97-25998. General Revision of Regulations Relating to Withholding of Tax on Certain U.S. Source Income Paid to Foreign Persons and Related Collection, Refunds, and Credits; Revision of Information Reporting and Backup Withholding Regulations; and ...  

  • [Federal Register Volume 62, Number 198 (Tuesday, October 14, 1997)]
    [Rules and Regulations]
    [Pages 53387-53498]
    From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
    [FR Doc No: 97-25998]
    
    
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    DEPARTMENT OF THE TREASURY
    
    Internal Revenue Service
    
    26 CFR Parts 1, 31, 35a, 301, 502, 503, 509, 513, 514, 516, 517, 
    520, 521, and 602
    
    [TD 8734]
    RIN 1545-AU43; 1545-AT77
    
    
    General Revision of Regulations Relating to Withholding of Tax on 
    Certain U.S. Source Income Paid to Foreign Persons and Related 
    Collection, Refunds, and Credits; Revision of Information Reporting and 
    Backup Withholding Regulations; and Removal of Regulations Under Part 
    35a and of Certain Regulations Under Income Tax Treaties
    
    AGENCY: Internal Revenue Service (IRS), Treasury.
    
    ACTION: Final and temporary regulations.
    
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    SUMMARY: This document contains final regulations relating to the 
    withholding of income tax under sections 1441, 1442, and 1443 on 
    certain U.S. source income paid to foreign persons, the related tax 
    deposit and reporting requirements under section 1461, and the related 
    requirements governing collection, refunds, and credits of withheld 
    amounts under sections 1461 through 1463 and sections 6402 and 6413. 
    Additionally, this document contains final regulations relating to the 
    statutory exemption under sections 871(h) and 881(c) for portfolio 
    interest.
    
    [[Page 53388]]
    
    This document removes temporary employment tax regulations under the 
    Interest and Dividend Compliance Act of 1983 and amends existing 
    regulations under sections 6041A and 6050N. This document finalizes 
    changes to the proposed regulations contained in project number INTL-
    52-86, published on February 29, 1988, under sections 6041, 6042, 6044, 
    6045, and 6049. This document also finalizes proposed regulations 
    contained in project number IA-33-95, published on December 21, 1995 , 
    relating to the effective date of certain temporary employment tax 
    regulations. This document finalizes related changes to the regulations 
    under sections 163(f), 165(j), 3401, 3406, 6109, 6114, 6413, and 6724. 
    This document removes certain regulations under income tax treaties.
    
    EFFECTIVE DATES: These regulations are effective January 1, 1999, 
    except the addition of Sec. 31.9999-0, the removal of Sec. 35a.9999-0T 
    and the addition of Sec. 35a.9999-0, which are effective October 14, 
    1997.
    
    FOR FURTHER INFORMATION CONTACT: Lilo Hester or Teresa Burridge Hughes, 
    telephone (202) 622-3840 (not a toll-free number), for questions on the 
    regulations generally; Carl Cooper, telephone (202) 622-3840 (not a 
    toll-free number), for questions on portfolio interest and qualified 
    intermediary agreements; Renay France, telephone (202) 622-4940 (not a 
    toll-free number), for questions on the regulations relating to chapter 
    61 of the Internal Revenue Code or section 3406.
    
    SUPPLEMENTARY INFORMATION:
    
    Paperwork Reduction Act
    
        The collections of information contained in these final regulations 
    have been reviewed and approved by the Office of Management and Budget 
    in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507) 
    under control number 1545-1484. Responses to these collections of 
    information are required to obtain a benefit (to claim an exemption to, 
    or a reduction in, the withholding tax), and to facilitate tax 
    compliance (to verify entitlement to an exemption or a reduced rate).
        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 OMB control number.
        The estimate of the reporting burden in these final regulations 
    will be reflected in the burdens of Forms W-8, 1042, 1042S, 8233, 8833, 
    and the income tax return of a foreign person filed for purposes of 
    claiming a refund of tax.
        Comments concerning the accuracy of this burden estimate and 
    suggestions for reducing the burden should be sent to the Internal 
    Revenue Service, Attn: IRS Reports Clearance Officer, T:FP, Washington, 
    DC 20224, and to the Office of Management and Budget, Attn: Desk 
    Officer for the Department of the Treasury, Office of Information and 
    Regulatory Affairs, Washington, DC 20503.
        Books or records relating to a collection of information must be 
    retained as long as their contents may become material in the 
    administration of any internal revenue law. Generally, tax returns and 
    tax return information are confidential, as required by 26 U.S.C. 6103.
    
    Background
    
        This document contains final amendments to the Income Tax 
    Regulations (CFR parts 1, 31, 35a and 301) under sections 163(f), 
    165(j), 871, 881, 1441, 1442, 1443, 1461, 1462, 1463, 3401, 3406, 6041, 
    6041A, 6042, 6045, 6049, 6050A, 6050N, 6109, 6114, 6402, 6413, and 6724 
    of the Internal Revenue Code (Code) . This document also removes 
    certain regulations under income tax treaties.
        On April 15, 1996, (61 FR 17614) the IRS and Treasury published a 
    notice of proposed rulemaking under a number of sections of the Code, 
    dealing with the withholding of tax under section 1441, 1442, or 1443 
    on amounts paid to foreign persons, procedures for claiming foreign 
    status to avoid backup withholding under section 3406 on certain 
    payments, and the reporting to the IRS of payments to foreign persons. 
    Reporting to the IRS may be required under sections 6011 and 1461 or 
    under the reporting provisions of chapter 61 of the Code, such as 
    sections 6041, 6041A, 6042, 6044, 6045, 6049, 6050A, or 6050N, (the 
    Form 1099 reporting provisions). Comments responding to the notice were 
    received and a public hearing was held on July 24, 1996. After 
    considering the comments submitted in writing and at the hearings, the 
    proposed regulations are adopted as revised by this Treasury decision. 
    The revisions are discussed below.
        Payments to domestic and foreign persons create a number of 
    withholding and information reporting obligations for both the payor 
    and the recipient of these payments under various provisions of the 
    Code. These procedures are important to the operation of IRS matching 
    systems. Those systems are part of a compliance program that allows the 
    IRS to match information provided by payors with income reported on a 
    payee's income tax return and help detect U.S. taxpayers that fail to 
    file returns or underreport income. The withholding of tax at source 
    and the reporting of payments to foreign persons are also important to 
    insure that foreign persons comply with their U.S. tax obligations. The 
    final regulations contained in this document deal mostly with payments 
    to foreign persons, and the U.S. income tax liability resulting from 
    such payments.
        Under sections 871(a) and 881(a) of the Code, nonresident alien 
    individuals and foreign corporations are subject to a 30-percent tax on 
    most items of income they receive from sources within the United States 
    that are not effectively connected with the conduct of a trade or 
    business in the United States. Income taxable under these provisions 
    includes interest, dividends, royalties, compensation, other fixed or 
    determinable annual or periodical (FDAP) income and certain gains. The 
    tax liability imposed under sections 871(a) and 881(a) is generally 
    collected by way of withholding at source under chapter 3 of the Code 
    pursuant to section 1441(a) (for payments to nonresident alien 
    individuals and foreign partnerships), section 1442(a) (for payments to 
    foreign corporations), or section 1443(a) (for payments of certain 
    income to foreign tax-exempt entities). Other special withholding 
    provisions apply under section 1443(b) (dealing with the withholding of 
    the 4-percent tax imposed under section 4948), section 1445 (dealing 
    with gains from the disposition of U.S. real property) and section 1446 
    (dealing with effectively connected income of foreign partners in a 
    partnership). The tax liability imposed under sections 871, 881, 1441, 
    1442, and 1443 also extends to payments to other foreign persons, 
    including foreign trusts and estates.
        The 30-percent rate is often reduced under the Code or an income 
    tax treaty. Under current regulations, a withholding agent may 
    generally rely on a statement furnished by, or for, the beneficial 
    owner certifying eligibility for a reduced rate. The procedural 
    requirements for claiming a reduced rate of withholding may vary 
    depending upon the type of income, the status of the taxpayer, or 
    whether an income tax treaty applies. For example, the portfolio 
    interest exception under sections 871(h) and 881(c) for U.S. interest 
    on an obligation in registered form is conditioned upon the beneficial 
    owner of the interest providing a statement of foreign status to the 
    U.S. withholding agent, which can be
    
    [[Page 53389]]
    
    provided on a Form W-8. See Sec. 35a.9999-5(b), A-9. If a reduction is 
    claimed under an income tax treaty, the withholding agent may generally 
    rely on a Form 1001 provided by, or for, the beneficial owner claiming 
    residence in a treaty country. For dividends, however, the current 
    rules do not require certification of foreign status in order to obtain 
    a reduced rate of withholding at source under an income tax treaty. 
    Instead, the withholding agent may generally rely on the address of the 
    payee and grant a reduced rate of withholding at source if the 
    recipient's address is in a treaty country.
        A withholding agent is generally required to file an annual income 
    tax return on Form 1042 to report amounts upon which an amount was 
    actually withheld under chapter 3 of the Code or would have been 
    required to be withheld but for an exemption under the regulations, or 
    an income tax treaty. An information return on a Form 1042-S must be 
    attached to the Form 1042 and must report each recipient's name and 
    address, amounts paid, and amounts withheld, if any. See Sec. 1.1461-2 
    (b) and (c).
        A payor making payments to foreign persons must also be aware of 
    the information reporting provisions under chapter 61 of the Code and 
    of other withholding regimes, such as section 3406 (backup 
    withholding), section 3402 (wage withholding), and section 3405 
    (withholding on pensions, annuities, etc.). Payors subject to these 
    reporting and withholding rules include both U.S. persons and foreign 
    persons, subject to certain exceptions. Under chapter 61 of the Code, 
    many types of payments, such as interest, dividends, royalties, broker 
    proceeds, etc. (reportable payments) must be reported on a Form 1099 if 
    paid to certain U.S. persons. The form is filed with the IRS and a copy 
    is furnished to the recipient of the payment. In addition, section 3406 
    requires those same U.S. payees to furnish a taxpayer identifying 
    number (TIN) to the payor, generally on a Form W-9, and, for reportable 
    interest and dividends, a certification that the payee is not subject 
    to notified payee underreporting. Failure to provide a TIN would 
    generally require the payor to backup withhold on the payment at the 
    rate of 31-percent. A payor that fails to obtain a TIN or other 
    required information in the manner required or to backup withhold when 
    required under section 3406 may also be liable, under section 3403, for 
    interest and penalties, in addition to any amount that should have been 
    withheld under section 3406.
        Payments to foreign persons are exempt from Form 1099 information 
    reporting and backup withholding. However, the exemption is generally 
    conditioned upon the recipient furnishing a certificate supporting its 
    foreign status. The existing regulations under the information 
    reporting provisions of chapter 61 contain guidance to help payors 
    determine when payments are made to a foreign person. Generally, 
    depending upon the type of payment involved, a payor may rely on a 
    certification of foreign status made on Form W-8, Form 1001, Form 4224, 
    or, in the case of certain payments outside the United States, on 
    alternative evidence of foreign status. See, for example, 
    Sec. 35a.9999-3, A-34. Therefore, even if an amount paid to a foreign 
    person is exempt from withholding under chapter 3 of the Code (e.g., 
    gain from the sale of securities), a payor must nevertheless comply 
    with specified certification procedures in order to avoid being subject 
    to penalties for failure to comply with the information reporting and 
    the backup withholding procedures (only amounts subject to reporting 
    under the Form 1099 reporting provisions are subject to backup 
    withholding under section 3406; see section 3406(b) and 
    Sec. 31.3406(a)-1(a) and, for example, Sec. 31.3406(b)(2)-1(a)).
        As explained in the preamble to the proposed regulations, the IRS 
    and Treasury have reviewed the current withholding and reporting 
    procedures applicable to cross-border payment flows and have concluded 
    that changes are necessary to accommodate the size and growth of 
    international financial markets. The IRS and Treasury have concluded 
    that allowing the benefit of the reduced rate at source, rather than 
    through a refund procedure, continues to be desirable. A regime based 
    on reduction of withholding at source avoids the administrative costs 
    and delays that can occur when applying for a refund of overwithheld 
    amounts. This regime, however, depends on withholding agents performing 
    important compliance functions. They must obtain documentation 
    substantiating claims of foreign status and of reduced rates of 
    withholding and must provide information to the IRS.
        One of the important objectives of the revisions is to eliminate 
    unnecessary burdens that the lack of standardization and coordination 
    of current procedures may impose on withholding agents. While it is 
    unavoidable that different information be required for different types 
    of income or recipients, the forms currently in use apply different 
    standards of proof and are not uniform in the manner in which the 
    information is furnished to withholding agents. The final regulations 
    unify the documentation requirements and seek to facilitate compliance 
    by clarifying uncertainties that may exist under current rules (e.g., 
    the scope of due diligence standards imposed on withholding agents).
        These regulations also address important issues relating to 
    payments to intermediaries (e.g., nominees, agents, etc.), including 
    whether intermediaries should certify status on behalf of beneficial 
    owners and, if so, how. Intermediary procedures under current rules 
    have proved difficult to implement in a number of cases. In particular, 
    U.S. source interest on obligations in registered form do not qualify 
    as portfolio interest under sections 871(h) and 881(c) unless the U.S. 
    withholding agent receives a statement that the beneficial owner of the 
    obligation is not a U.S. person (see section 871(h)(2)(B)(ii)). When 
    the payment is made to a foreign person acting as an intermediary on 
    behalf of the beneficial owner or of other intermediaries, the current 
    regulations require that the beneficial owner certification be passed 
    up through the chain of intermediaries to the U.S. withholding agent. 
    See Sec. 35a.9999-5(b), A-9. The final regulations offer alternative 
    procedures and respond to the concerns expressed by various 
    representatives of the financial community regarding compliance costs.
        The final regulations are also responsive to the Congressional 
    mandate in section 342 of the Tax Equity and Fiscal Responsibility Act 
    of 1982 (TEFRA) that Treasury consider a range of options for replacing 
    the address/self-certification method of administering income tax 
    treaty benefits. The IRS and Treasury have studied several options for 
    improving the withholding procedures to respond to this mandate, 
    including a system of certification of residence in a treaty country 
    and refund systems. At hearings held in February of 1985 on proposed 
    regulations issued in 1984 under section 1441, comments from the public 
    and several U.S. treaty partners made it apparent that certification 
    requirements, as proposed, would create too many administrative 
    problems for payments made through nominees. The final regulations 
    reflect these comments. The procedures adopted for documenting 
    eligibility for benefits under tax treaties are similar to those 
    applicable to portfolio interest on obligations in registered form.
        Streamlining the current procedures and implementing workable 
    intermediary certification procedures
    
    [[Page 53390]]
    
    represent a substantial simplification and reduction of burden. The IRS 
    and Treasury expect that this, in turn, should result in greater 
    compliance and improve the ability of withholding agents and the IRS to 
    detect abusive claims of foreign status or of benefits under U.S. 
    income tax treaties or under the Code.
        On December 21, 1995, at 60 FR 66243, a notice of proposed 
    rulemaking (IA-33-95) was published proposing to add Sec. 31.9999-0. 
    This document finalizes the proposed regulations. The effective date of 
    this addition is October 14, 1997.
    
    Explanation of Provisions and Revisions
    
    A. Comments and Changes to Sec. 1.871-14 and Related Reporting 
    Requirements Under Section 6049
    
        Consistent with the proposed regulations, the final regulations 
    incorporate without substantive changes the relevant provisions from 
    the existing temporary regulations implementing the repeal of the 30-
    percent tax on portfolio interest (Questions and Answers Relating to 
    the Repeal of 30-percent Withholding by Section 127 of the Tax Reform 
    Act of 1984 and to the Application of Information Reporting and Backup 
    Withholding in Light of such Repeal). These provisions deal with bearer 
    obligations, convertible obligations, and pass-through certificates. 
    Section 1.871-14(b)(1) incorporates the provisions in Sec. 35a.9999-
    5(a), A-1 and the rules in Sec. 5f.103-1(c) defining a bearer 
    obligation. It also reflects the rules in Sec. 5f.103-1(c) regarding 
    obligations in registered form that are convertible into bearer form. 
    At the request of commentators, the definition of an obligation in 
    registered form contained in Sec. 5f.103-1(c) is restated in 
    Sec. 1.871-14(c)(1)(i). The definition restates the rules in 
    Sec. 35a.9999-5(c), A-18, regarding the effect of convertibility 
    features on the status of an obligation as an obligation in bearer or 
    registered form. Further, at the request of commentators, the 
    provisions in Sec. 35a.9999-5(b), A-12 through 15 regarding obligations 
    issued in registered form and targeted to foreign markets are retained 
    without substantive changes. Comments received from U.S. agencies and 
    instrumentalities indicate that they have relied on these procedures in 
    the past and that they plan to do so again.
        One commentator requested additional clarifications under 
    Sec. 1.165-12(c). In response to these comments, the $1 million minimum 
    denomination requirement under Sec. 1.165-12(c)(1)(ii) is eliminated in 
    order to conform that provision to Sec. 1.165-12(c)(3)(iii). In 
    addition, in Sec. 1.165-12(c), the term United States is replaced with 
    the term United States and its possessions to coordinate the provisions 
    with Sec. 1.163-5(c)(2)(i) (C) and (D). In Sec. 1.165-12(c)(1)(iii), a 
    provision was added to explain that a holder delivering a bearer 
    obligation to a financial institution or exempt organization may rely 
    on a written statement furnished by the institution or organization. 
    Further, although the commentator suggested adding a sentence to 
    Sec. 1.165-12(c)(1) to clarify that each of paragraphs (i) through 
    (iii) must be satisfied in order to avoid holder sanctions, this change 
    is unnecessary because the need to meet all of the requirements in each 
    of these clauses is sufficiently clear. The commentator proposed 
    various changes to the rules governing the foreign targeting of bearer 
    obligations on original issuance. However, the final regulations do not 
    address these changes which are outside the scope of this project.
        The proposed regulations regarding the certification requirements 
    for obligations in registered form are finalized without substantive 
    changes. As in the proposed regulations, a TIN is not required to be 
    stated on a Form W-8 used to claim the benefit of the portfolio 
    interest exemption, regardless of whether the debt obligation is 
    publicly traded.
        Several commentators have asked that, in the case of portfolio 
    interest on obligations in registered form, the provisions dealing with 
    late-received documentation be conformed to similar provisions under 
    proposed Sec. 1.1441-1(f)(5). Under proposed Secs. 1.871-14(c)(3) and 
    1.1441-1(f)(5), the failure to timely receive appropriate documentation 
    (i.e., in most cases, a Form W-8) may be cured by obtaining the 
    documentation later. Under the proposed regulations, the cure 
    procedures apply for purposes of withholding under section 1441 and for 
    purposes of meeting the requirement under sections 871(h) and 881(d) 
    that the U.S. withholding agent receive a statement. However, proposed 
    Sec. 1.871-14(c)(3) requires that the documentation be received before 
    the expiration of the limitations period of the beneficial owner. In 
    contrast, proposed Sec. 1.1441-1(f)(5) requires that the documentation 
    be received before the expiration of the limitations period of the 
    withholding agent. Commentators have asked that the relevant 
    limitations period for qualifying interest as portfolio interest under 
    sections 871(h) and 881(d) be that of the withholding agent and not of 
    the beneficial owner. This comment is not adopted because of the 
    special conditions for interest to qualify as portfolio interest. Under 
    section 871(h)(2)(B)(ii), interest on an obligation in registered form 
    is portfolio interest only if the U.S. withholding agent receives a 
    statement that the beneficial owner of the obligation is not a U.S. 
    person. The legislative history to the amended provisions (see section 
    1810(d)(3)(B) of the Tax Reform Act of 1986 (Public Law 99-514)) 
    specifies that the statement may be received late, but no later than 
    the expiration of the beneficial owner's statute of limitation. This 
    indicates that, if the required statement is received after the 
    beneficial owner's statute of limitation has expired, the interest can 
    no longer qualify as portfolio interest. Although the withholding agent 
    is permitted to receive documentation at any time within its own 
    limitations period and establish an applicable reduction in the 
    withholding rate after the fact (e.g., under an income tax treaty), 
    such cure procedure is not effective to confer portfolio interest 
    status to the interest if it occurs after the beneficial owner's 
    statute of limitations has expired. A cross-reference to Sec. 1.1441-
    1(b)(7) (i.e., proposed Sec. 1.1441-1(f)(5) as renumbered under the 
    final regulations) is included in Sec. 1.871-14(c)(3) to clarify the 
    difference between the two cure procedures.
    
    B. Comments and Changes to Sec. 1.1441-1
    
    1. Coordination With Other Withholding and Information Reporting 
    Provisions
        Commentators noted that withholding and information reporting 
    requirements applicable to payments to foreign persons are governed by 
    a complex web of statutory provisions and that the relationship of 
    these provisions among themselves may be difficult to understand. In 
    response to these comments, a number of changes have been made to help 
    payors and their advisers locate relevant guidance.
        As suggested, the table of contents in Sec. 1.1441-0 has been 
    expanded. Section 1.1441-1(b) (4) and (5) has been added to provide an 
    overview of how the withholding and reporting procedures under chapter 
    3 of the Code relate to the information reporting provisions under 
    chapter 61 of the Code and other withholding regimes under sections 
    3402 (wage withholding), 3405 (withholding on pensions, annuities, 
    etc.), and 3406 (backup withholding). Provisions explaining the 
    interaction of
    
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    applicable withholding and reporting provisions in the case of payments 
    to foreign intermediaries or foreign partnerships have been added also. 
    See explanation of those rules, under the heading ``Clarification of 
    Reporting and Withholding Obligations for Payments to and by Foreign 
    Intermediaries'' of this preamble. Where appropriate, additional cross 
    references to chapter 61 and to sections 3402, 3405, and 3406 have been 
    added in Sec. 1.1441-1 and cross-references in regulations under 
    sections 3402, 3405 and 3406 have also been added.
        As a general matter, a withholding agent (whether U.S. or foreign) 
    must ascertain whether the payee is a U.S. or a foreign person. If the 
    payee is a U.S. person, the withholding provisions under chapter 3 of 
    the Code do not apply; however, information reporting under chapter 61 
    of the Code may apply; further, if a TIN is not furnished in the manner 
    required under section 3406, backup withholding may also apply. If the 
    payee is a foreign person, however, the withholding provisions under 
    chapter 3 of the Code apply instead. To the extent withholding is 
    required under chapter 3 of the Code, or is excused based on 
    documentation that must be provided, none of the information reporting 
    provisions under chapter 61 of the Code apply, nor do the provisions 
    under section 3406. If, however, withholding under chapter 3 of the 
    Code does not apply irrespective of documentation (e.g., in the case of 
    foreign source income or gross proceeds dealt with under section 6045), 
    documentation may nevertheless have to be furnished to the withholding 
    agent under the provisions of chapter 61 of the Code in order to be 
    excused from Form 1099 information reporting and, possibly, from backup 
    withholding under section 3406. Determinations of payee's status are 
    generally made at each level of the chain of payment, until, 
    ultimately, the payment is made to the beneficial owner. The following 
    example illustrates how these rules interact under the final 
    regulations.
        For example, assume that a U.S. bank acting as a paying agent of a 
    U.S. issuer of an obligation pays interest to a U.S. brokerage firm. 
    Chapter 3 withholding does not apply to that payment because the payee 
    is a U.S. person. Form 1099 information reporting under section 6049 is 
    not required because the brokerage firm is an exempt recipient (i.e., a 
    securities dealer), meaning that it is exempt from having the payment 
    reported on a Form 1099. See Sec. 1.6049-4(c)(1)(i). The U.S. brokerage 
    firm may or may not have to provide a Form W-9 to the U.S. bank to 
    establish its exempt recipient status depending on whether it meets one 
    of the ``eyeball'' tests under Sec. 1.6049-4(c)(1)(ii). Assume further 
    that the U.S. brokerage firm credits the interest to the account of a 
    customer. If the brokerage firm does not hold a Form W-9 (or a Form W-
    8) and cannot otherwise ascertain the exempt recipient status of the 
    customer under Sec. 1.6049-4(c)(1)(ii), it is required to backup 
    withhold 31-percent under section 3406. See Sec. 31.3406(a)-1(b). If it 
    determines that the customer is a U.S. person (e.g., the firm holds a 
    Form W-9 for the customer), then chapter 3 does not govern the payment. 
    Instead, the payment is governed by sections 3406 and 6049. If, 
    however, the U.S. brokerage firm determines that the customer is a 
    foreign person (e.g., it holds a valid Form W-8), then chapter 3 
    governs the payment and the payment is not reportable for purposes of 
    section 6049, meaning that it is also not subject to backup withholding 
    under section 3406. Thus, Form 1042 reporting and withholding at a 30-
    percent rate are required unless the income is exempt under the Code or 
    an income tax treaty. For example, if the interest is of a kind that 
    may qualify as portfolio interest, then withholding is excused if the 
    brokerage firm holds a valid Form W-8 from the customer (but would 
    still be reportable on Form 1042-S).
        If the payment to the customer is an amount exempt from withholding 
    under chapter 3 of the Code without the need to furnish documentation 
    (e.g., foreign source interest income), documentation may nevertheless 
    be required for purposes of chapter 61 of the Code. In this example, 
    the U.S. brokerage firm must report the payment of foreign source 
    interest on a Form 1099 unless the customer is an exempt recipient or 
    is a foreign person. If the customer's status as an exempt recipient 
    cannot be ascertained on an ``eyeball'' basis under Sec. 1.6049-
    4(c)(1)(ii), the brokerage firm must obtain a Form W-9 or a Form W-8 
    from the customer. If the documentation that the brokerage firm 
    receives reliably indicates an exempt recipient or foreign status, no 
    information reporting or withholding is required. If documentation is 
    not obtained or is not reliable, Form 1099 information reporting is 
    required under section 6049 and backup withholding is required under 
    section 3406.
        Assume, however, that the customer is not the beneficial owner of 
    the payment of U.S. and foreign source interest income. Instead, it is 
    a foreign bank acting on behalf of the beneficial owner. With respect 
    to the payment that is U.S. source interest, the brokerage firm would 
    be permitted to pay the interest free of withholding (assuming it would 
    qualify as portfolio interest if appropriate documentation were 
    received) if it held a Form W-8 (or alternative documentary evidence) 
    from the ultimate beneficial owner that is transmitted by the foreign 
    bank or if it held a Form W-8 from the foreign bank as a qualified 
    intermediary who, under the final regulations, is permitted to certify 
    on behalf of its own customer. See Sec. 1.1441-1(e)(5). In either case, 
    the brokerage firm must report the payment on a Form 1042 and must also 
    make an information return on Form 1042-S. The Form 1042-S must state 
    the name of the beneficial owner as shown on the Form W-8 (or 
    alternative documentary evidence) or the name of the foreign bank if 
    the bank is a qualified intermediary.
        Continuing with the same example, the foreign bank also has 
    obligations under sections 1441, 6049, and 3406 when it, in turn, makes 
    a payment to its own customer. However, to the extent it received a 
    valid Form W-8 (or alternative documentary evidence) from the 
    beneficial owner and furnished a copy to the U.S. brokerage firm (or 
    complied with the documentation requirements as a qualified 
    intermediary), it would meet its obligation under applicable 
    withholding and reporting provisions and, accordingly, would be exempt 
    from withholding any amount from the payment and from reporting the 
    payment. See Secs. 1.1441-1(b)(6) and 1.6049-5(b)(14).
        With respect to the foreign source interest paid to the foreign 
    bank acting as an intermediary, the only requirement imposed on the 
    U.S. brokerage firm is to obtain the Form W-8 of the foreign bank (and 
    not of the beneficial owner). Because the exemption sought by the 
    foreign bank is an exemption from Form 1099 information reporting and 
    backup withholding, the foreign bank may do so by establishing its 
    foreign status with a Form W-8 or by establishing its status as an 
    exempt recipient. Under the final regulations, a foreign bank's status 
    as an exempt recipient can be established on an ``eyeball'' test basis 
    if the bank s name reasonably indicates that it is a bank. However, as 
    is the case for U.S. income subject to chapter 3 withholding, the 
    foreign bank, acting as an agent for its own customer, may be required 
    to report the foreign source payment under section 6049 and to backup 
    withhold under 3406 when it, in turn, pays the amount to its customer 
    if the foreign bank is a U.S. payor (e.g., it is a controlled foreign 
    corporation). If it is not a U.S. payor or a U.S. middleman,
    
    [[Page 53392]]
    
    it has no withholding or reporting obligations under chapter 3 of the 
    Code due to the nature of the payment (i.e., foreign source income), 
    unless it makes the payment in the United States. If the foreign bank 
    makes a payment to its customer in the United States, then the payment 
    is reportable under section 6049 and the bank must obtain a Form W-8 or 
    a Form W-9 from its customer, unless the exempt status of the customer 
    can be established on an ``eyeball'' basis. If the customer is a U.S. 
    person who is not an exempt recipient, the bank must report the payment 
    on a Form 1099 and, if the customer has not provided a Form W-9 as 
    required under section 3406, backup withholding is required. The 
    provisions of Sec. 1.6049-5(b)(14) do not apply to exempt the foreign 
    bank from its reporting and withholding obligations because it has not 
    provided the required documentation to the U.S. withholding agent or 
    certified on behalf of the beneficial owner.
        These examples are illustrative only. Different rules may apply 
    depending upon a number of factors, the most significant being the 
    nature of the payment (FDAP or not FDAP, U.S. source or foreign 
    source), the status of the payor (U.S. or foreign), the status of the 
    payee (U.S. or foreign, beneficial owner or intermediary), where the 
    payment is made (in the U.S. or outside the U.S.), and where the 
    account is held (on-shore or offshore).
    2. U.S. Agent of Foreign Person
        Under the proposed regulations, a payment to a U.S. person gives 
    rise to withholding liability if the payor has actual knowledge that 
    the U.S. person is acting as an agent for a foreign person. 
    Commentators suggested that the withholding liability should be imposed 
    on the last U.S. person who makes the payment to a foreign person. At a 
    minimum, commentators asked that the final regulations limit the 
    obligation to withhold to situations where the withholding would seem 
    jeopardized. This comment is accepted. Under the final regulations, a 
    U.S. person making a payment to a U.S. financial institution is not 
    required to withhold even if it knows that the payee is collecting the 
    payment for a foreign person, if the U.S. person has no reason to 
    believe that the financial institution will not comply with its 
    obligation to withhold when it makes the payment to the foreign person. 
    See Sec. 1.1441-1(b)(2)(ii).
    3. Payments to Wholly-Owned Entities
        The final regulations under Sec. 1.1441-1(b)(2)(iii) provide 
    guidance on applicable withholding procedures for payments to a 
    domestic or foreign wholly-owned entity that is disregarded for federal 
    tax purposes (i.e., treated as a branch of its single owner) under 
    Sec. 301.7701-1(c)(2). As a general rule, a payment to a disregarded 
    wholly-owned entity is treated as a payment to its owner. Thus, for 
    example, if a foreign person owns a domestic disregarded entity, a 
    person making a payment to the disregarded entity is treated as the 
    withholding agent because the owner is a foreign person. However, 
    because the fact that the entity is disregarded for tax purposes 
    generally may not be apparent to a person making a payment to the 
    entity, the person making the payment can rely on documentation 
    received from the recipient to determine its withholding and reporting 
    obligations. Thus, if the person receives a Form W-9 from the entity 
    representing that the recipient is a domestic corporation, the person 
    may rely on the form to treat the entity as a U.S. person unless it has 
    actual knowledge or reason to know that the representation is 
    incorrect. If the entity is a wholly-owned entity disregarded for 
    federal tax purposes, then it must furnish documentation representing 
    the status of its owner. For example, if the disregarded domestic 
    entity is owned by a foreign person, it must furnish a Form W-8 from 
    its single owner. In that case, a person making a payment to the entity 
    may rely on the Form W-8 that the entity provides for its foreign owner 
    and comply with withholding and reporting requirements accordingly. A 
    domestic disregarded entity that does not furnish a certificate is 
    subject to Form 1099 information reporting on payments that are 
    reportable and subject to backup withholding under section 3406 
    because, lacking the words ``inc.'', ``incorporated'', ``corp.'' or 
    ``corporation'' in its name, it could not be treated as an exempt 
    recipient on an ``eyeball'' basis. If the entity had one of these words 
    in its name, it would be a per se corporation for U.S. tax purposes 
    because any of these words would indicate that the entity is organized 
    under a corporate statute; thus, it could not be a disregarded entity. 
    The TIN to be stated on the Form W-9 or the Form W-8, if required, is 
    that of the single owner and not that of the disregarded entity.
        Different documentation procedures apply if the benefit of a 
    reduced rate is claimed under an income tax treaty and the entity is 
    not treated as fiscally transparent in the applicable treaty 
    jurisdiction. See Secs. 1.1441-6(b)(4) and 1.894-1T(d).
    4. Payments to U.S. Branches of Foreign Institutions
        Commentators also suggested that a payment to a U.S. branch of a 
    foreign bank or other financial institution should not be subject to 
    withholding. Instead, the U.S. branch should be responsible for 
    withholding when it makes the payment to the foreign person. In 
    addition, commentators have asked that the regulations eliminate the 
    requirement for a U.S. branch to furnish a certificate representing 
    that the payment it receives is effectively connected with the conduct 
    of a U.S. trade or business. In response to these comments, the rules 
    governing payments to the U.S. branch of certain foreign financial 
    institutions have been modified to alleviate the certification burden 
    for those U.S. branches that operate in a manner equivalent to U.S. 
    companies.
        Therefore, Sec. 1.1441-4(a)(2)(ii) of the final regulations 
    provides that a payment to a U.S. branch of either a foreign financial 
    institution that is registered with the Federal Reserve Board or of a 
    foreign insurance company that is required to file an annual ``NAIC'' 
    statement with a State Insurance Commissioner is presumed to be a 
    payment of effectively connected income for withholding purposes. 
    Section 1.1441-1(b)(2)(iv) has been added to provide that a U.S. branch 
    may rebut this presumption by furnishing a Form W-8 to the withholding 
    agent certifying that the payment that it receives is not effectively 
    connected with its conduct of a U.S. trade or business. For a 
    description of the form that a U.S. branch must furnish, see 
    Sec. 1.1441-1(e)(3)(v). Under the final regulations, the U.S. branch 
    that furnishes a Form W-8 may agree with the withholding agent to 
    assume responsibility for all withholding and reporting obligations for 
    the payments it receives from the withholding agent. In the absence of 
    such an agreement, the withholding agent remains responsible for the 
    withholding and reporting obligations associated with the payment. This 
    means, for example, that, if the U.S. branch receives the payment on 
    behalf of its home office and the home office is covered by a qualified 
    intermediary agreement that the IRS has concluded with the foreign 
    financial institution, the U.S. branch must give to the withholding 
    agent the home office's Form W-8. If the branch receives the payment 
    for its own customers, it must give to the withholding agent all of the 
    required certificates for its customers.
        Similar withholding procedures are available to other U.S. branches 
    to the
    
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    extent permitted by the district director or the Assistant Commissioner 
    (International). Procedures for obtaining such permission existed under 
    prior regulations under Sec. 1.1441-4(f). These provisions are restated 
    in Sec. 1.1441-1(b)(2)(iv)(E) of the final regulations.
        The final regulations do not eliminate the requirement to report on 
    a Form 1042 or 1042-S payments to these branches, including payments 
    for which the branch has assumed withholding and reporting 
    responsibility. In such a case, however, the reporting is made to the 
    branch as recipient of the amount for which it has assumed withholding 
    responsibility rather than to the beneficial owner. See Sec. 1.1461-
    1(b)(2)(vi) and (c)(4)(v). Although commentators asked that these 
    reporting requirements be eliminated for payments of effectively 
    connected income, the IRS and Treasury believe that the reporting 
    serves an important compliance function.
    5. Beneficial Owner
        The definition of the term beneficial owner is clarified to 
    indicate that ownership is determined on the basis of existing 
    principles governing the determination of tax ownership, including 
    substance-over-form principles, such as those reflected in section 
    7701(l) dealing with conduit transactions. The special definition of 
    beneficial owner in proposed Sec. 1.1441-1(c)(6)(ii)(B) for purposes of 
    tax treaties has been eliminated. See the explanation below under 
    Sec. 1.1441-6 for claims of tax treaty-reduced rates for payments to 
    entities that are treated as fiscally transparent in the U.S. or in the 
    applicable treaty jurisdiction, or both.
    6. Forms
        a. Format and Design. Many comments were received regarding the 
    format and design of the revised Form W-8. In particular, several 
    commentators suggested that the IRS retain separate forms for 
    effectively connected income and payments to foreign governments. The 
    IRS is considering these comments and agrees that it may be more 
    convenient to keep certain forms separate from the basic beneficial 
    owner Form W-8. The revised forms will be released for public comments 
    before they are finalized.
        b. Content of Forms. The final regulations are modified in several 
    respects regarding the Form W-8. A Form W-8 furnished by the beneficial 
    owner is generally payee-specific and applies to all income received 
    from the withholding agent to whom furnished, except to the extent 
    provided in forms and instructions (e.g., effectively connected 
    income). See Sec. 1.1441-1(e)(2)(i). Entitlement to different types of 
    reduced rates may require different types of information or 
    representations on a Form W-8. For example, entitlement to exemption 
    from withholding on portfolio interest requires only proof of foreign 
    status. Claims of treaty benefits may require a certified TIN (that is, 
    a TIN that the IRS has certified as belonging to a person who is a 
    resident of a country with which the U.S. has an income tax treaty in 
    effect; see Sec. 1.1441-6(c) for procedures to have a TIN certified by 
    the IRS). A withholding agent is responsible for making sure that the 
    information or representations relevant to a particular type of income 
    or applicable rate appear on the form and for requesting a new form 
    where an existing form fails to support a claim of reduced rate for a 
    different type of income. For example, a beneficial owner who furnishes 
    a Form W-8 for portfolio interest (and therefore, does not complete the 
    information on the form relating to claims of treaty benefits) would be 
    required to furnish a new form to the withholding agent if it receives 
    from the same withholding agent other income for which it claims a 
    reduced rate of withholding under a tax treaty. The new form could 
    serve both for portfolio interest and the other income for which treaty 
    benefits are claimed.
        In response to comments, the final regulations clarify that, where 
    a person, other than an individual, does not have a tax residence in 
    any country, the required permanent residence address is the address of 
    the person's principal office, even though the principal office is not 
    in its country of incorporation (as was required in the proposed 
    regulations). Because of this change, the final regulations require 
    that the entity's country of organization or incorporation be stated on 
    the form. See Sec. 1.1441-1(e)(2)(ii).
        c. Signature of Forms under Power of Attorney. Some commentators 
    have asked that custodians be permitted to execute the Form W-8 on 
    behalf of their customers, based upon a power of attorney. This 
    suggestion is not adopted. Like a tax return, a Form W-8 must be signed 
    under penalties of perjury. As such, the IRS and Treasury view the 
    signature of a Form W-8 as governed by the same rules that govern the 
    signature of a tax return. Therefore, the final regulations clarify in 
    Sec. 1.1441-1(e)(4)(i) that a withholding certificate may be signed by 
    any person authorized to sign a declaration under penalties of perjury 
    on behalf of the person issuing the certificate as provided under 
    section 6061 (for individuals), 6062 (for corporations), or 6063 (for 
    partnerships).
        d. Facsimile and Electronic Transmission. Commentators have asked 
    that withholding agents be allowed to rely on a faxed copy or 
    electronically transmitted Form W-8 as if they were original forms. The 
    proposed regulations permit a faxed Form W-8 to indicate foreign status 
    for purposes of the grace period under proposed Sec. 1.1441-
    1(f)(2)(i)(B), but do not allow it to be used for other purposes. The 
    question of whether and to what extent a faxed certificate ought to be 
    allowed instead of an original certificate arises because, under 
    current law, a faxed document (like a photocopy) has weaker evidentiary 
    value than an original document. This question is not unique to the 
    Form W-8 and is currently under study by the IRS. Pending completion of 
    the study, the final regulations allow a withholding agent to rely on a 
    faxed form only for purposes of presuming foreign status in order to 
    reduce the rate of withholding during a 90-day grace period. However, 
    an original form must be provided before the grace period expires.
        On the other hand, the proposed regulations provide general 
    authority for the electronic transmission of Forms W-8, subject to 
    procedures issued by the IRS. The final regulations retain this rule 
    and, regulations issued together with these final regulation propose to 
    amend Sec. 1.1441-1(e)(4)(iv) of the final regulations by prescribing 
    the standards that electronic systems must meet in order to effect an 
    acceptable transmission of Forms W-8. The IRS believes that the 
    evidentiary value of documents transmitted with electronic systems 
    meeting these standards would equate with that of an original document. 
    See project REG-107872-97, published elsewhere in this issue of the 
    Federal Register. The option to use electronic transmission systems 
    should help alleviate the burden of having to mail original Forms W-8 
    in paper form.
        e. Single Form for Related Withholding Agents. Commentators have 
    asked that several withholding agents be allowed to rely on a single 
    Form W-8. In response to this comment, a number of changes were made to 
    the final regulations. First, under Sec. 1.1441-1(e)(4)(ix)(A), a 
    withholding agent may rely on the Form W-8 furnished for another 
    account at the same branch location, at a different branch location of 
    the same entity, or at a different branch location of a related person 
    if the entity or group of entities uses a universal account system or 
    uses another type of coordinated account
    
