makes a payment subject to chapter 3 
withholding to a nonqualified intermediary (as defined in Sec.  1.1441-
1(c)(14)) can reliably associate the payment with documentation when it 
obtains a valid intermediary withholding certificate (that is, Form W-
8IMY, Certificate of Foreign Intermediary, Foreign Flow-Through Entity, 
or Certain U.S. Branches for United States Tax Withholding) from the 
nonqualified intermediary and a withholding statement that allocates 
the payment among the payees and includes the documentation for each 
payee as described in Sec.  1441-1(b)(2)(vii)(B) and (e)(3)(iii). For 
purposes of chapter 4, a withholding agent making a withholdable 
payment to a nonqualified intermediary that is a participating FFI or a 
registered deemed-compliant FFI may rely on a withholding statement 
that includes an allocation of the payment to a chapter 4 withholding 
rate pool of payees, and must obtain payee-specific documentation for 
payees that are not includible in a chapter 4 withholding rate pool to 
permit any reduced rate of withholding. See Sec.  1.1471-
3(c)(3)(iii)(B).
    To the extent that a withholding agent cannot reliably associate a 
withholdable

[[Page 64763]]

payment made to a nonqualified intermediary with valid documentation 
under Sec.  1.1471-3(c), the withholding agent must presume that the 
payment is made to a nonparticipating FFI and withhold 30 percent of 
the payment. See Sec.  1.1471-3(f)(5). In such a case, the withholding 
agent is required to report the payment as a chapter 4 reportable 
amount made to an unknown recipient on a Form 1042-S that reports the 
nonqualified intermediary as an intermediary and the amount withheld as 
chapter 4 withholding. See the Instructions for Form 1042-S. If the 
amount withheld upon under chapter 4 is an amount subject to 
withholding under chapter 3, the withholding agent is relieved from its 
obligation to also withhold under chapter 3 on the payment. Sec.  
1.1441-3(a)(2). To the extent that a nonqualified intermediary is 
required to report the same payments to its account holders on Forms 
1042 and 1042-S under the chapter 3 or 4 regulations, the nonqualified 
intermediary need not withhold when chapter 3 or 4 withholding has 
already been applied by its withholding agent, and it substantiates the 
withholding by attaching to its Form 1042 a copy of the Form 1042-S 
furnished by the withholding agent.
    Comments have noted that some U.S. withholding agents charge fees 
for the administrative burden associated with reviewing underlying 
documentation that is included with a withholding statement provided by 
a nonqualified intermediary. In other cases, nonqualified 
intermediaries may not be able to obtain such documentation from 
account holders. For these reasons, some nonqualified intermediaries 
provide withholding agents with valid Forms W-8IMY to establish their 
chapter 4 statuses but do not provide any underlying payee 
documentation or withholding rate pool information to substantiate the 
allocations to payees shown on a withholding statement. Comments have 
stated that the requirement for withholding agents to report the 
withholding applied to withholdable payments as chapter 4 withholding 
in these cases (because the payees are presumed to be nonparticipating 
FFIs) has made it difficult for account holders to claim foreign tax 
credits from foreign jurisdictions that do not view the chapter 4 
withholding tax as a creditable income tax. These comments recommended 
various proposals to allow a nonqualified intermediary to report the 
withholding as chapter 3 withholding applied to its account holders.
    In response to the comments described in the preceding paragraph, 
these proposed regulations modify the rules for reporting by a 
nonqualified intermediary under Sec. Sec.  1.1461-1(c)(4)(iv) and 
1.1474-1(d)(2)(ii) to address a case in which a nonqualified 
intermediary receives a payment for which a withholding agent has 
withheld at the 30-percent rate under chapter 4 and reported the 
payment on Form 1042-S as made to an unknown recipient. In such a case, 
these proposed regulations permit a nonqualified intermediary that is a 
participating FFI or registered deemed-compliant FFI to report the 
withholding applied to the nonqualified intermediary on a Form 1042-S 
as chapter 3 withholding to the extent that the nonqualified 
intermediary determines that the payment is not an amount for which 
withholding is required under chapter 4 based on the payee's chapter 4 
status. Under the existing reporting requirements, the nonqualified 
intermediary would be required to file a Form 1042 and would need to be 
furnished a copy of the Form 1042-S filed by the withholding agent to 
substantiate the credit against its withholding tax liability for the 
withholding applied by its withholding agent. Under the modified 
requirement, the nonqualified intermediary would be permitted to 
substantiate the credit even though the Form 1042-S furnished to it 
reports chapter 4 withholding and the corresponding Forms 1042-S that 
the nonqualified intermediary issues reports chapter 3 withholding. 
This change should assist account holders using Form 1042-S to claim 
foreign tax credits in their jurisdictions of residence in these cases. 
The Treasury Department and the IRS are of the view that this 
determination should be limited to a nonqualified intermediary that is 
a participating FFI or registered deemed-compliant FFI given the role 
of these FFIs in documenting their account holders for chapter 4 
purposes and their compliance requirements under the chapter 4 
regulations or an applicable IGA jurisdiction.

