Regs issued on withholding of tax on U.S. source payments

The Treasury and IRS have issued regulations on the withholding of tax on U.S. source income paid to foreign persons (Chapter 3- Code Secs. 1441 and 1461), information reporting (Chapter 61-Code Secs. 6041, 6042, 6045, 6049 and 6050N) and backup withholding (Code Sec. 3406) with respect to payments made to certain U.S. persons, and portfolio interest paid to nonresident aliens and foreign corporations (Code Sec. 871).

Proposed regulations under Chapter 3 and Chapter 61 and Code Secs. 871, 3406 and 6402 are finalized with minor changes. Temporary regulations provide additional rules under Chapter 3. The regulations generally apply to payments made on or after December 30, 2016.

On January 28, 2013, the Treasury and IRS published final regulations under Chapter 4 (Code Sec. 1471-Code Sec. 1474) (T.D. 9610, I.R.B. 2013-15, 765) (the 2013 final regulations)). On March 6, 2014, the Treasury and IRS published temporary Chapter 4 regulations (T.D. 9657, I.R.B. 2014-13, 687 (2014 temporary regulations)). On March 6, 2014, temporary regulations were published under Chapter 3, Chapter 61 and Code Sec. 3406 (T.D. 9658, I.R.B. 2014-13, 748) (temporary coordination regulations)). The temporary coordination regulations modified certain provisions under Chapters 3 and 61 and Code Sec. 3406 to coordinate with the Chapter 4 regulations.

The temporary and final regulations in T.D. 9808 (referred to here as the Chapter 3 regulations) clarify and revise parts of the 2014 temporary coordination regulations and in some cases coordinate with the final and temporary Chapter 4 rules in T.D. 9809, issued on December 30, 2016. Some of the provisions in the Chapter 3 regulations were previewed in the following: Notice 2014-33, I.R.B. 2014-21, 1033; Notice 2014-59, I.R.B. 2014-44, 747; and Notice 2016-42, I.R.B. 2016-19, 67.

The following are some of the changes made to the requirements for deducting and withholding tax on payments to foreign persons under Reg. §1.1441-1:

(1) The rules in the temporary regulations that allow a U.S. branch of a foreign person to be treated as a U.S. person no longer require that the foreign person have a specified Chapter 4 status, such as a participating FFI.

(2) An undocumented entity payee that is an exempt recipient is presumed to be a foreign person if the name of the payee indicates that it is on the list of per se corporations, and if the name has the designation of corporation or company, the withholding agent has a document that reasonably demonstrates the payee is incorporated in the relevant jurisdiction.

(3) Withholding agents may rely upon forms or documentary evidence received by facsimile or scanned and sent by e-mail after March 6, 2014, regardless of when the payments are made.

(4) A withholding agent may obtain valid documentation after the payment date to establish a reduced rate of withholding if additional requirements are met. In the case of documentation for income that is effectively connected with the conduct of a trade or business in the United States, a requirement is added that an affidavit be provided establishing that the beneficial owner actually included the income on its income tax return for the tax year in which the income is required to be reported for U.S. tax purposes.

(5) An individual will not be treated as a U.S. person for a tax year (or portion of a tax year) in which the person is a dual resident taxpayer who is treated as a nonresident alien.

(6) An address that is subject to a hold mail instruction can be relied upon as a permanent residence address if documentary evidence is provided establishing the person’s residence.

(7) A requirement is added that a withholding agent may not treat as valid an allocation of a payment subject to Chapter 3 withholding to a withholding rate pool of U.S. payees that a nonqualified intermediary does not identify as described in Reg. §1.471-3(c)(3)(iii)(B)(2)(iii), for payments made on or after April 1, 2018.

(8) Under a new rule, a withholding agent may rely on an alternative withholding statement received from a nonqualified intermediary to the extent that the nonqualified intermediary provides the withholding agent with beneficial owner withholding certificates (and not just documentary evidence).

(9) It is clarified that, in order for an individual’s withholding certificate supporting a claim of foreign status to remain valid indefinitely, the withholding certificate and documentary evidence must be received within 30 days of one another, regardless of which is received first. A withholding certificate provided by an entity on Form W-8BEN-E, accompanied by documentary evidence will be valid indefinitely if the withholding agent receives both before either the certificate or documentary evidence expire.