    [[Page 53394]]
    
    information system that allows the withholding agent to easily access 
    information regarding the nature of the certificate furnished, the 
    information on the certificate, and its validity status.
        In addition, the system must allow the withholding agent to keep a 
    record of how and when it accesses the information and, if applicable, 
    of how and when it communicates relevant facts affecting the 
    reliability of the certificate to the location where the certificate is 
    kept. Second, the rule in proposed Sec. 1.1441-1(e)(2)(i) allowing the 
    beneficial owner to provide a single Form W-8 with respect to a family 
    of mutual funds is extended to investors in affiliated partnerships and 
    corporations under Sec. 1.1441-1(e)(4)(ix)(B) of the final regulations. 
    Further, the final regulations also adopt a suggestion that a 
    withholding agent be able to rely on representations from a broker that 
    it holds a valid withholding certificate from a beneficial owner. See 
    Sec. 1.1441-1(e)(4)(ix)(C). The final regulations clarify that a 
    withholding agent has knowledge of all information in the system. See 
    Sec. 1.1441-7(b)(3).
        f. Forms from Foreign Partnerships. In response to comments, the 
    provisions under proposed Sec. 1.1441-1(e)(3)(iii) dealing with 
    withholding certificates furnished by a foreign partnership have been 
    moved to Sec. 1.1441-5(c), which contains most of the withholding 
    provisions governing payments to foreign partnerships (see explanation 
    of the changes under Sec. 1.1441-5).
        g. Forms from Non-Qualified Intermediaries. In response to 
    comments, provisions have been added to clarify the manner in which a 
    non-QI must transmit documentation to the withholding agent and the 
    information that it must contain. Proposed Sec. 1.1441-1(e)(3)(iv) 
    (renumbered as Sec. 1.1441-1(e)(3)(iii) in the final regulations) is 
    expanded to explain the manner in which withholding certificates or 
    other appropriate documentation is passed up a chain of non-QIs. The 
    final regulations allow the intermediary to furnish copies of an 
    original Form W-8 so as to avoid requesting multiple originals for 
    different accounts that the intermediary may hold on behalf of the same 
    beneficial owner. See Sec. 1.1441-1(e)(3)(iii).
        Also, proposed Sec. 1.1441-1(e)(3)(iv) (C) and (D) (renumbered as 
    Sec. 1.1441-1(e)(3)(iii) (C) and (D) in the final regulations) has been 
    modified and paragraph (e)(3)(iv) has been added in response to 
    comments that the regulations should explain the information required 
    from a non-qualified intermediary to insure proper withholding by a 
    withholding agent making a payment to a non-qualified intermediary. In 
    particular, if different withholding rates apply to different owners of 
    the payment flowing through an intermediary, the withholding agent must 
    know which rate applies to each portion of the payment. Where such 
    information is necessary, the final regulations provide that the 
    intermediary must, in a statement attached to the withholding 
    certificate from the non-qualified intermediary, provide (and update as 
    often as is necessary) sufficient information for the withholding agent 
    or payor to determine the proportion of each payment subject to 
    withholding that is attributable to each person to whom the 
    intermediary certificate relates, including persons for whom the 
    intermediary has not attached a withholding certificate or other 
    appropriate documentation. Such statement is not necessary, however, if 
    the allocation information is known to the withholding agent due to the 
    account structure that it uses (for example, the withholding agent uses 
    separate accounts for different categories of income and applicable 
    withholding rates).
        h. Validity Period. Comments were received under Sec. 1.1441-
    1(e)(4)(ii) regarding the period of validity of a properly executed 
    Form W-8. Commentators requested that, irrespective of whether a Form 
    W-8 includes a TIN, all forms should be valid indefinitely, or at least 
    those furnished for a claim of effectively connected income. Some 
    commentators suggested that a Form W-8 should not expire where a payor 
    continues to send all correspondence to a mailing address that is also 
    the permanent address on a Form W-8. These suggestions are not adopted 
    because the IRS and Treasury believe that it is important for taxpayers 
    to re-certify status periodically. Similar re-certification is also 
    important for effectively connected income, since income may cease to 
    be effectively connected due to a change in the taxpayer's business 
    structure, without the withholding agent becoming aware of such 
    changes. However, the final regulations provide relief by presuming 
    that payments made to certain U.S. branches are effectively connected 
    income, thereby avoiding the need to provide a certificate in such a 
    case. See Sec. 1.1441-4(a)(2)(ii).
        Also, Sec. 1.1441-1(e)(4)(ii)(B) is modified to make all 
    intermediary certificates and certificates for non-withholding foreign 
    partnerships valid indefinitely. (The indefinite validity period does 
    not apply to the withholding certificates or documentary evidence 
    required to be attached to a certificate from a non-qualified 
    intermediary, a U.S. branch of a foreign institution, or a foreign non-
    withholding partnership.) In addition, Forms W-8 furnished by an 
    integral part of a foreign government, a foreign central bank of issue, 
    or the Bank for International Settlements are valid indefinitely. For 
    these certificates, the information required is likely to change only 
    infrequently. What may change more frequently is the withholding rate 
    information that an intermediary or foreign partnership may have to 
    furnish to a withholding agent on a separate statement, which the 
    intermediary or partnership must update as often as is necessary to 
    insure that the withholding agent withholds at the proper rates. See 
    Sec. 1.1441-1(e) (3)(iv) and (5)(v) for a description of the statement 
    and Sec. 1.1441-1(e)(4)(ii)(D) for related validity rules.
        i. Effect of Changes in Circumstances. Proposed Sec. 1.1441-
    1(e)(4)(ii)(D), dealing with changes in circumstances affecting the 
    validity of a Form W-8, is revised to clarify the due diligence imposed 
    on a non-qualified intermediary who becomes aware of a change in the 
    circumstances affecting the validity of a withholding certificate that 
    it has received and transmitted to the U.S. withholding agent or 
    another intermediary. The final regulations provide that, in such a 
    case, the non-qualified intermediary must inform the person to whom it 
    provided the affected withholding certificate (i.e., the U.S. 
    withholding agent or the other intermediary). It must also obtain a new 
    withholding certificate or other documentation to replace the 
    certificate or documentation that is no longer valid due to changes in 
    circumstances. The same rules apply to foreign partnerships that are 
    not withholding foreign partnerships and to a U.S. branch that passes 
    through documentation to a U.S. withholding agent.
        The final regulations also clarify that a withholding agent does 
    not have a duty to inquire into possible changes of circumstances. In 
    other words, a withholding agent may assume that circumstances have not 
    changed unless it knows of facts suggesting that changes in 
    circumstances have occurred that may affect the validity of 
    documentation. Changes in circumstances relevant to the information and 
    certification provided on a withholding certificate, a statement, or in 
    documentary evidence affect the validity of the certificate, statement, 
    or documentary evidence as of the date that the withholding agent has 
    actual knowledge or reason to know of the changes. The final 
    regulations are
    
    [[Page 53395]]
    
    revised to clarify that point and give withholding agents the same 90-
    day period as is given for a new account for perfecting documentation 
    (i.e., inquire into the change of circumstances and obtain a new 
    certificate, if necessary). See Secs. 1.1441-1(b)(3)(iv) and 1.6049-
    5(d)(2)(ii).
        j. Acceptable Substitute Form. In addition, proposed Sec. 1.1441-
    1(e)(4)(vi) is modified in response to comments that asked that the 
    meaning of the cross-reference to Sec. 31.3406(h)-3(c)(1) defining an 
    acceptable substitute form be clarified. The revised provisions 
    enumerate the type of information and certifications that must appear 
    on any substitute form for purposes of the regulations under chapter 3 
    of the Code. The rules are similar to the rules contained in 
    Sec. 31.3406(h)-3(c)(1). Under the final regulations, a withholding 
    agent must provide a copy of the instructions to the recipient only to 
    the extent specified in the form and in the instructions to the 
    official form. As is the case for the Form W-9, the IRS expects that 
    the form instructions will waive the obligation to furnish the official 
    Form W-8 instructions to customers. Further, withholding agents are 
    also authorized to develop customized substitute Forms W-8 and 
    incorporate them as part of account opening documents.
        k. Guidance Regarding Reliance on Withholding Certificates. Several 
    commentators asked for clearer guidance on the extent to which 
    withholding agents may rely on forms and the extent of their duty to 
    inquire into the truthfulness of information stated on forms. In 
    response to these comments, the final regulations contain a number of 
    clarifications. Section 1.1441-1(e)(4)(viii) has been added to provide 
    that a withholding agent may rely on a foreign entity's certification 
    of corporate (or other) status on a Form W-8. In the case of a 
    withholding certificate by or for a foreign entity whose name is on the 
    list of per se foreign corporations described in Sec. 301.7701-
    2(b)(8)(i) that claims to be a partnership, the certificate must 
    represent that the entity's partnership status was grandfathered under 
    the regulations and has not been terminated. Further, a withholding 
    agent that receives a beneficial owner certificate from a foreign 
    financial institution may rely on such certificate to treat the 
    institution as the beneficial owner unless it has information in its 
    records that would indicate otherwise, or unless the certificate 
    contains information that would contradict such claim (e.g., sub-
    account numbers or names). If a foreign intermediary receives payments 
    both in its capacity as an intermediary and for its own account, it 
    must furnish two certificates in order to allow the withholding agent 
    to apply the proper withholding rate and report the amounts 
    accordingly. Additional reliance guidance has been added regarding 
    claims of benefits under a tax treaty (see explanation under 
    Sec. 1.1441-6, below). Further, the provisions dealing with a 
    withholding agent's due diligence are also expanded and clarified (see 
    explanation under Sec. 1.1441-7, below).
    7. Non-Qualified Intermediaries
        Some commentators requested that the regulations eliminate the 
    requirement that non-qualified intermediaries (non-QIs) pass through 
    Forms W-8 to the U.S. withholding agent because investors and 
    intermediaries will not disclose customer information to third parties. 
    In particular, some commentators recommended that the regulations 
    eliminate any reference to the intermediary procedures currently 
    applicable under Sec. 35a.9999-5(b), A-9, dealing with certification 
    required in order for interest to qualify as portfolio interest. These 
    suggestions are not adopted. The qualified intermediary regime is 
    designed to provide these benefits, but only where the intermediary 
    follows procedures to insure adequate withholding compliance. In 
    addition, as explained in the preamble to the proposed regulations, the 
    intermediary procedures provided in Sec. 35a.9999-5(b), A-9 are 
    retained because, if the qualified intermediary regime does not apply 
    to the intermediary, these procedures may be useful.
        The final regulations also do not adopt a suggestion that, for 
    income for which no TIN needs to be provided, the intermediary only 
    reports the aggregate amount on Form 1042 without having to report 
    individual amounts for each beneficial owner on a Form 1042-S. 
    Commentators have suggested that a financial institution acting as an 
    intermediary should be required to indicate only the proportion of a 
    payment subject to withholding and the applicable rate. Should the 
    proportion change, the certificate furnished by the intermediary would 
    have to be modified to reflect the change in circumstances. This 
    suggestion is not adopted because permission to report aggregate 
    amounts is limited to payments made to qualified intermediaries. In the 
    case of a qualified intermediary, the IRS may rely on audit procedures 
    in the qualified intermediary agreement described in Sec. 1.1441-
    1(e)(5)(iii) to determine whether the intermediary has properly advised 
    the U.S. withholding agent regarding each portion of a payment to which 
    different withholding rates should apply. The IRS' ability to check the 
    representations made by a non-QI is limited, particularly if the non-QI 
    is not owned by U.S. persons. In that case, it must rely on reconciling 
    the amounts paid as reported on Forms 1042-S, disclosure of the 
    identity of beneficial owners (or further intermediaries), and 
    exchanges of information under tax treaties. In that context, 
    disclosure of the exact amounts allocated to each beneficial owner (or 
    further intermediary) is important to the compliance regime applicable 
    to non-QIs.
    8. Qualified Intermediaries
        a. Scope of Qualified Intermediary Provisions. Under the proposed 
    regulations, a withholding agent may rely on the certification of a 
    foreign person made on behalf of others to reduce the rate of 
    withholding. If the foreign person has a qualified intermediary 
    agreement with the IRS, the intermediary may certify without having to 
    furnish the certificates or other documentation of the persons for whom 
    it acts. Many comments were received regarding the proposal, which are 
    discussed below.
        In response to comments, the final regulations are modified to 
    allow a foreign branch of a U.S. financial institution to be a 
    qualified intermediary (QI) in the same manner as a foreign financial 
    institution. However, U.S. branches of U.S. or foreign financial 
    institutions are not permitted to obtain QI status. Such difference in 
    treatment conforms to the distinction in the final regulations between 
    accounts maintained outside the United States and accounts maintained 
    on-shore. See Sec. 1.1441-1(e)(5)(ii) (A) and (B). This distinction is 
    appropriate because it reflects the policy that the Form W-8 (signed 
    under penalties of perjury) is the preferred means of establishing 
    foreign status for transactions in the United States. On the other 
    hand, documentary evidence provides appropriate evidence of foreign 
    status for transactions outside the United States, especially in those 
    countries where financial institutions must document the identity of 
    customers opening new accounts or for whom they process certain 
    transactions.
        At the request of commentators, the definition of a clearing 
    organization for purposes of Sec. 1.1441-1(e)(5)(ii)(A) is revised so 
    that clearing organizations that, as members of other clearing 
    organizations, do not hold physical securities, are nevertheless 
    considered to hold obligations for members and,
    
    [[Page 53396]]
    
    therefore, qualify for QI status. Further, the final regulations allow 
    QI status for foreign corporations that receive U.S. income for which 
    the benefit of a reduced rate is claimed under an income tax treaty by 
    their shareholders (because the shareholders derive the income as 
    residents of an applicable treaty jurisdiction within the meaning of 
    Sec. 1.894-1T(d)(1)). By allowing these corporate entities to be QIs, 
    the regulations intend to facilitate the processing of treaty benefits 
    claims by reverse hybrid entities with large shareholdings. See 
    discussion under Sec. 1.1441-6, below. Also at the request of 
    commentators, a transition rule is added to Sec. 1.1441-1(e)(5)(i) 
    whereby institutions that are otherwise eligible for QI status and that 
    satisfy certain criteria (as will be published by the IRS) are 
    permitted to act as QIs while awaiting confirmation of their QI status.
        Commentators were divided on whether the regulations should allow a 
    QI to assume primary withholding responsibility as proposed in 
    Sec. 1.1441-1(e)(5)(iv). In view of these comments, the final 
    regulations retain the provisions that permit the shifting of primary 
    responsibility for withholding and reporting under chapter 3 of the 
    Code. However, because of IRS concerns regarding compliance and 
    comments received from foreign institutions, the final regulations 
    provide that the responsibility for Form 1099 information reporting and 
    related backup withholding under section 3406 may not be assigned to a 
    QI, unless the QI is a foreign branch of a U.S. bank or another U.S. 
    person or establishes that the obligations related to information 
    reporting and backup withholding can adequately be carried out by a 
    U.S. branch of the QI (even though the branch itself cannot be a QI). 
    Some commentators suggested that, if a QI is allowed to assume primary 
    withholding responsibility, it should be allowed to do so only for all 
    the payments that it receives from a payor with respect to a particular 
    account. Permitting a QI to assume withholding responsibility with 
    respect to some but not all payments to an account would make it 
    difficult for payors to determine the correct amount of withholding on 
    payments to a single account. This comment has been adopted and the 
    final regulations are modified accordingly to provide that if a QI 
    assumes primary withholding responsibility for an account, it must do 
    so for all payments to the account. The decision to assume or not 
    assume withholding responsibility may be made on an account-by-account 
    basis. See Sec. 1.1441-1(e)(5)(iv).
        As is the case for non-QIs, the regulations describe in greater 
    detail the information that must be provided by a QI in order for the 
    withholding agent or payor to comply with applicable reporting and 
    withholding obligations. Section 1.1441-1(e)(3)(ii)(C) requires an 
    allocation statement to be attached to the intermediary withholding 
    certificate, if necessary to provide sufficient information to allow 
    the withholding agent to determine the applicable withholding rate or 
    rates on payments to the QI. Such a statement may not be necessary if 
    the withholding agent allocates the assets among separate accounts for 
    each type of income and applicable withholding rates, as directed by 
    the intermediary at the time that the assets are acquired. The assets 
    with respect to which payments of reportable amounts are received must 
    be allocated to one of the three categories described below. If the 
    withholding agent maintains a system of separate accounts to keep track 
    of different withholding rates for different classes of income or 
    payees, it would maintain at least three separate accounts 
    corresponding to the three categories of assets. For this purpose, a 
    reportable amount is defined in Sec. 1.1441-1(e)(3)(vi) as income 
    subject to withholding under chapter 3 of the Code. For reasons 
    explained under the heading ``U.S. Source Bank Deposit Interest and 
    Short-term OID'' of this preamble, U.S. bank deposit interest and U.S. 
    short-term OID amounts are also included in the definition of 
    reportable amount. However, reportable amounts do not otherwise include 
    amounts that are not subject to chapter 3 withholding (e.g., foreign 
    source income, broker proceeds).
        The three categories of assets are described in Sec. 1.1441-
    1(e)(5)(v). They are (1) assets related to documented non-U.S. payees; 
    (2) assets related to documented U.S. payees (whether or not exempt 
    recipients); and (3) assets related to undocumented payees (i.e., 
    payees for whom the QI holds no documentation or holds documentation 
    that is unreliable). Reportable amounts paid with respect to assets in 
    category 1 (documented non-U.S. payees) may benefit from a reduced rate 
    of withholding under the Code (e.g., portfolio interest) or under a 
    treaty (i.e., to the extent the QI further indicates subcategories of 
    assets associated with different withholding rates under an applicable 
    treaty).
        Reportable amounts paid with respect to category 2 (documented U.S. 
    payees) are not subject to withholding or reporting under chapter 3 of 
    the Code. However, the payor must report the payment on a Form 1099 by 
    treating the payment of a reportable amount as made directly to any 
    U.S. person for whom it receives a Form W-9 to the extent the U.S. 
    person is not an exempt recipient. The final regulations clarify that a 
    QI must agree to disclose the identity of these U.S. persons, 
    regardless of local secrecy laws. The identity of U.S. payees that are 
    exempt recipients under an applicable provision of the regulations 
    under chapter 61 of the Code need not be disclosed to the withholding 
    agent. If a Form W-9 furnished by the QI to the payor on behalf of a 
    U.S. payee that is not an exempt recipient is not reliable (e.g., 
    missing information or obviously incorrect TIN), the U.S. payor must 
    backup withhold under section 3406.
        Reportable amounts paid with respect to assets in category 3 
    (undocumented owners) are treated as amounts paid to a foreign person 
    if the payment is an amount subject to chapter 3 withholding. See 
    Sec. 1.1441-1(b) (2)(v) and (3)(v)(B). Therefore, withholding applies 
    at the unreduced 30-percent rate. Reportable amounts that are U.S. bank 
    deposit interest or U.S. short-term original issue discount paid with 
    respect to asserts in category 3 are treated as paid to a U.S. person 
    who is not an exempt recipient. Therefore, 31-percent backup 
    withholding applies to those amounts and reporting on Form 1099 is 
    required. See Sec. 1.6049-5(d)(3)(iii) and explanation below under 
    paragraph 10 (U.S. source bank deposit interest and short-term OID).
        If a QI assumes primary withholding responsibility, it must also 
    attach a statement to its withholding certificate if necessary for the 
    U.S. withholding agent to determine how much of each payment is 
    allocable to U.S. payees. All assets are presumed allocable to foreign 
    persons unless the QI indicates that it is acting for U.S. persons. The 
    QI must provide the same information about U.S. payees that are not 
    exempt recipients as is required in the case of a QI that has not 
    assumed primary withholding responsibility.
        b. Agreements with Qualified Intermediaries. The IRS intends to 
    finalize the revenue procedure published in Announcement 96-23 (1996-18 
    I.R.B. 7) dealing with agreements between the IRS and certain 
    institutions that wish to be a qualified intermediary for purposes of 
    the U.S. tax withholding and reporting provisions (including the 
    provisions of the Announcement regarding the documentation of 
    beneficial ownership or foreign payee status (section 4.03)). A 
    preliminary review of applicable know-your-customer procedures in 
    several countries indicates that these
    
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    procedures will generally provide adequate information regarding the 
    nationality and residence status of account holders and their status as 
    owners or intermediaries. The IRS intends that the documentation 
    requirements imposed on QIs under their agreements with the IRS will 
    not be more burdensome than those imposed on withholding agents, 
    payors, or middlemen under applicable withholding and reporting 
    regulations.
        The Announcement provides that a QI would generally be subject to 
    the same Form 1042 and 1042-S reporting requirements as apply to 
    withholding agents under Sec. 1.1461-1 (b) and (c). After further 
    review, the IRS intends to finalize the rules so that a QI will be 
    required to file an annual Form 1042 return with the IRS. Generally, a 
    Form 1042-S will not be required if a schedule in the form described 
    below is attached to the Form 1042.
        Reporting on a Form 1042 would consist of providing the following 
    information to the IRS: the amount of reportable U.S. source income 
    received by the QI during the calendar year, identified by pool, 
    listing each payor's name, address, EIN, income type and rate of 
    withholding; information regarding overpayments or balance due; a 
    statement regarding the audit conducted by the QI's internal auditor, 
    providing a description of the audit conducted and including the 
    auditor's opinion and summary of findings. The audit statement should 
    define the scope and objective of the audit and report on the QI's 
    compliance with the terms of the QI agreement.
        In addition, the Form 1042 must attach a schedule providing 
    information on payments of reportable U.S. source income made by the QI 
    and allocated to specified pools. Under a pool reporting system, 
    separate pools would generally be required for each type of income 
    (e.g., interest, dividends, etc.). These pools may have to be further 
    subdivided into pools consisting of income allocable to one of the 
    three assets categories identified in the regulations under 
    Sec. 1.1441-1(e)(5)(v)(B). Additional pools may be required for other 
    purposes, including differentiating among applicable withholding rates. 
    For example, assume that a QI pays portfolio interest and U.S. source 
    dividends in a calendar year. The rates applicable to portfolio 
    interest are zero (interest allocable to pool of documented foreign 
    owners), zero (interest allocable to pool of U.S. owners who are exempt 
    recipients), and 30% (interest allocable to pool of undocumented 
    owners), and the rates applicable to dividends are 30% (dividends 
    allocable to pool of residents in non-treaty countries), 15% (dividends 
    allocable to pool of residents in treaty country eligible for this 
    rate), zero (dividends allocable to pool of U.S. owners that are exempt 
    recipients), and zero (dividends allocable to pool of foreign pension 
    fund owners claiming an exemption under a tax treaty). In such a case, 
    the QI may have to report the interest and dividend income in seven 
    different pools.
        The IRS will not require a QI to report beneficial ownership 
    information if this information is otherwise reasonably available in 
    appropriate cases, either under exchange of information provisions, 
    under income tax treaties or under other procedures stated in the 
    agreement to verify compliance with conditions for benefits claimed 
    under income tax treaties. Appropriate cases for which the IRS may 
    require beneficial ownership information include cases in which the IRS 
    needs to verify compliance with conditions under an applicable tax 
    treaty for reduced rates. This includes, for example, whether an entity 
    claiming benefits under a tax treaty is a resident of the applicable 
    treaty country, derives the income (within the meaning of the 
    regulations under Sec. 1.894-1T(d)), and meets any applicable 
    conditions imposed under limitation on benefits provisions in the 
    treaty. The IRS intends to limit requests for beneficial owner s 
    identity to cases where compliance concerns are significant due to the 
    size of investments involved or the extent of bank secrecy laws in 
    effect in the local jurisdiction.
        The QI will not be required to provide a Form 1042-S to its account 
    holders. In fact, providing such a form would not be consistent with 
    the collective-type refund procedures which the IRS intends to develop. 
    These procedures will allow QIs to request refunds of overwithheld 
    amounts on behalf of their customers. In such a system, a Form 1042-S, 
    which can also serve as proof of tax withheld at source, would have to 
    be monitored by the IRS in order to insure that refunds are not claimed 
    twice for the same amount. Collective-type refund procedures are 
    intended to be the exclusive means by which taxpayers can obtain refund 
    of overwithheld amounts that they have received through a QI. Special 
    procedures will have to be developed in order to reconcile this regime 
    with regular refund procedures applicable to U.S. taxpayers that 
    receive U.S. source investment income in an account with a QI.
        With respect to audits, the proposed regulations provide that the 
    IRS may, in appropriate cases, agree to rely on an audit of a QI 
    performed by an approved auditor where, for example, under an income 
    tax treaty or local laws, the IRS would be given access to appropriate 
    auditors records to verify compliance. Records may include workpapers 
    of, reports prepared by, and methodology employed by, the approved 
    external auditors. An auditor is approved if it is subject to 
    regulatory supervision under the laws of the country in which a 
    significant part of the QI s activities are expected to occur, its 
    internal procedures must require it to verify that the financial 
    institution complies with the terms of the QI agreement and to report 
    non-compliance findings under the QI agreement in the same manner as it 
    is required to report other findings of non-compliance with applicable 
    local laws and regulatory requirements, and its relevant records (i.e., 
    workpapers and reports) must be available to the IRS.
        Several comments were received asking that audits be performed 
    solely by internal auditors. The IRS, however, does not believe that it 
    is appropriate to rely solely on internal auditors to perform 
    compliance checks. The IRS intends to permit internal auditors to 
    certify that appropriate procedures, internal controls, and systems are 
    in effect and are sufficient to insure the QI's compliance with the 
    agreement, such as procedures to obtain documentation upon opening of 
    accounts, to monitor that the address on an account does not change to 
    a U.S. address or to an address outside the treaty country (if treaty 
    benefits are claimed), to organize and process such information in a 
    way relevant to U.S. tax withholding and reporting, to communicate the 
    information to withholding agents timely and updating the pool 
    information when necessary; procedures by which underwithholding and 
    overwithholding are identified and addressed; and the existence of 
    adequate manuals and programs for training and advising appropriate 
    personnel in standard operating procedures. However, it is important 
    that compliance with these procedures be verified periodically by 
    persons who are not also employed by the QI. The IRS does not believe 
    that internal auditors provide sufficient assurances that audits will 
    be performed with required impartiality, even if internal auditors are 
    required to operate independently and to report exclusively to the QI's 
    board of directors. However, the IRS intends to use external audits 
    only periodically, either when it becomes aware (e.g., based on a Form
    
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    1042 or an internal audit report) that there may be compliance problems 
    or as part of its regular audit program.
        In addition, with respect to collection of taxes due, the IRS 
    intends to waive the requirement of a bond in appropriate cases, 
    particularly where the QI has assets in the United States from which 
    tax can be collected or where occurrences of underwithholding are 
    expected to be minimal due to the nature of the QI's established 
    procedures.
        In QI agreements, the IRS intends to address the manner in which a 
    QI may pay to, or receive a payment from, another intermediary. A QI 
    making a payment to another intermediary must normally obtain the 
    underlying beneficial owner information from the intermediary, unless 
    the intermediary is itself a QI. In the alternative, the QI may agree 
    to a private arrangement with the intermediary that would be identical 
    to a QI agreement, except that it would not be concluded with the IRS 
    and the intermediary would have no reporting obligations to the IRS. 
    Under this regime, similar to that described for authorized foreign 
    agents in Sec. 1.1441-7(c)(2), the QI assumes responsibility for 
    failures by the intermediary to comply with the documentation and 
    withholding procedures. The intermediary would agree, under its private 
    arrangement with the QI, to be audited in the same manner as if it were 
    a QI. Auditors reports would be furnished to the QI and be available 
    for inspection by the IRS. A QI would normally obtain an 
    indemnification from the intermediary as a protection against its own 
    U.S. tax liability arising from failures by the intermediary.
        Further, the IRS will permit QIs that assume primary withholding 
    responsibility to be combined in a chain of payment with QIs that do 
    not assume primary withholding responsibility. For example, a U.S. 
    withholding agent may pay to a QI that assumes primary withholding 
    responsibility (QI1) and withhold no amount. QI1 may, in turn, pay a 
    customer that is a QI that does not assume primary withholding 
    responsibility (QI2). In such a case, QI1 must withhold on payments to 
    QI2 in the same manner that a U.S. withholding agent would have had to 
    withhold if it were paying the amount to QI2. QI2 may also be dealing 
    with a third tier, QI3, that assumes primary withholding 
    responsibility. In such a case, QI2 would inform QI1 that the portion 
    of the payment allocable to QI3 (without having to disclose QI3's 
    identity to QI1) is allocable to a QI that has assumed primary 
    withholding responsibility. Accordingly, neither QI1 nor QI2 would 
    withhold on the portion of the payment allocable to QI3.
    9. Clarification of Reporting and Withholding Obligations for Payments 
    to and by Foreign Intermediaries
        Commentators have asked for clarification of how the procedures 
    applicable to payments to foreign intermediaries relate to the exempt 
    recipient rules under chapter 61 and to a foreign intermediary's 
    reporting and withholding obligations under chapter 61 of the Code and 
    section 3406.
        Under chapter 61 of the Code and section 3406, the reporting and 
    backup withholding requirements depend, in part, upon the status of the 
    payee as an exempt recipient. Generally, exempt recipients include 
    corporations and financial institutions. See Sec. 1.6049-4(c)(1)(ii). 
    The category of persons treated as exempt recipients may vary depending 
    upon the type of income being paid. For this purpose, the payee is 
    generally identified as the person to whom the payment is actually 
    made. This person is not necessarily the beneficial owner of the 
    income. For example, a custodian receiving a payment may be a payee for 
    purposes of chapter 61 of the Code, even though it is not the 
    beneficial owner of the amounts that it receives on behalf of a 
    customer. Under the final regulations, a payment to a nominee or agent 
    is treated as a payment to an exempt recipient, which, as a result, is 
    exempt from information reporting and backup withholding. See 
    Sec. 1.6049-4(c)(1)(ii)(O). Treating a U.S. intermediary as an exempt 
    recipient avoids multiple information reporting and insures that the 
    liability for information reporting and, if applicable, backup 
    withholding, falls upon the last person in a chain of intermediaries, 
    that is the intermediary that has the direct relationship with the 
    customer.
        When a payment is made to a foreign intermediary, however, the IRS 
    may not be able to obtain information and, thus, collect the tax that 
    may be due from the ultimate owner if the payment to the foreign 
    intermediary is exempt from information reporting (assuming that the 
    intermediary is an exempt recipient). If the payment to the foreign 
    intermediary involves amounts subject to withholding under chapter 3 of 
    the Code (e.g., U.S. source dividends, U.S. source interest on 
    obligations in registered form, or U.S. source royalties), a U.S. tax 
    is collected at source at a 30-percent rate (assuming that the 
    intermediary has furnished no reliable information concerning the 
    beneficial owners of those payments; see applicable presumptions rules, 
    as revised). If, however, the payment is not subject to chapter 3 
    withholding (e.g., broker proceeds or foreign source income) and the 
    beneficial owner is a U.S. person, the lack of information regarding 
    the beneficial owner is of greater concern to the IRS.
        The regulations proposed in 1988 and in 1996 set forth procedures 
    for payments to intermediaries that are, in part, designed to address 
    some of these concerns (see, for example, the 1996 proposal to apply 
    30-percent withholding to U.S. source bank deposit interest unless 
    beneficial owner documentation is obtained). The final regulations 
    clarify how withholding and reporting under chapter 3 of the Code 
    interacts with Form 1099 reporting and backup withholding.
        Under Sec. 1.1441-1(b)(2)(v)(A), a payment to a foreign 
    intermediary (if reliably identified as such by the payor) that has not 
    assumed primary withholding responsibility, is treated as a payment 
    made directly to the person or persons for whom the intermediary 
    (whether or not a QI) collects the payment. If that person is 
    undocumented (i.e., has not furnished a reliable withholding 
    certificate or other appropriate documentation), the person is presumed 
    to be foreign under Sec. 1.144-1(b)(3)(v)(B) to the extent the payment 
    consists of an amount subject to chapter 3 withholding. Therefore, for 
    example, if a U.S. source dividend is paid to a foreign intermediary 
    that furnishes a Form W-9 for another person and such U.S. person is 
    not an exempt recipient, the payor must treat the U.S. person as the 
    payee for purposes of the Form 1099 reporting provisions under section 
    6042 and backup withholding under section 3406. If the U.S. person is 
    not an exempt recipient, the payment is reportable even though the 
    person who actually receives the payment is the foreign intermediary. 
    The foreign intermediary is an exempt person by virtue of being a 
    foreign person and a nominee. However, as clarified under the final 
    regulations, the fact that the intermediary may be an exempt person is 
    not relevant because, under the final rules, it is not a payee with 
    respect to a payment associated with underlying documentation attached 
    to the certificate. See Secs. 1.6049-5(d)(3)(i) and 1.1441-
    1(b)(3)(v)(B).
        If, however, the amount paid to the person identified as a foreign 
    intermediary is not of a type that is subject to chapter 3 withholding 
    (e.g., foreign source income, broker proceeds), then Sec. 1.6049-
    5(d)(3)(ii) provides that the amount is treated as paid to an exempt 
    recipient and, as such, exempt from reporting and backup withholding
    
    [[Page 53399]]
    
    under section 3406. This rule is subject to two exceptions. First, a 
    U.S. payor with actual knowledge that the person for whom the 
    intermediary collects the payment (including broker proceeds and 
    foreign source income) is a U.S. person is required to report the 
    payment (and backup withhold in the absence of a TIN) if the U.S. 
    person is not an exempt recipient. See Sec. 1.6049-5(d)(3)(iv), Example 
    7. A second exception is made for U.S. source bank deposit interest and 
    short-term OID. Because these amounts are not subject to withholding, 
    this exception appears under Sec. 1.6049-5(d)(3)(iii) and not under 
    section 1441. As explained under the heading ``U.S. Source Bank Deposit 
    Interest and Short-term OID'' of this preamble, a payment of such 
    amounts to a foreign intermediary (or certain foreign partnerships) is 
    reportable unless the intermediary establishes that the payee (other 
    than an intermediary or a flow-through entity) is a foreign person or 
    an exempt recipient.
        Further, provisions have been added to explain how the U.S. 
    withholding and reporting requirements apply to payments made by a 
    foreign intermediary, certain U.S. branches, or certain foreign 
    partnerships. A foreign intermediary that furnishes a valid 
    intermediary withholding certificate to the withholding agent is 
    considered to have complied with its own reporting and withholding 
    obligations under chapters 3 and 61 of the Code and sections 3402, 
    3405, or 3406. See, for example, Sec. 1.1441-1(b)(6) applicable to 
    payments of amounts subject to chapter 3 withholding by a foreign 
    intermediary or a U.S. branch and corresponding provisions in 
    Sec. 1.6049-5(b)(14) for interest and Sec. 1.6042-3(b)(1)(vi) for 
    dividends. Similar provisions are made under Sec. 1.1441-5(c)(3)(v) for 
    payments by foreign partnerships that are not withholding foreign 
    partnerships. For example, a foreign custodian bank that is not a 
    qualified intermediary and acts as an agent for a nonresident alien 
    individual who holds U.S. publicly traded obligations in registered 
    form is not required to withhold under section 1441 when it credits the 
    customer's account if it has furnished the individual's Form W-8 (or 
    alternative documentary evidence) to the U.S. withholding agent in 
    compliance with Sec. 1.1441-1(e)(3)(iii). If, however, the foreign 
    custodian bank knows that the Form W-8 (or alternative documentary 
    evidence) is not reliable and has not so informed the U.S. withholding 
    agent who, as a result, has not withheld, then the bank is not relieved 
    from its obligation to withhold under section 3406 because it has not 
    acted in compliance with the regulations under section 1441.
        These rules apply when the withholding agent/payor holds a valid 
    intermediary withholding certificate. The final regulations add 
    provisions to clarify applicable presumptions when the status of the 
    intermediary is not reliably established or parts of the intermediary 
    withholding certificate are not reliable. See a description of these 
    provisions under the heading ``Presumptions--Payments to Foreign 
    Intermediaries'' of this preamble.
    10. U.S. Source Bank Deposit Interest and Short-Term OID
        Some commentators objected to the requirement that eligibility for 
    the exemption from U.S. tax on U.S. source bank deposit interest be 
    subject to the same beneficial ownership documentation requirements 
    that apply to portfolio interest, suggesting lack of statutory 
    authority and an increase in burden in the context of interbank 
    financing transactions.
        In view of these comments, the final regulations do not require a 
    withholding agent to withhold 30-percent on bank deposit interest under 
    section 1441 in the absence of beneficial owner documentation. Instead, 
    documentation regarding the beneficial owner is required under sections 
    6049 and 3406 for purposes of avoiding information reporting and backup 
    withholding. This documentation requirement also applies to short-term 
    OID. See Sec. 1.6049-5(d)(3)(iii). Therefore, the final regulations 
    provide that a payment to a foreign intermediary of U.S. source short-
    term OID or of U.S. source interest on deposits with U.S. banks and 
    other financial institutions described in sections 871(i)(2)(A) and 
    881(d) is treated as made to a foreign payee or an exempt recipient 
    only to the extent that the payor can treat the payment as made to a 
    foreign beneficial owner under Sec. 1.1441-1 (d)(4) or (e)(1)(ii) or if 
    the payment is made to a qualified intermediary that has assumed 
    primary withholding responsibility or to a withholding foreign 
    partnership. In all other cases, the foreign intermediary is not 
    treated as an exempt recipient and its certification that it is a 
    foreign person is not sufficient to make the payment non-reportable 
    under Sec. 1.6049-5(b)(12). Under Sec. 1.6049-5(d)(3)(iii), the payment 
    is treated as made directly to the unidentified owners for whom the 
    intermediary receives the payment and, as such, is treated as made to a 
    U.S. payee who is not an exempt recipient.
        The regulations provide special rules to help a payor determine 
    whether the person to whom it makes the payment is a foreign or a U.S. 
    person, and, if presumed to be a foreign person under these rules, 
    whether it is an intermediary or is acting for its own account. These 
    presumptions are helpful if the payment is to a foreign person that 
    qualifies as an exempt recipient on an ``eyeball'' basis (e.g., a 
    foreign bank with the word ``bank'' in its name). In such a case, no 
    documentation is required to be provided by such person and the payor 
    may have no ability to determine whether the person is U.S. or foreign 
    and whether it is acting as an intermediary or for its own account. A 
    person receiving a payment is presumed to be a foreign person for the 
    purpose of these rules if the payor has actual knowledge of the payee's 
    employer identification number and that number begins with the two 
    digits ``98,'' if the payor's communications with the payee are mailed 
    to an address in a foreign country, or if the name indicates that the 
    payee is a per se corporation under Sec. 301-7701-2(b)(8)(i), or the 
    payment is made outside the United States. The final regulations under 
    Sec. 1.6049-5(d)(4)(iii) presume that a person receiving a payment of 
    U.S. bank deposit interest or U.S. short-term OID is not acting for its 
    own account (note that this presumption is different from the general 
    presumption under Sec. 1.1441-1(b)(3)(v)(A) that presumes a foreign 
    person to be acting for its own account unless it furnishes certain 
    documentation establishing its status as an intermediary). Thus, in the 
    absence of documentation and any evidence that the foreign person is 
    acting for its own account, a payor would presume that the payment is 
    made to unidentified owners for whom the person receives the payment, 
    required to be reported under section 6049 and subject to 31-percent 
    backup withholding under section 3406.
        A payee may rebut this presumption by furnishing an indication of 
    beneficial ownership to the payor. Such indication may be provided in 
    any manner as the parties may choose, but must be reflected in the 
    payor's records. An indication by a foreign person that it is not an 
    intermediary does not have to be made under penalties of perjury.
        In order to minimize disruptions to high-volume wholesale banking 
    transactions and to the sale and repurchase (repo) market, the final 
    regulations exempt from these documentation requirements deposits with 
    banks and other financial institutions that remain on deposit for a 
    period of two weeks or less, and amounts of original issue discount
    