Reliance on Proposed Regulations

    Under section 7805(b)(1)(C), taxpayers may rely on the proposed 
regulations until final regulations are issued, except as otherwise 
provided in this paragraph. With respect to the elimination of 
withholding on non-cash value insurance premiums under proposed Sec.  
1.1473-1(a)(3)(iii), the clarification of the definition of a ``managed 
by'' investment entity under proposed Sec.  1.1471-5(e)(4)(i)(B), and 
the revised allowance for a permanent residence address subject to a 
hold mail instruction under proposed Sec. Sec.  1.1441-1(c)(38) and 
1.1471-1(b)(99), taxpayers may apply the modifications in these 
proposed regulations for all open tax years until final regulations are 
issued. For the revisions included in these proposed regulations that 
relate to credits and refunds of withheld tax, taxpayers may not rely 
on these proposed regulations until Form 1042 and Form 1042-S are 
updated for the 2019 calendar year.

Special Analyses

    The Administrator of the Office of Information and Regulatory 
Affairs (OIRA), Office of Management and Budget (OMB), has waived 
review of this proposed rule in accordance with section 6(a)(3)(A) of 
Executive Order 12866. OIRA will subsequently make a significance 
determination of the final rule, pursuant to section 3(f) of Executive 
Order 12866 and the April 11, 2018, Memorandum of Agreement between the 
Treasury Department and the OMB.
    The Treasury Department and the IRS expect the proposed regulation, 
when final, to be an Executive Order 13771 deregulatory action and 
request comment on this designation.

Paperwork Reduction Act

    The collection of information contained in these proposed 
regulations is in a number of provisions, including Sec. Sec.  1.1441-
1, 1.1461-1, 1.1461-2, 1.1474-1, and 1.1474-2. The IRS intends that the 
information collection requirements of these regulations will be 
implemented through the use of Forms 1042 and 1042-S. As a result, for 
purposes of the Paperwork Reduction Act (44 U.S.C. 3507), the reporting 
burden associated with the collection of information in these 
regulations will be reflected in the information burden and OMB control 
number of the appropriate IRS form.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless the collection of 
information displays a valid control number.
    The proposed regulations will not increase the number of taxpayers 
required to file a return. Current filers may have to modify slightly 
how they report, but the burden of reporting should not increase.
    As described in section VI.A of the Explanations of Provisions, the 
proposed regulations allow a partnership that withholds in a subsequent 
year to designate the deposit as attributable to the preceding year and 
report the withholding on Forms 1042 and 1042-S for the preceding year

[[Page 64764]]

(rather than the subsequent year). In addition, the proposed 
regulations allow a partnership that withholds after March 15 of the 
subsequent year to file Form 1042-S on or before September 15 of such 
year. The IRS intends to modify Form 1042-S to add a check box to the 
form so that a partnership filer can indicate that it qualifies for the 
September 15 due date for filing the form. A partnership that relies on 
the September 15 due date may need to file an additional Form 1042-S if 
it is filing to report a partner's distributive share of an amount 
received by the partnership in the preceding year and it has already 
filed a Form 1042-S for such partner for the same year. Information on 
the number of partnerships that withhold in a year subsequent to the 
year in which the amount was received is not available. However, as an 
upper bound, table 1 shows the estimated number of partnerships that 
file Form 1042.
    As explained in section IV.B of the Explanation of Provisions, the 
proposed regulations provide additional time for withholding agents to 
apply the reimbursement or set-off procedure to adjust overwithholding. 
The proposed revision may increase the amounts reported by filers of 
Forms 1042 and 1042-S, but should not affect the number of filers. It 
is unknown how many withholding agents will use the reimbursement and 
set-off procedures as a result of the modifications to those procedures 
in the proposed regulations. However, as an upper bound, table 1 shows 
the estimated number of withholding agents that report non-zero amounts 
as adjustments to overwithholding.
    Finally, as described in section IV.C of the Explanation of 
Provisions, the proposed regulations permit certain nonqualified 
intermediaries to report on certain payments on Form 1042-S using the 
code for chapter 3 withholding rather than the code for chapter 4 
withholding in certain cases in which chapter 4 withholding is applied 
on payments made to the nonqualified intermediaries. This modification 
in the proposed regulations should not affect the number of filers or 
increase any burdens, but rather change how nonqualified intermediaries 
report to certain recipients. It is not possible to estimate the number 
of nonqualified intermediaries that may change the code from chapter 4 
to chapter 3, so as an upper bound, table 1 shows the estimated number 
of withholding agents that are nonqualified intermediaries that file 
Form 1042-S.