(10) The treaty statement that is required for a reduced rate of withholding under a treaty and to satisfy limitation of benefits provisions associated with documentary evidence will remain valid until the last day of the third calendar year following the year in which the statement is provided with the withholding agent. Existing accounts documented with documentary evidence before December 30, 2016, expire January 1, 2019.

(11) Requirements for establishing an electronic system to collect Form 8233, Exemption from Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien, are added.

(12) Valid electronically signed withholding certificates may be accepted, regardless of whether an electronic system is established, if the withholding certificates reasonably demonstrate to the withholding agent that they have been electronically signed by the recipient identified on the form or a person authorized by the recipient to sign the form.

(13) Guidance is provided regarding circumstances under which a Form W-8 maintained by a third-party repository will be considered furnished by a withholding agent.

(14) Withholding agents generally may use prior versions of withholding certificates until the later of six months after the date of issuance of the most recent withholding certificate or the end of the calendar year during which the revision was used.

(15) Rules are added that align with the Proposed Qualified Intermediary (QI) Agreement in Notice 2016-16, I.R.B. 2016-29, 67. The final QI agreement was issued on December 30, 2016, in Rev. Proc. 2017-15.
(16) Beginning January 1, 2017, for an account maintained at a U.S. branch or office of a withholding agent that is a financial institution, the withholding agent will collect the account holder’s foreign TIN, and in the case of an individual account holder, the date of birth, on the withholding certificate. For withholding certificates associated with payments made on or after January 1, 2018, a foreign person that does not have a foreign TIN must provide a reasonable explanation for the lack of foreign TIN.

The following are some of the changes made to the requirements for claiming reduced withholding under an income tax treaty in Reg. §1.1441-6:

(1) The Chapter 3 regulations reflect the revised Form W-8BEN-E instructions to require that the limitation on benefits statement on the form identify the specific limitation on benefits provision upon which the taxpayer is relying. A withholding agent can rely on the information unless it is known to be unreliable or incorrect. The information is to be reported beginning in 2018.

(2) The Chapter 3 regulations clarify a withholding agent’s responsibility with respect to claims of benefits under an income tax treaty.

The following are some of the changes made to provisions relating to withholding agents in Reg. §1.1441-7:

(1) A withholding agent may treat an entity account opened during the transition period between July 1, 2014, and January 1, 2015, as a preexisting entity account for purposes of the standards of knowledge applicable to accounts under Chapter 3 and Chapter 61.

(2) The existence of U.S. indicia on a Form W-8ECI will not cause a withholding agent to have reason to know that the form is unreliable or incorrect for purposes of establishing the account holder’s status as a foreign person.

(3) Due to the new provisions provided in Temporary Reg. §1.1441-1T(e)(4)(i)(B), describing when a withholding agent may except a withholding certificate electronically, the standards of knowledge for payments to intermediary and flow-through entities in Notice 2016-08, I.R.B. 2016-6, 304, are no longer necessary.

(4) A withholding agent must file Form 8655, Reporting Agent Authorization, only when its agent files a Form 1042 as the filer on behalf of one or more agents.

The following are some of the changes made to the provisions covering payment and returns of tax withheld in Reg. §1.1461-1:

(1) The Form 1042-S may be furnished to recipients, electronically, beginning in calendar year 2017, for payments made in calendar year 2016.

(2) The Form 1042-S instructions will be modified to allow a foreign TIN to be truncated on the recipient copy of the Form 1042-S, consistent with the truncation of U.S. TINs in the Form 1042.
The following are some of the changes made to provisions on reporting interest and original issue discounts in Reg. §1.6049-5:

(1) A payor may continue to use, for accounts opened on or after July 1, 2014, and before January 1, 2015, the rules regarding the use of documentary evidence, in the 2013 regulations, rather than the new rules for offshore obligations, as previewed in Notice 2014-59.

(2) A change to the presumption rule for U.S. source interest, which was inadvertently removed, is re-added.

The Chapter 3 regulations also clarify in Reg. §1.1441-2 that U.S. source gross transportation taxable income (USSGTI), subject to the 4-percent tax under Code Sec. 887(a), is not subject to withholding under Code Sec. 1441 or Code Sec. 1442.

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