    [[Page 53400]]
    
    arising from any repo transaction that is completed within a period of 
    two weeks or less. Further, amounts paid with respect to certain bearer 
    obligations are also exempt.
    11. Presumptions--In General
        Proposed Sec. 1.1441-1(f), dealing with presumptions of U.S. or 
    foreign status in the absence of reliable documentation, is restated 
    with a number of clarifications, in Secs. 1.1441-1(b)(3) and 1.6049-
    5(d) (2) through (5). The presumptions in Sec. 1.1441-1(b)(3) apply to 
    amounts that are subject to chapter 3 withholding. The same 
    presumptions apply under Sec. 1.6049-5(d)(2) to payments that are not 
    subject to chapter 3 withholding (e.g., foreign source income, sales 
    proceeds), with a few differences. As under the proposed regulations, 
    payments that a payor or withholding agent cannot reliably associate 
    with documentation are presumed to be made to a U.S. payee who is not 
    an exempt recipient, in which case 31-percent backup withholding 
    applies if the payment is otherwise a reportable payment (within the 
    meaning of the applicable information reporting provisions under 
    chapter 61 of the Code). As an exception to this rule, a payee is 
    presumed to be foreign if it is an exempt recipient for whom indicia of 
    foreign status exist. Special rules are also provided for scholarships 
    and pensions, for which no backup withholding applies under section 
    3406, and for certain payments to offshore accounts. See Sec. 1.1441-
    1(b)(3)(iii).
        In determining the extent to which the withholding agent can 
    consider that it can rely on documentation to determine the extent of 
    its withholding obligations, the final regulations rely on a concept of 
    ``reliable association'' of a payment with withholding certificates or 
    other documentation. This concept replaces the requirement under 
    Sec. 1.1441-1(f)(1)(ii) of the proposed regulations that the 
    withholding agent hold required documentation. The definition of 
    ``reliable association'' is set forth in Sec. 1.1441-1(b)(2)(vii). As 
    in the proposed regulations, a withholding agent cannot reliably 
    associate a payment with documentation if the documentation is lacking 
    or is unreliable. These provisions apply regardless of whether 
    documentation is otherwise required. For example, a payment of U.S. 
    source royalties to a corporation with the word ``Inc.'' in its name 
    requires no documentation from the payee under section 6050N because 
    the payee's status as an exempt recipient is inferred from its name 
    (i.e., on an ``eyeball'' basis) under Sec. 1.6049-4(c)(1)(ii)(A)(1). In 
    such a case, the payor must consider that there is a per se lack of 
    documentation. Therefore, under Sec. 1.1441-1(b)(3)(iii)(A), a payment 
    to such an exempt recipient is presumed made to a foreign person if 
    certain indicia of foreign status are present. If these indicia are 
    present, the payor, if also a withholding agent, must withhold 30-
    percent from the payment under section 1441.
        The final regulations modify the presumptions for certain payments 
    to offshore accounts. Under the proposed regulations, a payment to a 
    foreign account is presumed to be made to a U.S. person. Thus, the 
    payor must file a Form 1099 for the payee, but the payment is not 
    subject to backup withholding. See proposed Secs. 1.1441-1(f)(2)(ii) 
    and 31.3406(g)-1(e). The final regulations provide that, in the case of 
    a payment to a foreign account of an amount subject to chapter 3 
    withholding, the payment is presumed to be made to a foreign person and 
    not to a U.S. person. Thus, the withholding agent must withhold on the 
    payment at a 30-percent rate. In that case, the foreign status 
    presumption insures that a tax is paid on such amounts since, under 
    Sec. 31.3406(g)-1(e), no backup withholding would apply to an 
    undocumented account if the account holder were presumed to be a U.S. 
    person. See Sec. 1.1441-1(b)(3)(iii)(D). The final regulations adopt 
    the rule in the proposed regulations for payments involving amounts 
    that are not subject to chapter 3 withholding (i.e., payee is presumed 
    to be a U.S. person who is not an exempt recipient, subject to Form 
    1099 reporting but not to backup withholding). See Secs. 1.1441-
    1(b)(3)(iii) and 1.6049-5(d)(2)(i).
        The final regulations include presumptions regarding the 
    characteristics of a payee so that a payor or withholding agent may 
    determine whether to treat the payee as an owner of an account or as an 
    intermediary (see Sec. 1.1441-1(b)(3)(v)(A)), and as an individual, a 
    trust, an estate, a corporation or a partnership. See Sec. 1.1441-
    1(b)(3)(ii). The final regulations also make a number of clarifications 
    to the presumption provisions in response to comments. First, the 
    revised rules clarify that the presumptions are mandatory. A payor that 
    withholds a lesser amount or does not report a payment contrary to what 
    the presumptions would require may be liable for the amount of the tax 
    in addition to interest and penalties, even if the withholding agent 
    acted on the basis of actual knowledge. Although the liability for the 
    tax may be eliminated if the withholding agent establishes that it 
    withheld the proper amount (based on its actual knowledge or 
    otherwise), liability for interest and penalties may be assessed. This 
    rule is consistent with the requirement under the regulations to 
    provide documentation before a payment is made so that a withholding 
    agent may not rely on actual knowledge to reduce a withholding or 
    reporting obligation. Treating the presumptions as mandatory rather as 
    mere safe harbors is necessary to avoid undermining the requirement 
    that withholding agents obtain documentation prior to the time of a 
    payment.
        On the other hand, a withholding agent or payor may not rely on the 
    presumptions if it has actual knowledge (or, in the case of amounts 
    subject to chapter 3 withholding, reason to know) of facts that would 
    require it to withhold an amount greater than would otherwise be 
    required based upon an applicable presumption or to report a payment 
    that would be exempt from reporting under an applicable presumption. 
    See Sec. 1.1441-1(b)(3)(ix) and (b)(7).
        The final regulations clarify that if, under the rules, a payment 
    is presumed to be made to a U.S. payee, the determination of whether to 
    report on a Form 1099 or backup withhold is governed by the provisions 
    under chapter 61 of the Code and section 3406 and not by chapter 3 of 
    the Code. See Sec. 1.1441-1(b)(3)(i). Also, the final regulations 
    clarify that a withholding agent that withholds in accordance with an 
    applicable presumption is not liable under another withholding 
    provision for that payment, even if the payee is subsequently 
    determined to have a status different from its presumed status. See 
    Sec. 1.1441-1(b)(3)(ix)(A).
    12. Presumptions--Grace Period
        Several comments were received regarding the grace period 
    provisions under proposed Sec. 1.1441-1(f)(2)(ii). Under the proposed 
    rules, a withholding agent or payor may presume that an account holder 
    for whom specified indicia of foreign status exist at the time that a 
    payment is first credited to the account may be treated as a foreign 
    person, even if no documentation has been received before the account 
    is first credited. This presumption has two consequences: first, backup 
    withholding is deferred until the end of the grace period (and may 
    never be required if foreign status documentation is provided when or 
    before the grace period terminates); second, an amount must be withheld 
    under chapter 3 of the Code without the benefit of a reduced rate under 
    the Code or an income tax treaty if the amount is
    
    [[Page 53401]]
    
    income subject to chapter 3 withholding. At the expiration of the grace 
    period, the account holder is treated as a U.S. or foreign person, 
    depending upon whether documentation is furnished, and, if so, what 
    type of documentation is furnished.
        Commentators argued that a withholding agent should be allowed to 
    rely on the apparent status of the beneficial owner to grant a reduced 
    rate of withholding for payments made during the grace period. They 
    point to the prohibition against depleting the account below 31-percent 
    of the amounts paid and argue that this prohibition protects the 
    government's interest that the proper amount of tax be collected upon 
    expiration of the grace period if entitlement to a reduced rate is not 
    confirmed. This comment is accepted but only if the withholding agent 
    has received a faxed Form W-8. Thus, for example, a reduced rate of 
    withholding for portfolio interest or under a tax treaty can apply to 
    amounts credited during the grace period based on a faxed Form W-8.
        Commentators also argued that any backup withholding should not be 
    retroactively imposed after the expiration of the 90-day grace period 
    when documentation is still lacking at that time, because of the 
    difficulty to deduct and deposit a tax after the fact. In response to 
    these comments, the final regulations are revised to impose backup 
    withholding only to payments credited to the account after the 
    expiration of the grace period if, at that time, documentation is still 
    lacking or unreliable. The presumption that the account holder was a 
    foreign person during the grace period is not reversed. Thus, if 
    amounts credited during the grace period were subject to withholding at 
    less than the full 30-percent rate, and, at the end of the grace 
    period, the documentation is still lacking or unreliable, then the 
    payor must make an adjustment in order to correct the underwithholding, 
    so that all amounts credited during the grace period are withheld upon 
    at the full 30-percent rate (to the extent they are amounts subject to 
    chapter 3 withholding). Under the final regulations, amounts credited 
    to the account during the grace period could be subject to no or 
    reduced withholding if the withholding agent receives a faxed Form W-8. 
    Consistent with the 30-day grace period under Sec. 31.3406(d)-3(c), the 
    provisions are revised to treat reinvestment as withdrawals. The grace 
    period is terminated if withdrawals or other events leave a balance in 
    the account that is insufficient to cover potential backup withholding 
    liability. See Sec. 1.6049-5(d)(2)(ii) and Sec. 1.1441-1(b)(3)(iv) of 
    the final regulations, as renumbered.
        For purposes of withholding under chapter 3 of the Code, the 90-day 
    grace period applies to all payments that are exempted from the TIN 
    requirement under Sec. 1.1441-6(b)(2)(ii). For purposes of information 
    reporting on amounts not subject to withholding, the 90-day grace 
    period applies to all payments reportable as dividends, interest, 
    royalties, and broker proceeds. Although comments were received asking 
    that the grace period be extended to existing accounts, the final 
    regulations do not do so. A grace period should not be necessary for 
    existing accounts where the expiration of withholding certificates is a 
    predictable event for which withholding agents and payors can plan 
    accordingly. On the other hand, the grace period is extended to 
    situations where the validity of documentation expires because of a 
    change of circumstances. In such a case, it is reasonable to allow time 
    to obtain new or corrected documentation to account for changes 
    affecting the validity of documentation in an unexpected manner. The 
    final regulations also extend the availability of a grace period for 
    purposes of payments for which a Form 8233 is required (i.e., claim of 
    treaty benefits for compensation to nonresident alien for personal 
    services). This benefit is intended to facilitate withholding on these 
    payments to beneficial owners who are awaiting their social security 
    number or ITIN. The final regulations clarify that the grace period 
    provisions apply at the option of the payor or withholding agent. 
    Therefore, a payor or withholding agent is not required to implement 
    procedures offering a grace period to its customers.
    13. Presumptions--Payments to Foreign Intermediaries
        At the request of commentators, the final regulations clarify how 
    the presumptions apply to payments to foreign intermediaries in the 
    absence of reliable documentation both for purposes of chapter 3 and 
    chapter 61 information, and sections 3402, 3405, and 3406. Under 
    Sec. 1.1441-1(b)(3)(v)(A), a payee who has not provided a valid 
    intermediary withholding certificate or whose intermediary withholding 
    certificate is defective because, for example, the information on the 
    certificate regarding the intermediary is lacking or unreliable, must 
    generally be treated as an undocumented owner of the payment. Under 
    Sec. 1.1441-1(b)(3)(ii), an undocumented owner is presumed to be an 
    individual, a trust, or an estate, if the payee appears to be such a 
    person. In the absence of reliable indication that the payee is an 
    individual, a trust, or an estate, the payee is presumed to be a 
    corporation if it can be treated as a corporation under the ``eyeball'' 
    test described in Sec. 1.6049-4(c)(1)(ii)(A)(1) or is presumed to be 
    one of the persons enumerated under Sec. 1.6049-4(c)(1)(ii) (B) through 
    (Q) if it can be so treated under an ``eyeball'' test basis. If it 
    cannot be so treated, then it is presumed to be a partnership.
        If the payee is presumed to be an individual, a trust, an estate, 
    or a partnership, it is presumed under Sec. 1.1441-1(b)(3)(iii) to be a 
    U.S. person who is not an exempt recipient and the information 
    reporting provisions under chapter 61 of the Code and section 3406 
    would govern the payor's reporting and withholding obligations with 
    respect to the payment. If the payee is presumed to be a corporation or 
    another exempt recipient under Sec. 1.6049-4(c)(1)(ii) (B) through (Q), 
    then it is also presumed to be a U.S. person. However, if the amount 
    paid consists of an amount that is subject to withholding under chapter 
    3 of the Code (e.g., U.S. source interest or dividends), the payee is 
    presumed to be a foreign person if there are indicia of foreign status, 
    in which case withholding at the 30-percent rate is required under 
    chapter 3 of the Code. See Sec. 1.1441-1(b)(3)(iii)(A).
        If the payment can be treated as made to a foreign intermediary but 
    the intermediary's withholding certificate is unreliable either because 
    the withholding agent or payor has not been given sufficient 
    information to determine the proper amount of withholding or because 
    some or all of the underlying certificates that are required to be 
    attached are lacking or are unreliable, the payment is presumed made to 
    a foreign nominee acting for an undocumented owner. Therefore, the 
    payment is subject to withholding under chapter 3 of the Code at the 
    unreduced 30-percent rate to the extent it consists of income subject 
    to such withholding under chapter 3 of the Code. See Sec. 1.1441-
    1(b)(3)(v)(B). Additional presumptions are provided under Sec. 1.1441-
    1(b)(3)(v) (C) and (D) to deal with lacking or unreliable information 
    regarding the allocation of a payment among beneficial owners or other 
    payees and lacking or unreliable information regarding whether the 
    intermediary's certificate identifies all of the persons to whom the 
    payment relates. Section 1.6049-5(d)(3)(ii) clarifies, however, that if 
    the payment is not an amount subject to chapter 3 withholding, then the 
    payment is
    
    [[Page 53402]]
    
    presumed to be made to an exempt recipient not reportable under section 
    6042, 6045, or 6049 (except for certain payments of U.S. bank deposit 
    interest or U.S. short-term OID under Sec. 1.6049-5(d)(3)(iii)).
        The lack of reliable information regarding beneficial owners or the 
    allocation of the payments among them raise an issue as to how the 
    amounts should be reported on a Form 1099 (if, for example, the 
    withholding agent has a Form W-9 from a beneficial owner but has no or 
    unreliable information regarding how much the payment is allocable to 
    such person) or on a Form 1042-S. The final regulations under 
    Sec. 1.1461-1(c)(4)(iv) provide that payments to an intermediary or 
    foreign partnership for the account of undocumented owners or partners 
    are reportable on a single Form 1042-S made out to the intermediary, 
    and bearing the mention ``unknown owners.'' The final regulations, 
    however, do not contain guidance for situations where the withholding 
    agent or payor is lacking reliable allocation information. This matter 
    is under consideration by the IRS and comments are solicited regarding 
    appropriate procedures before guidance is issued.
        The final regulations contain similar provisions for payments to 
    foreign partnerships under Sec. 1.1441-5(d). See the explanation under 
    Sec. 1.1441-5, below.
    15. Late-Received Form W-8--Cure Procedures
        Generally, a Form W-8 or other applicable documentation must be 
    furnished to the withholding agent or payor prior to the time of 
    payment. The proposed regulations in Sec. 1.1441-1(f)(5) prescribe 
    procedures allowing a Form W-8 or other documentation to be furnished 
    late (i.e., after the 90-day grace period), subject to interest and 
    penalties. They also contemplate the possibility that, upon 
    examination, the IRS might require the withholding agent or payor to 
    furnish additional proof in support of the claim of foreign status or 
    eligibility for a reduced rate of withholding under the Code or a tax 
    treaty. Commentators asked for an exemption from interest and penalties 
    when it is determined that there is no underlying tax liability once 
    the documentation has been provided or, at least, that the liability be 
    abated where the withholding agent has acted in good faith.
        The final regulations do not eliminate the possibility that 
    interest and penalties may apply because the liability for those items 
    is clearly contemplated under section 1463. However, several revisions 
    are made to relieve liability in certain cases. See Sec. 1.1441-
    1(b)(7), restating the provisions of proposed Sec. 1.1441-1(f)(5). 
    First, in order to eliminate the possibility of a double interest 
    charge when the respective unsatisfied tax liabilities of the 
    withholding agent and of the beneficial owner run concurrently, the 
    regulations are modified to limit collection to one amount of interest 
    only. In that regard, interest will not be assessed against the 
    withholding agent if it otherwise is assessed or collected against the 
    beneficial owner. Next, in order to clarify that the cure rules apply 
    to all cases for which documentation must be provided to the 
    withholding agent, cross references have been added under Secs. 1.1441-
    4(f), 1.1441-5(f), 1.1441-6(f), 1.1441-8(e), 1.1441-9(c), and 1.1443-
    1(b)(3). In addition, the final regulations make this relief available 
    on a retroactive basis for all open years. This action is intended to 
    eliminate any ongoing controversy with the IRS regarding an issue that 
    is unclear under current law. The final regulations clarify that the 
    period for calculating penalties and interest is limited to the time 
    that the liability remains outstanding, i.e., starting with the due 
    date for filing the return under section 6601 (i.e., March 15 of the 
    year following the year in which the payment was made) and ending with 
    the date that the tax is considered paid (i.e., the time that the 
    documentation is furnished establishing the proper amount of tax due or 
    that the tax is actually paid, whichever is earlier). Also, 
    commentators asked for a clarification of how late deposit penalties 
    would apply when the withholding agent fails to withhold. This issue 
    remains under consideration.
    16. Due Diligence With Respect to Information Returns Required Under 
    Chapter 61 of the Code
        The Interest and Dividend Tax Compliance Act of 1983 provided that 
    the penalty for the failure to file an information return, furnish a 
    copy of it to a payee, or supply a TIN can be waived if it is shown 
    that the filer exercised due diligence in filing the return, furnishing 
    it to a payee, or supplying the payee's TIN. The due diligence standard 
    applied to failures on information returns reporting dividends under 
    section 6042, patronage dividends under section 6044, and interest or 
    OID under section 6049. The IRS issued regulations in question and 
    answer form providing the prerequisites to establish due diligence. See 
    Secs. 35a.9999-1 through 35a.9999-5.
        The Omnibus Budget Reconciliation Act of 1989, Public Law 101-239, 
    103 Stat. 2393, repealed sections 6676 and 6678 with the enactment of 
    uniform information reporting penalties under sections 6721 through 
    6724 and replaced due diligence with a reasonable cause standard under 
    newly enacted section 6724. However, Congress provided that the 
    separate and higher due diligence waiver standard for returns filed 
    under sections 6042, 6044, and 6049 be considered to meet reasonable 
    cause. H. Rep. No. 247, 101st. Cong., 1st. Sess., at 1385 (1989).
        These final regulations remove the Q/As under Part 35a, effective 
    January 1, 1999. Because due diligence will remain in effect, the IRS 
    will retain the relevant Q/As set forth in Part 35a. These final 
    regulations redesignate the relevant Q/As under Sec. 301.6724-1(g).
    17. Effective Dates
        Many comments were received regarding the effective dates of the 
    final regulations. Commentators argued that the January 1, 1998 
    effective date in the proposed regulations should be extended because 
    of the anticipated time required to complete QI agreements and for 
    withholding agents to make the administrative and operating systems 
    changes that will be necessary to comply with the regulations. However, 
    commentators have argued that provision should also be made for a 
    financial institution to elect earlier adoption of the new requirements 
    where possible.
        The final regulations accommodate these concerns. The effective 
    date is changed to January 1, 1999. In view of the later effective date 
    and comments that staggered effective dates make system adjustments 
    more difficult and costly, all special delayed effective dates rules 
    are eliminated. Also, transition rules are modified for existing 
    certificates. Valid withholding certificates that are held on December 
    31, 1998, remain valid until the earlier of December 31, 1999 or the 
    due date of expiration of the certificate under rules currently in 
    effect (unless otherwise invalidated due to changes in the 
    circumstances of the person whose name is on the certificate). Further, 
    certificates dated prior to January 1, 1998 that are valid as of 
    January 1, 1998, remain valid until the end of 1998, irrespective of 
    the fact that their validity expires during 1998 (other than by reason 
    of changes in the circumstances of the person whose name is on the 
    certificate).
        The final regulations do not accelerate the effective date of 
    certain provisions as had been requested by several commentators. 
    Although doing so would provide relief to a number of
    
    [[Page 53403]]
    
    taxpayers, it would also complicate the many system adjustments that 
    withholding agents, particularly financial institutions with large 
    volume of cross-border payments, must implement before the effective 
    date of these regulations. The IRS and Treasury feel that the benefits 
    of accelerating certain provisions would not sufficiently outweigh the 
    added costs and burdens to many withholding agents.
    
    C. Comments and Changes to Sec. 1.1441-2
    
    1. Amounts Subject to Withholding
        Under Sec. 1.1441-1 of current regulations, an amount is subject to 
    withholding only if it is from sources within the United States. The 
    final regulations under Sec. 1.1441-2(a) clarify that an amount can be 
    sourced within the United States irrespective of the fact that the 
    source is undetermined at the time of payment. This clarification 
    addresses the Tax Court's ruling in Albert J. Miller v. Commissioner, 
    T.C. Memo 1997-134, 73 T.C.M. (CCH) 2319, that an amount whose source 
    cannot be determined at the time paid is sourced outside the United 
    States for purposes of sections 871(a) or 881(a) and the withholding 
    provisions of chapter 3 of the Code.
    2. Fixed or Determinable Annual or Periodical Income
        The definition of the term fixed or determinable annual or 
    periodical (FDAP) income under existing regulations under section 1441 
    is retained in the final regulations and clarified. In particular, 
    Sec. 1.1441-2(b)(1)(iii) addresses three types of uncertainties that a 
    withholding agent may encounter: (1) The proportion of the payment that 
    constitutes income cannot be determined when a payment is made (e.g., a 
    payment made on an obligation that may include interest, but the exact 
    amount of interest cannot be determined because the determination is 
    contingent upon future events); (2) the proportion of the payment that 
    constitutes U.S. source income cannot be determined at the time of 
    payment; or (3) the fact that the payment may be income in the future 
    cannot be anticipated at the time of payment. Only in the third case 
    would the payment not constitute FDAP income. In the first two cases, 
    income is actually being paid. The only uncertainty is the amount that 
    the recipient should include in income and this uncertainty does not 
    prevent the payment from constituting fixed or determinable annual or 
    periodical income for purposes of section 871(a) or 881(a) and the 
    withholding provisions of chapter 3 of the Code. See also the 
    additional provisions under Secs. 1.1441-2(b)(1)(iii) and 1.1441-
    3(d)(1) dealing with determinability and rules of withholding for items 
    whose source cannot be determined at the time of payment.
    3. Original Issue Discount
        In response to comments, the final regulations regarding 
    withholding on original issue discount (OID) are simplified. As a 
    general principle, withholding is required on a payment that is treated 
    as taxable OID under section 871(a)(1)(C) or 881(a)(3)(A) to the extent 
    the withholding agent knows the amount that is OID. That amount is 
    known to the withholding agent if it knows how long the beneficial 
    owner has held the obligation on which a payment is made, the terms of 
    the obligation, and the extent to which the beneficial owner purchased 
    the obligation at a premium. A withholding agent has knowledge if the 
    information is obtainable upon exercising reasonable efforts. The 
    information is not considered obtainable in the case of payments with 
    respect to publicly traded securities where the withholding agent, 
    consistent with normal industry practices, does not have a direct 
    customer relationship with the person who has actual knowledge of the 
    relevant information or has no access to this information in the normal 
    course of its business due to the manner in which the obligation is 
    held (e.g., in street name or through intermediaries). In the case of a 
    withholding agent maintaining a direct customer relationship with the 
    beneficial owner, knowledge regarding the owner's holding period and 
    acquisition premium is considered to be reasonably available to the 
    withholding agent. Because of the complexities that may be involved in 
    calculating the amount taxable to the owner and, thus, subject to 
    withholding, withholding agents may rely on the most recently published 
    ``List of OID Instruments'' or similar list published by the IRS 
    (currently contained in IRS Publication 1212 (available from the IRS 
    Forms Distribution Centers)).
        Notwithstanding the rules described in the preceding paragraph, 
    withholding is required with respect to OID that would qualify as 
    portfolio interest except for the fact that documentation required 
    under section 871(h)(5) is not furnished to the withholding agent. In 
    the absence of information regarding the amount of OID, the withholding 
    agent may rely on IRS Publication 1212. The final regulations clarify 
    that no withholding applies to amounts that are not otherwise subject 
    to chapter 3 withholding (e.g., OID on obligations in bearer form that 
    qualifies as portfolio interest).
    3. Securities Lending Transactions
        The final regulations add paragraph (b)(4) to cross-reference the 
    regulations under sections 871 and 881 dealing with securities lending 
    transactions and equivalent transactions. Thus, the character of the 
    income arising from these transactions applies for purposes of 
    determining the amount of withholding under chapter 3 of the Code. 
    Similar rules apply for purposes of information reporting and backup 
    withholding on interest and dividends. See Secs. 1.6042-3(a)(2) and 
    1.6049-5(a)(5). See Sec. 1.1441-1(b)(4)(i) for documenting interest 
    equivalent amounts for which the beneficial owner claims a portfolio 
    interest exemption.
    4. Relief for Deemed Payments of Income
        Several comments were received regarding the difficulty for a 
    withholding agent to withhold on an amount of income that is not 
    represented by cash or property (i.e., deemed payments of income). The 
    final regulations in Sec. 1.1441-2(d) provide relief in cases in which 
    the withholding agent does not have custody of, or control over, 
    property of the taxpayer who is deemed to receive income under section 
    871(a) or 881(a) or does not have knowledge of the events that give 
    rise to the deemed payment. Relief, however, does not apply for deemed 
    payments arising between related parties or as part of a pre-arranged 
    plan to avoid withholding. Therefore, a withholding obligation arising 
    out of a deemed payment resulting from an allocation of income under 
    section 482 is not eliminated because the parties are related. Examples 
    are provided for cancellation of debt and constructive income arising 
    from correcting prior underwithholding by paying the amount of tax due 
    to the IRS. Withholding on deemed distributions with respect to stock 
    is not excused under these rules. For these amounts, the IRS and 
    Treasury believe that an exemption from withholding would be 
    inappropriate in view of the ongoing investment or business 
    relationship between the parties. Under the final regulations, 
    withholding is required at the time of the deemed distribution even if 
    the income from the distribution is prorated over time (such as a 
    redemption premium under section 305(c)). The IRS and Treasury 
    considered comments asking that withholding be deferred until income is 
    includable in the
    
    [[Page 53404]]
    
    shareholder's income but concluded that the withholding procedures 
    necessary to implement such an exception and insure proper withholding 
    would be too complex.
    
    D. Comments and Changes to Sec. 1.1441-3
    
    1. Withholding on Interest Payments
        No obligation to withhold is imposed under current law on the 
    payment of stated interest on an obligation that was purchased between 
    interest payment dates. Under Sec. 1.61-7(c), interest received on the 
    interest payment date is treated as a return of basis to the extent it 
    represents accrued unpaid interest as of the date of purchase as 
    reflected in the new holder's basis for the obligation. Therefore, when 
    the new holder receives a payment of the stated interest, the holder s 
    tax liability is limited to the amount of interest accrued after the 
    date of purchase (subject to additional adjustments reflecting possible 
    acquisition premiums or market discounts). Because of the difficulty 
    for a withholding agent to determine the amount accrued to the holder 
    and other adjustments affecting the actual amount taxable to the 
    holder, withholding on the entire amount of stated interest is 
    permitted under the regulations. Although commentators have asked that 
    the withholding agent be permitted to withhold on the amount that it 
    knows is taxable, the final regulations do not modify the proposed 
    regulations on this point because the IRS and Treasury consider that 
    withholding on the entire amount is justified to the extent that, under 
    existing rules, withholding on sales of obligations between interest 
    payment dates is not required.
        This comment is taken into account, however, in regulations that 
    are proposed together with these final regulations to require 
    withholding on sales of obligations between interest payment dates. 
    These proposed regulations are intended to conform the withholding 
    regime for sale of bonds between interest payment dates to that 
    implemented for OID obligations under the final regulations. See 
    project REG-114000-97 published elsewhere in this issue of the Federal 
    Register.
    2. Withholding on Distributions
        The proposed regulations regarding withholding on corporate 
    distributions are expanded and clarified in view of comments. Section 
    1.1441-3(c)(1) and (2)(i) are revised to clarify that the withholding 
    procedures are elective. In other words, a distributing corporation or 
    the custodian or nominee may choose to withhold on the entire amount 
    distributed and, thus, to not take advantage of the election to limit 
    withholding to the estimated earnings and profits amount. An election 
    by the distributing corporation to determine withholding based on the 
    estimated earnings and profits amount for distributions it makes 
    directly to a foreign person does not mean that a custodian or nominee 
    who receives payments of distributions for the account of foreign 
    investors must do the same when it makes a payment of these 
    distributions to the foreign investors. Instead, the custodian may 
    choose to disregard the estimate of earnings and profits and to 
    withhold on the entire distribution. The revisions reflect the fact 
    that each withholding agent must be able to make this decision 
    independently because of its own potential tax liability under section 
    1461 in the event of underwithholding. The final regulations clarify 
    that the amounts of tax that the withholding agent pays to satisfy the 
    tax liability under section 1461 if underwithholding has occurred is 
    not subject to withholding even if it constitutes a constructive 
    dividend. This rule applies irrespective of the fact that the 
    satisfaction of the tax liability may be additional income to the 
    shareholder unless the additional payment results from a contractual 
    arrangement between the parties regarding the shareholder's 
    satisfaction of its tax liability by the distributing corporation. With 
    this rule, the final regulations eliminate, for this situation, the 
    question as to whether a taxpayer realizes income when the withholding 
    agent satisfies a tax liability under section 1461.
        Further, proposed Sec. 1.1441-3(c)(2)(iii) (renumbered as 
    Sec. 1.1441-3(c)(2)(ii)(C) in the final regulations) is revised so that 
    an erroneous estimate by the distributing corporation is imputed to an 
    intermediary not only in situations in which the IRS challenges the 
    estimate but also in situations in which the distributing corporation 
    unilaterally determines that its estimate is in error. Some 
    commentators questioned whether a reference to interest in Sec. 1.1441-
    3(c)(3)(ii)(B) regarding consequences in the event of underwithholding 
    had been omitted in error. Interest is not mentioned in the provision 
    because, to the extent underwithholding is corrected by the due date of 
    filing the annual return under Sec. 1.1461-1(b), no interest charge 
    applies. On the other hand, if the withholding agent corrects the 
    underwithholding as part of an amended return filed after the due date 
    for filing the annual return, then an interest charge would apply, as 
    reflected in Sec. 1.1441-3(c)(3)(ii)(B)(2)(ii).
        In response to another comment, Sec. 1.1441-3(c)(3)(ii) is added to 
    allow custodians and nominees to rely on estimates made by mutual funds 
    regarding their capital gain dividends and exempt interest dividends. 
    Some commentators also asked that Sec. 1.1441-3(c)(3)(ii) be revised to 
    provide that an adjustment to the amount of withholding is not a 
    distribution for all purposes and not just for purposes of section 
    562(c). This comment is not accepted because there are circumstances in 
    which the adjustment may constitute a distribution--such would be the 
    case, if, for example, the adjustment cannot be made by adjusting the 
    withholding on a subsequent distribution because the affected 
    shareholder is no longer a shareholder or the adjustment occurs after 
    the end of the taxable year.
        Finally, Sec. 1.1441-3(c)(4) has been added to coordinate the 
    general distribution provisions with the regulations under section 
    1445. Under Sec. 1.1445-5(b)(1), no withholding is required under 
    section 1445 on a distribution from a U. S. real property holding 
    corporation (USRPHC) if the distribution is subject to withholding 
    under section 1441 or 1442. Given the change in the withholding 
    procedures applicable to corporate distributions, the exemption from 
    withholding under section 1445 may now lead to underwithholding on 
    distributions from a USRPHC. In order to correct this situation, the 
    final regulations give taxpayers a choice between two withholding 
    regimes. A USRPHC may choose to withhold under section 1441, provided 
    it withholds on the entire amount of the distribution, regardless of 
    estimated earnings or profits. However, the rate of withholding may be 
    reduced under income tax treaty provisions, although not below the 10-
    percent rate applicable under section 1445 (unless the treaty provides 
    otherwise for distributions from USRPHCs). For purposes of applying the 
    treaty, the entire amount of the distribution is treated as a dividend. 
    Alternatively, the USRPHC may withhold under a mixed regime. Under this 
    regime, withholding applies under section 1441 on the portion of the 
    distribution that represents estimated earnings and profits and under 
    section 1445 on the remainder of the distribution. The mixed 
    withholding regime is mandatory for distributions from publicly-traded 
    real estate investment trusts (REITs). In other words, a REIT may not, 
    with respect to its distributions, choose to apply the withholding 
    regime of section
    
    [[Page 53405]]
    
    1441 to the entire distribution. Instead, the REIT must withhold under 
    section 1441 on the portion of the distribution that is not designated 
    as a capital gain dividend or a return of basis. Withholding under 
    section 1445 is also required on the portion of the distribution that 
    the REIT designates as a capital gain dividend in accordance with 
    Sec. 1.1445-8.
    3. Withholding on Undetermined Amounts
        The final regulations also address the practical difficulties of 
    withholding on an amount when, at the time of payment, there is not 
    sufficient information to calculate which portion, if any, is taxable 
    or to determine the source of the income. For these purposes, 
    provisions have been added under Sec. 1.1441-3(d)(1) that require a 
    withholding agent to withhold on the entire amount when such 
    uncertainties exist. This requirement in part reflects the policy that 
    withholding generally should apply to payments that leave the U.S. 
    taxing jurisdiction. The requirement to withhold in the event of 
    uncertainty is similar to the provisions under existing regulations 
    under Sec. 1.1441-3(d)(1) (restated as Sec. 1.1441-3(d)(2) of the final 
    regulations) requiring withholding of an amount sufficient to assure 
    that the tax withheld is no less than 30 percent of the recognized 
    gain. In order to minimize overwithholding, the final regulations 
    provide an alternative to withholding on the entire amount when 
    uncertainties exist. Instead, the withholding agent may make a 
    reasonable estimate of the amount from U.S. sources or of the taxable 
    amount and set aside a corresponding portion in escrow until the amount 
    subject to withholding can be determined. Under this alternative, 
    setting aside an amount is not an event of withholding for purposes of 
    Sec. 1.1461-1(a) that would give rise to the requirement to pay the 
    tax. Instead, the payment of the tax can be postponed until a 
    determination can be made of the amount of withholding liability under 
    this section. The provisions under Sec. 1.1441-1(d)(1) do not apply to 
    uncertainties that are specifically addressed under other provisions of 
    the regulations, such as lack of information regarding the identity or 
    status of the beneficial owner or payee (see Sec. 1.1441-1(b)(3) for 
    applicable presumptions in those cases and the grace period provisions 
    set forth in Sec. 1.1441-1(b)(3)(iv)) or withholding on original issue 
    discount amounts (see Sec. 1.1441-2(b)(3)).
    
    E. Comments and Changes to Sec. 1.1441-4
    
    1. Notional Principal Contracts
        Commentators have questioned whether it is appropriate to treat 
    income from notional principal contracts as FDAP income, particularly 
    since it is unclear at the outset whether the arrangement will generate 
    any income. The IRS and Treasury believe that the statute contemplates 
    very few exceptions to the concept of FDAP, and the only clear 
    exception is for gain from the disposition of property. Income from 
    notional principal contracts is not gain from the disposition of 
    property, nor is it the equivalent of gain. However, the final 
    regulations minimize the burden associated with characterizing the 
    income as FDAP because the liability for withholding under chapter 3 of 
    the Code is eliminated for such income. See Sec. 1.1441-4(a)(3). 
    Reporting under section 1461 or 6041, however, continues to be required 
    under the final regulations. However, in response to comments, the 
    reporting burden has been reduced and clarified (see Secs. 1.1441-
    4(a)(3), 1.1461-1(c)(2)(i)(C) and (ii)(D), 1.6041-1(d)(5) and 1.6041-
    4(a)(4) of the final regulations).
        Under the final regulations, notional principal contract payments 
    are exempt from withholding. However, if paid to a foreign person, they 
    are presumed effectively connected income and, as such, are required to 
    be reported on a Form 1042-S. The effectively connected income 
    presumption under Sec. 1.1441-4(a)(3) can be rebutted by providing to 
    the withholding agent a valid withholding certificate representing that 
    the payments are not effectively connected with the conduct of a U.S. 
    trade or business. In such a case, no reporting is required on a Form 
    1042-S for these amounts. A financial institution (as defined in 
    Sec. 1.165-12(c)(1)(iv)) may, instead of a withholding certificate, 
    represent in a master agreement that governs the transactions in 
    notional principal contracts between the parties (such as an 
    International Swaps and Derivatives Association (ISDA) Agreement, 
    including the Schedule thereto) or in the confirmation on the 
    particular notional principal contract transaction, that the 
    counterparty is a U.S. person or is a non-U.S. office of a foreign 
    person. These representations are not required to be made under 
    penalties of perjury.
        In the final regulations, swap payments include payments on 
    notional principal contracts described in Sec. 1.988-2(e), dealing with 
    foreign currency swaps. Also, income on notional principal contracts 
    does not, for purposes of these rules, include amounts characterized as 
    embedded interest under Sec. 1.446-3(g)(4). Such amounts, if not 
    effectively connected with the conduct of a U.S. trade or business and 
    from U.S. sources, are subject to chapter 3 withholding and are 
    reportable on a Form 1042 and 1042-S.
        Under Sec. 1.6041-1(d)(5), a payment on a notional principal 
    contract, including embedded interest, is a reportable payment, unless 
    paid to an exempt recipient (i.e., a person described in Sec. 1.6049-
    4(c)(1)(ii)), paid outside the United States (unless the payor has 
    actual knowledge that the payee is a U.S. person), treated as 
    effectively connected with a U.S. trade or business under Sec. 1.1441-
    4(a)(3), or paid by a non-U.S. payor or a non-U.S. middleman. If none 
    of these exceptions applies, and the payor does not hold a Form W-9, 
    then a payment is presumed under Sec. 1.6049-5(d)(2)(i) to be made to a 
    U.S. person that is not an exempt recipient, in which case backup 
    withholding would be required under section 3406.
        The final regulations under Secs. 1.6041-1(d)(5) and 1.1461-
    1(c)(2)(i)(C) adopt the suggestion that nonperiodic payments are 
    reportable only at the time that an actual payment is made. The final 
    regulations require reporting of net income rather than gross amounts 
    from notional principal contracts. Further, in response to comments, 
    the final regulations in Secs. 1.1441-4(a)(3) and 1.6041-1(d)(5) 
    specify that the reporting requirements apply only prospectively, i.e., 
    to payments made after December 31, 1998.
    2. Form 8233 Procedures
        The current regulations prescribe a procedure by which a 
    withholding agent may grant a reduced rate under an income tax treaty 
    on payments to nonresident aliens for services rendered in the U.S., 
    generally in connection with a sporting, cultural, scientific, or 
    artistic event. The procedure involves submitting a Form 8233 to the 
    IRS for review and approval as instructed under Sec. 1.1441-4(b)(2). 
    The regulations provide, in effect, that the withholding agent may not 
    grant an exemption from withholding until after a 10-day period 
    beginning with the date that the Form 8233, as reviewed and approved by 
    the withholding agent, is mailed by the withholding agent to the IRS. 
    The proposed regulations extend the 10-day period to 20 days.
        Commentators objected to the 20-day period and asked for the 
    retention of the 10-day period. In addition, they suggested that, 
    instead of making the treaty exemption effective only after the
    
    [[Page 53406]]
    
    submission of Form 8233, the exemption should be retroactive to the 
    date of first payment covered by the certificate if the completed Form 
    8233 contains the nonresident alien's TIN, and if the withholding agent 
    is not subsequently notified by the IRS within the 20-day period that 
    the exemption is not valid. After further consideration, the comments 
    are adopted. The 10-day waiting period is continued and the approval of 
    the Form 8233 is made retroactive to the date of first payment covered 
    by the certificate. However, the final regulations clarify that the IRS 
    review process does not exonerate the withholding agent from liability 
    for underwithholding. In its review, the IRS simply insures that the 
    form contains all of the requested information, that the country of 
    residence stated on the form is a country with which the U.S. has an 
    income tax treaty, that the reduced rate that the withholding agent 
    plans to apply is the proper rate under the applicable treaty, and 
    that, based solely on information contained on the form, the reduced 
    rate appears applicable. The IRS approval of the form makes no 
    determination regarding whether the withholding agent's reliance on the 
    form is reasonable, based on facts that the withholding agent knows or 
    has reason to know at the time of the payment and that are not 
    disclosed to the IRS as part of the review process. In addition, the 
    final regulations allow the 90-day grace period to apply to payments 
    covered by a Form 8233, in order to allow time for foreign persons who 
    come to the United States for the first time and must complete a Form 
    8233 shortly after arrival to apply for and obtain an individual 
    taxpayer identifying number. See Sec. 1.1441-1(b)(3)(iv).
        The final regulations modify the proposed rule under Sec. 1.1441-
    1(b)(6) reducing the amount of certain compensation income by the 
    personal exemption under section 151. The proposed regulations allowed 
    a reduction for the full amount of the exemption. Commentators noted 
    that allowing a reduction for the full amount of the allowable personal 
    exemption may lead to inappropriate claims of multiple exemptions for 
    nonresident aliens who come to the U.S. frequently for short-term 
    events or assignments with different organizations. Commentators were 
    concerned that they would have no ability to keep track of prior claims 
    of the personal exemption. For this reason, the proration rule now 
    currently in effect, is continued in the final regulations.
    3. Reimbursed Expenses
        Commentators asked that the regulations provide an exemption from 
    withholding for reimbursed expenses paid to a nonresident alien 
    individual in relation to performance of services in the U.S. as an 
    independent contractor. A change to the regulations is not necessary, 
    however. If the payments are exempt from tax under the Code, they are 
    exempt from withholding under Sec. 1.1441-4(b)(1)(iv). If, on the other 
    hand, those payments are not exempt under the Code, then it would be 
    inappropriate to provide for an exemption from withholding under 
    section 1441.
    