                    Table 1--Related Tax Form Counts
------------------------------------------------------------------------
                                                            Number of
                                                           respondents
                                                           (estimated)
------------------------------------------------------------------------
Total number of Form 1042 filers.......................    45,000-50,000
Partnership filers of Form 1042........................      2,000-3,000
Form 1042 filers reporting adjustments to                    4,000-5,000
 overwithholding.......................................
Nonqualified intermediaries filers of Form 1042-S......              500
------------------------------------------------------------------------

    Tax Form 1042 data are from administrative tax files while the Form 
1042-S information is from a 2016 data file on foreign tax withholding.
    Books and records relating to a collection of information must be 
retained as long as their contents may be 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.

Regulatory Flexibility Act

    It is hereby certified that the collection of information 
requirements in this notice of proposed rulemaking will not have a 
significant economic impact on a substantial number of small business 
entities within the meaning of section 601(6) of the Regulatory 
Flexibility Act (5 U.S.C. chapter 6). This notice of proposed 
rulemaking reduces the information required to be reported under 
chapters 3 and 4 as required by TDs 9610, 9657, 9658, 9808, and 9809, 
information collections that were certified by the Treasury Department 
and the IRS as not resulting in a significant economic impact on a 
substantial number of small business entities. The burden-reducing 
information collections of this notice of proposed rulemaking provide 
benefits for small business entities consistent with the Regulatory 
Flexibility Act's objective that information collections achieve 
statutory objectives while minimizing any significant impact on small 
business entities. Therefore, a Regulatory Flexibility Analysis is not 
required.
    Pursuant to section 7805(f), this regulation has been submitted to 
the Chief Counsel for Advocacy of the Small Business Administration for 
comment on its impact on small businesses.

Statement of Availability of IRS Documents

    IRS Revenue Procedures, Revenue Rulings, Notices, and other 
guidance cited in this preamble are published in the Internal Revenue 
Bulletin (or Cumulative Bulletin) and are available from the 
Superintendent of Documents, U.S. Government Publishing Office, 
Washington, DC 20402, or by visiting the IRS website at www.irs.gov.

Comments and Requests for Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any comments that are submitted timely 
to the IRS as prescribed in this preamble under the ``Addresses'' 
heading. The Treasury Department and the IRS request comments on all 
aspects of the proposed rules but specifically on foreign passthru 
payment withholding and the definition of investment entity, as 
discussed in section II of the Explanation of Provisions. All comments 
will be available for public inspection and copying. A public hearing 
will be scheduled if requested in writing by any person that timely 
submits written comments. If a public hearing is scheduled, notice of 
the date, time, and place for the public hearing will be published in 
the Federal Register.

Drafting Information

    The principal authors of these proposed regulations are John 
Sweeney, Nancy Lee, and Subin Seth, Office of Associate Chief Counsel 
(International). However, other personnel from the IRS and the Treasury 
Department participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 is amended by revising 
the entries for Sec. Sec.  1.1471-1, 1.1471-2, 1.1471-3, 1.1471-4, and 
1.1474-4 to read in part as follows:

    Authority: 26 U.S.C. 7805 * * *
* * * * *
    Section 1.1471-1 also issued under 26 U.S.C. 1471 and 26 U.S.C. 
1473.
    Section 1.1471-2 also issued under 26 U.S.C. 1471 and 26 U.S.C. 
1473.
    Section 1.1471-3 also issued under 26 U.S.C. 1471 and 26 U.S.C. 
1473.
    Section 1.1471-4 also issued under 26 U.S.C. 1471 and 26 U.S.C. 
1474.
* * * * *

[[Page 64765]]

    Section 1.1474-1 also issued under 26 U.S.C. 1473 and 26 U.S.C. 
1474.
* * * * *
0
Par. 2. Section 1.1441-1 is amended by revising paragraphs (c)(38) and 
(e)(4)(ii)(A)(2) to read as follows:


Sec.  1.1441-1  Requirement for the deduction and withholding of tax on 
payments to foreign persons.