    F. Comments and Changes to Sec. 1.1441-5
    
        In response to comments, many partnership provisions have been 
    consolidated in this section. A new paragraph (a) has been added to 
    describe the steps necessary to determine the status of the payee for 
    withholding purposes. The withholding procedures applicable to domestic 
    partnerships are stated in paragraph (b). The withholding procedures 
    applicable to foreign partnerships are stated in paragraph (c). 
    Paragraph (d) describes applicable presumptions in the absence of 
    documentation. Paragraph (e) is reserved for rules applicable to 
    estates and trusts. Paragraph (f) contains the effective date 
    provisions. Corresponding provisions have been added in Sec. 1.6049-
    5(d)(4), dealing with payments of reportable amounts under chapter 61 
    of the Code to address reporting of payments of amounts that are not 
    subject to chapter 3 withholding.
        Paragraph (c)(1) provides guidance for identifying the payee in the 
    case of a payment to a foreign partnership. As a general rule, a 
    payment to a foreign partnership is treated as a payment directly to 
    the partners, whether or not documentation has been provided for the 
    partners, with two exceptions: a payment to a ``withholding foreign 
    partnership'' and a payment to a foreign partnership that has furnished 
    a certificate upon which the withholding agent can rely to treat the 
    payment as effectively connected with the conduct of a U.S. trade or 
    business are treated as a payment to the foreign partnership and not to 
    the partners.
        Paragraph (c)(2) restates the rule proposed under Sec. 1.1441-
    1(e)(5), dealing with qualified intermediaries, for foreign 
    partnerships that are withholding foreign partnerships. In order to 
    avoid confusion, a withholding foreign partnership is no longer named a 
    qualified intermediary.
        Paragraph (c)(3) deals with foreign partnerships that are not 
    withholding partnerships. Paragraph (c)(3)(iii) incorporates the 
    withholding certificate provisions that were in proposed Sec. 1.1441-
    1(e)(3)(iii). Those rules parallel the rules applicable to non-QIs 
    under Sec. 1.1441-1(e)(3)(iii) of the final regulations. In particular, 
    the regulations require that a statement be attached to the withholding 
    certificate if necessary to provide information sufficient for the 
    withholding agent to determine each partner's distributive share of 
    income subject to withholding. The rules governing the statement are 
    stated in paragraph (c)(3)(iv) and parallel similar rules in 
    Sec. 1.1441-1(e)(3)(iv) of the final regulations applicable to non-QIs. 
    At the request of commentators, paragraph (c)(3)(iii) clarifies that a 
    foreign partnership receiving income that is effectively connected with 
    the conduct of a U.S. trade or business is not required to furnish 
    separate certificates for each of its partners. Instead, it may furnish 
    one single withholding certificate, even though the partnership is not 
    a withholding foreign partnership. See also paragraph (c)(1)(ii)(C). 
    This procedure is reasonable because, in such a case, the partnership 
    is subject to withholding procedures under section 1446.
        Paragraph (d) describes the presumptions upon which a withholding 
    agent can rely when making payments to a partnership for which certain 
    documentation is lacking or unreliable. First, under paragraph (d)(2), 
    a recipient that is presumed to be a partnership (based on presumptions 
    set forth in Sec. 1.1441-1(b)(3)(ii)) is presumed to be a foreign 
    partnership if certain indicia of foreign status are present. If, based 
    on such a presumption, the withholding agent has determined that the 
    payment is made to a foreign partnership (presumably acting for the 
    account of its partners since intermediary status generally cannot be 
    presumed in the absence of valid documentation), uncertainties may 
    remain regarding the status of the partners, the allocation of a 
    payment among them, or whether all the partners have been accounted 
    for. Under the final regulations, a payment that cannot be reliably 
    associated with a withholding certificate from a partner is presumed 
    made to a foreign payee. As a result, the withholding agent is required 
    to withhold 30-percent from the payment, without a reduction. Also, any 
    part of a payment that it is not reliably allocated to a partner is 
    presumed allocable to the partner with
    
    [[Page 53407]]
    
    the highest withholding rate or the highest U.S. tax liability (as the 
    withholding agent can best estimate) if the withholding rates are 
    equal. Third, if the withholding agent does not have a reliable 
    certification that all the partners are accounted for, and, as a 
    result, the withholding agent cannot reliably determine the 
    distributive share of any one or more partners, then none of the 
    payment can be reliably associated with any one partner and the entire 
    payment is presumed made to a foreign payee.
        These procedures parallel those applicable to foreign 
    intermediaries under Sec. 1.1441-1(b)(3)(v). They differ from the 
    presumptions stated in the proposed regulations under Sec. 1.1441-
    1(f)(4)(ii) which provided that the amounts were paid to a U.S. payee 
    that is not an exempt recipient. Thus, the final regulations, by 
    presuming that the amounts are paid to a foreign payee, require that a 
    30-percent amount be withheld on amounts subject to withholding under 
    chapter 3 of the Code rather than a 31-percent amount under the backup 
    withholding provisions of section 3406. However, for amounts that are 
    not subject to chapter 3 withholding, Sec. 1.16049-5(d)(4) retains the 
    provisions in the proposed regulations that the payments are presumed 
    made to a non-exempt recipient U.S. payee. In such a case, 31-percent 
    backup withholding applies instead of 30-percent withholding.
        The final regulations under Sec. 1.1441-5(d)(3)(iv) clarify that a 
    foreign partnership that is a withholding foreign partnership 
    determines who the payee is and the status of the payee, based on the 
    provisions of Sec. 1.1441-1(b)(2) and Sec. 1.1441-5 (c) and (d) in the 
    same manner as if it were making payments directly to the partners 
    other than in their capacity as partners. In the absence of 
    documentation regarding the partners, the partners are presumed to be 
    foreign persons rather than U.S. persons, including for amounts that 
    are not subject to chapter 3 withholding. A presumption of U.S. status 
    for amounts not subject to chapter 3 withholding would not be 
    meaningful because a foreign partnership is not a payor for purposes of 
    chapter 61 of the Code and backup withholding under section 3406 when 
    making payments to its partners. Therefore, payments made by a foreign 
    partnership to its partners are not reportable under chapter 61 and are 
    not subject to backup withholding. Instead, a foreign partnership must 
    file an annual return on Form 1065 and report each partner's 
    distributive share on Forms K-1, which forms are filed with the IRS 
    with a copy to each partner. Such filing requirements apply in all 
    cases in which the foreign partnership derives U.S. income, 
    irrespective of whether the tax liability has been satisfied by 
    withholding at source or whether all the partners are foreign. See 
    section 6031 and Secs. 1.6031-1(c) and 1.6031(b)-1T. However, in order 
    to reduce the burden on foreign partnerships that are not withholding 
    foreign partnerships, the IRS and Treasury are planning to issue 
    regulations under section 6031 that would eliminate the filing 
    requirement under section 6031 for foreign partnerships that are not 
    engaged in a U.S. trade or business, that furnish appropriate 
    documentation for each of their partners, and whose partners' U.S. tax 
    liability has been fully satisfied at source.
        Commentators asked that foreign partnerships be allowed to certify 
    under penalties of perjury that all the partners are foreign and to use 
    the same sub-accounting procedures that qualified intermediaries may 
    use. In particular, where a partner is entitled to reduced withholding 
    under the regulations without providing a TIN, commentators argue that 
    there should not be a requirement that the partnership's intermediary 
    withholding certificate specify that partner's distributive share of 
    the item of income paid to the partnership. Also, they argue that there 
    should not be a requirement that a separate Form 1042-S be filed under 
    the partner's name. Instead, the partnership's intermediary withholding 
    certificate should indicate the aggregate distributive shares of all 
    members entitled to a single rate, and reporting should be done on the 
    aggregate amount under the partnership's account. These comments are 
    similar to those received for non-QIs and are not adopted for the same 
    reasons that they are rejected for non-QIs. It is important to retain 
    the distinction between foreign partnerships that qualify as 
    withholding agents (i.e., those that are withholding foreign 
    partnerships or are subject to section 1446) and those that are not 
    qualified to act as withholding agents. If a foreign partnership is not 
    a withholding foreign partnership, it should not be permitted to 
    certify the status of its partners on their behalf.
        Commentators asked that a foreign entity holding a passive 
    investment for its own account be allowed to use the withholding 
    procedures applicable to foreign corporate entities, irrespective of 
    its actual classification for tax purposes. It is argued that, in many 
    cases, investments are structured using organizations that, under the 
    default classification rules of the check-the-box regulations would be 
    classified as partnerships. In order to avoid more onerous withholding 
    procedures, these entities would normally prefer a corporate 
    classification. It is argued that the need to make an election for this 
    purpose is an unnecessary step that should be eliminated. This comment 
    is not accepted because the election procedure to insure corporate 
    classification is simple and serves an important compliance role.
        At the request of commentators, the final regulations in 
    Sec. 1.1441-7(a) clarify that, if a nominee holds an interest in a 
    domestic or foreign partnership on behalf of a partner and provides the 
    partnership with the information required under Sec. 1.6031(c)-1T(a) 
    with respect to the partner, the nominee is deemed to have satisfied 
    its obligations as a withholding agent under chapter 3 of the Code and 
    has no liability for underwithholding on the partner's distributive 
    share of the amounts to which the furnished information pertains. This 
    rule reflects the fact that a custodian holding a partnership interest 
    for an investor often lacks the information needed to determine which 
    withholding regime applies to income from the partnership. The 
    necessary information to correctly withhold on partnership income is 
    often only known to the partnership and is not easily accessible to the 
    custodian. On the other hand, the partnership, which is also a 
    withholding agent, or has withholding responsibilities, has the 
    information necessary to determine how withholding should apply. It is 
    also responsible for filing the partnership return and furnishing the 
    Forms K-1 to the partners.
        Some commentators requested that a withholding agent should be 
    permitted to rely on a withholding certificate provided directly by a 
    partner, without a withholding certificate from the partnership. The 
    commentators argue that this reliance rule would permit partners to 
    claim a reduced rate of withholding even though the partnership refuses 
    to cooperate and to submit the proper documentation. This suggestion is 
    not accepted because it would, in effect, read the partnership 
    withholding certification rules out of the regulations. It may also 
    become a source of confusion for withholding agents who would not 
    always know how reliable the partner's information is. The IRS and 
    Treasury believe that the partnership withholding certificate provides 
    important information to the withholding agent, such as each partner's 
    distributive share of the payment. In addition, in the absence of a 
    partnership withholding certificate,
    
    [[Page 53408]]
    
    the withholding agent would lack information required to be stated on 
    the Form 1042-S (e.g., the partnership's EIN) and compliance may be 
    weakened as a result.
    
    G. Comments and Changes to Sec. 1.1441-6
    
    1. Address Rule
        Comments were received asking reconsideration of the proposal to 
    eliminate the address rule for dividends. The IRS and Treasury believe, 
    however, that there is no longer a justification for the address rule 
    as in effect under current law. When the payment is made directly to a 
    foreign beneficial owner, there is no justification for not requiring a 
    Form W-8 from the owner in the same manner that is required for 
    payments on debt obligations. In the case of payments of dividends to 
    foreign intermediaries, the proposed and final regulations provide for 
    new intermediary procedures that are more adapted to the monitoring of 
    abusive claims of treaty benefits than is the address rule. For these 
    reasons, the address rule is not reinstated.
    2. Reliance on Withholding Certificate
        In response to comments, Sec. 1.1441-6(b)(1) clarifies, by cross-
    reference to Sec. 1.1441-1(e)(4)(viii) dealing with reliance on 
    withholding certificates, that a withholding agent may rely on 
    information and certifications in a certificate without having to 
    inquire into the truthfulness thereof, absent actual knowledge or 
    reason to know otherwise. Therefore, absent actual knowledge or reason 
    to know that such claims are false, a withholding agent may rely on 
    claims on a Form W-8 of beneficial ownership and residence by a person 
    claiming benefits under a tax treaty. Under these principles, a 
    withholding agent may rely on representations from a foreign person 
    regarding the application of foreign tax laws or certifications 
    regarding the circumstances of the recipient or of the transaction. In 
    particular, a withholding agent may rely on the recipient's 
    representation made by furnishing a beneficial owner withholding 
    certificate that it is a beneficial owner of the income. If the address 
    on a withholding certificate comports with a claim of residence in a 
    particular country, a withholding agent may also rely on such address 
    as indicative of residence, even though the determination of residence 
    for tax treaty purposes may be far more complex than establishing an 
    address in the treaty country and is likely to involve the application 
    of foreign tax laws, particularly in the case of a person other than an 
    individual. However, if the withholding agent knows that the 
    representations on a Form W-8 are inconsistent with foreign laws or 
    with the recipient's or the transaction's circumstances, then the 
    withholding agent must question the basis for the representations.
    3. Requirement of a TIN
        Commentators have suggested that the final regulations require a 
    TIN only for related party transactions subject to treaty rate 
    withholding. This would eliminate the need to provide a specific list 
    of payments exempt from a TIN requirement. This suggestion is not 
    adopted because the IRS and Treasury believe that the TIN requirement 
    is useful in monitoring claims of reduced rates under tax treaties for 
    all transactions. Because the procedures for obtaining a TIN are 
    simple, the TIN requirement for non-market based transactions is not 
    viewed as overly burdensome relative to the compliance benefits.
        Section 1.1441-1(e)(4)(vii) enumerates the instances in which a TIN 
    must be furnished on a withholding certificate. Under the proposed 
    rules, a TIN is required to obtain the benefit of reduced withholding 
    under an income tax treaty, unless the payment consists of dividends 
    paid on publicly traded stocks. Commentators have requested that the 
    exemption from having to furnish a TIN be extended to other securities, 
    including pre-1984 bonds and other debt obligations, payments on any 
    mutual fund investment (e.g., an open-end mutual fund), interests in 
    publicly-traded grantor trusts generating royalty income, interest- and 
    dividend-equivalent payments on the loan of exempted publicly traded 
    stocks or securities, income from repurchase agreements involving 
    exempted publicly traded stocks or securities, dividends on non-
    publicly traded stocks, interest on syndicated or bank loans, income 
    from publicly-traded grantor trusts, contingent interest, and amounts 
    paid on private placements of stocks or securities.
        In response to these comments, the final regulation are amended to 
    expand the categories of income for which a TIN is not required to be 
    furnished. Under the final regulations, the categories are dividends 
    and interest on publicly traded securities, dividends on redeemable 
    securities issued by an investment company registered under the 
    Investment Company Act of 1940 (15 U.S.C. 80a-1), income related to 
    loans of publicly traded securities, and dividends, interest, or 
    royalties from units of beneficial interest in a publicly offered and 
    registered unit investment trusts. See Sec. 1.1441-6(b)(2)(ii). The 
    covered securities extend to foreign securities as well as U.S. 
    securities. Also, in response to comments that the regulations should 
    provide a reliable source to determine whether or not a stock (or other 
    security) is publicly traded, the regulations clarify that section 
    1092(d) and Sec. 1.1092(d)-1 apply to determine whether a stock or 
    security is publicly traded for this purpose. An exception is not made 
    for other securities because the IRS and Treasury believe that the TIN 
    exemptions should be limited to income arising from securities that are 
    publicly traded and should not extend to securities held and transacted 
    as part of a private business relationship. Also, an exception is not 
    made for sale-repurchase transactions (repos) because repos completed 
    within a 6-month period give rise to income that is treated as short-
    term OID for tax purposes. Such income, if earned by a foreign person, 
    is exempt from chapter 3 withholding. Because the type of repo 
    transaction that would be equivalent to the type of TIN-exempted market 
    transactions would generally be of substantially shorter duration, the 
    IRS and Treasury believe that it is not appropriate to provide an 
    exemption for more than 6-month repo transactions.
        Comments suggested that requiring TINs on intermediary certificates 
    is an undue compliance burden when reporting is not done to the 
    intermediary's account, especially if the Form W-8 of any underlying 
    beneficial owner is not required to bear a TIN. Commentators argue that 
    any IRS compliance concerns can be met without the requirement for a 
    TIN from a non-qualified intermediary since U.S. withholding agents 
    would, in any event, supply the identification and address of the 
    beneficial owners to the IRS on Form 1042-S. The final regulations 
    eliminate the need for a TIN on a non-qualified intermediary 
    certificate and on a certificate from a foreign partnership that is not 
    a withholding foreign partnership. However, a TIN continues to be 
    required in the case of a qualified intermediary certificate or in the 
    case of a certificate from a foreign partnership.
        Some commentators asked that the TIN requirement be made optional. 
    They argue that this would provide a reasonable accommodation to 
    foreign investors who only occasionally or rarely enter into financial 
    transactions involving U.S. securities. This comment is not adopted; 
    instead, the final regulations broaden the types of transactions exempt 
    from the requirement to provide a TIN. This change should alleviate the 
    concern
    
    [[Page 53409]]
    
    expressed by these commentators. Also, commentators asked that the 
    final regulations provide an exemption for intermediaries with a small 
    number of foreign accounts (500 or less). This suggestion is also not 
    adopted in light of the fact that the burden of manually processing 
    account information for complying with these regulations should be 
    outweighed by the substantial compliance benefits.
        With regard to documentary evidence required to validate a TIN used 
    to support a claim of treaty benefits, commentators asked that the 
    documentary evidence remain valid indefinitely rather than expire after 
    three years as provided in the proposed regulations. See Sec. 1.1441-
    6(c). This comment is not adopted. The withholding certificates, and 
    the TIN showing on that certificate, are used to represent many facts, 
    including the foreign status of the owner and his residence for tax 
    treaty benefit purposes. These facts may change frequently, 
    particularly for individuals, and it is important that beneficial 
    owners recertify their status periodically to the IRS. This 
    recertification is also important because withholding agents cannot 
    monitor the continued validity of the original residence claim, since 
    the TIN on the certificate does not indicate which country of residence 
    has been represented to the IRS as part of the certification process.
        The final regulations do not adopt a comment that some 
    organizations claiming tax-exempt status under section 501(c) should be 
    exempt from the requirement to obtain and furnish a TIN if the 
    organization is a universally recognized charitable organization, such 
    as a church or religious order. As previously stated, TINs are used by 
    the IRS to electronically process and match tax information. Any 
    exception to the TIN requirement precludes such electronic processing. 
    In light of the ease with which such organizations can obtain an EIN, 
    the IRS and Treasury believe that no change to the proposed regulations 
    is justified. However, the regulations clarify that a TIN is required 
    from a foreign exempt organization or foreign private foundation only 
    to the extent it claims a reduced rate of withholding solely based upon 
    its exempt status or if a TIN is otherwise required from non-tax exempt 
    taxpayers in order to claim a reduced rate of withholding (e.g., under 
    an income tax treaty). Also, a foreign private foundation is not 
    required to furnish a TIN for income subject to the 4-percent tax under 
    section 4948(a) if such income would otherwise be exempt from tax under 
    the Code if paid to a foreign person that is not a private foundation.
    4. Certification and Electronic Matching of TINs
        The final regulations are revised to specify that a taxpayer must 
    provide the IRS with a certificate of residence to enable it to certify 
    a TIN if that procedure is available in the country of residence. 
    Documentary evidence is permitted as an alternative means of 
    establishing residence in a treaty country only if a certificate of 
    residence is not reasonably available from the tax administration in 
    the country of residence. This change reflects the view that a 
    certificate of residence is more reliable evidence of tax residence in 
    a treaty country than is documentary evidence. The obligation to 
    furnish a certificate of residence if one is available does not apply 
    to corporate bodies who may, instead, furnish incorporation documents 
    establishing their status as a corporate body in the applicable treaty 
    jurisdiction.
        The final regulations retain the provision in the proposed 
    regulations regarding the electronic confirmation by a withholding 
    agent of a TIN under procedures to be prescribed by the IRS. The IRS 
    has undertaken a TIN-matching prototype in the past. See 60 FR 66243 
    (December 21, 1995). More recently, the IRS and Treasury issued a 
    regulation under Sec. 31.3406(j)-1 (1997-26 I.R.B. 4) and Rev. Proc. 
    97-31 (1997-26 I.R.B. 6) making a TIN-matching program available to 
    Federal agency payors of reportable payments under section 3406. TIN-
    matching, however, will not apply for chapter 3 withholding purposes 
    until specifically implemented by the IRS.
    5. Treaty Benefits for Payments to Hybrids
        The proposed regulations provide guidance on procedures for 
    claiming reduced withholding rates under an income tax treaty. For this 
    purpose, the proposed regulations define the term beneficial owner 
    under foreign law principles. See proposed Secs. 1.1441-1(c)(6)(i)(B) 
    and 1.1441-6(b)(4). Commentators were divided on whether the proposed 
    rule is a correct interpretation of the treaty. In particular, several 
    commentators noted that the term beneficial owner is meant to be 
    defined under the source country's domestic law. Also, commentators 
    asked whether the proposed rules were solely for withholding purposes 
    or were meant to define a foreign beneficial owner's eligibility for 
    treaty benefits for purposes of section 894.
        In part in response to these comments, temporary regulations have 
    been issued under section 894 (62 FR 35673, published July 2, 1997) 
    that are largely consistent with the principles contained in the 
    proposed withholding regulations. Under these temporary regulations, a 
    reduced withholding rate applies under an income tax treaty only to the 
    extent that the income is treated as derived by a resident of the 
    applicable treaty jurisdiction. Income is treated as being so derived 
    only to the extent it is taxed in the hands of the resident as income 
    of a resident of the applicable treaty jurisdiction. The final 
    withholding regulations have been modified to reflect these temporary 
    regulations.
        The regulations under Sec. 1.1441-6(b)(4)(ii) finalize the rules 
    regarding the type of withholding certificates that must be furnished 
    in situations involving hybrid entities where the payment is made to 
    the entity but the benefit is determined by the status of the interest 
    holder. Generally, a partnership Form W-8 would have to be provided by 
    the interest holder, which form must be presented by the entity on 
    behalf of the interest holder. In order to reduce the burden in the 
    case of reverse foreign hybrid entities (e.g., foreign mutual funds 
    treated as corporations for U.S. tax purposes but as fiscally 
    transparent entities for foreign countries' law purposes), the final 
    regulations allow those entities to become qualified intermediary, so 
    that, like foreign partnerships and entities acting as intermediaries 
    for others, they may present a global Form W-8 to a U.S. withholding 
    agent instead of furnishing individual forms for each of their 
    shareholders who claim a benefit under an income tax treaty. See 
    Sec. 1.1441-1(e)(5)(ii)(C).
        The preamble to the temporary regulations under section 894 
    indicates that withholding agents should consider the effect of the 
    regulations on their withholding obligations, including the need to 
    obtain new withholding certificates to confirm claims of treaty 
    benefits for payments made on or after the effective date of 
    Sec. 1.894-1T(d). Until the final regulations under section 1441 are 
    effective (i.e., until 1999), withholding agents may continue to rely 
    on Forms 1001 regarding claims of reduced rates under income tax 
    treaties. In addition, with respect to dividends, no Form 1001 is 
    generally required due to the alternative ``address'' rule. However, 
    withholding agents that are making payments in 1998 should require new 
    Forms 1001 for payments that they believe are affected by the 
    provisions of Sec. 1.894-1T(d) in order to
    
    [[Page 53410]]
    
    insure that representations regarding entitlement to a reduced rate 
    under an income tax treaty are given in light of the provisions of 
    Sec. 1.894-1T(d). For this purpose, withholding agents may rely on 
    Forms 1001 that are prepared and furnished in accordance with the 
    procedures described in Sec. 1.1441-6(b)(4)(ii), even though these 
    procedures are not effective until 1999. Thus, for example, if the 
    withholding agent pays to a foreign reverse hybrid entity, it may rely 
    on a Form 1001 furnished by the entity even though the name of the 
    beneficial owner is that of the entity's interest holder. Implicit in 
    the entity's presentation of a Form 1001 from its interest holder is a 
    representation that the interest holder is a resident of an applicable 
    treaty country and derives the income paid to the entity within the 
    meaning of Sec. 1.894-1T(d)(1). A Form 1001 obtained in 1998 is valid 
    until December 31, 1999 (except to the extent that circumstances change 
    affecting its validity). Payments made after 1998 to persons for whom 
    the withholding agent does not hold a certificate will require a new 
    Form W-8.
        In view of the temporary regulations under Sec. 1.894-1T(d), 
    several commentators have asked for guidance on how to apply the 
    ``reason-to-know'' standard to self-certifications of entitlement to 
    treaty benefits in situations involving hybrid entities. The 
    regulations do not include special guidance on this point, because the 
    IRS and Treasury believe that the due diligence issues in this context 
    are not different from those arising in other contexts. Therefore, 
    withholding agents may rely on the general principles in Sec. 1.1441-
    1(e)(4)(viii) (that, absent actual knowledge or reason to know 
    otherwise, a withholding agent may rely on information and 
    certifications without having to inquire into the truthfulness thereof) 
    and in Sec. 1.1441-6(b)(4)(ii) (that a withholding agent may rely on 
    representations that the beneficial owner derives the income within the 
    meaning of Sec. 1.894-T(d) and is a resident of the treaty country 
    without inquiring into the truthfulness thereof or researching foreign 
    law). For example, if a withholding agent knows that a person whose 
    name is on a Form 1001 or a Form W-8 is an interest holder in an entity 
    and that the treaty country where the person claims residence generally 
    treats the entity as a non-fiscally transparent entity, the withholding 
    agent would have reason to know that a claim of reduced rate by such 
    person may not be reliable and should make further inquiries. 
    Generally, any claim of treaty benefits by interest holders in a U.S. 
    LLC should be scrutinized based on many published indications that 
    foreign countries generally regard U.S. LLC's as corporate entities.
    6. Certification of Entitlement to Benefits Under an Income Tax Treaty
        The proposed regulations do not contain special procedures 
    regarding the manner in which a foreign person can establish that it 
    satisfies the conditions under applicable limitation on benefits 
    provisions of an income tax treaty. This matter is indirectly addressed 
    in Sec. 1.1441-6(b)(1) for foreign persons claiming benefits under an 
    income tax treaty that are required to file a disclosure statement 
    under section 6114 if they are related to the withholding agent and the 
    amounts received during the calendar year that exceed $500,000.
        After further consideration, the IRS and Treasury have determined 
    that certification procedures, as had been suggested in Notice 94-85 
    (1994-2 CB 511), issued under the U.S.-Dutch tax treaty, are not 
    procedures that could realistically be extended to all tax treaties 
    within a reasonable time frame, if at all. Instead, the IRS and 
    Treasury believe that an approach relying on self-certification and 
    proper disclosure to the IRS is more practical. Therefore, the final 
    regulations provide in Sec. 1.1441-6(c)(5)(i) that those persons who 
    are required to furnish an IRS-certified TIN must, as part of the TIN 
    certification process, certify that they satisfy the conditions of an 
    applicable limitation on benefits provision. For this purpose, the 
    person must attach an affidavit to the request for certification, 
    describing sufficient facts for the IRS to determine the basis upon 
    which such conditions are satisfied. The IRS review of a foreign 
    person's affidavit does not constitute an audit of the taxpayer on this 
    issue. In view of these new procedures, Notice 94-85 is withdrawn.
        The final regulations also provide under Sec. 1.1441-6(c)(5)(ii) 
    that a taxpayer (other than an individual) applying for IRS 
    certification of its TIN must certify to the IRS that any income for 
    which it intends to claim benefits under an applicable income tax 
    treaty is income that will properly be treated as derived by itself 
    within the meaning of Sec. 1.894-1T(d)(1).
    7. Reporting Under Section 6114
        Under proposed Sec. 1.1441-6(b)(1), a taxpayer receiving income 
    benefitting from a reduced rate under an income tax treaty is required 
    to file an information return under section 6114 if it is related to 
    the withholding agent and the amounts ``paid'' during the taxable year 
    exceed $500,000. The final regulations modify the $500,000 condition by 
    providing that the requirement to file an information return applies 
    only to amounts ``received'' during the calendar year that, in the 
    aggregate, exceed $500,000. The revision clarifies that the test is not 
    intended to be applied on a per-withholding agent basis. Rather, the 
    $500,000 threshold is intended to measure the total amount received by 
    the taxpayer, whether from one or several related withholding agents.
        The final regulations under section 6114 are also revised to allow 
    the IRS to eliminate duplicate reporting requirements for payments 
    received by a foreign taxpayer that must be reported both on a Form 
    5472 under section 6038A and under section 6114. See Sec. 301.6114-
    1(c)(6). Such change is to be reflected in the applicable forms and 
    instructions.
    8. Joint Owners
        One commentator suggested that since a joint owner can get a 
    separate Form 1042-S, the final regulations under Sec. 1.1441-6 should 
    let each joint owner claim its own treaty rate (if different) on its 
    pro-rata share of the income. This suggestion is not adopted because of 
    the difficulties, generally, for each joint owner to present reliable 
    representation of its pro-rata share of the income being paid.
    9. Claim of Treaty Benefits by U.S. Taxpayer
        A commentator noted that the existing regulations under 
    Sec. 1.1441-4(b)(2) fail to address the situation of a foreign national 
    who is a resident alien of the United States under section 7701(b) and 
    under a treaty tie-breaker rule, but who is entitled to treaty benefits 
    under a treaty saving clause exception. The commentator indicated that 
    procedures are needed to allow such persons to submit proper forms and 
    documentation. According to the commentator, such persons entitled to 
    treaty benefits often are not currently residents of a treaty country, 
    do not have a permanent residence address in the foreign country of 
    which they are claiming benefits, and are not able to obtain 
    certification or documentation to satisfy the three-year rule under 
    Sec. 1.1441-6(c)(4). Further, the commentator argued that the 
    regulations should specify which form such persons can file to claim 
    treaty benefits (under the proposed regulations neither Form W-8 nor W-
    9 would accommodate this claim). In response to this suggestion, 
    paragraph (b)(5) is added to allow a U.S. taxpayer to claim benefits 
    under an income tax treaty on a Form W-9 or
    
    [[Page 53411]]
    
    such other form as the IRS may prescribe.
    
    H.Comments and Changes to Sec. 1.1441-7
    
    1. Withholding Agent's Due Diligence Standards
        Section 1.1441-7(b)(1) is restated to clarify that a withholding 
    agent is under a general due diligence standard to determine its 
    withholding obligations based on its actual knowledge or reason to 
    know, if based on such knowledge or reason to know, it appears that the 
    obligation to withhold or report the payment is greater than would 
    otherwise be the case. This due diligence standard applies generally, 
    not just in the context of determining the extent to which a 
    withholding agent can rely on a withholding certificate. Therefore, for 
    example, if a withholding agent has reasons to believe that a foreign 
    beneficial owner of interest income is related to the debtor, so that 
    the portfolio interest exemption may not be available, the withholding 
    agent should make an inquiry in order to ascertain whether the 
    portfolio interest, in fact, applies. The fact that the Form W-8 is not 
    required to certify lack of relationship does not mean that the 
    withholding agent can ignore what it knows or otherwise suspects if 
    such knowledge or reason to know affects the tax liability of the 
    beneficial owner which withholding under chapter 3 of the Code is 
    intended to satisfy.
    2. Due Diligence Safe Harbors
        Some commentators asked that the standard of care governing the 
    withholding agent's liability should be actual knowledge rather than 
    reason to know, especially in the context of high-volume commercial 
    transactions where there is not necessarily a pre-existing client 
    relationship. In response to this comment, the final regulations define 
    reason to know so that certain circumstances described in paragraphs 
    (b)(2)(ii) (A) through (F) are the only circumstances that require the 
    withholding agent to exercise due diligence (other than actual 
    knowledge). Further, examples are added regarding the documentation 
    that a withholding agent may rely on in order to correct a defective 
    Form W-8. This limitation only applies to payments made by a financial 
    institution with which a customer may open an account that consists of 
    portfolio interest, payments on publicly traded securities described in 
    Sec. 1.1441-6(b)(2)(ii), deposit interest with banks or other financial 
    institutions as described in sections 871(i)(2)(a) and 881(d), or 
    original issue discount (or interest) on obligations with a maturity of 
    183 days or less from the date of original issue.
        The final regulations eliminate the need to inquire further when 
    the customer directs the financial institution to make a payment to 
    another U.S. financial institution. While such direction may indicate 
    that the account holder is, in fact, residing in the U.S., the burden 
    of this due diligence requirement outweighs the compliance benefits.
        However, the final regulations impose a duty to inquire when a 
    payment is directed to a P.O. box or an in-care-of address where the 
    withholding agent has a permanent address on file for the payee that is 
    neither a P.O. box or an in-care-of address. Contrary to the comments, 
    the IRS and Treasury believe that how a payment is directed may 
    indicate that the beneficial owner wishes not to disclose his or her 
    place of residence. As stated above, the beneficial owner may be 
    treated as a foreign person despite a P.O. box address; however, such 
    treatment would require that the withholding agent obtain evidence of 
    foreign status in addition to the Form W-8.
        The final regulations add a due diligence item. A withholding agent 
    may not rely on a claim of partnership status on a Form W-8 if the name 
    of the person on the form indicates that the entity may be the type of 
    entity that is on the per se list of foreign corporations included in 
    Sec. 301.7701-2(b)(8)(i), unless the form explains that the entity is a 
    grandfathered partnership.
    2. Authorized Foreign Agents
        The proposed regulations would modify the current rules governing 
    foreign agents of U.S. withholding agents by allowing a foreign agent 
    to file Forms 1042 and 1042-S returns on behalf of the U.S. withholding 
    agent. Some commentators have pointed out that the inability to tier 
    authorized foreign agents limits the usefulness of the procedure. 
    However, after further consideration, the IRS and Treasury have decided 
    to leave the proposed rules unchanged. The authorized foreign agent 
    procedure relies on the IRS' ability to audit the agent. Any compliance 
    failure of the agent is imputed to the U.S. withholding agent. If the 
    U.S. withholding agent acts through several layers of agents, the IRS 
    would have to audit all of the agents in the chain of payment to 
    determine the compliance of the U.S. withholding agent. Such audits are 
    impractical. The procedure is retained, however, because it may still 
    be useful in its proposed form in cases not involving tiers of 
    intermediaries.
    
    I.Comments and Changes to Sec. 1.1441-8
    
        The final regulations are revised to take into account comments 
    that the proposed documentation requirements for payments to foreign 
    governments and international organizations are unnecessarily 
    cumbersome. The documentation requirement is eliminated entirely for 
    payments to international organizations and for interest on bankers' 
    acceptances paid to central banks of issue. This exception is 
    appropriate because the withholding exemption is not conditioned on any 
    representation of the beneficial owner, other than its status as such 
    (see Sec. 1.6049-4(c)(1)(ii) (G) and (H) for an ``eyeball'' test for 
    ascertaining the status of the payee as an international organization 
    or a foreign central bank of issue). Payments to foreign governments 
    and to the Bank for International Settlements must be documented, 
    however, because a withholding exemption applies only if the 
    government's or the Bank's income is not associated with a commercial 
    activity. However, if a person represents that it is an integral part 
    of a foreign government, the documentation remains valid permanently. 
    If, on the other hand, the person claiming to be a foreign government 
    represents that it is a controlled entity, then the certificate must be 
    renewed every three years. A certificate furnished by the Bank for 
    International Settlements is also valid permanently. In view of these 
    simplified documentation requirements, the final regulations require 
    that all payments to foreign governments, international organizations, 
    and the Bank for International Settlements be reported on a Form 1042 
    and 1042-S, to the extent reportable if paid to a foreign person.
    
    J. Comments and Changes to Secs. 1.1441-9 and 1.1443-1
    
    1. Foreign Tax-exempt Organization and Foreign Private Foundations
        Several comments were received regarding withholding on the income 
    of foreign tax-exempt organizations and applicable procedures for 
    documenting the foreign organization's exempt status. The commentators 
    questioned whether section 1443(a) should apply to items of passive 
    income that would not be unrelated business income but for section 514 
    (relating to debt-financed property), and whether section 4948 should 
    apply to impose a 4-percent tax on U.S. source portfolio interest and 
    bank deposit interest so that a 4-percent withholding applies under 
    section
    
    [[Page 53412]]
    
    1443(b) to payments of such income to foreign foundations.
        Commentators argued that a foreign organization meeting the 
    description of section 501(c)(3) should be permitted to claim tax-
    exempt status even if it has not first obtained an IRS determination. 
    They argued that the IRS determination letter is required for domestic 
    organizations because contributions to a domestic section 501(c)(3) 
    organization are deductible. No such deduction is permitted for a 
    contributions to a foreign organization and, therefore, a foreign 
    organization described in section 501(c)(3) should be treated like any 
    other organization described under section 501(c). Also, commentators 
    argued that the regulations should not require an opinion of counsel to 
    be attached to the withholding certificate. The final regulations, 
    however, do not accept most of these comments. As in the proposed 
    regulations, foreign organizations that are required to obtain an IRS 
    determination letter in order to qualify as a tax-exempt organization 
    under section 501(c)(3) (i.e., those organizations that obtain a 
    substantial portion of their support from U.S. sources) must obtain 
    such a determination letter and attach it to the Form W-8. Other 
    foreign organizations that may qualify for tax-exempt status under 
    section 501(c)(3) without an IRS determination letter (i.e., 
    organizations that receive substantially all of their support from 
    sources outside the United States; see section 4948(b)) may establish 
    their exempt status on the basis of an opinion of counsel. Also, they 
    clarify that the opinion must be from U.S. counsel, meaning an attorney 
    admitted to, and in good standing with, the bar in one of the fifty 
    States or the District of Columbia. In addition, the final regulations 
    under Sec. 1.1441-9(b)(2) provide that tax-exempt organizations that 
    claim that they are tax-exempt under section 501(c)(3) and not private 
    foundations and do not have an IRS determination letter must attach an 
    affidavit to their Form W-8 in addition to the opinion of counsel. 
    Thus, the final regulations relieve those organizations from the 
    obligation under the proposed regulations to provide an opinion of 
    counsel regarding their non-private foundation status. The IRS and 
    Treasury view the IRS certification procedure for section 501(c)(3) 
    organizations as an important compliance measure. They do not believe 
    that self-certification procedures should be substituted where the Code 
    clearly requires an IRS determination letter.
        The final regulations under Sec. 1.1441-9(a) also clarify that a 
    foreign organization that does not rely on its tax-exempt qualification 
    to claim reduced withholding on a payment need not comply with the 
    special procedures in Sec. 1.1441-9. Instead, it may follow the same 
    procedures that apply to taxable entities. In particular, the final 
    regulations clarify that a foreign tax-exempt organization or foreign 
    private foundation that claims a benefit under an income tax treaty 
    must follow the procedures described under Sec. 1.1441-6 rather than 
    rely on the procedures described under Secs. 1.1441-9 or 1443-1.
        The final regulations do not make a special exception for debt-
    financed income that, under section 512, is treated as unrelated 
    business income. In addition, the final regulations do not eliminate 
    the 4-percent tax imposed under section 4948(a) on any items of 
    investment income of a private foreign foundation and required to be 
    withheld under section 1443(b). The IRS and Treasury believe that they 
    have no authority to eliminate a tax that is clearly imposed by 
    statute. Therefore, it would be inappropriate to eliminate the 
    requirement to withhold such tax. A foreign private foundation claiming 
    a reduced rate of 4-percent is subject to the same documentation 
    requirements as apply to tax-exempt foreign organizations, meaning that 
    a Form W-8 must be furnished, to which the appropriate determination 
    letter or opinion of U.S. counsel must be attached. The final 
    regulations restate the existing regulations under section 1443 in an 
    effort to eliminate unnecessary provisions. The elimination of several 
    provisions does not indicate that the procedures do not apply (e.g., 
    requirement to file Forms 1042 and 1042-S), but, simply that these 
    provisions are not necessary.
    