* * * * *
    (c) * * *
    (38) Permanent residence address--(i) In general. The term 
permanent residence address is the address in the country of which the 
person claims to be a resident for purposes of that country's income 
tax. In the case of a withholding certificate furnished in order to 
claim a reduced rate of withholding under an income tax treaty, whether 
a person is a resident of a treaty country must be determined in the 
manner prescribed under the applicable treaty. See Sec.  1.1441-6(b). 
The address of a financial institution with which the person maintains 
an account, a post office box, or an address used solely for mailing 
purposes is not a permanent residence address unless such address is 
the only address used by the person and appears as the person's 
registered address in the person's organizational documents. Further, 
an address that is provided subject to a hold mail instruction (as 
defined in Sec.  1.1471-1(b)(62)) is not a permanent residence address 
unless the person provides the documentary evidence described in 
paragraph (c)(38)(ii) of this section. If, after a withholding 
certificate is provided, a person's permanent residence address is 
subsequently subject to a hold mail instruction, the addition of the 
hold mail instruction is a change in circumstances requiring the person 
to provide the documentary evidence described in paragraph (c)(38)(ii) 
of this section in order for a withholding agent to use the address as 
a permanent residence address. If the person is an individual who does 
not have a tax residence in any country, the permanent residence 
address is the place at which the person normally resides. If the 
person is an entity and does not have a tax residence in any country, 
then the permanent residence address of the entity is the place at 
which the person maintains its principal office.
    (ii) Hold mail instruction. An address that is subject to a hold 
mail instruction (as defined in Sec.  1.1471-1(b)(62)) can be used by a 
withholding agent as a permanent residence address if the person has 
provided the withholding agent with documentary evidence described in 
Sec.  1.1471-3(c)(5)(i) (without regard to the requirement in Sec.  
1.1471-3(c)(5)(i) that the documentary evidence contain a permanent 
residence address). The documentary evidence described in Sec.  1.1471-
3(c)(5)(i) must support the person's claim of foreign status or, in the 
case of a person that is claiming treaty benefits, must support 
residence in the country where the person is claiming a reduced rate of 
withholding under an income tax treaty.
* * * * *
    (e) * * *
    (4) * * *
    (ii) * * *
    (A) * * *
    (2) Documentary evidence for treaty claims and treaty statements. 
Documentary evidence described in Sec.  1.1441-6(c)(3) or (4) shall 
remain valid until the last day of the third calendar year following 
the year in which the documentary evidence is provided to the 
withholding agent, except as provided in paragraph (e)(4)(ii)(B) of 
this section. A statement regarding entitlement to treaty benefits 
described in Sec.  1.1441-6(c)(5) (treaty statement) shall remain valid 
until the last day of the third calendar year following the year in 
which the treaty statement is provided to the withholding agent except 
as provided in this paragraph (e)(4)(ii)(A)(2). A treaty statement 
provided by an entity that identifies a limitation on benefits 
provision for a publicly traded corporation shall not expire at the 
time provided in the preceding sentence if a withholding agent 
determines, based on publicly available information at each time for 
which the treaty statement would otherwise be renewed, that the entity 
is publicly traded. A withholding agent described in the preceding 
sentence must retain a record of the information relied upon (to 
confirm that the entity is publicly traded) for as long as it may be 
relevant to the determination of the withholding agent's tax liability 
under section 1461 and Sec.  1.1461-1. Notwithstanding the second 
sentence of this paragraph (e)(4)(ii)(A)(2), a treaty statement 
provided by an entity that identifies a limitation on benefits 
provision for a government or tax-exempt organization (other than a 
tax-exempt pension trust or pension fund) shall remain valid 
indefinitely. Notwithstanding the validity periods (or exceptions 
thereto) prescribed in this paragraph (e)(4)(ii)(A)(2), a treaty 
statement will cease to be valid if a change in circumstances makes the 
information on the statement unreliable or incorrect. For accounts 
opened and treaty statements obtained prior to January 6, 2017 
(including those from publicly traded corporations, governments, and 
tax-exempt organizations), the treaty statement will expire January 1, 
2020.
* * * * *
0
Par. 3. Section 1.1441-6 is amended by adding a sentence at the end of 
paragraph (c)(5)(i) to read as follows:


Sec.  1.1441-6  Claim of reduced withholding under an income tax 
treaty.