    K. Comments and Changes to Secs. 1.1461-1 and 1.1461-2
    
    1. Form 1042-S Reporting
        In response to comments, the deadline for filing Forms 1042 and 
    1042-S has been moved from February 28 to March 15. Regarding joint 
    accounts, the final regulations do not adopt the suggestion that only 
    one Form 1042-S be required for a joint account even where the other 
    joint owner requests another statement. Commentators argued that 
    subdividing payments made to a single account and providing multiple 
    Forms 1042-S would significantly increase administrative burden. 
    However, joint owners should be able to obtain a proof of tax payment 
    in case one of them wishes to apply for a refund of tax or needs to 
    substantiate the payment of tax for any reason and it does not have 
    access to the form issued to one of the joint owners. The fact that the 
    obligation to issue more than one Form 1042-S is only on request by one 
    of the joint owners should minimize the burden on withholding agents.
        The proposed regulations require that a financial institution with 
    actual knowledge of the payee's TIN report the TIN on Form 1042-S even 
    though a TIN did not have to be provided in connection with the 
    payment. In response to comments, the final regulations clarify in 
    Sec. 1.1461-1(c)(3)(v) that, in the case of a financial institution 
    dealing with customers through a system of accounts, actual knowledge 
    exists only if such TIN was reported on a Form W-8 provided with 
    respect to another payment made through the same account or through 
    another account, the information with respect to which can be retrieved 
    through a centralized account information system (including a universal 
    account system) containing both accounts.
        Commentators requested a clarification that Form 1042-S reporting 
    is not required with respect to interest on deposits paid by any U.S. 
    bank (including its foreign branches or subsidiaries), except in the 
    limited situation where the interest is paid to a Canadian resident. 
    This point is clarified under Sec. 1.1461-1(c)(2)(i), which limits 
    reporting to amounts subject to withholding, as defined in Sec. 1.1441-
    2(a). However, Sec. 1.1461-1(c)(2)(i)(D) contains an exception for 
    interest paid to Canadian residents. In addition, Sec. 1.1461-
    1(c)(2)(ii)(F) is added to clarify that interest or OID accrued on an 
    obligation is not required to be reported on a Form 1042-S to the 
    extent the interest or OID is not required to be withheld upon under 
    Sec. 1.1441-2(b)(3) due to the lack of knowledge by the withholding 
    agent. On the other hand, Sec. 1.1461-1(c)(2)(i)(E) clarifies that, as 
    is the case under existing regulations, amounts representing interest 
    on an obligation sold between interest payment dates is reportable on a 
    Form 1042 and 1042-S, even though it is not subject to withholding.
    2. Adjustments for Overwithholding or Underwithholding of Tax
        Commentators asked that withholding agents be permitted to process 
    refund claims for nonresident alien payees. Since refund claims will 
    now require TINs, duplication of claims can be avoided. Commentators 
    point to the fact that this procedure should be more efficient as it 
    may require the IRS to process only a single refund claim from a 
    withholding agent for all of its foreign
    
    [[Page 53413]]
    
    clients rather than dealing with claims filed by each individual 
    foreign client. This comment is accepted in the context of qualified 
    intermediary arrangements. However, in other situations, a procedure 
    allowing refunds on behalf of customers is impractical because of the 
    risk that customers would independently file for refunds based on their 
    form 1042-S.
        Withholding agents also made a number of points regarding authority 
    to rectify any underwithholding situation discovered after the due date 
    for filing Form 1042 but before actual filing, streamlining current 
    refund procedures by, for example, providing for a ``quickie'' refund 
    form, and the reporting of adjustments to withholding during the 
    calendar year. Those points, however, should be addressed in the 
    context of forms and administrative procedures, rather than in the 
    regulations. The IRS will continue to work with the industry to find 
    ways to improve and streamline the information and return filing 
    procedures.
    
    L. Comments and Changes to Information Reporting Provisions Under 
    Chapter 61 and Section 3406 of the Code
    
    1. Information Reporting--Exempt Recipient
        Commentators asked that the proposed changes to the exempt 
    recipient rules for corporations be eliminated. Under Sec. 1.6049-
    4(c)(1)(ii)(A) of the proposed regulations, the ``eyeball'' test for 
    corporations with an account relationship with the payor would be 
    required to be supplemented by an EIN or a corporate resolution. 
    Commentators suggested that, instead, payors should be allowed to rely 
    on the per se list provided in the check the box regulations under 
    Sec. 301.7701-3.
        In response to these comments, the final regulations eliminate the 
    proposed corporate resolution requirement and, therefore, reinstate the 
    ``eyeball'' test for corporate payees. Foreign corporations are able to 
    establish their corporate payee status based on the per se list in 
    Sec. 301.7701-2(b)(8)(i). In addition, a payee may establish corporate 
    status with a copy of the Form 8832, if the entity has filed one with 
    the IRS in order to elect corporate classification. See Sec. 1.6049-
    4(c)(1)(ii)(A) (1) and (2).
        Section 1.6049-4(c)(1)(ii) of the 1988 proposed regulations delete 
    nominees, custodians, and brokers from the list of exempt recipients. 
    Some commentators objected to this change. The final regulations re-
    instate nominees, custodians, and brokers as exempt recipients. 
    Additionally, swap dealers are included in the list of exempt 
    recipients, and the description of financial institutions that are 
    exempt recipients has been clarified to include clearing organizations.
        Comments were received requesting that the list of international 
    organizations be re-instated in the regulations. The final regulations 
    do not contain such a list because frequent changes in the status of 
    such organizations would make it too burdensome for the IRS to keep 
    current. Instead, the IRS intends to issue guidance indicating that 
    withholding agents and payors may rely on the list published by the 
    Department of State.
        Commentators asked that the list of exempt recipients under 
    sections 6041 and 6045 be conformed to that under section 6049 and, in 
    the case of section 6041, be extended to banks and financial 
    institutions. The final regulations apply the same exempt recipient 
    rules to interest under section 6049, dividends under section 6042, and 
    notional principal contracts under section 6041. The exempt recipient 
    rules under section 6045 remain unchanged, except that a foreign 
    central bank of issue is added to the list for substitute payments 
    under Sec. 1.6045-2(b)(2)(i)(G).
    2. Information Reporting for Offshore Accounts--Documentary Evidence
        The proposed regulations make a number of changes to the existing 
    procedures applicable to deposits with foreign branches of U.S. banks. 
    The proposed regulations modify the documentary evidence standard in 
    Sec. 35a.9999-3, A-34, as part of an effort to subject all off-shore 
    accounts to a uniform documentary evidence standard, whether the 
    account is with a foreign branch of a U.S. bank, with a foreign branch 
    of a domestic institution other than a bank, or with a foreign branch 
    of a foreign financial institution. As a result, foreign branches of 
    U.S. banks would become subject to more stringent documentary evidence 
    requirements to the extent they would no longer be able to rely on an 
    indication of foreign status from a customer. Instead, the proposed 
    regulations require a foreign banking branch to obtain actual 
    documentary evidence from the customer and keep a record of it. Some 
    commentators questioned whether the proposed regulations eliminate the 
    possibility of relying on a statement of foreign status incorporated in 
    the account opening form. In addition, the proposed regulations impose 
    a three-year renewal of the documentary evidence, a requirement that 
    does not currently apply to foreign banking branches. Further, the 
    proposed regulations eliminate the $600 threshold under the current 
    regulations (by making foreign branch bank deposit interest subject to 
    reporting under section 6041 rather than section 6049). They impose new 
    backup withholding requirements for accounts actually known to the 
    branch as being owned by a U.S. person. In addition, the provisions 
    under Sec. 1.1441-1(f) create a presumption of U.S. status for 
    undocumented accounts. Although a presumption of U.S. status is not 
    sufficient for triggering an obligation to backup withhold (because the 
    bank has no actual knowledge), it is sufficient to require the interest 
    to be reported on a Form 1099.
        After further consideration, and based on comments received, the 
    final regulations are revised. Consistent with the regulations proposed 
    in 1988 and in 1996, the requirement to document owners of accounts 
    maintained at offshore branches of U.S. banks is imposed under section 
    6049 rather than section 6041. Therefore, the $600 limit will no longer 
    apply to those accounts. On the other hand, the documentation 
    requirements are substantially simplified. If the customer's address is 
    in the country where the branch is located and it is not customary in 
    that location that banks request documentary evidence from customers 
    when opening an account, then the bank or other financial institution 
    may rely on a declaration of foreign status, contained in an account 
    opening form, that does not have to be signed under penalties of 
    perjury. The declaration does not expire unless circumstances change 
    that would indicate that the account holder has become a U.S. person or 
    the payor is so notified. The payor must send a year-end reminder to 
    the account holder to notify the payor of change of status, if 
    applicable.
        These alternative documentary evidence procedures are extended to 
    all offshore accounts for payments that are not subject to withholding 
    under chapter 3 of the Code and are not U.S. source bank deposit 
    interest. These amounts include foreign source income and gross 
    proceeds.
        The alternative documentary evidence rules apply to accounts opened 
    on or after the effective date of the regulations (i.e., on or after 
    January 1, 1999). However, existing accounts as of that date are 
    required to comply with the due diligence requirements, including 
    inserting a negative confirmation statement in the annual year-end 
    statement provided to the customer.
    
    [[Page 53414]]
    
        In response to comments, the final regulations under Sec. 1.6049-
    5(b)(10) are revised to incorporate a waiver from the certification 
    requirement of regulations Sec. 1.163-5(c)(2)(i)(D)(3) for debt 
    instruments with a maturity of 183 days or less from the date of issue. 
    In addition, Sec. 1.6049-4(d)(3) is modified to clarify that the same 
    conversion rules are applicable to all foreign currency-denominated 
    obligations for purposes of section 6049.
    3. Reporting Obligations of Non-U.S. Payors or Middlemen
        Under the regulations under section 6045, dealing with broker 
    proceeds, non-U.S. payors are exempt from reporting if the payment is 
    made outside the United States. See Sec. 1.6045-1(a)(1). In contrast, 
    non-U.S. payors and middlemen making payments of U.S. source interest 
    or dividends are required to report these payments on a Form 1099, 
    unless they receive documentation supporting the payee's foreign status 
    (or the payee is an exempt recipient). Commentators requested that non-
    U.S. payors of U.S. interest and dividends be similarly exempt from 
    information reporting if the payments are made outside the United 
    States. This change is not appropriate, at least for amounts that are 
    subject to withholding under chapter 3 of the Code. To the extent the 
    U.S. interest or dividends are subject to U.S. 30-percent withholding, 
    and documentation is received for reducing the withholding rate, the 
    foreign payee exemption would apply under sections 6042 and 6049 and 
    the payment would not be reportable. Under the final regulations, 
    however, a payor making a payment of U.S. source dividends or interest 
    (whether inside or outside the U.S.) to a payee who has provided no 
    documentation is not exempt from Form 1099 information reporting, even 
    if another payor ``upstream'' has withheld an amount under chapter 3 of 
    the Code. However, a payor is exempt from backup withholding on the 
    payment if an ``upstream'' withholding agent has withheld a full 30-
    percent amount from the payment. The payor, however, is not relieved 
    from making a return on Form 1099 under section 6042 or 6049 if it has 
    actual knowledge that the payee is a U.S. person who is not an exempt 
    recipient. See Sec. 31.3406(g)-1(e). These rules also apply to U.S. 
    source royalties reportable under section 6050N.
        Further, the regulations under section 3406 are amended to 
    authorize the IRS to establish procedures by which an amount backup 
    withheld under section 3406 from a payee that subsequently establish 
    that it is a foreign person exempt from information reporting and 
    backup withholding can be credited toward amounts required to be 
    withheld under chapter 3 of the Code. Such ``cross-crediting'' 
    procedures are not available at present and would require the IRS to 
    modify its systems.
    4. Information Reporting for Capital Gain Dividends
        Under the proposed regulations, capital gain dividends as defined 
    under section 852(b)(3)(C) would no longer be reportable on Form 1099-
    DIV. Commentators objected that, absent such reporting, shareholders 
    could not easily ascertain the amount of capital gain dividends paid 
    for the calendar year for purposes of calculating their income tax 
    liability. Accordingly, the final regulations eliminate the proposed 
    exclusion of capital gain dividends under Sec. 1.6042-3(b)(3).
    
    Effect on Other Documents
    
        The following publications are obsolete as of October 14, 1997:
    
    Rev. Rul. 55-106, 1955-1 CB 102.
    Rev. Rul. 57-391, 1957-2 CB 606.
    Rev. Rul. 60-288, 1960-2 CB 265.
    Rev. Rul. 65-86, 1965-1 CB 538.
    Rev. Rul 68-173, 1968-1 CB 626.
    Rev. Rul. 68-237, 1968-1 CB 391.
    Rev. Rul. 68-333, 1968-1 CB 390.
    Rev. Rul. 69-41, 1969-1 CB 214.
    Rev. Rul. 69-244, 1969-1 CB 215.
    Rev. Rul. 70-175, 1970-1 CB 184.
    Rev. Rul. 70-250, 1970-1 CB 182.
    Rev. Rul. 70-251, 1970-1 CB 183.
    Rev. Rul. 70-616, 1970-2 CB 174.
    Rev. Rul. 72-87, 1972-1 CB 274.
    Rev. Rul. 80-222, 1980-2 CB 211.
    Rev. Rul. 83-175, 1983-2 CB 109.
    Rev. Rul. 84-158, 1984-2 CB 262.
    Rev. Rul. 85-61, 1985-1 CB 355.
    Rev. Rul. 89-17, 1989-1 CB 268.
    Rev. Rul. 89-33, 1989-1 CB 269.
    Rev. Rul. 89-91, 1989-2 CB 129.
    Rev. Proc. 65-2, 1965-1 CB 715.
    Rev. Proc. 67-24, 1967-1 CB 625.
    Notice 94-85, 1994-2 CB 511.
    
    Special Analyses
    
        It has been determined that this Treasury decision is not a 
    significant regulatory action as defined in EO 12866. Therefore, a 
    regulatory assessment is not required. It also has been determined that 
    section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) 
    does not apply to these regulations.
        This Treasury decision finalizes notices of proposed rulemaking 
    published February 29, 1988 (53 FR 5991), December 21, 1995 (60 FR 
    66243), and April 15, 1996 (61 FR 17614), respectively. It has been 
    determined that a final regulatory flexibility analysis is required 
    under 5 U.S.C. Sec. 604 for the collections of information contained in 
    this Treasury decision with respect to the notice of proposed 
    rulemaking published on April 15, 1996. An initial regulatory 
    flexibility analysis was not required because the notice of proposed 
    rulemaking was issued prior to the effective date (June 27, 1996) of 
    the amendments to the Regulatory Flexibility Act (5 U.S.C. chapter 6) 
    made by the Small Business Regulatory Enforcement Fairness Act (SBREFA) 
    (Public Law 104-121). It also has been determined that a regulatory 
    flexibility analysis is not required for the notice of proposed 
    rulemaking published on (1) December 21, 1995 because the notice does 
    not impose any collection of information on a small entity, and was 
    published prior to the March 29, 1996 enactment date of SBREFA, and (2) 
    on February 29, 1988 because the notice was published prior to the 
    enactment of SBREFA.
    
    Final Regulatory Flexibility Act Analysis
    
        The major objective of the final regulations is to prescribe new 
    procedures to eliminate unnecessary burdens created by the lack of 
    standardization and coordination of the current withholding and 
    information reporting procedures with respect to amounts paid to 
    foreign persons. To this effect, the regulations facilitate compliance 
    and reduce taxpayer burden by simplifying the documentation 
    requirements, unifying the certification procedures and clarifying 
    reliance standards in an effort to streamline the processing of U.S. 
    source payments to foreign persons.
        The economic impact of collection of information contained in these 
    regulations on any small entity would result primarily from the entity 
    being required either (1) to provide a Form W-8 as the beneficial owner 
    or payee of U.S. source income, or (2) to receive a Form W-8 as the 
    withholding agent or payor (and eventually, file a Form 1042 and Forms 
    1042-S). In both situations, these regulations generally impose minimal 
    additional reporting or recordkeeping requirements beyond those already 
    imposed under current law. In fact, the regulations significantly 
    reduce the withholding and reporting burdens associated with Form W-8 
    by, for example, consolidating the current withholding certificates 
    (Forms 1001, 1078, 4224, 8709 and W-8) into a Form W-8 format, 
    permitting certain foreign intermediaries to certify on behalf of their 
    customers, permitting the electronic transmission of the form (subject 
    to IRS prescribed procedures),
    
    [[Page 53415]]
    
    clarifying the standards for an acceptable substitute form, permitting 
    a 90-day grace period for actual receipt of the form, and providing 
    cure procedures for a late-received form.
        For a small entity in the role of the beneficial owner, the new 
    collection of information contained in these regulations is the 
    extension of the Form W-8 requirement to claims for a treaty-based 
    reduction in the withholding rate with respect to dividend income; 
    thereby, subjecting dividends to the same documentation requirements as 
    other income types. This change imposes no recordkeeping requirements 
    beyond those necessary (and currently required for all other income 
    types) to ensure proper entitlement to treaty benefits, and is 
    illustrative of IRS efforts to eliminate unnecessary procedural 
    differences in order to reduce the burden on withholding agents. 
    Although there is no estimate of the number of beneficial owners or 
    payees of U.S. source income payments, the number of cross border 
    payments have steadily increased over the years (over 80 billion 
    dollars paid in 1995). The IRS and Treasury believe that most of these 
    payments are made to individuals, large financial institutions and 
    large corporations.
        For a small entity in the role of the withholding agent, the most 
    significant change of the regulations that impacts the collection of 
    information is the establishment of the wholly-elective qualified 
    intermediary regime which will impose, but only pursuant to an 
    agreement with the IRS, additional reporting and recordkeeping 
    requirements in exchange for the benefit of furnishing a single Form W-
    8 for multiple beneficiary owners or payees. The IRS and Treasury 
    believe that this alternative will be adopted primarily by large 
    foreign financial institutions that maintain numerous accounts for 
    large numbers of customers, and it is unlikely that a substantial 
    number of small entities would find it necessary or useful to agree to 
    act as a qualified intermediary. Of the approximately 25,000 tax 
    returns (Form 1042) filed by withholding agents per year, the IRS 
    estimates that 95 percent of such returns are filed by large financial 
    institutions.
        A summary of the significant issues raised by the public comments 
    in response to the proposed regulations and IRS' views on such issues, 
    and changes made as a result of the comments is set forth above in the 
    section of the preamble to the regulations entitled ``Explanation of 
    Provisions and Revisions.''
        The IRS and Treasury Department are not aware of any federal rules 
    that duplicate, overlap, or conflict with the regulations.
        These regulations will affect small entities such as small banks, 
    small businesses paying interest and dividends, small private 
    foundations, and small tax-exempt organizations (including colleges and 
    charities). The IRS and Treasury believe that most of these small 
    entities will have a direct relationship with the foreign person and 
    therefore, will not act as, or have transactions through, an 
    intermediary (i.e., nominee, custodian, or agent). The professional 
    competence necessary to comply with these regulations is no greater 
    than that already necessary to handle the day-to-day business 
    operations of a small entity because much of the recordkeeping and 
    reporting requirements under the regulations can be easily (if not 
    already done under the existing regulations) incorporated into the 
    existing or customary recordkeeping and reporting obligations of the 
    small entity (e.g., an account opening form of a bank, the registration 
    form of a college, etc.).
        None of the significant alternatives considered in drafting these 
    regulations would have significantly altered the economic impact of 
    these regulations on small entities. A detailed description of the 
    measures taken to minimize the economic impact of the collections of 
    information on small entities, consistent with the stated objectives of 
    applicable statutes is set forth above in the section of the preamble 
    to the regulations entitled ``Explanation of Provisions and 
    Revisions.'' In considering alternatives, the IRS and Treasury have 
    concluded that a withholding system (based on reduction of withholding 
    at source) rather than a refund system avoids the administrative 
    burdens (including costs and delays) that can occur when applying for a 
    refund of overwithheld amounts. Ensuring compliance under a withholding 
    system, however, requires documentation substantiating claims of 
    foreign status and of exemptions from, or reduced rates of, 
    withholding, and submission of proper information to the IRS.
        Pursuant to section 7805(f) of the Code, the notice of proposed 
    rulemaking preceding these regulations was submitted to the Small 
    Business Administration for comment on its impact on small business.
    
    List of Subjects
    
    26 CFR Part 1
    
        Income taxes, Reporting and recordkeeping requirements.
    
    26 CFR Part 31
    
        Employment taxes, Income taxes, Penalties, Pensions, Railroad 
    retirement, Reporting and recordkeeping requirements, Social security, 
    Unemployment compensation.
    
    26 CFR Part 35a
    
        Employment taxes, Income taxes, Reporting and recordkeeping 
    requirements.
    
    26 CFR Part 301
    
        Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income 
    taxes, Penalties, Reporting and recordkeeping requirements.
    
    26 CFR Part 502
    
        Greece, Reporting and recordkeeping requirements, Tax treaties.
    
    26 CFR Part 503
    
        Germany, Reporting and recordkeeping requirements, Tax treaties.
    
    26 CFR Part 509
    
        Switzerland, Reporting and recordkeeping requirements, Tax 
    treaties.
    
    26 CFR Part 513
    
        Ireland, Reporting and recordkeeping requirements, Tax treaties.
    
    26 CFR Part 514
    
        France, Reporting and recordkeeping requirements, Tax treaties.
    
    26 CFR Part 516
    
        Austria, Reporting and recordkeeping requirements, Tax treaties.
    
    26 CFR Part 517
    
        Pakistan, Reporting and recordkeeping requirements, Tax treaties.
    
    26 CFR Part 520
    
        Sweden, Reporting and recordkeeping requirements, Tax treaties.
    
    26 CFR Part 521
    
        Denmark, Reporting and recordkeeping requirements, Tax treaties.
    
    26 CFR Part 602
    
        Reporting and recordkeeping requirements.
    
    Adoption of Amendments to the Regulations
    
        Accordingly, under the authority of 26 U.S.C. 7805, 26 CFR parts 1, 
    31, 35a, 301, 502, 503, 509, 513, 514, 516, 517, 520, 521, and 602 are 
    amended as follows:
    
    [[Page 53416]]
    
    PART 1--INCOME TAXES
    
        Paragraph 1. The authority citation for part 1 is amended by 
    removing the entry for Section 1.1441-4T, revising the entries for 
    Sections 1.1441-3, 1.1441-4, 1.1441-5, 1.1441-7, 1.6049-4 and 1.6049-5 
    adding entries in numerical order to read as follows:
    
        Authority: 26 U.S.C. 7805 * * *
    
        Section 1.1441-2 also issued under 26 U.S.C. 1441(c)(4) and 26 
    U.S.C. 3401(a)(6).
        Section 1.1441-3 also issued under 26 U.S.C. 1441(c)(4), 26 
    U.S.C. 3401(a)(6) and 26 U.S.C. 7701(l).
        Section 1.1441-4 also issued under 26 U.S.C. 1441(c)(4) and 26 
    U.S.C. 3401(a)(6).
        Section 1.1441-5 also issued under 26 U.S.C. 1441(c)(4), 26 
    U.S.C. 3401(a)(6) and 26 U.S.C. 7701(b)(11).
        Section 1.1441-6 also issued under 26 U.S.C. 1441(c)(4) and 26 
    U.S.C. 3401(a)(6).
        Section 1.1441-7 also issued under 26 U.S.C. 1441(c)(4), 26 
    U.S.C. 3401(a)(6) and 26 U.S.C. 7701(l).
        Section 1.1443-1 also issued under 26 U.S.C. 1443(a). * * *
        Section 1.1461-1 also issued under 26 U.S.C. 1441(c)(4) and 26 
    U.S.C. 3401(a)(6).
        Section 1.1461-2 also issued under 26 U.S.C. 1441(c)(4) and 26 
    U.S.C. 3401(a)(6).
        Section 1.1462-1 also issued under 26 U.S.C. 1441(c)(4) and 26 
    U.S.C. 3401(a)(6). * * *
        Section 1.6042-3 also issued under 26 U.S.C. 6045. * * *
        Section 1.6049-4 also issued under 26 U.S.C. 6049 (a), (b), and 
    (d).
        Section 1.6049-5 also issued under 26 U.S.C. 6049 (a), (b), and 
    (d). * * *
    
    
    Sec. 1.163-5  [Amended]
    
        Par. 2. In Sec. 1.163-5, paragraph (c)(2)(i)(B)(5) is amended by 
    removing the language ``subdivision (iii) of A-5 of Sec. 35a.9999-4T'' 
    in the last sentence and adding ``Sec. 1.6049-5(c)(1)'' in its place.
        Par. 3. Section 1.165-12 is amended by:
        1. Adding a sentence at the end of paragraph (a).
        2. Removing the language ``(c)(1)(v)'' and adding ``(c)(1)(iv)'' in 
    its place in paragraph (c)(1)(i).
        3. Removing paragraph (c)(1)(iii) and redesignating paragraphs 
    (c)(1)(iv) and (c)(1)(v) as paragraphs (c)(1) (iii) and (iv).
        4. Revising paragraphs (c)(1)(ii) and newly redesignated paragraph 
    (c)(1) (iii).
        5. Removing the language (c)(1) (ii) and (iv) and adding (c)(1) 
    (ii) and (iii) in its place in paragraphs (c)(2)(iv) and (c)(3)(iv).
        The addition and revisions read as follows:
    
    
    Sec. 1.165-12  Denial of deduction for losses on registration-required 
    obligations not in registered form.
    
        (a) * * * For purposes of this section, the term United States 
    means the United States and its possessions within the meaning of 
    Sec. 1.163-5(c)(2)(iv).
    * * * * *
        (c) * * *
        (1) * * *
        (ii) The holder must offer to sell, sell and deliver the obligation 
    in bearer form only outside of the United States except that a holder 
    that is a registered broker-dealer as described in paragraph (c)(1)(i) 
    of this section may offer to sell and sell the obligation in bearer 
    form inside the United States to a financial institution as defined in 
    paragraph (c)(1)(iv) of this section for its own account or for the 
    account of another financial institution or of an exempt organization 
    as defined in section 501(c)(3).
        (iii) The holder may deliver an obligation in bearer form that is 
    offered or sold inside the United States only if the holder delivers it 
    to a financial institution that is purchasing for its own account, or 
    for the account of another financial institution or of an exempt 
    organization, and the financial institution or organization that 
    purchases the obligation for its own account or for whose account the 
    obligation is purchased represents that it will comply with the 
    requirements of section 165(j)(3) (A), (B), or (C). Absent actual 
    knowledge that the representation is false, the holder may rely on a 
    written statement provided by the financial institution or exempt 
    organization, including a statement that is delivered in electronic 
    form. The holder may deliver a registration-required obligation in 
    bearer form that is offered and sold outside the United States to a 
    person other than a financial institution only if the holder has 
    evidence in its records that such person is not a U.S. citizen or 
    resident and does not have actual knowledge that such evidence is 
    false. Such evidence may include a written statement by that person, 
    including a statement that is delivered electronically. For purposes of 
    this paragraph (c), the term deliver includes a transfer of an 
    obligation evidenced by a book entry including a book entry notation by 
    a clearing organization evidencing transfer of the obligation from one 
    member of the organization to another member. For purposes of this 
    paragraph (c), the term deliver does not include a transfer of an 
    obligation to the issuer or its agent for cancellation or 
    extinguishment. The record-retention provisions in Sec. 1.1441-
    1(e)(4)(iii) shall apply to any statement that a holder receives 
    pursuant to this paragraph (c)(1)(iii).
    * * * * *
        Par. 4. Section 1.871-6 is revised to read as follows:
    
    
    Sec. 1.871-6  Duty of withholding agent to determine status of alien 
    payees.
    
        For the obligation of a withholding agent to withhold the tax 
    imposed by this section, see chapter 3 of the Internal Revenue Code and 
    the regulations thereunder.
    
    
    Sec. 1.871-7  [Amended]
    
        Par. 5. In Sec. 1.871-7, paragraph (b), the third sentence is 
    amended by removing the words ``see paragraph (a) of Sec. 1.1441-2'' 
    and adding ``see Sec. 1.1441-2(b)'' in its place.
        Par. 6. Section 1.871-14 is added to read as follows:
    
    
    Sec. 1.871-14  Rules relating to repeal of tax on interest of 
    nonresident alien individuals and foreign corporations received from 
    certain portfolio debt investments.
    
        (a) General rule. No tax shall be imposed under section 
    871(a)(1)(A), 871(a)(1)(C), 881(a)(1) or 881(a)(3) on any portfolio 
    interest as defined in sections 871(h)(2) and 881(c)(2) received by a 
    foreign person. But see section 871(b) or 882(a) if such interest is 
    effectively connected with the conduct of a trade or business within 
    the United States.
        (b) Rules concerning obligations in bearer form--(1) In general. 
    Interest (including original issue discount) with respect to an 
    obligation in bearer form is portfolio interest within the meaning of 
    section 871(h)(2)(A) or 881(c)(2)(A) only if it is paid with respect to 
    an obligation issued after July 18, 1984, that is described in section 
    163(f)(2)(B) and the regulations under that section and an exception 
    under section 871(h) or 881(c) does not apply. Any obligation that is 
    not in registered form as defined in paragraph (c)(1)(i) of this 
    section is an obligation in bearer form.
        (2) Coordination with withholding and reporting rules. For an 
    exemption from withholding under section 1441 with respect to 
    obligations described in this paragraph (b), see Sec. 1.1441-
    1(b)(4)(i). For rules relating to an exemption from Form 1099 reporting 
    and backup withholding under section 3406, see section 6049 and 
    Sec. 1.6049-5(b)(8) for the payment of interest and Sec. 1.6045-
    1(g)(1)(ii) for the redemption, retirement, or sale of an obligation in 
    bearer form.
        (c) Rules concerning obligations in registered form--(1) In 
    general--(i) Obligation in registered form. For purposes of this 
    section, an obligation is in registered form only as provided in this 
    paragraph (c)(1)(i). The conditions for an obligation to be considered 
    in registered form are identical to the conditions described in 
    Sec. 5f.103-1 of this chapter. Therefore, an obligation
    
    [[Page 53417]]
    
    that would be an obligation in registered form except for the fact that 
    it can be converted at any time in the future into an obligation that 
    is not in registered form shall not be an obligation in registered 
    form. An obligation that is not in registered form by reason of the 
    preceding sentence may nevertheless be in registered form, but only 
    after the possibility of conversion is terminated. An obligation that 
    is not in registered form and can be converted into an obligation that 
    would meet the requirements of this paragraph (c)(1)(i) for being in 
    registered form shall be considered in registered form only after the 
    conversion is effected. For purposes of this section, an obligation is 
    convertible if the obligation can be transferred by any means not 
    described in Sec. 5f.103-1(c) of this chapter. An obligation is treated 
    as an obligation in registered form if--
        (A) The obligation is registered as to both principal and any 
    stated interest with the issuer (or its agent) and transfer of the 
    obligation may be effected only by surrender of the old instrument, and 
    either the reissuance by the issuer of the old instrument to the new 
    holder or the issuance by the issuer of a new instrument to the new 
    holder;
        (B) The right to the principal of, and stated interest on, the 
    obligation may be transferred only through a book entry system 
    maintained by the issuer (or its agent) described in this paragraph 
    (c)(1)(i)(B). An obligation shall be considered transferable through a 
    book entry system if the ownership of an interest in the obligation, is 
    required to be reflected in a book entry, whether or not physical 
    securities are issued. A book entry is a record of ownership that 
    identifies the owner of an in interest in the obligation; or
        (C) It is registered as to both principal and any stated interest 
    with the issuer (or its agent) and may be transferred by way of either 
    of the methods described in paragraph (c)(1)(i) (A) or (B) of this 
    section.
        (ii) Requirements for portfolio interest qualification in the case 
    of an obligation in registered form. Interest (including original issue 
    discount) received on an obligation that is in registered form 
    qualifies as portfolio interest only if--
        (A) The interest is paid on an obligation issued after July 18, 
    1984;
        (B) The interest would be subject to tax under section 
    871(a)(1)(A), 871(a)(1)(C), 881(a)(1) or 881(a)(3) but for section 
    871(h) or 881(c);
        (C) A United States (U.S.) person otherwise required to deduct and 
    withhold tax under chapter 3 of the Internal Revenue Code (Code) 
    receives a statement that meets the requirements of section 871(h)(5) 
    that the beneficial owner of the obligation is not a U.S. person; and
        (D) An exception under section 871(h) or 881(c) does not apply.
        (2) Required statement. For purposes of paragraph (c)(1)(ii)(C) of 
    this section, a U.S. person will be considered to have received a 
    statement that meets the requirements of section 871(h)(5) if either it 
    complies with one of the procedures described in this paragraph (c)(2) 
    and does not have actual knowledge or reason to know that the 
    beneficial owner is a U.S. person or it complies with the procedures 
    described in paragraph (d) or (e) of this section.
        (i) The U.S. person (or its authorized foreign agent described in 
    Sec. 1.1441-7(c)(2)) can reliably associate the payment with 
    documentation upon which it can rely to treat the payment as made to a 
    foreign beneficial owner in accordance with Sec. 1.1441-1(e)(1)(ii). 
    See Sec. 1.1441-1(b)(2)(vii) for rules regarding reliable association 
    with documentation.
        (ii) The U.S. person (or its authorized foreign agent described in 
    Sec. 1.1441-7(c)(2)) can reliably associate the payment with a 
    withholding certificate described in Sec. 1.1441-5(c)(2)(iv) from a 
    person claiming to be withholding foreign partnership and the foreign 
    partnership can reliably associate the payment with documentation upon 
    which it can rely to treat the payment as made to a foreign beneficial 
    owner in accordance with Sec. 1.1441-1(e)(1)(ii).
        (iii) The U.S. person (or its authorized foreign agent described in 
    Sec. 1.1441-7(c)(2)) can reliably associate the payment with a 
    withholding certificate described in Sec. 1.1441-1(c)(3)(ii) from a 
    person representing to be a qualified intermediary that has assumed 
    primary withholding responsibility in accordance with Sec. 1.1441-
    1(e)(5)(iv) and the qualified intermediary can reliably associate the 
    payment with documentation upon which it can rely to treat the payment 
    as made to a foreign beneficial owner in accordance with its agreement 
    with the Internal Revenue Service (IRS).
        (iv) The U.S. person (or its authorized foreign agent described in 
    Sec. 1.1441-7(c)(2)) can reliably associate the payment with a 
    withholding certificate described in Sec. 1.1441-1(e)(3)(v) from a 
    person claiming to be a U.S. branch of a foreign bank or of a foreign 
    insurance company that is described in Sec. 1.1441-1(b)(2)(iv)(A) or a 
    U.S. branch designated in accordance with Sec. 1.1441-1(b)(2)(iv)(E) 
    and the U.S. branch can reliably associate the payment with 
    documentation upon which it can rely to treat the payment as made to a 
    foreign beneficial owner in accordance with Sec. 1.1441-1(e)(1)(ii).
        (v) The U.S. person receives a statement from a securities clearing 
    organization, a bank, or another financial institution that holds 
    customers' securities in the ordinary course of its trade or business. 
    In such case the statement must be signed under penalties of perjury by 
    an authorized representative of the financial institution and must 
    state that the institution has received from the beneficial owner a 
    withholding certificate described in Sec. 1.1441-1(e)(2)(i) (a Form W-8 
    or an acceptable substitute form as defined Sec. 1.1441-1(e)(4)(vi)) or 
    that it has received from another financial institution a similar 
    statement that it, or another financial institution acting on behalf of 
    the beneficial owner, has received the Form W-8 from the beneficial 
    owner. In the case of multiple financial institutions between the 
    beneficial owner and the U.S. person, this statement must be given by 
    each financial institution to the one above it in the chain. No 
    particular form is required for the statement provided by the financial 
    institutions. However, the statement must provide the name and address 
    of the beneficial owner, and a copy of the Form W-8 provided by the 
    beneficial owner must be attached. The statement is subject to the same 
    rules described in Sec. 1.1441-1(e)(4) that apply to intermediary Forms 
    W-8 described in Sec. 1.1441-1(e)(3)(iii). If the information on the 
    Form W-8 changes, the beneficial owner must so notify the financial 
    institution acting on its behalf within 30 days of such changes, and 
    the financial institution must promptly so inform the U.S. person. This 
    notice also must be given if the financial institution has actual 
    knowledge that the information has changed but has not been so informed 
    by the beneficial owner. In the case of multiple financial institutions 
    between the beneficial owner and the U.S. person, this notice must be 
    given by each financial institution to the institution above it in the 
    chain.
        (vi) The U.S. person complies with procedures that the U.S. 
    competent authority may agree to with the competent authority of a 
    country with which the United States has an income tax treaty in 
    effect.
        (3) Time for providing certificate or documentary evidence--(i) 
    General rule. Interest on a registered obligation shall qualify as 
    portfolio interest if the withholding certificate or documentary 
    evidence that must be provided is furnished before expiration of the 
    beneficial owner's period of limitation for claiming a refund of tax 
    with respect
    
    [[Page 53418]]
    
    to such interest. See, however, Sec. 1.1441-1(b)(7) for consequences to 
    a withholding agent that makes a payment without withholding even 
    though it cannot reliably associate the payment with the documentation 
    prior to the payment. If a withholding agent withholds an amount under 
    chapter 3 of the Code because it cannot reliably associate the payment 
    with the documentation for the beneficial owner on the date of payment, 
    the beneficial owner may nevertheless claim the benefit of an exemption 
    from tax under this section by claiming a refund or credit for the 
    amount withheld based upon the procedures described in Secs. 1.1464-1 
    and 301.6402-3(e) of this chapter. For this purpose, the taxpayer must 
    attach a withholding certificate described in Sec. 1.1441-1(e)(2)(i) to 
    the income tax filed for claiming a refund of tax. In the alternative, 
    adjustments to any amount of overwithheld tax may be made under the 
    procedures described in Sec. 1.1461-2(a) (for example, if the 
    beneficial owner furnishes documentation to the withholding agent 
    before the due date for filing the return required under Sec. 1.1461-
    1(b) with respect to that payment).
        (ii) Example. The following example illustrates the rules of this 
    paragraph (c)(3) and their coordination with Sec. 1.1441-1(b)(7):
    
        Example. A is a withholding agent who, on October 12, 1999, pays 
    interest on a registered obligation to B, a foreign corporation. B 
    is a calendar year taxpayer, engaged in the conduct of a trade or 
    business in the United States, and is, therefore, required to file 
    an annual income tax return on Form 1120F. The interest, however, is 
    not effectively connected with B's U.S. trade or business. On the 
    date of payment, B has not furnished, and A cannot associate the 
    payment with documentation for B. However, A does not withhold under 
    section 1442, even though, under Sec. 1.1441-1(b)(3)(iii)(A), A 
    should presume that B is a foreign person, because A's 
    communications with B are mailed to an address in a foreign country. 
    Assuming that B files a return for its taxable year ending December 
    31, 1999, and that its statute of limitations period with regard to 
    that year expires on June 15, 2003, the interest paid on October 12, 
    1999, may qualify as portfolio interest only if B provides 
    appropriate documentation to A on or before June 15, 2003. If B does 
    not provide the documentation on or before June 15, 2003, and does 
    not pay the tax, A is liable for the tax under section 1463, even if 
    B provides the documentation to A after June 15, 2003. Therefore, 
    the provisions in Sec. 1.1441-1(b)(7), regarding late-received 
    documentation would not help A avoid liability for tax under section 
    1463 even if the documentation is furnished within the statute of 
    limitations period of A. This is because, in a case involving 
    interest, the documentation received within the limitations period 
    of the beneficial owner serves as a condition for the interest to 
    qualify as portfolio interest. When documentation is received after 
    the expiration of the beneficial owner's limitations period, the 
    interest can no longer qualify as portfolio interest. On the other 
    hand, A could rely on documentation that it receives after the 
    expiration of B's limitations period to establish B's right to a 
    reduced rate of withholding under an applicable income tax treaty 
    (since, in such a case, a claim of treaty benefits is not 
    conditioned upon providing documentation prior to the expiration of 
    the beneficial owner's limitations period).
    
        (4) Coordination with withholding and reporting rules. For an 
    exemption from withholding under section 1441 with respect to 
    obligations described in this paragraph (c), see Sec. 1.1441-
    1(b)(4)(i). For rules applicable to withholding certificates, see 
    Sec. 1.1441-1(e)(4). For rules regarding documentary evidence, see 
    Sec. 1.6049-5(c)(1). For application of presumptions when the U.S. 
    person cannot reliably associate the payment with documentation, see 
    Sec. 1.1441-1(b)(3). For standards of knowledge applicable to 
    withholding agents, see Sec. 1.1441-7(b). For rules relating to an 
    exemption from Form 1099 reporting and backup withholding under section 
    3406, see section 6049 and Sec. 1.6049-5(b)(8) for the payment of 
    interest and Sec. 1.6045-1(g)(1)(i) for the redemption, retirement, or 
    sale of an obligation in registered form. For rules relating to 
    reporting on Forms 1042 and 1042-S, see Sec. 1.1461-1 (b) and (c).
        (d) Application of repeal of 30-percent withholding to pass-through 
    certificates--(1) In general. Interest received on a pass-through 
    certificate qualifies as portfolio interest under section 871(h)(2) or 
    881(c)(2) if the interest satisfies the conditions described in 
    paragraph (b)(1), (c)(1), or (e) of this section without regard to 
    whether any obligation held by the fund or trust to which the pass-
    through certificate relates is described in paragraph (b)(1), 
    (c)(1)(ii), or (e) of this section. This paragraph (d)(1) applies only 
    to payments made to the holder of the pass-through certificate from the 
    trustee of the pass-through trust and does not apply to payments made 
    to the trustee of the pass-through trust. For example, a mortgage pass-
    through certificate in bearer form must meet the requirements set forth 
    in paragraph (b)(1) of this section, but the obligations held by the 
    fund or trust to which the mortgage pass-through certificate relates 
    need not meet the requirements set forth in paragraph (b)(1), 
    (c)(1)(ii), or (e) of this section. However, for purposes of paragraphs 
    (b)(1), (c)(1)(ii), and (e) of this section and section 127 of the Tax 
    Reform Act of 1984, a pass-through certificate will be considered as 
    issued after July 18, 1984, only to the extent that the obligations 
    held by the fund or trust to which the pass-through certificate relates 
    are issued after July 18, 1984.
        (2) Interest in REMICs. Interest received on a regular or residual 
    interest in a REMIC qualifies as portfolio interest under section 
    871(h)(2) or 881(c)(2) if the interest satisfies the conditions 
    described in paragraph (b)(1), (c)(1)(ii), or (e) of this section. For 
    purposes of paragraph (b)(1), (c)(1)(ii), or (e) of this section, 
    interest on a regular interest in a REMIC is not considered interest on 
    any mortgage obligations held by the REMIC. The foregoing rule, 
    however, applies only to payments made to the holder of the regular 
    interest from the REMIC and does not apply to payments made to the 
    REMIC. For purposes of paragraph (b)(1), (c)(1)(ii), or (e) of this 
    section, interest on a residual interest in a REMIC is considered to be 
    interest on or with respect to the obligations held by the REMIC, and 
    not on or with respect to the residual interest. For purposes of 
    paragraphs (b)(1), (c)(1)(ii), and (e) of this section and section 127 
    of the Tax Reform Act of 1984, a residual interest in a REMIC will be 
    considered as issued after July 18, 1984, only to the extent that the 
    obligations held by the REMIC are issued after July 18, 1984, but a 
    regular interest in a REMIC will be considered as issued after July 18, 
    1984, if the regular interest was issued after July 18, 1984, without 
    regard to the date on which the mortgage obligations held by the REMIC 
    were issued.
        (3) Date of issuance. In general, a mortgage pass-through 
    certificate will be considered to have been issued after July 18, 1984, 
    if all of the mortgages held by the fund or trust were issued after 
    July 18, 1984. If some of the mortgages held by the fund or trust were 
    issued before July 19, 1984, then the portion of any interest payment 
    which represents interest on those mortgages shall not be considered to 
    be portfolio interest. The preceding sentence shall not apply, however, 
    if all of the following conditions are satisfied:
        (i) The mortgage pass-through certificate is issued after December 
    31, 1986;
        (ii) Payment of the mortgage pass-through certificate is guaranteed 
    by, and a guarantee commitment has been issued by, an entity that is 
    independent from the issuer of the underlying obligation;
        (iii) The guarantee commitment with respect to the mortgage pass-
    through certificate cannot have been issued more than 14 months prior 
    to the date on
    
    [[Page 53419]]
    
    which the mortgage pass-through certificate is issued; and
        (iv) The fund or trust to which the mortgage pass-through 
    certificate relates cannot contain mortgage obligations on which the 
    first scheduled monthly payment of principal and interest was made more 
    than twelve months before the date on which the guarantee commitment 
    was made.
        (e) Foreign-targeted registered obligations--(1) General rule. The 
    statement described in paragraph (c)(1)(ii)(C) of this section is not 
    required with respect to interest paid on a registered obligation that 
    is targeted to foreign markets in accordance with the provisions of 
    paragraph (e)(2) of this section if the interest is paid by a U.S. 
    person, a withholding foreign partnership, or a U.S. branch described 
    in Sec. 1.1441-1(b)(2)(iv) (A) or (E) to a registered owner at an 
    address outside the United States, provided that the registered owner 
    is a financial institution described in section 871(h)(5)(B). In that 
    case, the U.S. person otherwise required to deduct and withhold tax may 
    treat the interest as portfolio interest if it does not have actual 
    knowledge that the beneficial owner is a United States person and if it 
    receives the certificate described in paragraph (e)(3)(i) of this 
    section from a financial institution or member of a clearing 
    organization, which member is the beneficial owner of the obligation, 
    or the documentary evidence or statement described in paragraph 
    (e)(3)(ii) of this section from the beneficial owner, in accordance 
    with the procedures described in paragraph (e)(4) of this section.
        (2) Definition of a foreign-targeted registered obligation. An 
    obligation is considered to be targeted to foreign markets for purposes 
    of paragraph (e)(1) of this section if it is sold (or resold in 
    connection with its original issuance) only to foreign persons (or to 
    foreign branches of United States financial institutions described in 
    section 871(h)(5)(B)) in accordance with procedures similar to those 
    prescribed in Sec. 1.163-5(c)(2)(i) (A), (B), or (D). However, the 
    provisions of that section that require an obligation to be offered for 
    sale or resale in connection with its original issuance only outside 
    the United States do not apply with respect to registered obligations 
    offered for sale through a public auction. Similarly, the provisions of 
    that section that require delivery to be made outside the United States 
    do not apply to registered obligations offered for sale through a 
    public auction if the obligations are considered to be in registered 
    form by virtue of the fact that they may be transferred only through a 
    book entry system. The obligation, if evidenced by a physical document 
    other than a confirmation receipt, must contain on its face a legend 
    indicating that it has been sold (or resold in connection with its 
    original issuance) in accordance with those procedures.
        (3) Documentation. A certificate described in paragraph (e)(3)(i) 
    of this section is required if the United States person otherwise 
    required to deduct and withhold tax (the withholding agent) pays 
    interest to a financial institution described in section 871(h)(5)(B) 
    or to a member of a clearing organization, which member is the 
    beneficial owner of the obligation. The documentation described in 
    paragraph (e)(3)(ii) of this section is required if a withholding agent 
    pays interest to a beneficial owner that is neither a financial 
    institution described in section 871(h)(5)(B) nor a member of a 
    clearing organization.
        (i) Interest paid to a financial institution or a member of a 
    clearing organization--(A) Requirement of a certificate--(1) If the 
    withholding agent pays interest to a financial institution described in 
    section 871(h)(5)(B) or to a member of a clearing organization, which 
    member is the beneficial owner of the obligation, the withholding agent 
    must receive a certificate which states that, beginning at the time the 
    last preceding certificate under this paragraph (e)(3)(i) was provided 
    and while the financial institution or clearing organization member has 
    held the obligation, with respect to each foreign-targeted registered 
    obligation which has been held by the person providing the certificate 
    at any time since the provision of such last preceding certificate, 
    either--
        (i) The beneficial owner of the obligation has not been a United 
    States person on each interest payment date; or
        (ii) If the person providing the certificate is a financial 
    institution which is holding or has held an obligation on behalf of the 
    beneficial owner, the beneficial owner of the obligation has been a 
    United States person on one or more interest payment dates (identifying 
    such date or dates), and the person making the certification has 
    forwarded or will forward the appropriate United States beneficial 
    ownership notification to the withholding agent in accordance with the 
    provisions of paragraph (e)(4) of this section.
        (2) The person providing the certificate need not state the 
    foregoing where no previous certificate has been required to be 
    provided by the payee to the withholding agent under this paragraph 
    (e)(3)(i).
        (B) Additional representations. Whether or not a previous 
    certificate has been required to be provided with respect to the 
    obligation, each certificate furnished pursuant to the provisions in 
    this paragraph (e)(3)(i) must further state that, for each foreign-
    targeted registered obligation held and every other such obligation to 
    be acquired and held by the person providing the certificate during the 
    period beginning on the date of the certificate and ending on the date 
    the next certificate is required to be provided, the beneficial owner 
    of the obligation will not be a United States person on each interest 
    payment date while the financial institution or clearing organization 
    member holds the obligation and that, if the person providing the 
    certificate is a financial institution which is holding or will be 
    holding the obligation on behalf of a beneficial owner, such person 
    will provide a United States beneficial ownership notification to the 
    withholding agent (and a clearing organization that is not a 
    withholding agent where a member organization is required by this 
    paragraph (e)(3) to furnish the clearing organization with a statement) 
    in accordance with paragraph (e)(4) of this section in the event such 
    certificate (or statement in the case of a statement provided by a 
    member organization to a clearing organization that is not a 
    withholding agent) is or becomes untrue with respect to any obligation. 
    A clearing organization is an entity which is in the business of 
    holding obligations for member organizations and transferring 
    obligations among such members by credit or debit to the account of a 
    member without the necessity of physical delivery of the obligation.
        (C) Obligation must be identified. The certificate described in 
    paragraph (e)(3)(ii)(A) of this section must identify the obligation or 
    obligations with respect to which it is given, except where the 
    certification is given with respect to an obligation that has not been 
    acquired at the time the certification is made. An obligation is 
    identified if it or the larger issuance of which it is a part is 
    described on a list (e.g., $5 million principal amount of 12% 
    debentures of ABC Savings and Loan Association due February 25, 1995, 
    $3 million principal amount of 10% U.S. Treasury notes due May 28, 
    1990) of all registered obligations targeted to foreign markets held by 
    or on behalf of the person providing the certificate and the list is 
    attached to, and incorporated by reference into, the certificate. The 
    certificate must identify
    
    [[Page 53420]]
    
    and provide the address of the person furnishing the certificate.
        (D) Payment to a depository of a clearing organization. If the 
    withholding agent pays interest to a depository of a clearing 
    organization, then the clearing organization must provide the 
    certificate described in this paragraph (e)(3)(i) to the withholding 
    agent. Any certificate that is provided by a clearing organization must 
    state that the clearing organization has received a statement from each 
    member which complies with the provisions of this paragraph (e)(3)(i) 
    and of paragraph (e)(4) of this section (as if the clearing 
    organization were the withholding agent and regardless of whether the 
    member is a financial institution described in section 871(h)(5)(B)).
        (E) Statement in lieu of Form W-8. Subject to the requirements set 
    out in paragraph (e)(4) of this section, a certificate or statement in 
    the form described in this paragraph (e)(3)(i), in conjunction with the 
    next annual certificate or statement, will serve as the certificate 
    that may be provided in lieu of a Form W-8 with respect to interest on 
    all foreign-targeted registered obligations held by the person making 
    the certification or statement and which is paid to such person within 
    the period beginning on the date of the certificate and ending on the 
    date the next certificate is required to be provided.
        (F) Electronic transmission. The certificate described in this 
    paragraph (e)(3)(i) may be provided electronically under the terms and 
    conditions of Sec. 1.163-5(c)(2)(i)(D)(3)(ii).
        (ii) Payment to a person other than a financial institution or 
    member of a clearing organization. If the withholding agent pays 
    interest to the beneficial owner of an obligation that is neither a 
    financial institution described in section 871(h)(5)(B) nor a member of 
    a clearing organization, then such owner must provide the withholding 
    agent a statement described in paragraph (c)(1)(ii)(C) of this section.
        (4) Applicable procedures regarding documentation--(i) Procedures 
    applicable to certificates required under paragraph (e)(3)(i) of this 
    section--(A) Time for providing certificate. Where no previous 
    certificate for foreign-targeted registered obligations has been 
    provided to the withholding agent by the person providing the 
    certificate under paragraph (e)(3)(i) of this section, such certificate 
    must be provided within the period beginning 90 days prior to the first 
    interest payment date on which the person holds a foreign-targeted 
    registered obligation. The withholding agent may, in its discretion, 
    withhold under section 1441(a), 1442(a), or 1443 if the certificate is 
    not received by the date 30 days prior to the interest payment. 
    Thereafter the certificate must be filed within the period beginning on 
    January 15 and ending January 31 of each year. If a certificate 
    provided pursuant to the first sentence of this paragraph (e)(4)(i)(A) 
    is provided during the period beginning on January 15 and ending on 
    January 31 of any year, then no other certificate need be provided 
    during such period in such year.
        (B) Change of status notification on Form W-9. If, on any interest 
    payment date after the obligation was acquired by the person making the 
    certification, the beneficial owner of the obligation is a U.S. person, 
    then the person to whom the withholding agent pays interest must 
    furnish the withholding agent with a U.S. beneficial ownership 
    notification within 30 days after such interest payment date. A U.S. 
    beneficial ownership notification must include a statement that the 
    beneficial owner of the obligation has been a U.S. person on an 
    interest payment date (identifying such date), that such owner has 
    provided to the person providing the notification a Form W-9 (or a 
    substitute form that is substantially similar to Form W-9 and completed 
    under penalties of perjury), and that the person providing the 
    notification has been and will be complying with the information 
    reporting requirements of section 6049, if applicable.
        (C) Alternative notification statement. Where the person providing 
    the notification described in paragraph (e)(4)(i)(B) of this section is 
    neither a controlled foreign corporation within the meaning of section 
    957(a), nor a foreign corporation 50-percent or more of the gross 
    income of which from all sources for the three-year period ending with 
    the close of the taxable year preceding the date of the statement was 
    effectively connected with the conduct of trade or business in the 
    United States, such person must attach to the notification a copy of 
    the Form W-9 (or substitute form that is substantially similar to Form 
    W-9 and completed under penalties of perjury) provided by the 
    beneficial owner. When a person that provides the U.S. beneficial 
    ownership notification does not attach to it a copy of such Form W-9 
    (or substitute form that is substantially similar to Form W-9 and 
    completed under penalties of perjury), such person must state that it 
    is either a controlled foreign corporation within the meaning of 
    section 957(a), or a foreign corporation 50-percent or more of the 
    gross income of which from all sources for the three-year period ending 
    with the close of its taxable year preceding the date of the statement 
    was effectively connected with the conduct of a trade or business in 
    the United States. A withholding agent that receives a Form W-9 (or a 
    substitute form that is substantially similar to Form W-9 and completed 
    under penalties of perjury) must send a copy of such form to the IRS, 
    at such address as the IRS shall indicate, within 30 days after 
    receiving it and must attach a statement that the Form W-9 or 
    substitute form was provided pursuant to this paragraph (e)(4) with 
    respect to a U.S. person that has owned a foreign-targeted registered 
    obligation on one or more interest payment dates.
        (D) Failure to provide notification. If either a Form W-9 (or a 
    substitute form that is substantially similar to a Form W-9 and 
    completed under penalties of perjury) or the statement described in 
    paragraph (e)(4)(i)(C) of this section is not attached to the U.S. 
    beneficial ownership notification provided pursuant to paragraph 
    (e)(4)(i)(B) of this section, the withholding agent is required to 
    withhold under section 1441, 1442, or 1443 on a payment of interest 
    made after the withholding agent has received the notification unless 
    such form or statement (or a statement that the beneficial owner of the 
    obligation is no longer a U.S. person) is received before the interest 
    payment date from the person who provided the notification (or 
    transferee). If, during the period beginning on the next January 15 and 
    ending on the next January 31, such person certifies as set out in 
    paragraph (e)(3)(i) of this section (subject to paragraph 
    (e)(3)(i)(A)(2) of this section) then the withholding agent is not 
    required to withhold during the year following such certification 
    (unless such person again provides a U.S. beneficial ownership 
    notification without attaching a Form W-9 or substitute form that is 
    substantially similar to Form W-9 and completed under penalties of 
    perjury or the statement described in paragraph (e)(4)(i)(C) of this 
    section).
        (E) Procedures for clearing organizations. Within the period 
    beginning 10 days before the end of the calendar quarter and ending on 
    the last day of each calendar quarter, any clearing organization 
    (including a clearing organization that is a withholding agent) relying 
    on annual certificates or statements from its member organizations, as 
    set forth in paragraph (e)(3)(i) of this section, must send each member 
    organization having submitted such certificate or statement a reminder 
    that the member organization must give the clearing organization a U.S. 
    beneficial ownership
    
    [[Page 53421]]
    
    notification in the circumstances described in paragraph (e)(4)(i)(B) 
    of this section.
        (F) Retention of certificates. The certificate described in 
    paragraph (e)(3)(i) of this section must be retained in the records of 
    the withholding agent for four years from the end of the calendar year 
    in which it was received. The statement described in paragraph 
    (e)(3)(i) of this section that is received by a clearing organization 
    from a member organization must be retained in the records of the 
    clearing organization for four years from the end of the calendar year 
    in which it was received.
        (G) No reporting requirement. The withholding agent who receives 
    the certificate described in paragraph (e)(3)(i) of this section is not 
    required to file Form 1042S to report payments under Sec. 1.1461-1 (b) 
    or (c) of interest that are made with respect to foreign-targeted 
    registered obligations held by the person providing the certificate and 
    are made within the period beginning with the certificate date and 
    ending on the last date for filing the next certificate.
        (ii) Procedures regarding certificates required under paragraph 
    (e)(3)(ii) of this section--(A) Time for providing certificate. The 
    statement described in paragraph (e)(3)(ii) of this section must be 
    provided to the withholding agent within the period beginning 90 days 
    prior to and ending on the first interest payment date on which the 
    withholding agent pays interest to the beneficial owner. The 
    withholding agent may, in its discretion, withhold under section 
    1441(a), 1442(a), or 1443 if the statement is not received by the date 
    30 days prior to the interest payment. The beneficial owner must 
    confirm to the withholding agent the continuing validity of the 
    documentary evidence within the period beginning 90 days prior to the 
    first day of the third calendar year following the provision of such 
    evidence and during the same period every three years thereafter while 
    the owner still owns the obligation. The withholding agent who receives 
    the statement described in paragraph (e)(3)(ii) of this section is not 
    required to report payments of interest under Sec. 1.1461-1(b) or (c) 
    if the payments are made with respect to foreign-targeted registered 
    obligations held by the person who provides the statement and are made 
    within the period beginning with the date on which the statement is 
    provided and ending on the last date for confirming the validity of the 
    statement. The statement received for purposes of paragraph (e)(3)(ii) 
    of this section is subject to the applicable procedures set forth in 
    Sec. 1.1441-1(e)(4).
        (B) Change of status notification on Form W-9. If on any interest 
    payment date after the obligation was acquired by the person providing 
    the statement described in paragraph (e)(3)(ii) of this section, the 
    beneficial owner of the obligation is a U.S. person, then the 
    beneficial owner must so inform the withholding agent within 30 days 
    after such interest payment date and must provide a Form W-9 (or 
    substitute form that is substantially similar completed under penalties 
    of perjury) to the withholding agent. However, the beneficial owner is 
    not required to provide another Form W-9 (or substitute form that is 
    substantially similar and completed under penalties of perjury) if such 
    person has already provided it to the withholding agent within the same 
    calendar year.
        (iii) Disqualification of documentation. In accordance with the 
    provisions of section 871(h)(4), the Secretary may make a determination 
    in appropriate cases that a certificate or statement by any person, or 
    class of persons, does not satisfy the requirements of that section. 
    Should that determination be made, all payments of interest that 
    otherwise qualify as portfolio interest to that person would become 
    subject to 30-percent withholding under section 1441(a), 1442(a), or 
    1443.
        (iv) Special effective date. Notwithstanding the foregoing 
    requirements of this section--
        (A) Any certificate that is required to be filed with the 
    withholding agent during the period beginning on January 15 and ending 
    on January 31, 1986, is not required to state that the beneficial owner 
    of an obligation, prior to the date of the certificate, either was not 
    a United States person or was a United States person if the obligation 
    was acquired by the person providing the certificate on or before 
    September 19, 1985; and
        (B) All of the requirements of this paragraph (e), as in effect 
    prior to the effective date of these amendments, shall remain effective 
    with respect to each interest payment prior to the filing of the 
    certificate described in paragraph (e)(4)(iv)(A) of this section, 
    except that the provisions of paragraph (e)(3) of this section relating 
    to which persons are required to receive certificates or statements and 
    paragraph (e)(3)(ii) or (4)(ii) of this section shall become effective 
    with respect to each interest payment after September 20, 1985.
        (5) Information reporting. See Sec. 1.6049-5(b)(7) for special 
    information reporting rules applicable to interest on foreign-targeted 
    registered obligations. See Sec. 1.6045-1(g)(1)(ii) for information 
    reporting rules applicable to the redemption, retirement, or sale of 
    foreign-targeted registered obligations.
        (f) Securities lending transactions. For applicable rules regarding 
    substitute interest payments received pursuant to a securities lending 
    transaction or a sale-repurchase transaction, see Secs. 1.871-7(b)(2) 
    and 1.881-2(b)(2).
        (g) Definitions. For purposes of this section, the terms U.S. 
    person and foreign person have the meaning set forth in Sec. 1.1441-
    1(c)(2), the term beneficial owner has the meaning set forth in 
    Sec. 1.1441-1(c)(6), the term withholding agent has the meaning set 
    forth in Sec. 1.1441-7(a); the term payee has the meaning set forth in 
    Sec. 1.1441-1(b)(2); and the term payment has the meaning set forth in 
    Sec. 1.1441-2(e).
        (h) Effective date--(1) In general. This section shall apply to 
    payments of interest made after December 31, 1998.
        (2) Transition rule. For purposes of this section, a withholding 
    agent that on December 31, 1998, holds a Form W-8 that is valid under 
    the regulations in effect prior to January 1, 1999 (see 26 CFR parts 1 
    and 35a revised April 1, 1997), may treat it as a valid withholding 
    certificate until its validity expires under these regulations or, if 
    earlier, until December 31, 1999. Further, the validity of a Form W-8 
    that is dated prior to January 1, 1998, is valid on January 1, 1998, 
    and would expire at any time during 1998, is extended until December 
    31, 1998 (and is not extended after December 31, 1998 by reason of the 
    immediately preceding sentence). The rule in this paragraph (h)(2), 
    however, does not apply to extend the validity period of a Form W-8 
    that expires in 1998 solely by reason of changes in the circumstances 
    of the person whose name is on the certificate. Notwithstanding the 
    three preceding sentences, a withholding agent or payor may choose to 
    not take advantage of the transition rule in this paragraph (h)(2) with 
    respect to one or more withholding certificates and, therefore, to 
    require new withholding certificates conforming to the requirements 
    described in this section.
        Par. 6. Section 1.1441-0 is added to read as follows:
    
    
    Sec. 1.1441-0  Outline of regulation provisions for section 1441.
    
        This section lists captions contained in Secs. 1.1441-1 through 
    1.1441-9.
    
    Sec. 1.1441-1  Requirement for the deduction and withholding of tax 
    on payments to foreign persons.
    
    (a) Purpose and scope.
    (b) General rules of withholding.
    
    [[Page 53422]]
    
    (1) Requirement to withhold on payments to foreign persons.
    (2) Determination of payee and payee's status.
    (i) In general.
    (ii) Payments to a U.S. agent of a foreign person.
    (iii) Payments to wholly-owned entities.
    (A) Foreign-owned domestic entity.
    (B) Foreign entity.
    (iv) Payments to a U.S. branch of certain foreign banks or foreign 
    insurance companies.
    (A) U.S. branch treated as a U.S. person in certain cases.
    (B) Consequences to the withholding agent.
    (C) Consequences to the U.S. branch.
    (D) Definition of payment to a U.S. branch.
    (E) Payments to other U.S. branches.
    (v) Payments to a foreign intermediary.
    (A) Payments treated as made to persons for whom the intermediary 
    collects the payment.
    (B) Payments treated as made to foreign intermediary.
    (vi) Other payees.
    (vii) Rules for reliably associating a payment with documentation.
    (3) Presumptions regarding payee's status in the absence of 
    documentation.
    (i) General rules.
    (ii) Presumptions of status as individual, corporation, partnership, 
    etc.
    (iii) Presumption of U.S. or foreign status.
    (A) Payments to exempt recipients.
    (B) Scholarships and grants.
    (C) Pensions, annuities, etc.
    (D) Certain payments to offshore accounts.
    (iv) Grace period in the case of indicia of a foreign payee.
    (v) Special rules applicable to payments to foreign intermediaries.
    (A) Reliance on claim of status as foreign intermediary.
    (B) Beneficial owner documentation is lacking or unreliable.
    (C) Information regarding allocation of payment is lacking or 
    unreliable.
    (D) Certification that the foreign intermediary has furnished 
    documentation for all of the persons to whom the intermediary 
    certificate relates is lacking or unreliable.
    (vi) U.S. branches and foreign flow-through entities.
    (vii) Joint payees.
    (viii) Rebuttal of presumptions.
    (ix) Effect of reliance on presumptions and of actual knowledge or 
    reason to know otherwise.
    (A) General rule.
    (B) Actual knowledge or reason to know that amount of withholding is 
    greater than is required under the presumptions or that reporting of 
    the payment is required.
    (x) Examples.
    (4) List of exemptions from, or reduced rates of, withholding under 
    chapter 3 of the Code.
    (5) Establishing foreign status under applicable provisions of 
    chapter 61 of the Code.
    (6) Rules of withholding for payments by a foreign intermediary or 
    certain U.S. branches.
    (7) Liability for failure to obtain documentation timely or to act 
    in accordance with applicable presumptions.
    (i) General rule.
    (ii) Proof that tax liability has been satisfied.
    (iii) Liability for interest and penalties.
    (iv) Special effective date.
    (v) Examples.
    (8) Adjustments, refunds, or credits of overwithheld amounts.
    (9) Payments to joint owners.
    (c) Definitions.
    (1) Withholding.
    (2) Foreign and U.S. person.
    (3) Individual.
    (i) Alien individual.
    (ii) Nonresident alien individual.
    (4) Certain foreign corporations.
    (5) Financial institution and foreign financial institution.
    (6) Beneficial owner.
    (i) General rule.
    (ii) Special rules for flow-through entities and arrangements.
    (A) General rule.
    (B) Trusts and estates.
    (C) Definition of a flow-through entity or arrangement.
    (7) Withholding agent.
    (8) Person.
    (9) Source of income.
    (10) Chapter 3 of the Code.
    (11) Reduced rate.
    (d) Beneficial owner's or payee's claim of U.S. status.
    (1) In general.
    (2) Payments for which a Form W-9 is otherwise required.
    (3) Payments for which a Form W-9 is not otherwise required.
    (4) Other payments.
    (e) Beneficial owner's claim of foreign status.
    (1) Withholding agent's reliance.
    (i) In general.
    (ii) Payments that a withholding agent may treat as made to a 
    foreign person that is a beneficial owner.
    (A) General rule.
    (B) Additional requirements.
    (2) Beneficial owner withholding certificate.
    (i) In general.
    (ii) Requirements for validity of certificate.
    (3) Intermediary, flow-through, or U.S. branch withholding 
    certificate.
    (i) In general.
    (ii) Intermediary withholding certificate from a qualified 
    intermediary.
    (iii) Intermediary withholding certificate from an intermediary that 
    is not a qualified intermediary.
    (iv) Information to the withholding agent regarding assets owned by 
    beneficial owners, etc.
    (A) General rule.
    (B) Updating the information.
    (C) Examples.
    (v) Withholding certificate from certain U.S. branches.
    (vi) Reportable amounts.
    (4) Applicable rules.
    (i) Who may sign the certificate.
    (ii) Period of validity.
    (A) Three-year period.
    (B) Indefinite validity period.
    (C) Withholding certificate for effectively connected income.
    (D) Change in circumstances.
    (iii) Retention of withholding certificate.
    (iv) Electronic transmission of information.
    (v) Electronic confirmation of taxpayer identifying number on 
    withholding certificate.
    (vi) Acceptable substitute form.
    (vii) Requirement of taxpayer identifying number.
    (viii) Reliance rules.
    (A) Classification.
    (B) Status of payee as an intermediary or as a person acting for its 
    own account.
    (ix) Certificates to be furnished for each account unless exception 
    applies.
    (A) Coordinated account information system in effect.
    (B) Family of mutual funds.
    (C) Special rule for brokers.
    (5) Qualified intermediaries.
    (i) General rule.
    (ii) Definition of qualified intermediary.
    (iii) Withholding agreement.
    (A) In general.
    (B) Terms of the withholding agreement.
    (iv) Assignment of primary withholding responsibility.
    (v) Information to withholding agent regarding applicable 
    withholding rates.
    (A) General rule.
    (B) Categories of assets.
    (C) Updating the information.
    (f) Effective date.
    (1) In general.
    (2) Transition rules.
    (i) Special rules for existing documentation.
    (ii) Lack of documentation for past years.
    
    Sec. 1.1441-2  Amounts subject to withholding.
    
    (a) In general.
    (b) Fixed or determinable annual or periodical income.
    (1) In general.
    (i) Definition.
    (ii) Manner of payment.
    (iii) Determinability of amount.
    (2) Exceptions.
    (3) Original issue discount.
    (i) General rule.
    (ii) Amounts actually known to the withholding agent.
    (iii) Amounts for which certain documentation is not furnished.
    (iv) Exceptions to withholding.
    (4) Securities lending transactions and equivalent transactions.
    (c) Other income subject to withholding.
    (d) Exceptions to withholding where no money or property is paid or 
    lack of knowledge.
    (1) General rule.
    (2) Cancellation of debt.
    (3) Satisfaction of liability following underwithholding by 
    withholding agent.
    (e) Payment.
    (1) General rule.
    (2) Income allocated under section 482.
    (3) Blocked income.
    (4) Special rules for dividends.
    (5) Certain interest accrued by a foreign corporation.
    (6) Payments other than in U.S. dollars.
    (f) Effective date.
    
    [[Page 53423]]
    
    Sec. 1.1441-3  Determination of amounts to be withheld.
    
    (a) Withholding on gross amount.
    (b) Withholding on payments on certain obligations.
    (1) Withholding at time of payment of interest.
    (2) No withholding between interest payment dates.
    (i) In general.
    (ii) Anti-abuse rule.
    (c) Corporate distributions.
    (1) General rule.
    (2) Exception to withholding on distributions.
    (i) In general.
    (ii) Reasonable estimate of accumulated and current earnings and 
    profits on the date of payment.
    (A) General rule.
    (B) Procedures in case of underwithholding.
    (C) Reliance by intermediary on reasonable estimate.
    (D) Example.
    (3) Special rules in the case of distributions from a regulated 
    investment company.
    (i) General rule
    (ii) Reliance by intermediary on reasonable estimate.
    (4) Coordination with withholding under section 1445.
    (i) In general.
    (A) Withholding under section 1441.
    (B) Withholding under both sections 1441 and 1445.
    (C) Coordination with REIT withholding.
    (ii) Intermediary reliance rule.
    (d) Withholding on payments that include an undetermined amount of 
    income.
    (1) In general.
    (2) Withholding on certain gains.
    (e) Payments other than in U.S. dollars.
    (1) In general.
    (2) Payments in foreign currency.
    (f) Tax liability of beneficial owner satisfied by withholding 
    agent.
    (1) General rule.
    (2) Example.
    (g) Conduit financing arrangements
    (h) Effective date.
    
    Sec. 1.1441-4  Exemptions from withholding for certain effectively 
    connected income and other amounts.
    
    (a) Certain income connected with a U.S. trade or business.
    (1) In general.
    (2) Withholding agent's reliance on a claim of effectively connected 
    income.
    (i) In general.
    (ii) Special rules for U.S. branches of foreign persons.
    (A) U.S. branches of certain foreign banks or foreign insurance 
    companies.
    (B) Other U.S. branches.
    (3) Income on notional principal contracts.
    (i) General rule.
    (ii) Exception for certain payments.
    (b) Compensation for personal services of an individual.
    (1) Exemption from withholding.
    (2) Manner of obtaining withholding exemption under tax treaty.
    (i) In general.
    (ii) Withholding certificate claiming withholding exemption.
    (iii) Review by withholding agent.
    (iv) Acceptance by withholding agent.
    (v) Copies of Form 8233.
    (3) Withholding agreements.
    (4) Final payments exemption.
    (i) General rule.
    (ii) Final payment of compensation for personal services.
    (iii) Manner of applying for final payment exemption.
    (iv) Letter to withholding agent.
    (5) Requirement of return.
    (6) Personal exemption.
    (i) In general.
    (ii) Multiple exemptions.
    (iii) Special rule where both certain scholarship and compensation 
    income are received.
    (c) Special rules for scholarship and fellowship income.
    (1) In general.
    (2) Alternate withholding election.
    (d) Annuities received under qualified plans.
    (e) Per diem of certain alien trainees.
    (f) Failure to receive withholding certificates timely or to act in 
    accordance with applicable presumptions.
    (g) Effective date.
    (1) General rule.
    (2) Transition rules.
    
    Sec. 1.1441-5  Withholding on payments to partnerships, trusts, and 
    estates.
    
    (a) Rules of withholding applicable to payments to partnerships.
    (b) Domestic partnerships.
    (1) Exemption from withholding on payment to domestic partnerships.
    (2) Withholding by a domestic partnership.
    (i) In general.
    (ii) Determination by the domestic partnership of partners' status.
    (iii) Reliance on a partner's claim for reduced withholding.
    (iv) Rules for reliably associating a payment with documentation.
    (v) Coordination with chapter 61 of the Internal Revenue Code and 
    section 3406.
    (c) Foreign partnerships.
    (1) Determination of payee.
    (i) Payments treated as made to partners.
    (ii) Payments treated as made to the partnership.
    (iii) Rules for reliably associating a payment with documentation.
    (iv) Example.
    (2) Withholding foreign partnerships.
    (i) Reliance on claim of withholding foreign partnership status.
    (ii) Withholding agreement.
    (A) In general.
    (B) Terms of withholding agreement.
    (iii) Withholding responsibility.
    (iv) Withholding certificate from a withholding foreign partnership.
    (3) Other foreign partnerships.
    (i) Reliance on claim of foreign partnership status.
    (ii) Reliance on claim of reduced withholding by a partnership for 
    its partners.
    (iii) Withholding certificate from a foreign partnership that is not 
    a withholding foreign partnership.
    (iv) Information to withholding agent regarding each partner's 
    distributive share.
    (v) Withholding by a foreign partnership.
    (d) Presumptions regarding payee's status in the absence of 
    documentation.
    (1) In general.
    (2) Determination of partnership's status as domestic or foreign in 
    the absence of documentation.
    (3) Determination of partners' status in the absence of certain 
    documentation.
    (i) Documentation regarding the status of a partner is lacking or 
    unreliable.
    (ii) Information regarding the allocation of payment is lacking or 
    unreliable.
    (iii) Certification that the foreign partnership has furnished 
    documentation for all of the persons to whom the intermediary 
    certificate relates is lacking or unreliable.
    (iv) Determination by a withholding foreign partnership of the 
    status of its partners.
    (4) Examples.
    (e) Trusts and estates. [Reserved]
    (f) Failure to receive withholding certificate timely or to act in 
    accordance with applicable presumptions.
    (g) Effective date.
    (1) General rule.
    (2) Transition rules.
    
    Sec. 1.1441-6  Claim of reduced withholding under an income tax 
    treaty.
    
    (a) In general.
    (b) Reliance on claim of reduced withholding under an income tax 
    treaty.
    (1) In general.
    (2) Exemption from requirement to furnish a taxpayer identifying 
    number and special documentary evidence rules for certain income.
    (i) General rule.
    (ii) Income to which special rules apply.
    (3) Competent authority agreements.
    (4) Eligibility for reduced withholding under an income tax treaty 
    in the case of a payment to a person other than an individual.
    (i) General rule.
    (ii) Withholding certificates.
    (A) In general.
    (B) Certification by qualified intermediary.
    (iii) Multiple claims of treaty benefits.
    (iv) Examples.
    (5) Claim of benefits under an income tax treaty by a U.S. person.
    (c) Proof of tax residence in a treaty country and certification of 
    entitlement to treaty benefits. (1) In general.
    (2) Certification of taxpayer identifying number.
    (i) In general.
    (ii) IRS-certified TIN.
    (iii) Special rules for qualified intermediaries.
    (3) Certificate of residence.
    (4) Documentary evidence establishing residence in the treaty 
    country.
    (i) Individuals.
    (ii) Persons other than individuals.
    (5) Certifications regarding entitlement to treaty benefits.
    (i) Certification regarding conditions under a Limitation on 
    Benefits Article.
    (ii) Certification regarding whether the taxpayer is deriving the 
    income.
    (d) Joint owners.
    (e) Related party dividends under U.S.-Denmark income tax treaty.
    
    [[Page 53424]]
    
    (f) Failure to receive withholding certificate timely.
    (g) Effective date.
    (1) General rule.
    (2) Transition rules.
    
    Sec. 1.1441-7  General provisions relating to withholding agents.
    
    (a) Withholding agent defined.
    (b) Standards of knowledge.
    (1) In general.
    (2) Reason to know.
    (i) In general.
    (ii) Limits on reason to know in certain cases.
    (3) Coordinated account information systems.
    (c) Authorized agent.
    (1) In general.
    (2) Authorized foreign agent.
    (3) Notification.
    (4) Liability of U.S. withholding agent.
    (5) Filing of returns.
    (d) United States obligations.
    (e) Assumed obligations.
    (f) Conduit financing arrangements.
    (g) Effective date.
    
    Sec. 1.1441-8  Exemption from withholding for payments to foreign 
    governments, international organizations, foreign central banks of 
    issue, and the Bank for International Settlements.
    
    (a) Foreign governments.
    (b) Reliance on claim of exemption by foreign government.
    (c) Income of a foreign central bank of issue or the Bank for 
    International
    Settlements.
    (1) Certain interest income.
    (2) Bankers' acceptances.
    (d) Exemption for payments to international organizations.
    (e) Failure to receive withholding certificate timely and other 
    applicable procedures.
    (f) Effective date.
    (1) In general.
    (2) Transition rules.
    
    Sec. 1.1441-9  Exemption from withholding on exempt income of a 
    foreign tax-exempt organization, including foreign private 
    foundations.
    
    (a) Exemption from withholding for exempt income.
    (b) Reliance on foreign organization's claim of exemption from 
    withholding.
    (1) General rule.
    (2) Withholding certificate.
    (3) Presumptions in the absence of documentation.
    (4) Reason to know.
    (c) Failure to receive withholding certificate timely and other 
    applicable procedures.
    (d) Effective date.
    (1) In general.
    (2) Transition rules.
    
        Par. 7. Sections 1.1441-1 and 1.1441-2 are revised to read as 
    follows:
    
    
    Sec. 1.1441-1  Requirement for the deduction and withholding of tax on 
    payments to foreign persons.
    