* * * * *
    (c) * * *
    (5) * * *
    (i) * * * A withholding agent may rely on the taxpayer's claim on a 
treaty statement regarding its reliance on a specific limitation on 
benefits provision absent actual knowledge that such claim is 
unreliable or incorrect.
* * * * *
0
Par. 4. Section 1.1461-1 is amended by:
0
1. Adding two sentences after the first sentence in paragraph (a)(1).
0
2. Redesignating paragraph (c)(1)(i) as paragraph (c)(1)(i)(A) and 
adding paragraphs (c)(1)(i) introductory text and (c)(1)(i)(B).
0
3. Adding a sentence at the end of paragraph (c)(4)(iv).
    The additions read as follows:


Sec.  1.1461-1  Payment and returns of tax withheld.

    (a)* * * (1) * * * In a case in which a withholding agent is 
permitted to withhold on an amount subject to reporting (as defined in 
paragraph (c)(2) of this section) in a calendar year (subsequent year) 
following the calendar year (preceding year) in which the withholding 
agent paid such amount (or, for a partnership or trust withholding with 
respect to a foreign partner, beneficiary, or owner, the year the 
partnership or trust received such amount), the withholding agent shall 
designate the deposit of the withholding as made for the preceding year 
and report the tax liability on Form 1042 for the preceding year. In 
the case of a partnership that withholds as described in the preceding 
sentence and does not file its federal income tax return on a calendar-
year basis, however, such partnership may instead designate the deposit 
as made for the subsequent year and report the tax liability on Form 
1042 for the subsequent year. * * *
* * * * *
    (c) * * *
    (1) * * *
    (i) Withholding agent information reporting. This paragraph 
(c)(1)(i) describes the general requirements for a withholding agent to 
file an information return on Form 1042-S and describes a special rule 
for a withholding agent that

[[Page 64766]]

withholds in a subsequent year as described in paragraph (a)(1) of this 
section.
* * * * *
    (B) Special reporting by withholding agents that withhold in a 
subsequent year. Notwithstanding the first sentence of paragraph 
(c)(1)(i)(A) of this section, if a withholding agent designates the 
deposit of such withholding as made for the preceding calendar year as 
described in paragraph (a)(1) of this section, the withholding agent is 
required to report the amount on Form 1042-S for the preceding year. 
With respect to a withholding agent described in the previous sentence 
that is a partnership and that withholds after March 15 of the 
subsequent year, such partnership may file and furnish the Form 1042-S 
on or before September 15 of that year. In the case of a partnership 
that designates the deposit of such withholding as made for the 
subsequent year as permitted in paragraph (a)(1) of this section, 
however, the partnership shall report the amount on Form 1042-S for the 
subsequent year.
* * * * *
    (4) * * *
    (iv) * * * If a nonqualified intermediary that is a participating 
FFI or a registered deemed-compliant FFI receives a payment that has 
been withheld upon at a 30-percent rate under chapter 4 by another 
withholding agent and that is reported as made to an unknown recipient 
on Form 1042-S provided to the nonqualified intermediary, the 
nonqualified intermediary may report the payment (or portion of the 
payment) on Form 1042-S as made to a recipient that has been withheld 
upon under chapter 3 when the payment is not an amount for which 
withholding is required under chapter 4 based on the payee's chapter 4 
status and the nonqualified intermediary reports the correct 
withholding rate for the recipient.
* * * * *
0
Par. 5. Section 1.1461-2 is amended by:
0
1. Revising the second sentence of paragraph (a)(2)(i) introductory 
text.
0
2. Revising paragraphs (a)(2)(i)(A) and (B).
0
3. Adding paragraph (a)(2)(i)(C).
0
4. Revising paragraph (a)(3).
    The revisions and addition read as follows:


Sec.  1.1461-2  Adjustments for overwithholding or underwithholding of 
tax.

    (a) * * *
    (2) * * *
    (i) * * * In such a case, the withholding agent may reimburse 
itself by reducing, by the amount of tax actually repaid to the 
beneficial owner or payee, the amount of any deposit of withholding tax 
otherwise required to be made by the withholding agent under Sec.  
1.6302-2(a)(1)(iii) for any subsequent payment period occurring before 
the end of the calendar year following the calendar year of 
overwithholding. * * *
    (A) The repayment to the beneficial owner or payee occurs before 
the earliest of the due date (including extensions) for filing the Form 
1042-S for the calendar year of overwithholding, the date the Form 
1042-S is actually filed with the IRS, or the date the Form 1042-S is 
furnished to the beneficial owner or payee;
    (B) The withholding agent states on a timely filed (including 
extensions) Form 1042-S for the calendar year of overwithholding the 
amount of tax withheld and the amount of any actual repayment; and
    (C) The withholding agent states on a timely filed (including 
extensions) Form 1042 for the calendar year of overwithholding the 
amount of adjustments made to overwithholding under paragraph (a)(1) of 
this section and the amount of any credit claimed under Sec.  1.6414-1.
* * * * *
    (3) Set-off. Under the set-off procedure, the withholding agent may 
repay the beneficial owner or payee by applying the amount overwithheld 
against any amount of tax which otherwise would be required under 
chapter 3 or 4 of the Internal Revenue Code or the regulations under 
part 1 of this chapter to be withheld from income paid by the 
withholding agent to such person. Any such set-off that occurs for a 
payment period in the calendar year following the calendar year of 
overwithholding shall be allowed only if--
    (i) The repayment to the beneficial owner or payee occurs before 
the earliest of the due date (including extensions) for filing the Form 
1042-S for the calendar year of overwithholding, the date the Form 
1042-S is actually filed with the IRS, or the date the Form 1042-S is 
furnished to the beneficial owner or payee;
    (ii) The withholding agent states on a timely filed (including 
extensions) Form 1042-S for the calendar year of overwithholding the 
amount of tax withheld and the amount of any repayment made through 
set-off; and
    (iii) The withholding agent states on a timely filed (including 
extensions) Form 1042 for the calendar year of overwithholding the 
amount of adjustments made to overwithholding under paragraph (a)(1) of 
this section and the amount of any credit claimed under Sec.  1.6414-1.
* * * * *
0
Par. 6. Section 1.1471-1 is amended by:
0
1. Removing paragraph (b)(60) and redesignating paragraphs (b)(61) and 
(b)(62) as new paragraphs (b)(60) and (b)(61).
0
2. Adding new paragraph (b)(62).
0
3. Revising paragraph (b)(99).
    The addition and revision read as follows:


Sec.  1.1471-1  Scope of chapter 4 and definitions.

* * * * *
    (b) * * *
    (62) Hold mail instruction. The term hold mail instruction means a 
current instruction by a person to keep the person's mail until such 
instruction is amended. An instruction to send all correspondence 
electronically is not a hold mail instruction.
* * * * *
    (99) Permanent residence address. The term permanent residence 
address has the meaning set forth in Sec.  1.1441-1(c)(38).
* * * * *
0
Par. 7. Section 1.1471-2 is amended by:
0
1. Removing the language ``or constitutes gross proceeds from the 
disposition of such an obligation'' from the first sentence of 
paragraph (a)(1).
0
2. Removing and reserving paragraph (a)(2)(iii)(B).
0
3. Removing paragraph (a)(2)(vi).
0
4. Removing the language ``, or any gross proceeds from the disposition 
of such an obligation'' from the first and second sentences of 
paragraph (b)(1).
0
5. Removing the language ``and the gross proceeds allocated to a 
partner from the disposition of such obligation as determined under 
Sec.  1.1473-1(a)(5)(vii)'' from paragraph (b)(3)(i).
0
6. Removing the language ``and further includes a beneficiary's share 
of the gross proceeds from a disposition of such obligation as 
determined under Sec.  1.1473-1(a)(5)(vii)'' from paragraph (b)(3)(ii).
0
7. Removing the language ``and the gross proceeds from the disposition 
of such obligation to the extent such owner is treated as owning the 
portion of the trust that consists of the obligation'' from paragraph 
(b)(3)(iii).
    The revision reads as follows:


Sec.  1.1471-2  Requirement to deduct and withhold tax on withholdable 
payments to certain FFIs.

    (a) * * *
    (2) * * *

[[Page 64767]]

    (iii) * * *
    (B) [Reserved]
* * * * *


Sec.  1.1471-3  [Amended]

0
Par. 8. Section 1.1471-3 is amended by:
0
1. Removing the language that reads ``and that is excluded from the 
definition of a withholdable payment under Sec.  1.1473-1(a)(4)'' from 
paragraph (a)(3)(ii)(A)(4).
0
2. Removing paragraph (c)(8)(iv) and redesignating paragraph (c)(8)(v) 
as new paragraph (c)(8)(iv).
0
Par. 9. Section 1.1471-4 is amended by:
0
1. Removing the language ``or the gross proceeds from the disposition 
of such an obligation'' from the seventh sentence of paragraph (b)(1).
0
2. Revising paragraph (b)(4).
    The revision reads as follows:


Sec.  1.1471-4  FFI agreement.