        (a) Purpose and scope. This section, Secs. 1.1441-2 through 1.1441-
    9, and 1.1443-1 provide rules for withholding under sections 1441, 
    1442, and 1443 when a payment is made to a foreign person. This section 
    provides definitions of terms used in chapter 3 of the Internal Revenue 
    Code (Code) and regulations thereunder. It prescribes procedures to 
    determine whether an amount must be withheld under chapter 3 of the 
    Code and documentation that a withholding agent may rely upon to 
    determine the status of a payee or a beneficial owner as a U.S. person 
    or as a foreign person and other relevant characteristics of the payee 
    that may affect a withholding agent's obligation to withhold under 
    chapter 3 of the Code and the regulations thereunder. Special 
    procedures regarding payments to foreign persons that act as 
    intermediaries are also provided. Section 1.1441-2 defines the income 
    subject to withholding under section 1441, 1442, and 1443 and the 
    regulations under these sections. Section 1.1441-3 provides rules 
    regarding the amount subject to withholding. Section 1.1441-4 provides 
    exemptions from withholding for, among other things, certain income 
    effectively connected with the conduct of a trade or business in the 
    United States, including certain compensation for the personal services 
    of an individual. Section 1.1441-5 provides rules for withholding on 
    payments made to flow-through entities and other similar arrangements. 
    Section 1.1441-6 provides rules for claiming a reduced rate of 
    withholding under an income tax treaty. Section 1.1441-7 defines the 
    term withholding agent and provides due diligence rules governing a 
    withholding agent's obligation to withhold. Section 1.1441-8 provides 
    rules for relying on claims of exemption from withholding for payments 
    to a foreign government, an international organization, a foreign 
    central bank of issue, or the Bank for International Settlements. 
    Sections 1.1441-9 and 1.1443-1 provide rules for relying on claims of 
    exemption from withholding for payments to foreign tax exempt 
    organizations and foreign private foundations.
        (b) General rules of withholding--(1) Requirement to withhold on 
    payments to foreign persons. A withholding agent must withhold 30-
    percent of any payment of an amount subject to withholding made to a 
    payee that is a foreign person unless it can reliably associate the 
    payment with documentation upon which it can rely to treat the payment 
    as made to a beneficial owner that is a U.S. person or as made to a 
    beneficial owner that is a foreign person entitled to a reduced rate of 
    withholding. However, a withholding agent making a payment to a foreign 
    person need not withhold where the foreign person assumes 
    responsibility for withholding on the payment under chapter 3 of the 
    Code and the regulations thereunder as a qualified intermediary (see 
    paragraph (e)(5) of this section), as a U.S. branch of a foreign person 
    (see paragraph (b)(2)(iv) of this section), as a withholding foreign 
    partnership (see Sec. 1.1441-5(c)(2)(i)), or as an authorized foreign 
    agent (see Sec. 1.1441-7(c)(1)). This section (dealing with general 
    rules of withholding and claims of foreign or U.S. status by a payee or 
    a beneficial owner), and Secs. 1.1441-4, 1.1441-5, 1.1441-6, 1.1441-8, 
    1.1441-9, and 1.1443-1 provide rules for determining whether 
    documentation is required as a condition for reducing the rate of 
    withholding on a payment to a foreign beneficial owner or to a U.S. 
    payee and if so, the nature of the documentation upon which a 
    withholding agent may rely in order to reduce such rate. Paragraph 
    (b)(2) of this section prescribes the rules for determining who the 
    payee is, the extent to which a payment is treated as made to a foreign 
    payee, and reliable association of a payment with documentation. 
    Paragraph (b)(3) of this section describes the applicable presumptions 
    for determining the payee's status as U.S. or foreign and the payee's 
    other characteristics (i.e., as an owner or intermediary, as an 
    individual, partnership, corporation, etc.). Paragraph (b)(4) of this 
    section lists the types of payments for which the 30-percent 
    withholding rate may be reduced. Because the treatment of a payee as a 
    U.S. or a foreign person also has consequences for purposes of making 
    an information return under the provisions of chapter 61 of the Code 
    and for withholding under other provisions of the Code, such as 
    sections 3402, 3405 or 3406, paragraph (b)(5) of this section lists 
    applicable provisions outside chapter 3 of the Code that require 
    certain payees to establish their foreign status (e.g., in order to be 
    exempt from information reporting). Paragraph (b)(6) of this section 
    describes the withholding obligations of a foreign person making a 
    payment that it has received in its capacity as an intermediary. 
    Paragraph (b)(7) of this section describes the liability of a 
    withholding agent that fails to withhold at the required 30-percent 
    rate in the absence of documentation. Paragraph (b)(8) of this section 
    deals with adjustments and refunds in the case of overwithholding. 
    Paragraph (b)(9) of this section deals with determining the status of 
    the payee
    
    [[Page 53425]]
    
    when the payment is jointly owned. See paragraph (c)(6) of this section 
    for a definition of beneficial owner. See Sec. 1.1441-7(a) for a 
    definition of withholding agent. See Sec. 1.1441-2(a) for the 
    determination of an amount subject to withholding. See Sec. 1.1441-2(e) 
    for the definition of a payment and when it is considered made. Except 
    as otherwise provided, the provisions of this section apply only for 
    purposes of determining a withholding agent's obligation to withhold 
    under chapter 3 of the Code and the regulations thereunder.
        (2) Determination of payee and payee's status--(i) In general. 
    Except as otherwise provided in this paragraph (b)(2), a payee is the 
    person to whom a payment is made, regardless of whether such person is 
    the beneficial owner of the amount (as defined in paragraph (c)(6) of 
    this section). A foreign payee is a payee who is a foreign person. A 
    U.S. payee is a payee who is a U.S. person. Generally, the 
    determination by a withholding agent of the U.S. or foreign status of a 
    payee and of its other relevant characteristics (e.g., as a beneficial 
    owner or intermediary, or as an individual, corporation, or flow-
    through entity) is made on the basis of a withholding certificate that 
    is a Form W-8 or a Form 8233 (indicating foreign status of the payee or 
    beneficial owner) or a Form W-9 (indicating U.S. status of the payee). 
    The provisions of this paragraph (b)(2), paragraph (b)(3) of this 
    section, and Sec. 1.1441-5 (c), (d), and (e) dealing with 
    determinations of payee and applicable presumptions in the absence of 
    documentation, apply only to payments of amounts subject to withholding 
    under chapter 3 of the Code (within the meaning of Sec. 1.1441-2(a)). 
    Similar payee and presumption provisions are set forth under 
    Sec. 1.6049-5(d) for payments of amounts that are not subject to 
    withholding under chapter 3 of the Code (or the regulations thereunder) 
    but that may be reportable under provisions of chapter 61 of the Code 
    (and the regulations thereunder). See paragraph (d) of this section for 
    documentation upon which the withholding agent may rely in order to 
    treat the payee or beneficial owner as a U.S. person. See paragraph (e) 
    of this section for documentation upon which the withholding agent may 
    rely in order to treat the payee or beneficial owner as a foreign 
    person. For applicable presumptions of status in the absence of 
    documentation, see paragraph (b)(3) of this section and Sec. 1.1441-
    5(d). For definitions of a foreign person and U.S. person, see 
    paragraph (c)(2) of this section.
        (ii) Payments to a U.S. agent of a foreign person. A withholding 
    agent making a payment to a U.S. person (other than to a U.S. branch 
    that is treated as a U.S. person pursuant to paragraph (b)(2)(iv) of 
    this section) and who has actual knowledge that the U.S. person 
    receives the payment as an agent of a foreign person must treat the 
    payment as made to the foreign person. However, the withholding agent 
    may treat the payment as made to the U.S. person if the U.S. person is 
    a financial institution and the withholding agent has no reason to 
    believe that the financial institution will not comply with its 
    obligation to withhold. See paragraph (c)(5) of this section for the 
    definition of a financial institution.
        (iii) Payments to wholly-owned entities--(A) Foreign-owned domestic 
    entity. A payment to a wholly-owned domestic entity that is disregarded 
    for federal tax purposes under Sec. 301.7701-2(c)(2) of this chapter as 
    an entity separate from its owner and whose single owner is a foreign 
    person shall be treated as a payment to the owner of the entity, 
    subject to the provisions of paragraph (b)(2)(iv) of this section. For 
    purposes of this paragraph (b)(2)(iii)(A), a domestic entity means a 
    person that would be treated as a U.S. person if it had an election in 
    effect under Sec. 301.7701-3(c)(1)(i) of this chapter to be treated as 
    a corporation. For example, a limited liability company, A, organized 
    under the laws of the State of Delaware, opens an account at a U.S. 
    bank. Upon opening of the account, the bank requests A to furnish a 
    Form W-9 as required under section 6049(a) and the regulations under 
    that section. A does not have an election in effect under 
    Sec. 301.7701-3(c)(1)(i) of this chapter and, therefore, is not treated 
    as an organization taxable as a corporation, including for purposes of 
    the exempt recipient provisions in Sec. 1.6049-4(c)(1). If A has a 
    single owner and the owner is a foreign person (as defined in paragraph 
    (c)(2) of this section), then A may not furnish a Form W-9 because it 
    may not represent that it is a U.S. person for purposes of the 
    provisions of chapters 3 and 61 of the Code, and section 3406. 
    Therefore, A must furnish a Form W-8 with the name, address, and 
    taxpayer identifying number (TIN) (if required) of the foreign person 
    who is the single owner in the same manner as if the account were 
    opened directly by the foreign single owner. See Secs. 1.894-1T(d) and 
    1.1441-6(b)(4) for special rules where the entity's owner is claiming a 
    reduced rate of withholding under an income tax treaty.
        (B) Foreign entity. A payment to a wholly-owned foreign entity that 
    is disregarded under Sec. 301.7701-2(c)(2) of this chapter as an entity 
    separate from its owner shall be treated as a payment to the single 
    owner of the entity, subject to the provisions of paragraph (b)(2)(iv) 
    of this section if the foreign entity has a U.S. branch in the United 
    States. For purposes of this paragraph (b)(2)(iii)(B), a foreign entity 
    means a person that would be treated as a foreign person if it had an 
    election in effect under Sec. 301.7701-3(c)(1)(i) of this chapter to be 
    treated as a corporation. See Secs. 1.894-1T(d) and 1.1441-6(b)(4) for 
    special rules where the foreign entity or its owner is claiming a 
    reduced rate of withholding under an income tax treaty. Thus, for 
    example, if the foreign entity's single owner is a U.S. person, the 
    payment shall be treated as a payment to a U.S. person. Therefore, 
    based on the savings clause in U.S. income tax treaties, such an entity 
    may not claim benefits under an income tax treaty even if the entity is 
    organized in a country with which the United States has an income tax 
    treaty in effect and treats the entity as a non-fiscally transparent 
    entity. See Sec. 1.894-1T(d)(6), Example 10. Unless it has actual 
    knowledge or reason to know that the foreign entity to whom the payment 
    is made is disregarded under Sec. 301.7701-2(c)(2) of this chapter, a 
    withholding agent may treat a foreign entity as an entity separate from 
    its owner unless it can reliably associate the payment with a 
    withholding certificate from the entity's owner.
        (iv) Payments to a U.S. branch of certain foreign banks or foreign 
    insurance companies--(A) U.S. branch treated as a U.S. person in 
    certain cases. A payment to the U.S. branch of a foreign person is a 
    payment to the foreign person. However, a U.S. branch described in this 
    paragraph (b)(2)(iv)(A) and a withholding agent (including another U.S. 
    branch described in this paragraph (b)(2)(iv)(A)) may agree to treat 
    the branch as a U.S. person for purposes of withholding on specified 
    payments to the U.S. branch. Such agreement must be evidenced by a U.S. 
    branch withholding certificate described in paragraph (e)(3)(v) of this 
    section furnished by the U.S. branch to the withholding agent. A U.S. 
    branch described in this paragraph (b)(2)(iv)(A) is any U.S. branch of 
    a foreign bank subject to regulatory supervision by the Federal Reserve 
    Board or a U.S. branch of a foreign insurance company required to file 
    an annual statement on a form approved by the National Association of 
    Insurance Commissioner with the Insurance Department of a State, a 
    Territory, or the District of Columbia. The Internal Revenue Service 
    (IRS) may approve a list of U.S. branches that may
    
    [[Page 53426]]
    
    qualify for treatment as a U.S. person under this paragraph 
    (b)(2)(iv)(A) (see Sec. 601.601(d)(2) of this chapter).
        (B) Consequences to the withholding agent. Any person that is 
    otherwise a withholding agent regarding a payment to a U.S. branch 
    described in paragraph (b)(2)(iv)(A) of this section shall treat the 
    payment in one of the following ways--
        (1) As a payment to a U.S. person, in which case the withholding 
    agent is not responsible for withholding on such payment to the extent 
    it can reliably associate the payment with a withholding certificate 
    described in paragraph (e)(3)(v) of this section that has been 
    furnished by the U.S. branch under its agreement with the withholding 
    agent to be treated as a U.S. person;
        (2) As a payment directly to the persons whose names are on 
    withholding certificates or other appropriate documentation forwarded 
    by the U.S. branch to the withholding agent when no agreement is in 
    effect to treat the U.S. branch as a U.S. person for such payment, to 
    the extent the withholding agent can reliably associate the payment 
    with such certificates or documentation; or
        (3) As a payment to a foreign person of income that is effectively 
    connected with the conduct by that foreign person of a trade or 
    business in the United States if the withholding agent cannot reliably 
    associate the payment with a certificate from the U.S. branch or any 
    other certificate or other appropriate documentation from another 
    person.
        (C) Consequences to the U.S. branch. A U.S. branch that is treated 
    as a U.S. person under paragraph (b)(2)(iv)(A) of this section shall be 
    treated as a person for purposes of section 1441(a) and all other 
    provisions of chapter 3 of the Code and the regulations thereunder for 
    any payment that it receives as such. Thus, the U.S. branch shall be 
    responsible for withholding on the payment in accordance with the 
    provisions under chapter 3 of the Code and the regulations thereunder 
    and other applicable withholding provisions of the Code. For this 
    purpose, it shall obtain and retain documentation from payees or 
    beneficial owners of the payments that it receives as a U.S. person in 
    the same manner as if it were a separate entity. For example, if a U.S. 
    branch receives a payment on behalf of its home office and the home 
    office is a qualified intermediary, the U.S. branch must obtain a 
    withholding certificate described in paragraph (e)(3)(ii) of this 
    section from its home office. In addition, a U.S. branch that has not 
    provided documentation to the withholding agent for a payment that is, 
    in fact, not effectively connected income is a withholding agent with 
    respect to that payment. See paragraph (b)(6) of this section.
        (D) Definition of payment to a U.S. branch. A payment is treated as 
    a payment to a U.S. branch of a foreign bank or foreign insurance 
    company if the payment is credited to an account maintained in the 
    United States in the name of a U.S. branch of the foreign person, or 
    the payment is made to an address in the United States where the U.S. 
    branch is located and the name of the U.S. branch appears on documents 
    (in written or electronic form) associated with the payment (e.g., the 
    check mailed or a letter addressed to the branch).
        (E) Payments to other U.S. branches. Similar withholding procedures 
    may apply to payments to U.S. branches that are not described in 
    paragraph (b)(2)(iv)(A) of this section to the extent permitted by the 
    district director or the Assistant Commissioner (International). Any 
    such branch must establish that its situation is analogous to that of a 
    U.S. branch described in paragraph (b)(2)(iv)(A) of this section 
    regarding its registration with, and regulation by, a U.S. governmental 
    institution, the type and amounts of assets it is required to, or 
    actually maintain in the United States, and the personnel who carry out 
    the activities of the branch in the United States. In the alternative, 
    the branch must establish that the withholding and reporting 
    requirements under chapter 3 of the Code and the regulations thereunder 
    impose an undue administrative burden and that the collection of the 
    tax imposed by section 871(a) or 881(a) on the foreign person (or its 
    members in the case of a foreign partnership) will not be jeopardized 
    by the exemption from withholding. Generally, an undue administrative 
    burden will be found to exist in a case where the person entitled to 
    the income, such as a foreign insurance company, receives from the 
    withholding agent income on securities issued by a single corporation, 
    some of which is, and some of which is not, effectively connected with 
    conduct of a trade or business within the United States and the 
    criteria for determining the effective connection are unduly difficult 
    to apply because of the circumstances under which such securities are 
    held. No exemption from withholding shall be granted under this 
    paragraph (b)(2)(iv)(E) unless the person entitled to the income 
    complies with such other requirements as may be imposed by the district 
    director or the Assistant Commissioner (International) and unless the 
    district director or the Assistant Commissioner (International) is 
    satisfied that the collection of the tax on the income involved will 
    not be jeopardized by the exemption from withholding. The IRS may 
    prescribe such procedures as are necessary to make these determinations 
    (see Sec. 601.601(d)(2) of this chapter).
        (v) Payments to a foreign intermediary--(A) Payments treated as 
    made to persons for whom the intermediary collects the payment. Except 
    as otherwise provided in paragraph (b)(2)(v)(B) of this section, a 
    payment to a person that the withholding agent may treat as a foreign 
    intermediary in accordance with the provisions of paragraph 
    (b)(3)(v)(A) of this section is treated as a payment made directly to 
    the person or persons for whom the intermediary collects the payment. 
    Thus, for example, a payment that the withholding agent can reliably 
    associate with a withholding certificate from a qualified intermediary 
    (defined in paragraph (e)(5)(ii) of this section) and that is allocable 
    to the category of assets described in paragraph (e)(5)(v)(B)(3) of 
    this section (i.e., assets allocable to persons for whom the foreign 
    qualified intermediary does not hold documentation as specified under 
    its agreement with the IRS) is treated as a payment to the persons 
    holding assets in that category. See paragraph (b)(3)(v)(B) of this 
    section for applicable presumptions in such a case. For similar rules 
    for payments to flow-through entities, see Sec. 1.1441-5 (c)(1)(i) and 
    (e).
        (B) Payments treated as made to foreign intermediary. A payment to 
    a person that the withholding agent can reliably associate with a 
    withholding certificate described in paragraph (e)(3)(ii) of this 
    section from a qualified intermediary that has elected to assume 
    primary withholding responsibility in accordance with paragraph 
    (e)(5)(iv) of this section is treated as a payment to the qualified 
    intermediary, except to the extent of the portion of the payment that 
    the withholding agent can reliably associate with Forms W-9. See 
    paragraphs (b)(1) and (e)(5)(iv) of this section for consequences to 
    the withholding agent.
        (vi) Other payees. A payment to a person described in Sec. 1.6049-
    4(c)(1)(ii) that the withholding agent would treat as a payment to a 
    foreign person without obtaining documentation for purposes of 
    information reporting under section 6049 (if the payment were interest) 
    is treated as a payment to a foreign payee for purposes of chapter 3 of 
    the Code and the regulations thereunder (or to a foreign beneficial 
    owner to the extent provided in paragraph (e)(1)(ii)(A) (6) or (7) of 
    this
    
    [[Page 53427]]
    
    section). Further, payments that the withholding agent can reliably 
    associate with documentary evidence described in Sec. 1.6049-5(c)(4) 
    relating to the payee is treated as a payment to a foreign payee. A 
    payment that the withholding agent may treat as a payment to an 
    authorized foreign agent (as defined in Sec. 1.1441-7(c)(2)) is treated 
    as a payment to the agent and not to the persons for whom the agent 
    collects the payment. See Sec. 1.1441-5 (b)(1) and (c)(1) for payee 
    determinations for payments to partnerships. See Sec. 1.1441-5(e) for 
    payee determinations for payments to foreign trusts or foreign estates.
        (vii) Rules for reliably associating a payment with documentation. 
    Generally, a withholding agent can reliably associate a payment with 
    documentation if, for that payment, it holds valid documentation to 
    which the payment relates, it can reliably determine how much of the 
    payment relates to the valid documentation (e.g., based on information 
    furnished in accordance with paragraph (e)(3)(iv) or (5)(v) of this 
    section in the case of a payment to a foreign intermediary or in 
    accordance with Sec. 1.1441-5(c)(3)(iv) in the case of a payment to a 
    foreign partnership), and it has no actual knowledge or reason to know 
    that any of the information or certifications stated in the 
    documentation are incorrect. The documentation referred to in this 
    paragraph (b)(2)(vii) is documentation described in paragraph (d) or 
    (e) of this section upon which a withholding agent may rely in order to 
    treat the payment as a payment made to a payee or beneficial owner that 
    is a U.S. or a foreign person, and to ascertain the characteristics of 
    the payee or beneficial owner, as may be relevant to withholding or 
    reporting under chapter 3 of the Code and the regulations thereunder 
    (e.g., beneficial owner or intermediary, corporation or partnership). 
    For purposes of this paragraph (b)(2)(vii), documentation also includes 
    a withholding certificate described in paragraph (e)(3)(ii) of this 
    section from a person representing to be a qualified intermediary that 
    has assumed primary withholding responsibility, a withholding 
    certificate described in paragraph (e)(3)(v) of this section from a 
    person representing to be a U.S. branch described in paragraph 
    (b)(2)(iv)(A) of this section, a withholding certificate described in 
    Sec. 1.1441-5(c)(2)(iv) from a person representing to be a withholding 
    foreign partnership, and the agreement that the withholding agent has 
    in effect with an authorized foreign agent in accordance with 
    Sec. 1.1441-7(c)(2)(i). A withholding agent that is not required to 
    obtain documentation with respect to a payment is considered to lack 
    documentation for purposes of this paragraph (b)(2)(vii). For example, 
    a withholding agent paying U.S. source interest to a person that is an 
    exempt recipient, as defined in Sec. 1.6049-4(c)(1)(ii), is not 
    required to obtain documentation from that person in order to determine 
    whether an amount paid to that person is reportable under an applicable 
    information reporting provision under chapter 61 of the Code. 
    Therefore, the withholding agent may rely on the provisions of 
    paragraph (b)(3)(iii)(A) of this section to determine whether the 
    person is presumed to be a U.S. person (in which case, no withholding 
    is required under this section), or whether the person is presumed to 
    be a foreign person (in which case 30-percent withholding is required 
    under this section). See paragraph (b)(3)(v)(A) of this section for 
    special reliance rules in the case of a payment to a foreign 
    intermediary and Sec. 1.1441-5(d)(3) for special reliance rules in the 
    case of a payment to a foreign partnership.
        (3) Presumptions regarding payee's status in the absence of 
    documentation--(i) General rules. A withholding agent that cannot 
    reliably associate a payment with documentation may rely on the 
    presumptions of this paragraph (b)(3) in order to determine the status 
    of the payee as a U.S. or a foreign person and the payee's other 
    relevant characteristics (e.g., as an owner or intermediary, as an 
    individual, trust, partnership, or corporation). The determination of 
    withholding and reporting requirements applicable to payments to a 
    person presumed to be a foreign person is governed only by the 
    provisions of chapter 3 of the Code and the regulations thereunder. For 
    the determination of withholding and reporting requirements applicable 
    to payments to a person presumed to be a U.S. person, see chapter 61 of 
    the Code, section 3402, 3405, or 3406, and the regulations under these 
    provisions. A presumption that a payee is a foreign payee is not a 
    presumption that the payee is a foreign beneficial owner. Therefore, 
    the provisions of this paragraph (b)(3) have no effect for purposes of 
    reducing the withholding rate if associating the payment with 
    documentation of foreign beneficial ownership is required as a 
    condition for such rate reduction. See paragraph (b)(3)(ix) of this 
    section for consequences to a withholding agent that fails to withhold 
    in accordance with the presumptions set forth in this paragraph (b)(3) 
    or if the withholding agent has actual knowledge or reason to know of 
    facts that are contrary to the presumptions set forth in this paragraph 
    (b)(3). See paragraph (b)(2)(vii) of this section for rules regarding 
    the extent which a withholding agent can reliably associate a payment 
    with documentation.
        (ii) Presumptions of status as individual, corporation, 
    partnership, etc. A withholding agent that cannot reliably associate a 
    payment with documentation must presume that the payee is an 
    individual, a trust, or an estate, if the payee appears to be such 
    person (i.e., based on the payee's name or other indications). In the 
    absence of reliable indications that the payee is an individual, 
    estate, or trust, the withholding agent must presume that the payee is 
    a corporation or one of the persons enumerated under Sec. 1.6049-
    4(c)(1)(ii) (B) through (Q) if it can be so treated under Sec. 1.6049-
    4(c)(1)(ii)(A)(1) or any one of the paragraphs under Sec. 1.6049-
    4(c)(1)(ii) (B) through (Q) without the need to furnish documentation. 
    If the withholding agent cannot treat a payee as a person described in 
    Sec. 1.6049-4(c)(1)(ii) (A)(1) through (Q), then the payee shall be 
    presumed to be a partnership. The fact that a payee is presumed to have 
    a certain status under the provisions of this paragraph (b)(3)(ii) does 
    not mean that it is excused from furnishing documentation, if 
    documentation is otherwise required in order to obtain a reduced rate 
    of withholding under this section. For example, if, for purposes of 
    this paragraph (b)(3)(ii), a payee is presumed to be a tax-exempt 
    organization based on Sec. 1.6049-4(c)(1)(ii)(B), the withholding agent 
    cannot rely on this presumption to reduce the rate of withholding on 
    payments to such person (if such person is also presumed to be a 
    foreign person under paragraph (b)(3)(iii)(A) of this section) because 
    a reduction in the rate of withholding for payments to a foreign tax-
    exempt organization generally requires that a valid Form W-8 described 
    in Sec. 1.1441-9(b)(2) be furnished to the withholding agent.
        (iii) Presumption of U.S. or foreign status. A payment that the 
    withholding agent cannot reliably associate with documentation is 
    presumed to be made to a U.S. person, except as otherwise provided in 
    this paragraph (b)(3)(iii), in paragraphs (b)(3) (iv) and (v) of this 
    section, or in Sec. 1.1441-5 (d) or (e).
        (A) Payments to exempt recipients. If a withholding agent cannot 
    reliably associate a payment with documentation from the payee and the
    
    [[Page 53428]]
    
    payee is an exempt recipient (as determined under the provisions of 
    Sec. 1.6049-4(c)(1)(ii) in the case of interest, or under similar 
    provisions under chapter 61 of the Code applicable to the type of 
    payment involved, but not including a payee that the withholding agent 
    may treat as a foreign intermediary in accordance with paragraph 
    (b)(3)(v) of this section), the payee is presumed to be a foreign 
    person and not a U.S. person--
        (1) If the withholding agent has actual knowledge of the payee's 
    employer identification number and that number begins with the two 
    digits ``98'';
        (2) If the withholding agent's communications with the payee are 
    mailed to an address in a foreign country;
        (3) If the name of the payee indicates that the entity is the type 
    of entity that is on the per se list of foreign corporations contained 
    in Sec. 301.7701-2(b)(8)(i) of this chapter; or
        (4) If the payment is made outside the United States (as defined in 
    Sec. 1.6049-5(e)).
        (B) Scholarships and grants. A payment representing taxable 
    scholarship or fellowship grant income that does not represent 
    compensation for services (but is not excluded from tax under section 
    117) and that a withholding agent that cannot reliably associate with 
    documentation is presumed to be made to a foreign person if the 
    withholding agent has a record that the payee has a U.S. visa that is 
    not an immigrant visa. See section 871(c) and Sec. 1.1441-4(c) for 
    applicable tax rate and withholding rules.
        (C) Pensions, annuities, etc. A payment from a trust described in 
    section 401(a), an annuity plan described in section 401(a), an annuity 
    plan described in section 403(a), or a payment with respect to any 
    annuity, custodial account, or retirement income account described in 
    section 403(b) that a withholding agent cannot reliably associate with 
    documentation is presumed to be made to a U.S. person only if the 
    withholding agent has a record of a Social Security number for the 
    payee and relies on a mailing address described in the following 
    sentence. A mailing address is an address used for purposes of 
    information reporting or otherwise communicating with the payee that is 
    an address in the United States or in a foreign country with which the 
    United States has an income tax treaty in effect that provides that the 
    payee, if an individual resident in that country, would be entitled to 
    an exemption from U.S. tax on amounts described in this paragraph 
    (b)(3)(iii)(C). Any payment described in this paragraph (b)(3)(iii)(C) 
    that is not presumed made to a U.S. person is presumed to be made to a 
    foreign person. A withholding agent making a payment to a person 
    presumed to be a foreign person may not reduce the 30-percent amount of 
    withholding required on such payment unless it receives a withholding 
    certificate described in paragraph (e)(2)(i) of this section furnished 
    by the beneficial owner. For basis of reduction in the 30-percent rate, 
    see Sec. 1.1441-4(e) or Sec. 1.1441-6(b).
        (D) Certain payments to offshore accounts. A payment that would be 
    subject to withholding under section 1441, 1442, or 1443 if made to a 
    foreign person and is exempt from backup withholding under section 3406 
    by reason of Sec. 31.3406(g)-1(e) of this chapter (relating to 
    exemption from backup withholding under section 3406 for certain 
    payments to offshore accounts) is presumed to be made to a foreign 
    payee.
        (iv) Grace period in the case of indicia of a foreign payee. A 
    withholding agent may choose, in its discretion, to apply the 
    provisions of Sec. 1.6049-5(d)(2)(ii) regarding a 90-day grace period 
    for purposes of this paragraph (b)(3) (by substituting the term 
    withholding agent for the term payor) to amounts described in 
    Sec. 1.1441-6(b)(2)(ii) and to amounts covered by a Form 8233 described 
    in Sec. 1.1441-4(b)(2)(ii). Thus, for these amounts, a withholding 
    agent may, in its discretion, choose to treat an account holder as a 
    foreign person and withhold under chapter 3 of the Code (and the 
    regulations thereunder) while awaiting documentation. For purposes of 
    determining the rate of withholding under this section, the withholding 
    agent must withhold at the unreduced 30-percent rate at the time that 
    the amounts are credited to the account. However, a withholding agent 
    who can reliably associate the payment with a withholding certificate 
    that is otherwise valid within the meaning of the applicable provisions 
    except for the fact that it is transmitted by facsimile may rely on 
    that facsimile form for purposes of withholding at the claimed reduced 
    rate. For reporting of amounts credited both before and after the grace 
    period, see Sec. 1.1461-1(c)(7). The following adjustments shall be 
    made at the expiration of the grace period:
        (A) If, at the end of the grace period, the documentation is not 
    furnished in the manner required under this section and the account 
    holder is presumed to be a U.S. person who is not an exempt recipient, 
    then backup withholding applies to amounts credited to the account 
    after the expiration of the grace period only. Amounts credited to the 
    account during the grace period shall be treated as owned by a foreign 
    payee and adjustments must be made to correct any underwithholding on 
    such amounts in the manner described in Sec. 1.1461-2.
        (B) If, at the end of the grace period, the documentation is not 
    furnished in the manner required under this section and the account 
    holder is presumed to be a foreign person, or if documentation is 
    furnished that does not support the claimed rate reduction, then 
    adjustments must be made to correct the underwithholding on amounts 
    credited to the account during the grace period, based on adjustment 
    procedures described in Sec. 1.1461-2.
        (v) Special rules applicable to payments to foreign 
    intermediaries--(A) Reliance on claim of status as foreign 
    intermediary. A withholding agent that can reliably associate a payment 
    with a withholding certificate described in paragraph (e)(3)(ii) or 
    (iii) of this section may treat the payment as made to a foreign 
    intermediary, as represented in the certificate. For this purpose, a 
    U.S. person's foreign branch that is a qualified intermediary defined 
    in paragraph (e)(5)(ii) of this section shall be treated as a foreign 
    intermediary. For purposes of this section, a payment that the 
    withholding agent can reliably associate with a withholding certificate 
    described in paragraph (e)(3)(ii) or (iii) of this section that would 
    be valid except for the fact that some or all of the withholding 
    certificates or other appropriate documentation required to be attached 
    are lacking or are unreliable or that information for allocating the 
    payment among the various persons for whom the intermediary is acting 
    is lacking or is unreliable shall nevertheless be treated as a payment 
    to a foreign intermediary and the rules of this paragraph (b)(3)(v) 
    shall apply accordingly. A payee that the withholding agent may not 
    reliably treat as a foreign intermediary under this paragraph 
    (b)(3)(v)(A) is presumed to be an owner whose status as an individual, 
    trust, estate, etc., must be determined in accordance with paragraph 
    (b)(3)(ii) of this section, to the extent relevant. In addition, such 
    payee is presumed to be a U.S. or a foreign payee based upon the 
    presumptions described in paragraph (b)(3)(iii) of this section. The 
    provisions of paragraphs (b)(3)(v) (B), (C), and (D) of this section 
    are not relevant to a withholding agent that can reliably associate a 
    payment with a withholding certificate from a person representing to be 
    a qualified intermediary that has assumed primary withholding 
    responsibility in accordance with paragraph (e)(5)(iv) of this section.
    
    [[Page 53429]]
    
        (B) Beneficial owner documentation is lacking or unreliable. Any 
    portion of a payment that the withholding agent may treat as made to a 
    foreign intermediary in accordance with paragraph (b)(3)(v)(A) of this 
    section but cannot reliably associate with a beneficial owner due to 
    the lack of a withholding certificate or other appropriate 
    documentation for that beneficial owner is presumed to be made to a 
    foreign payee for whom the foreign intermediary collects the payment 
    (see paragraph (b)(2)(v) of this section). For purposes of this 
    paragraph (b)(2)(v)(B), any payment that a foreign qualified 
    intermediary represents to be allocable to the category of assets 
    described in paragraph (e)(5)(v)(B)(3) of this section (i.e., assets 
    allocable to persons for whom the qualified intermediary does not hold 
    documentation as specified under its agreement with the IRS) is treated 
    as a payment that the withholding agent cannot reliably associate with 
    beneficial owners. As a result, any payment allocable to such category 
    of assets is presumed to be made to an unidentified foreign payee. 
    Under paragraph (b)(1) of this section, a payment to a foreign payee is 
    subject to withholding at a 30-percent rate.
        (C) Information regarding allocation of payment is lacking or 
    unreliable. If a withholding agent can reliably associate a payment 
    with a group of beneficial owners or payees but lacks reliable 
    information to determine how much of the payment is allocable to one or 
    more of the beneficial owners or payees in the group (because, for 
    example, the statement described in paragraph (e)(3)(iv) of this 
    section has not been furnished), the payment, to the extent it cannot 
    reliably be allocated, is presumed to be allocable entirely to the 
    beneficial owner or payee in the group with the highest applicable 
    withholding rate or, if the rates are equal, to the beneficial owner or 
    payee in the group with the highest U.S. tax liability, as the 
    withholding agent shall estimate, based on its knowledge and available 
    information. If a withholding certificate attached to an intermediary 
    certificate is another intermediary certificate or a certificate from a 
    foreign partnership described in Sec. 1.1441-5(c)(3)(iii), the rules of 
    this paragraph (b)(3)(v)(C) apply by treating the share of the payment 
    allocable to the other intermediary or to the foreign partnership as if 
    the payment were made directly to the other intermediary or to the 
    foreign partnership.
        (D) Certification that the foreign intermediary has furnished 
    documentation for all of the persons to whom the intermediary 
    certificate relates is lacking or unreliable. If the certification 
    required under paragraph (e)(3)(iii)(D) of this section (that the 
    attached withholding certificates and other appropriate documentation 
    represent all of the persons to whom the intermediary withholding 
    certificate relates) is lacking or is unreliable and, as a result, the 
    withholding agent cannot reliably determine how much of the payment is 
    allocable to each of the persons or group of persons for which the 
    withholding agent holds a withholding certificate or other appropriate 
    documentation, then none of the payment can reliably be associated with 
    any one person and the entire payment is presumed to be made to an 
    unidentified foreign payee for whom the intermediary collects the 
    payment and from which a 30-percent amount must be withheld in 
    accordance with paragraph (b)(1) of this section.
        (vi) U.S. branches and foreign flow-through entities. The rules of 
    paragraphs (b)(3)(v) (B), (C), and (D) of this section shall apply to 
    payments to a U.S. branch described in paragraph (b)(2)(iv)(A) of this 
    section that has agreed to assume withholding responsibility in the 
    same manner that they apply to payments to a foreign intermediary. See 
    Sec. 1.1441-5(d) for similar rules in the case of payments to foreign 
    partnerships. See Sec. 1.1441-5(e) for similar rules in the case of 
    payments to foreign trusts or foreign estates.
        (vii) Joint payees. A payment made to joint payees for whom the 
    withholding agent cannot reliably associate documentation for all joint 
    payees or can reliably associate the payment with a Form W-9 furnished 
    in accordance with the procedures described in Secs. 31.3406(d)-1 
    through 31.3406(d)-5 of this chapter from one of the joint payees is 
    presumed to be made to U.S. persons. For purposes of applying this 
    paragraph (b)(3), the grace period rules in paragraph (b)(3)(iv) of 
    this section shall apply only if each payee qualifies for the 
    conditions described in paragraph (b)(3)(iv) of this section. However, 
    as provided in paragraph (b)(3)(iii)(D) of this section, a payment of 
    an amount that would be subject to withholding under section 1441, 
    1442, or 1443 if paid to a foreign person and is exempt from the 
    application of the provisions of section 3406 by reason of 
    Sec. 31.3406(g)-1(e) of this chapter (relating to exemption from backup 
    withholding under section 3406 of the Code for certain payments made 
    with respect to offshore accounts), is presumed to be made to foreign 
    persons.
        (viii) Rebuttal of presumptions. A payee or beneficial owner may 
    rebut the presumptions described in this paragraph (b)(3) by providing 
    reliable documentation to the withholding agent or, if applicable, to 
    the IRS.
        (ix) Effect of reliance on presumptions and of actual knowledge or 
    reason to know otherwise--(A) General rule. Except as otherwise 
    provided in paragraph (b)(3)(ix)(B) of this section, a withholding 
    agent that withholds on a payment under section 3402, 3405 or 3406 in 
    accordance with the presumptions set forth in this paragraph (b)(3) 
    shall not be liable for withholding under this section even it is later 
    established that the beneficial owner of the payment is, in fact, a 
    foreign person. Similarly, a withholding agent that withholds on a 
    payment under this section in accordance with the presumptions set 
    forth in this paragraph (b)(3) shall not be liable for withholding 
    under section 3402 or 3405 or for backup withholding under section 3406 
    even if it is later established that the payee or beneficial owner is, 
    in fact, a U.S. person. A withholding agent that, instead of relying on 
    the presumptions described in this paragraph (b)(3), relies on its own 
    actual knowledge to withhold a lesser amount, not withhold, or not 
    report a payment, even though reporting of the payment or withholding a 
    greater amount would be required if the withholding agent relied on the 
    presumptions described in this paragraph (b)(3) shall be liable for 
    tax, interest, and penalties to the extent provided under section 1461 
    and the regulations under that section. See paragraph (b)(7) of this 
    section for provisions regarding such liability if the withholding 
    agent fails to withhold in accordance with the presumptions described 
    in this paragraph (b)(3).
        (B) Actual knowledge or reason to know that amount of withholding 
    is greater than is required under the presumptions or that reporting of 
    the payment is required. Notwithstanding the provisions of paragraph 
    (b)(3)(ix)(A) of this section, a withholding agent may not rely on the 
    presumptions described in this paragraph (b)(3) to the extent it has 
    actual knowledge or reason to know that the status or characteristics 
    of the payee or of the beneficial owner are other than what is presumed 
    under this paragraph (b)(3) and, if based on such knowledge or reason 
    to know, it should withhold (under this section or another withholding 
    provision of the Code) an amount greater than would be the case if it 
    relied on the presumptions described in this paragraph (b)(3) or it 
    should report (under this section or under another provision of the 
    Code) an amount that would not otherwise be reportable if it relied on 
    the presumptions described in this
    
    [[Page 53430]]
    
    paragraph (b)(3). In such a case, the withholding agent must rely on 
    its actual knowledge or reason to know rather than on the presumptions 
    set forth in this paragraph (b)(3). Failure to do so and, as a result, 
    failure to withhold the higher amount or to report the payment, shall 
    result in liability for tax, interest, and penalties to the extent 
    provided under sections 1461 and 1463 and the regulations under those 
    sections.
        (x) Examples. The provisions of this paragraph (b)(3) are 
    illustrated by the following examples:
    
        Example 1. A withholding agent, W, makes a payment of U.S. 
    source dividends to person X, Inc. at an address outside the United 
    States. W cannot reliably associate the payment to X with 
    documentation. Under Secs. 1.6042-3(b)(1)(vii) and 1.6049-
    4(c)(1)(ii)(A)(1), W may treat X as a corporation. Thus, under the 
    presumptions described in paragraph (b)(3)(iii) of this section, W 
    must presume that X is a foreign person (because the payment is made 
    outside the United States). However, W knows that X is a U.S. person 
    who is an exempt recipient. W may not rely on its actual knowledge 
    to not withhold under this section. If W s knowledge is, in fact, 
    incorrect, W would be liable for tax, interest, and, if applicable, 
    penalties, under section 1461. W would be permitted to reduce or 
    eliminate its liability for the tax by establishing, in accordance 
    with paragraph (b)(7) of this section, that the tax is not due or 
    has been satisfied. If W s actual knowledge is, in fact, correct, W 
    may nevertheless be liable for tax, interest, or penalties under 
    section 1461 for the amount that W should have withheld based upon 
    the presumptions. W would be permitted to reduce or eliminate its 
    liability for the tax by establishing, in accordance with paragraph 
    (b)(7) of this section, that its actual knowledge was, in fact, 
    correct and that no tax or a lesser amount of tax was due.
        Example 2. A withholding agent, W, makes a payment of U.S. 
    source dividends to Y who does not qualify as an exempt recipient 
    under Secs. 1.6042-3(b)(1)(vii) and 1.6049-4(c)(1)(ii). W cannot 
    reliably associate the payment to Y with documentation. Under the 
    presumptions described in paragraph (b)(3)(iii) of this section, W 
    must presume that Y is a U.S. person who is not an exempt recipient 
    for purposes of section 6042. However, W knows that Y is a foreign 
    person. W may not rely on its actual knowledge to withhold under 
    this section rather than backup withhold under section 3406. If W s 
    knowledge is, in fact, incorrect, W would be liable for tax, 
    interest, and, if applicable, penalties, under section 3403. If W s 
    actual knowledge is, in fact, correct, W may nevertheless be liable 
    for tax, interest, or penalties under section 3403 for the amount 
    that W should have withheld based upon the presumptions. Paragraph 
    (b)(7) of this section does not apply to provide relief from 
    liability under section 3403.
        Example 3. A withholding agent, W, makes a payment of U.S. 
    source dividends to X, Inc. W cannot reliably associate the payment 
    to X, Inc. with documentation. X, nc. presents none of the indicia 
    of foreign status described in paragraph (b)(3)(iii)(A) of this 
    section, but W has actual knowledge that X, Inc. is a foreign 
    corporation. W may treat X, Inc. as an exempt recipient under 
    Sec. 1.6042-3(b)(1)(vii). Because there are no indicia of foreign 
    status, W would, absent actual knowledge or reason to know 
    otherwise, be permitted to treat X, Inc. as a domestic corporation 
    in accordance with the presumptions of paragraph (b)(3)(iii) of this 
    section. However, under paragraph (b)(3)(ix)(B) of this section, W 
    may not rely on the presumption of U.S. status since reliance on its 
    actual knowledge requires that it withhold an amount greater than 
    would be the case under the presumptions.
        Example 4. A withholding agent, W, is a plan administrator who 
    makes pension payments to person X with a mailing address in a 
    foreign country with which the United States has an income tax 
    treaty in effect. Under that treaty, the type of pension income paid 
    to X is taxable solely in the country of residence. The plan 
    administrator has a record of X's U.S. social security number. W has 
    no actual knowledge or reason to know that X is a foreign person. W 
    may rely on the presumption of paragraph (b)(3)(iii)(C) of this 
    section in order to treat X as a U.S. person. Therefore, any 
    withholding and reporting requirements for the payment are governed 
    by the provisions of section 3405 and the regulations under that 
    section.
    