* * * * *
    (b) * * *
    (4) Foreign passthru payments. A participating FFI is not required 
to deduct and withhold tax on a foreign passthru payment made by such 
participating FFI to an account held by a recalcitrant account holder 
or to a nonparticipating FFI before the date that is two years after 
the date of publication in the Federal Register of final regulations 
defining the term foreign passthru payment.
* * * * *
0
Par. 10. Section 1.1471-5 is amended by adding a sentence at the end of 
paragraph (e)(4)(i)(B) to read as follows:


Sec.  1.1471-5  Definitions applicable to section 1471.

* * * * *
    (e) * * *
    (4) * * *
    (i) * * *
    (B) * * * Notwithstanding the preceding sentence, an entity is not 
managed by another entity for purposes of this paragraph (e)(4)(i)(B) 
solely because the first-mentioned entity invests all or a portion of 
its assets in such other entity, if such other entity is a mutual fund, 
exchange traded fund, or a collective investment entity that is widely-
held and is subject to investor protection regulation.
* * * * *
0
Par. 11. Section 1.1473-1 is amended by:
0
1. Revising paragraph (a)(1).
0
2. Removing the fourth sentence of paragraph (a)(2)(vii)(A).
0
3. Removing and reserving paragraph (a)(3).
0
4. Revising paragraph (a)(4)(iii).
0
5. Removing paragraph (a)(4)(iv) and redesignating paragraphs (a)(4)(v) 
through (viii) as new paragraphs (a)(4)(iv) through (vii).
0
6. Removing paragraph (a)(5)(vii).
    The revisions read as follows:


Sec.  1.1473-1  Section 1473 definitions.

    (a) * * * (1) In general. Except as otherwise provided in this 
paragraph (a) and Sec.  1.1471-2(b) (regarding grandfathered 
obligations), the term withholdable payment means any payment of U.S. 
source FDAP income (as defined in paragraph (a)(2) of this section).
* * * * *
    (3) [Reserved]
    (4) * * *
    (iii) Excluded nonfinancial payments. Payments for the following: 
services (including wages and other forms of employee compensation 
(such as stock options)), the use of property, office and equipment 
leases, software licenses, transportation, freight, gambling winnings, 
awards, prizes, scholarships, interest on outstanding accounts payable 
arising from the acquisition of goods or services, and premiums for 
insurance contracts that do not have cash value (as defined in Sec.  
1.1471-5(b)(3)(vii)(B)). Notwithstanding the preceding sentence, 
excluded nonfinancial payments do not include the following: Payments 
in connection with a lending transaction (including loans of 
securities), a forward, futures, option, or notional principal 
contract, or a similar financial instrument; premiums for cash value 
insurance contracts or annuity contracts; amounts paid under cash value 
insurance or annuity contracts; dividends; interest (including 
substitute interest described in Sec.  1.861-2(a)(7)) other than 
interest described in the preceding sentence; investment advisory fees; 
custodial fees; and bank or brokerage fees.
* * * * *
0
Par. 12. Section 1.1474-1 is amended by:
0
1. Adding two sentences after the first sentence in paragraph (b)(1).
0
2. Revising paragraph (b)(2).
0
3. Redesignating paragraph (d)(1)(i) as paragraph (d)(1)(i)(A) and 
adding paragraphs (d)(1)(i) introductory text and (d)(1)(i)(B).
0
4. Adding a sentence after the first sentence in paragraph (d)(2)(ii).
    The revisions and additions read as follows:


Sec.  1.1474-1  Liability for withheld tax and withholding agent 
reporting.

* * * * *
    (b) * * *
    (1) * * * In a case in which a withholding agent is permitted to 
withhold on a chapter 4 reportable amount (as defined in paragraph 
(d)(2) of this section) in a calendar year (subsequent year) following 
the calendar year (preceding year) in which the withholding agent paid 
such amount (or, for a partnership or trust withholding with respect to 
a foreign partner, beneficiary, or owner, the year the partnership or 
trust received such amount), the withholding agent shall designate the 
deposit of the withholding as made for the preceding year and shall 
report the tax liability on Form 1042 for the preceding year. In the 
case of a partnership that withholds as described in the preceding 
sentence and does not file its federal income tax return on a calendar-
year basis, however, such partnership may instead designate the deposit 
as made for the subsequent year and report the tax liability on Form 
1042 for the subsequent year.* * *
    (2) Special rule for foreign passthru payments that include an 
undetermined amount of income subject to tax. [Reserved]
* * * * *
    (d) * * *
    (1) * * *
    (i) Withholding agent information reporting. This paragraph 
(d)(1)(i) describes the general requirements for a withholding agent to 
file an information return on Form 1042-S and describes a special rule 
for a withholding agent that withholds in a subsequent year as 
described in paragraph (b)(1) of this section.
* * * * *
    (B) Special reporting by withholding agents that withhold in a 
subsequent year. Notwithstanding the first sentence of paragraph 
(d)(1)(i)(A) of this section, if a withholding agent designates the 
deposit of such withholding as made for the preceding calendar year as 
described in paragraph (b)(1) of this section, the withholding agent is 
required to report the amount on Form 1042-S for the preceding year. 
With respect to a withholding agent described in the previous sentence 
that is a partnership and that withholds after March 15 of the 
subsequent year, such partnership may file and furnish the Form 1042-S 
on or before September 15 of that year. In the case of a partnership 
that designates the deposit of such withholding as made for the 
subsequent year as permitted in paragraph (b)(1) of this section, 
however, the partnership shall report the chapter 4 reportable amount 
on Form 1042-S for the subsequent year.
* * * * *
    (2) * * *
    (ii) * * * A chapter 4 reportable amount also does not include an

[[Page 64768]]

amount received by a nonqualified intermediary that is a participating 
FFI or a registered deemed-compliant FFI if the nonqualified 
intermediary reports such amount as having been withheld upon under 
chapter 3 to the extent permitted under Sec.  1.1461-1(c)(4)(iv). * * *
* * * * *
0
Par. 13. Section 1.1474-2 is amended by revising the second sentence of 
paragraph (a)(3)(i) introductory text, paragraphs (a)(3)(i)(A) through 
(C), and paragraph (a)(4) to read as follows:


Sec.  1.1474-2   Adjustments for overwithholding or underwithholding of 
tax.

    (a) * * *
    (3) * * *
    (i) * * * In such a case, the withholding agent may reimburse 
itself by reducing, by the amount of tax actually repaid to the 
beneficial owner or payee, the amount of any deposit of withholding tax 
otherwise required to be made by the withholding agent under Sec.  
1.6302-2(a)(1)(iii) for any subsequent payment period occurring before 
the end of the calendar year following the calendar year of 
overwithholding. * * *
    (A) The repayment to the beneficial owner or payee occurs before 
the earliest of the due date (including extensions) for filing the Form 
1042-S for the calendar year of overwithholding, the date the Form 
1042-S is actually filed with the IRS, or the date the Form 1042-S is 
furnished to the beneficial owner or payee;
    (B) The withholding agent states on a timely filed (including 
extensions) Form 1042-S for the calendar year of overwithholding the 
amount of tax withheld and the amount of any actual repayment; and
    (C) The withholding agent states on a timely filed (including 
extensions) Form 1042 for the calendar year of overwithholding the 
amount of adjustments made to overwithholding under paragraph (a)(1) of 
this section and the amount of any credit claimed under Sec.  1.6414-1.
* * * * *
    (4) Set-off. Under the set-off procedure, the withholding agent may 
repay the beneficial owner or payee by applying the amount overwithheld 
against any amount of tax which otherwise would be required under 
chapter 3 or 4 of the Internal Revenue Code or the regulations under 
part 1 of this chapter to be withheld from income paid by the 
withholding agent to such person. Any such set-off that occurs for a 
payment period in the calendar year following the calendar year of 
overwithholding shall be allowed only if--
    (i) The repayment to the beneficial owner or payee occurs before 
the earliest of the due date (including extensions) for filing the Form 
1042-S for the calendar year of overwithholding, the date the Form 
1042-S is actually filed with the IRS, or the date the Form 1042-S is 
furnished to the beneficial owner or payee;
    (ii) The withholding agent states on a timely filed (including 
extensions) Form 1042-S for the calendar year of overwithholding the 
amount of tax withheld and the amount of any repayment made through 
set-off; and
    (iii) The withholding agent states on a timely filed (including 
extensions) Form 1042 for the calendar year of overwithholding the 
amount of adjustments made to overwithholding under paragraph (a)(1) of 
this section and the amount of any credit claimed under Sec.  1.6414-1.
* * * * *

Kirsten Wielobob,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2018-27290 Filed 12-13-18; 4:15 pm]
BILLING CODE 4830-01-P