        (4) List of exemptions from, or reduced rates of, withholding under 
    chapter 3 of the Code. A withholding agent that has determined that the 
    payee is a foreign person for purposes of paragraph (b)(1) of this 
    section must determine whether the payee is entitled to a reduced rate 
    of withholding under section 1441, 1442, or 1443. This paragraph (b)(4) 
    identifies items for which a reduction in the rate of withholding may 
    apply and whether the rate reduction is conditioned upon documentation 
    being furnished to the withholding agent. Documentation required under 
    this paragraph (b)(4) is documentation that a withholding agent must be 
    able to associate with a payment upon which it can rely to treat the 
    payment as made to a foreign person that is the beneficial owner of the 
    payment in accordance with paragraph (e)(1)(ii) of this section. This 
    paragraph (b)(4) also cross-references other sections of the Code and 
    applicable regulations in which some of these exceptions, exemptions, 
    or reductions are further explained. See, for example, paragraph 
    (b)(4)(viii) of this section, dealing with effectively connected 
    income, that cross-references Sec. 1.1441-4(a); see paragraph 
    (b)(4)(xv) of this section, dealing with exemptions from, or reductions 
    of, withholding under an income tax treaty, that cross-references 
    Sec. 1.1441-6. This paragraph (b)(4) is not an exclusive list of items 
    to which a reduction of the rate of withholding may apply and, thus, 
    does not preclude an exemption from, or reduction in, the rate of 
    withholding that may otherwise be allowed under the regulations under 
    the provisions of chapter 3 of the Code for a particular item of income 
    identified in this paragraph (b)(4).
        (i) Portfolio interest described in section 871(h) or 881(c) and 
    substitute interest payments described in Sec. 1.871-7(b)(2)(i) or 
    1.881-2(b)(2) are exempt from withholding under section 1441(a). See 
    Sec. 1.871-14 for regulations regarding portfolio interest and section 
    1441(c)(9) for exemption from withholding. Documentation establishing 
    foreign status is required for interest on an obligation in registered 
    form to qualify as portfolio interest. See section 871(h)(2)(B)(ii) and 
    Sec. 1.871-14(c)(1)(ii)(C). For special documentation rules regarding 
    foreign-targeted registered obligations described in Sec. 1.871-
    14(e)(2), see Sec. 1.871-14(e) (3) and (4) and, in particular, 
    Sec. 1.871-14(e)(4)(i)(A) and (ii)(A) regarding the time when the 
    withholding agent must receive the documentation. The documentation 
    furnished for purposes of qualifying interest as portfolio interest 
    serves as the basis for the withholding exemption for purposes of this 
    section and for purposes of establishing foreign status for purposes of 
    section 6049. See Sec. 1.6049-5(b)(8). Documentation establishing 
    foreign status is not required for qualifying interest on an obligation 
    in bearer form described in Sec. 1.871-14(b)(1) as portfolio interest. 
    However, in certain cases, documentation for portfolio interest on a 
    bearer obligation may have to be furnished in order to establish 
    foreign status for purposes of the information reporting provisions of 
    section 6049 and backup withholding under section 3406. See 
    Sec. 1.6049-5(b)(7).
        (ii) Bank deposit interest and similar types of deposit interest 
    (including original issue discount) described in section 871(i)(2)(A) 
    or 881(d) that are from sources within the United States are exempt 
    from withholding under section 1441(a). See section 1441(c)(10). 
    Documentation establishing foreign status is not required for purposes 
    of this withholding exemption but may have to be furnished for purposes 
    of the information reporting provisions of section 6049 and backup 
    withholding under section 3406. See Sec. 1.6049-5(d)(3)(iii) for 
    exceptions to the foreign payee and exempt recipient rules regarding 
    this type of income. See also Sec. 1.6049-5(b)(11) for applicable 
    documentation exemptions for certain
    
    [[Page 53431]]
    
    bank deposit interest paid on obligations in bearer form.
        (iii) Bank deposit interest (including original issue discount) 
    described in section 861(a)(1)(B) is exempt from withholding under 
    sections 1441(a) as income that is not from U.S. sources. Documentation 
    establishing foreign status is not required for purposes of this 
    withholding exemption but may have to be furnished for purposes of the 
    information reporting provisions of section 6049 and backup withholding 
    under section 3406. Reporting requirements for payments of such 
    interest are governed by section 6049 and the regulations under that 
    section. See Sec. 1.6049-5(b)(12) and alternative documentation rules 
    under Sec. 1.6049-5(c)(4).
        (iv) Interest or original issue discount from sources within the 
    United States on certain short-term obligations described in section 
    871(g)(1)(B) or 881(a)(3) is exempt from withholding under sections 
    1441(a). Documentation establishing foreign status is not required for 
    purposes of this withholding exemption but may have to be furnished for 
    purposes of the information reporting provisions of section 6049 and 
    backup withholding under section 3406. See Sec. 1.6049-5(b)(12) for 
    applicable documentation for establishing foreign status and 
    Sec. 1.6049-5(d)(3)(iii) for exceptions to the foreign payee and exempt 
    recipient rules regarding this type of income. See also Sec. 1.6049-
    5(b)(10) for applicable documentation exemptions for certain 
    obligations in bearer form.
        (v) Income from sources without the United States is exempt from 
    withholding under sections 1441(a). Documentation establishing foreign 
    status is not required for purposes of this withholding exemption but 
    may have to be furnished for purposes of the information reporting 
    provisions of section 6049 or other applicable provisions of chapter 61 
    of the Code and backup withholding under section 3406. See, for 
    example, Sec. 1.6049-5(b) (6) and (12) and alternative documentation 
    rules under Sec. 1.6049-5(c)(4). See also paragraph (b)(5) of this 
    section for cross references to other applicable provisions of the 
    regulations under chapter 61 of the Code.
        (vi) Distributions from certain domestic corporations described in 
    section 871(i)(2)(B) or 881(d) are exempt from withholding under 
    section 1441(a). See section 1441(c)(10). Documentation establishing 
    foreign status is not required for purposes of this withholding 
    exemption but may have to be furnished for purposes of the information 
    reporting provisions of section 6042 and backup withholding under 
    section 3406. See Sec. 1.6042-3(b)(1) (iii) through (vi).
        (vii) Dividends paid by certain foreign corporations that are 
    treated as income from sources within the United States by reason of 
    section 861(a)(2)(B) are exempt from withholding under section 
    884(e)(3) to the extent that the distributions are paid out of earnings 
    and profits in any taxable year that the corporation was subject to 
    branch profits tax for that year. Documentation establishing foreign 
    status is not required for purposes of this withholding exemption but 
    may have to be furnished for purposes of the information reporting 
    provisions of section 6042 and backup withholding under section 3406. 
    See Sec. 1.6042-3(b)(1) (iii) through (vii).
        (viii) Certain income that is effectively connected with the 
    conduct of a U.S. trade or business is exempt from withholding under 
    section 1441(a). See section 1441(c)(1). Documentation establishing 
    foreign status and status of the income as effectively connected must 
    be furnished for purposes of this withholding exemption to the extent 
    required under the provisions of Sec. 1.1441-4(a). Documentation 
    furnished for this purpose also serves as documentation establishing 
    foreign status for purposes of applicable information reporting 
    provisions under chapter 61 of the Code and for backup withholding 
    under section 3406. See, for example, Sec. 1.6041-4(a)(1).
        (ix) Certain income with respect to compensation for personal 
    services of an individual that are performed in the United States is 
    exempt from withholding under section 1441(a). See section 1441(c)(4) 
    and Sec. 1.1441-4(b). However, such income may be subject to 
    withholding as wages under section 3402. Documentation establishing 
    foreign status must be furnished for purposes of any withholding 
    exemption or reduction to the extent required under Sec. 1.1441-4(b) or 
    31.3401(a)(6)-1 (e) and (f) of this chapter. Documentation furnished 
    for this purpose also serves as documentation establishing foreign 
    status for purposes of information reporting under section 6041. See 
    Sec. 1.6041-4(a)(1).
        (x) Amounts described in section 871(f) that are received as 
    annuities from certain qualified plans are exempt from withholding 
    under section 1441(a). See section 1441(c)(7). Documentation 
    establishing foreign status must be furnished for purposes of the 
    withholding exemption as required under Sec. 1.1441-4(d). Documentation 
    furnished for this purpose also serves as documentation establishing 
    foreign status for purposes of information reporting under section 
    6041. See Sec. 1.6041-4(a)(1).
        (xi) Payments to a foreign government (including a foreign central 
    bank of issue) that are excludable from gross income under section 
    892(a) are exempt from withholding under section 1442. See Sec. 1.1441-
    8(b). Documentation establishing status as a foreign government is 
    required for purposes of this withholding exemption. Payments to a 
    foreign government are exempt from information reporting under chapter 
    61 of the Code (see Sec. 1.6049-4(c)(1)(ii)(F)).
        (xii) Payments of certain interest income to a foreign central bank 
    of issue or the Bank for International Settlements that are exempt from 
    tax under section 895 are exempt from withholding under section 1442. 
    Documentation establishing eligibility for such exemption is required 
    to the extent provided in Sec. 1.1441-8(c)(1). Payments to a foreign 
    central bank of issue or to the Bank for International Settlements are 
    exempt from information reporting under chapter 61 of the Code (see 
    Sec. 1.6049-4(c)(1)(ii) (H) and (M)).
        (xiii) Amounts derived by a foreign central bank of issue from 
    bankers' acceptances described in section 871(i)(2)(C) or 881(d) are 
    exempt from tax and, therefore, from withholding. See section 
    1441(c)(10). Documentation establishing foreign status is not required 
    for purposes of this withholding exemption if the name of the payee and 
    other facts surrounding the payment reasonably indicate that the 
    beneficial owner of the payment is a foreign central bank of issue as 
    defined in Sec. 1.861-2(b)(4). See Sec. 1.1441-8(c)(2) for withholding 
    procedures. See also Secs. 1.6049-4(c)(1)(ii)(H) and 1.6041-3(q)(8) for 
    a similar exemption from information reporting.
        (xiv) Payments to an international organization from investments in 
    the United States of stocks, bonds, or other domestic securities or 
    from interest on deposits in banks in the United States of funds 
    belonging to such international organization are exempt from tax under 
    section 892(b) and, thus, from withholding. Documentation establishing 
    status as an international organization is not required if the name of 
    the payee and other facts surrounding the payment reasonably indicate 
    that the beneficial owner of the payment is an international 
    organization within the meaning of section 7701(a)(18). See 
    Sec. 1.1441-8(d). Payments to an international organization are exempt 
    from information reporting under chapter 61 of the Code (see 
    Sec. 1.6049-4(c)(1)(ii)(G)).
    
    [[Page 53432]]
    
        (xv) Amounts may be exempt from, or subject to a reduced rate of, 
    withholding under an income tax treaty. Documentation establishing 
    eligibility for benefits under an income tax treaty is required for 
    this purpose as provided under Secs. 1.1441-6. Documentation furnished 
    for this purpose also serves as documentation establishing foreign 
    status for purposes of applicable information reporting provisions 
    under chapter 61 of the Code and for backup withholding under section 
    3406. See, for example, Sec. 1.6041-4(a)(1).
        (xvi) Amounts of scholarships and grants paid to certain exchange 
    or training program participants that do not represent compensation for 
    services but are not excluded from tax under section 117 are subject to 
    a reduced rate of withholding of 14-percent under section 1441(b). 
    Documentation establishing foreign status is required for purposes of 
    this reduction in rate as provided under Sec. 1.1441-4(c). This income 
    is not subject to information reporting under chapter 61 of the Code 
    nor to backup withholding under section 3406. The compensatory portion 
    of a scholarship or grant is reportable as wage income. See 
    Sec. 1.6041-3(o).
        (xvii) Amounts paid to a foreign organization described in section 
    501(c) are exempt from withholding under section 1441 to the extent 
    that the amounts are not income includible under section 512 in 
    computing the organization's unrelated business taxable income and are 
    not subject to the tax imposed by section 4948(a). Documentation 
    establishing status as a tax-exempt organization is required for 
    purposes of this exemption to the extent provided in Sec. 1.1441-9. 
    Amounts includible under section 512 in computing the organization's 
    unrelated business taxable income are subject to withholding to the 
    extent provided in section 1443(a) and Sec. 1.1443-1(a). Gross 
    investment income (as defined in section 4940(c)(2)) of a private 
    foundation is subject to withholding at a 4-percent rate to the extent 
    provided in section 1443(b) and Sec. 1.1443-1(b). Payments to a tax-
    exempt organization are exempt from information reporting under chapter 
    61 of the Code and the regulations thereunder (see Sec. 1.6049-
    4(c)(1)(ii)(B)(1)).
        (xviii) Per diem amounts for subsistence paid by the U.S. 
    government to a nonresident alien individual who is engaged in any 
    program of training in the United States under the Mutual Security Act 
    of 1954 are exempt from withholding under section 1441(a). See section 
    1441(c)(6). Documentation of foreign status is required under 
    Sec. 1.1441-4(e) for purposes of establishing eligibility for this 
    exemption. See Sec. 1.6041-3(p).
        (xix) Interest with respect to tax-free covenant bonds issued prior 
    to 1934 is subject to special withholding procedures set forth in 
    Sec. 1.1461-1 in effect prior to January 1, 1999 (see Sec. 1.1461-1 as 
    contained in 26 CFR part 1, revised April 1, 1997).
        (xx) Income from certain gambling winnings of a nonresident alien 
    individual is exempt from tax under section 871(j) and from withholding 
    under section 1441(a). See section 1441(c)(11). Documentation 
    establishing foreign status is not required for purposes of this 
    exemption but may have to be furnished for purposes of the information 
    reporting provisions of section 6041 and backup withholding under 
    section 3406. See Secs. 1.6041-1 and 1.6041-4(a)(1).
        (xxi) Any payments not otherwise mentioned in this paragraph (b)(4) 
    shall be subject to withholding at the rate of 30-percent if it is an 
    amount subject to withholding (as defined in Sec. 1.1441-2(a)) unless 
    and to the extent the IRS may otherwise prescribe in published guidance 
    (see Sec. 601.601(d)(2) of this chapter) or unless otherwise provided 
    in regulations under chapter 3 of the Code.
        (5) Establishing foreign status under applicable provisions of 
    chapter 61 of the Code. This paragraph (b)(5) identifies relevant 
    provisions of the regulations under chapter 61 of the Code that exempt 
    payments from information reporting, and therefore, from backup 
    withholding under section 3406, based on the payee's status as a 
    foreign person. Many of these exemptions require that the payee's 
    foreign status be established in order for the exemption to apply. The 
    regulations under applicable provisions of chapter 61 of the Code 
    generally provide that the documentation described in this section may 
    be relied upon for purposes of determining foreign status.
        (i) Payments to a foreign person that are governed by section 6041 
    (dealing with certain trade or business income) are exempt from 
    information reporting under Sec. 1.6041-4(a).
        (ii) Payments to a foreign person that are governed by section 
    6041A (dealing with remuneration for services and certain sales) are 
    exempt from information reporting under Sec. 1.6041A-1(d)(3).
        (iii) Payments to a foreign person that are governed by section 
    6042 (dealing with dividends) are exempt from information reporting 
    under Sec. 1.6042-3(b)(1) (iii) through (vi).
        (iv) Payments to a foreign person that are governed by section 6044 
    (dealing with patronage dividends) are exempt from information 
    reporting under Sec. 1.6044-3(c)(1).
        (v) Payments to a foreign person that are governed by section 6045 
    (dealing with broker proceeds) are exempt from information reporting 
    under Sec. 1.6045-1(g).
        (vi) Payments to a foreign person that are governed by section 6049 
    (dealing with interest) to a foreign person are exempt from information 
    reporting under Sec. 1.6049-5(b) (6) through (15).
        (vii) Payments to a foreign person that are governed by section 
    6050N (dealing with royalties) are exempt from information reporting 
    under Sec. 1.6050N-1(c).
        (viii) Payments to a foreign person that are governed by section 
    6050P (dealing with income from cancellation of debt) are exempt from 
    information reporting under section 6050P or the regulations under that 
    section except to the extent provided in Notice 96-61 (I.R.B. 1996-49); 
    see also Sec. 601.601(b)(2) of this chapter.
        (6) Rules of withholding for payments by a foreign intermediary or 
    certain U.S. branches. A foreign intermediary described in paragraph 
    (e)(3)(i) of this section or a U.S. branch described in paragraph 
    (b)(2)(iv) of this section that receives an amount subject to 
    withholding (as defined in Sec. 1.1441-2(a)) shall be deemed to have 
    satisfied any obligation it has under chapter 3 of the Code and the 
    regulations thereunder to withhold and report the amount when it, in 
    turn, pays such amount to another person (whether or not the beneficial 
    owner) to the extent that the payment is associated with a valid 
    withholding certificate described in paragraph (e)(3) (ii), (iii), or 
    (v) of this section that it has furnished to another withholding agent 
    and the intermediary does not know and has no reason to know that the 
    correct amount has not been withheld under chapter 3 of the Code and 
    the regulations thereunder. See Sec. 1.1441-5(c)(3)(v) for a similar 
    rule for payments by certain foreign partnerships.
        (7) Liability for failure to obtain documentation timely or to act 
    in accordance with applicable presumptions--(i) General rule. A 
    withholding agent that cannot reliably associate a payment with 
    documentation on the date of payment and that does not withhold under 
    this section, or withholds at less than the 30-percent rate prescribed 
    under section 1441(a) and paragraph (b)(1) of this section, is liable 
    under section 1461 for the tax required to be withheld under chapter 3 
    of the Code and the regulations thereunder, without the benefit of a 
    reduced rate unless--
    
    [[Page 53433]]
    
        (A) The withholding agent has appropriately relied on the 
    presumptions described in paragraph (b)(3) of this section (including 
    the grace period described in paragraph (b)(3)(iv) of this section) in 
    order to treat the payee as a U.S. person or, if applicable, on the 
    presumptions described in Sec. 1.1441-4(a) (2)(i) or (3) to treat the 
    payment as effectively connected income; or
        (B) The withholding agent can demonstrate to the satisfaction of 
    the district director or the Assistant Commissioner (International) 
    that the proper amount of tax, if any, was in fact paid to the IRS; or
        (C) No documentation is required under section 1441 or this section 
    in order for a reduced rate of withholding to apply.
        (ii) Proof that tax liability has been satisfied. Proof of payment 
    of tax may be established for purposes of paragraph (b)(7)(i)(B) of 
    this section on the basis of a Form 4669 (or such other form as the IRS 
    may prescribe in published guidance (see Sec. 601.601(d)(2) of this 
    chapter)), establishing the amount of tax, if any, actually paid by or 
    for the beneficial owner on the income. Proof that a reduced rate of 
    withholding was, in fact, appropriate under the provisions of chapter 3 
    of the Code and the regulations thereunder may also be established 
    after the date of payment by the withholding agent on the basis of a 
    valid withholding certificate or other appropriate documentation 
    furnished after that date. However, in the case of a withholding 
    certificate or other appropriate documentation received after the date 
    of payment (or after the grace period specified in paragraph (b)(3)(iv) 
    of this section), the district director or the Assistant Commissioner 
    (International) may require additional proof if it is determined that 
    the delays in obtaining the withholding certificate affect its 
    reliability.
        (iii) Liability for interest and penalties. A withholding agent 
    that has failed to withhold other than based on appropriate reliance on 
    the presumptions described in paragraph (b)(3) of this section or in 
    Sec. 1.1441-4(a) (2)(i) or (3) is not relieved from liability for 
    interest under section 6601. Such liability exists even if there is no 
    underlying tax liability due. The interest on the amount that should 
    have been withheld shall be imposed as prescribed under section 6601 
    beginning on the last date for paying the tax due under section 1461 
    (which, under section 6601, is the due date for filing the withholding 
    agent's return of tax). The interest shall stop accruing on the earlier 
    of the date that the required withholding certificate or other 
    documentation is provided to the withholding agent and to the extent of 
    the amount of tax that is determined not to be due based on 
    documentation provided, or the date, and to the extent, that the unpaid 
    tax liability under section 871, 881 or under section 1461 is 
    satisfied. Further, in the event that a tax liability is assessed 
    against the beneficial owner under section 871, 881, or 882 and 
    interest under section 6601(a) is assessed against, and collected from, 
    the beneficial owner, the interest charge imposed on the withholding 
    agent shall be abated to that extent so as to avoid the imposition of a 
    double interest charge. However, the withholding agent is not relieved 
    of any applicable penalties. See section 1464.
        (iv) Special effective date. See paragraph (f)(2)(ii) of this 
    section for the special effective date applicable to this paragraph 
    (b)(7).
        (v) Examples. The provisions of paragraph (b)(7) of this section 
    are illustrated by the following examples:
    
        Example 1. On June 15, 1999, a withholding agent pays U.S. 
    source interest on an obligation in registered form (issued after 
    July 18, 1984) to a foreign corporation that it cannot reliably 
    associate with a Form W-8 or other appropriate documentation upon 
    which to rely to treat the beneficial owner as a foreign person. The 
    withholding agent does not withhold from the payment. On September 
    30, 2001, the withholding agent receives from the foreign 
    corporation a valid Form W-8 described in paragraph (e)(2)(ii) of 
    this section. Thus, the interest qualifies as portfolio interest 
    retroactively to June 15, 1999 (the date of payment). See 
    Sec. 1.871-14(c)(3). The foreign corporation does not file a U.S. 
    federal income tax return and does not pay the tax owed. The 
    withholding agent is not liable under section 1461 for the 30-
    percent tax on the interest income because the receipt of the Form 
    W-8 exempts the interest from tax for purposes of sections 881(a) 
    and 1461. The withholding agent, however, is liable for interest on 
    the amount of withholding that should have been deducted from the 
    payment on June 15, 1999 and deposited. Under paragraph (b)(7)(iii) 
    of this section, the period during which interest may be assessed 
    against the withholding agent runs from March 15, 2000 (the due date 
    for the Form 1042 relating to the payment) until September 30, 2001 
    (i.e., the date that appropriate documentation is furnished to the 
    withholding agent).
        Example 2. On June 15, 1999, a withholding agent pays U.S. 
    source dividends to a foreign corporation that it cannot reliably 
    associate with a Form W-8 or other appropriate documentation upon 
    which to rely to treat the beneficial owner as a foreign person. The 
    withholding agent does not withhold from the payment. On September 
    30, 2001, the withholding agent receives from the foreign 
    corporation a valid Form W-8 described in paragraph (e)(2)(ii) of 
    this section claiming a reduced 15-percent rate of withholding under 
    a U.S. income tax treaty. The dividend qualifies for the reduced 
    treaty rate retroactively to June 15, 1999 (the date of payment). 
    The foreign corporation does not file a U.S. federal income tax 
    return and does not pay the tax owed. Under section 1461, the 
    withholding agent is liable only for a 15-percent tax on the 
    dividend income because the receipt of the Form W-8 allows the tax 
    rate to be reduced for purposes of sections 881(a) and 1461 from 30 
    percent to 15 percent. The withholding agent, however, is liable for 
    interest on the full 30-percent amount that should have been 
    deducted and withheld from the payment on June 15, 1999, and 
    deposited, over a period running from March 15, 2000 (the due date 
    for the Form 1042 relating to the payment) until September 30, 2001 
    (the date that the appropriate documentation is furnished to the 
    withholding agent supporting a reduction in rate under a tax 
    treaty). Additional interest may be assessed relating to the 
    outstanding 15-percent tax liability (i.e., the portion of the 30-
    percent total tax liability that is not reduced under the treaty). 
    Such additional interest runs from March 15, 2000, until such date 
    as that 15-percent tax liability is satisfied by the withholding 
    agent or the taxpayer (subject to abatement in order to avoid a 
    double interest charge).
    
        (8) Adjustments, refunds, or credits of overwithheld amounts. If 
    the amount withheld under section 1441, 1442, or 1443 is greater than 
    the tax due by the withholding agent or the taxpayer, adjustments may 
    be made in accordance with the procedures described in Sec. 1.1461-
    2(a). Alternatively, refunds or credits may be claimed in accordance 
    with the procedures described in Sec. 1.1464-1, relating to refunds or 
    credits claimed by the beneficial owner, or Sec. 1.6414-1, relating to 
    refunds or credits claimed by the withholding agent. If an amount was 
    withheld under section 3406 or is subsequently determined to have been 
    paid to a foreign person, see paragraph (b)(3)(vii) of this section and 
    Sec. 31.6413(a)-3(a)(1) of this chapter.
        (9) Payments to joint owners. A payment to joint owners that 
    requires documentation in order to reduce the rate of withholding under 
    chapter 3 of the Code and the regulations thereunder does not qualify 
    for such reduced rate unless the withholding agent can reliably 
    associate the payment with documentation from each owner. 
    Notwithstanding the preceding sentence, a payment to joint owners 
    qualifies as a payment exempt from withholding under this section if 
    any one of the owners provides a certificate of U.S. status on a Form 
    W-9 in accordance with paragraph (d) (2) or (3) of this section or the 
    withholding agent can associate the payment with a withholding 
    certificate upon which it can rely to treat the payment as made
    
    [[Page 53434]]
    
    to a U.S. beneficial owner under paragraph (d)(4) of this section. See 
    Sec. 31.3406(h)-2(a)(3)(i)(B) of this chapter.
        (c) Definitions--(1) Withholding. The term withholding means the 
    deduction and withholding of tax at the applicable rate from the 
    payment.
        (2) Foreign and U.S. person. The term foreign person means a 
    nonresident alien individual, a foreign corporation, a foreign 
    partnership, a foreign trust, a foreign estate, and any other person 
    that is not a U.S. person described in the next sentence. For purposes 
    of the regulations under chapter 3 of the Code, the term foreign person 
    also means, with respect to a payment by a withholding agent, a foreign 
    branch of a U.S. person that furnishes an intermediary withholding 
    certificate described in paragraph (e)(3)(ii) of this section. A U.S. 
    person is a person described in section 7701(a)(30), the U.S. 
    government (including an agency or instrumentality thereof), a State 
    (including an agency or instrumentality thereof), or the District of 
    Columbia (including an agency or instrumentality thereof).
        (3) Individual--(i) Alien individual. The term alien individual 
    means an individual who is not a citizen or a national of the United 
    States. See Sec. 1.1-1(c).
        (ii) Nonresident alien individual. The term nonresident alien 
    individual means a person described in section 7701(b)(1)(B), an alien 
    individual who is a resident of a foreign country under the residence 
    article of an income tax treaty and Sec. 301.7701(b)-7(a)(1) of this 
    chapter, or an alien individual who is a resident of Puerto Rico, Guam, 
    the Commonwealth of Northern Mariana Islands, the U.S. Virgin Islands, 
    or American Samoa as determined under Sec. 301.7701(b)-1(d) of this 
    chapter. An alien individual who has made an election under section 
    6013 (g) or (h) to be treated as a resident of the United States is 
    nevertheless treated as a nonresident alien individual for purposes of 
    withholding under chapter 3 of the Code and the regulations thereunder.
        (4) Certain foreign corporations. For purposes of this section, a 
    corporation created or organized in Guam, the Commonwealth of Northern 
    Mariana Islands, the U.S. Virgin Islands, and American Samoa, is not 
    treated as a foreign corporation if the requirements of sections 
    881(b)(1) (A), (B), and (C) are met for such corporation. Further, a 
    payment made to a foreign government or an international organization 
    shall be treated as a payment made to a foreign corporation for 
    purposes of withholding under chapter 3 of the Code and the regulations 
    thereunder.
        (5) Financial institution and foreign financial institution. For 
    purposes of the regulations under chapter 3 of the Code, the term 
    financial institution means a person described in Sec. 1.165-
    12(c)(1)(iv) (not including a person providing pension or other similar 
    benefits or a regulated investment company or other mutual fund, unless 
    otherwise indicated) and the term foreign financial institution means a 
    financial institution that is a foreign person, as defined in paragraph 
    (c)(2) of this section.
        (6) Beneficial owner--(i) General rule. In the case of a payment of 
    income, the term beneficial owner means the person who is the owner of 
    the income for tax purposes and who beneficially owns that income. A 
    person shall be treated as the owner of the income to the extent that 
    it is required under U.S. tax principles to include the amount paid in 
    gross income under section 61 (determined without regard to an 
    exclusion or exemption from gross income under the Code). Beneficial 
    ownership of income is determined under the provisions of section 
    7701(l) and the regulations under that section and any other applicable 
    general U.S. tax principles, including principles governing the 
    determination of whether a transaction is a conduit transaction. Thus, 
    a person receiving income in a capacity as a nominee, agent, custodian 
    for another person is not the beneficial owner of the income. In the 
    case of a scholarship, the student receiving the scholarship is the 
    beneficial owner of that scholarship. In the case of a payment of an 
    amount that is not income, the beneficial owner determination shall be 
    made under this paragraph (c)(6) as if the amount was income.
        (ii) Special rules for flow-through entities and arrangements--(A) 
    General rule. The beneficial owners of income paid to a partnership or 
    other flow-through arrangements described in paragraph (c)(6)(ii)(C) of 
    this section are those persons who, under U.S. tax principles, are the 
    owners of the income for tax purposes in their separate or individual 
    capacities and who beneficially own that income. For example, a 
    partnership (first tier) that is a partner in another partnership 
    (second tier) is not the beneficial owner of income paid to the second 
    tier partnership since the first tier partnership is not the owner of 
    the income under U.S. tax principles. Rather, the partners of the first 
    tier partnership are the beneficial owners (to the extent they are not 
    themselves partnerships and are not conduits within the meaning of 
    section 7701(l) and the regulations under that section). See 
    Sec. 1.1441-5(b) for applicable withholding procedures for payments to 
    a domestic partnership. See also Sec. 1.1441-5(c)(3)(ii) for applicable 
    withholding procedures for payments to a foreign partnership where one 
    of the partners (at any level in the chain of tiers) is a domestic 
    partnership. See Sec. 1.1441-6(b)(4) for rules governing the 
    eligibility of a payment to an entity or other arrangement for a 
    reduced rate of withholding under an income tax treaty.
        (B) Trusts and estates. The provisions of paragraphs (c)(6)(i) and 
    (ii)(A) of this section shall not apply to a trust or an estate, 
    whether domestic or foreign. The beneficial owner of income paid to a 
    trust or to an estate shall be determined under the provisions of 
    Sec. 1.1441-3(f) and (g) in effect prior to January 1, 1999 (see 
    Sec. 1.1441-3(f) and (g) as contained in 26 CFR part 1, revised April 
    1, 1997).
        (C) Definition of a flow-through entity or arrangement. For 
    purposes of this paragraph (c)(6)(ii), a flow-through entity means a 
    partnership, estate, or trust. A flow-though arrangement is a 
    contractual arrangement that does not involve an entity and is treated 
    as a partnership for U.S. tax purposes or is a wholly-owned entity that 
    is disregarded for federal tax purposes under Sec. 301.7701-2(c)(2) of 
    this chapter as an entity separate from its owner. The term partnership 
    means any entity or arrangement (as defined in Sec. 301.7701-2(c)(1) of 
    this chapter) whose tax regime is governed by subchapter K of chapter 1 
    of the Code.
        (7) Withholding agent. For a definition of the term withholding 
    agent and applicable rules, see Sec. 1.1441-7.
        (8) Person. For purposes of the regulations under chapter 3 of the 
    Code, the term person shall mean a person described in section 
    7701(a)(1) and the regulations under that section and a U.S. branch to 
    the extent treated as a U.S. person under paragraph (b)(2)(iv) of this 
    section. For purposes of the regulations under chapter 3 of the Code, 
    the term person does not include a wholly-owned entity that is 
    disregarded for federal tax purposes under Sec. 301.7701-2(c)(2) of 
    this chapter as an entity separate from its owner. See paragraph 
    (b)(2)(iii) of this section for procedures applicable to payments to 
    such entities.
        (9) Source of income. The source of income is determined under the 
    provisions of part I (section 861 and following) , subchapter N, 
    chapter 1 of the Code and the regulations under those provisions.
        (10) Chapter 3 of the Code. For purposes of the regulations under 
    sections 1441, 1442, and 1443, any reference to chapter 3 of the Code 
    shall
    
    [[Page 53435]]
    
    not include references to sections 1445 and 1446, unless the context 
    indicates otherwise.
        (11) Reduced rate. For purposes of regulations under chapter 3 of 
    the Code, and other withholding provisions of the Code, the term 
    reduced rate, when used in regulations under chapter 3 of the Code, 
    shall include an exemption from tax.
        (d) Beneficial owner's or payee's claim of U.S. status--(1) In 
    general. Under paragraph (b)(1) of this section, a withholding agent is 
    not required to withhold under chapter 3 of the Code on payments to a 
    U.S. payee, to a person presumed to be a U.S. payee in accordance with 
    the provisions of paragraph (b)(3) of this section, or to a person that 
    the withholding agent may treat as a U.S. beneficial owner of the 
    payment. Absent actual knowledge or reason to know otherwise, a 
    withholding agent may rely on the provisions of this paragraph (d) in 
    order to determine whether to treat a payee or beneficial owner as a 
    U.S. person.
        (2) Payments for which a Form W-9 is otherwise required. A 
    withholding agent may treat as a U.S. person a payee who is required to 
    furnish a Form W-9 and who furnishes it in accordance with the 
    procedures described in Secs. 31.3406(d)-1 through 31.3406(d)-5 of this 
    chapter (including the requirement that the payee furnish its taxpayer 
    identifying number (TIN)) if the withholding agent meets all the 
    requirements described in Sec. 31.3406(h)-3(e) of this chapter 
    regarding reliance by a payor on a Form W-9.
        (3) Payments for which a Form W-9 is not otherwise required. In the 
    case of a payee who is not required to furnish a Form W-9 under section 
    3406, the withholding agent may rely on a certificate of U.S. status 
    described in this paragraph (d)(3). A certificate of U.S. status is a 
    certificate described in Sec. 31.3406(h)-3(c)(2) of this chapter 
    (relating to forms for exempt recipients) or a Form W-9 (or a 
    substitute form or such other form as the IRS may prescribe) that is 
    signed under penalties of perjury by the payee and contains the name, 
    permanent residence address, and TIN of the payee. The procedures 
    described in Sec. 31.3406(h)-2(a) of this chapter shall apply to 
    payments to joint payees. A withholding agent that receives a Form W-9 
    in order to satisfy this paragraph (d)(3) must retain the form in 
    accordance with the provisions of Sec. 31.3406(h)-3(g) of this chapter, 
    if applicable, or of paragraph (e)(4)(iii) of this section (relating to 
    the retention of withholding certificates) if Sec. 31.3406(h)-3(g) of 
    this chapter does not apply. The rules of this paragraph (d)(3) are 
    only intended to provide a method by which a withholding agent may 
    determine that a payee is not a foreign person and do not otherwise 
    impose a requirement that documentation be furnished by a person who is 
    otherwise treated as an exempt recipient for purposes of the applicable 
    information reporting provisions under chapter 61 of the Code (e.g., 
    Sec. 1.6049-4(c)(1)(ii) for payments of interest).
        (4) Other payments. This paragraph (d)(4) describes the 
    documentation upon which a withholding agent may rely in order to treat 
    a payment as made to a U.S. person that is a beneficial owner for 
    purposes of paragraph (b)(1) of this section. The withholding agent may 
    treat the payment as made to a U.S. beneficial owner only if it can 
    reliably associate the payment with documentation prior to the payment, 
    if it complies with the electronic confirmation procedures described in 
    paragraph (e)(4)(v) of this section, if required, and if it has not 
    been notified by the IRS that any of the information on the withholding 
    certificate or other documentation is incorrect or unreliable. In the 
    case of a Form W-9 that is required to be furnished for a reportable 
    payment that may be subject to backup withholding, the payor may be 
    notified in accordance with section 3406(a)(1)(B) and the regulations 
    under that section. See applicable procedures under that section and 
    the regulations under that section for payors who have been notified 
    with regard to such a Form W-9. Payors who have been notified in 
    relation to other Forms W-9, including under section 6724(b) pursuant 
    to section 6721, may rely on the withholding certificate or other 
    documentation only to the extent provided under procedures as 
    prescribed by the IRS (see Sec. 601.601(d)(2) of this chapter). A 
    withholding agent may treat a payment as made to a U.S. beneficial 
    owner--
        (i) To the extent the withholding agent can reliably associate the 
    payment with a Form W-9 described in paragraph (d) (2) or (3) of this 
    section attached to a valid intermediary, flow-through, or U.S. branch 
    withholding certificate described in paragraph (e)(3)(i) of this 
    section;
        (ii) To the extent the withholding agent can reliably associate a 
    payment to a qualified intermediary with the category of assets 
    described in paragraph (e)(5)(v)(B)(2) of this section that the 
    qualified intermediary has represented, in accordance with paragraphs 
    (e) (3)(ii)(E) and (5)(v) of this section as being allocable to U.S. 
    persons based on the Forms W-9 that they have furnished; or
        (iii) To the extent the withholding agent can reliably associate 
    the payment with a Form W-8 from a U.S. branch described in paragraph 
    (e)(3)(v) of this section that evidences an agreement between the U.S. 
    branch and the withholding agent to treat the U.S. branch as U.S. 
    person.
        (e) Beneficial owner's claim of foreign status--(1) Withholding 
    agent's reliance--(i) In general. Absent actual knowledge or reason to 
    know otherwise, a withholding agent may treat a payment as made to a 
    foreign beneficial owner in accordance with the provisions of paragraph 
    (e)(1)(ii) of this section. See paragraph (e)(4)(viii) of this section 
    for applicable reliance rules. See paragraph (b)(4) of this section for 
    a description of payments for which a claim of foreign status is 
    relevant for purposes of claiming a reduced rate of withholding for 
    purposes of section 1441, 1442, or 1443. See paragraph (b)(5) of this 
    section for a list of payments for which a claim of foreign status is 
    relevant for other purposes, such as claiming an exemption from 
    information reporting under chapter 61 of the Code.
        (ii) Payments that a withholding agent may treat as made to a 
    foreign person that is a beneficial owner--(A) General rule. The 
    withholding agent may treat a payment as made to a foreign person that 
    is a beneficial owner if it complies with the requirements described in 
    paragraph (e)(1)(ii)(B) of this section and, then, only to the extent--
        (1) That the withholding agent can reliably associate the payment 
    with a beneficial owner withholding certificate described in paragraph 
    (e)(2) of this section furnished by the person whose name is on the 
    certificate or attached to a valid foreign intermediary, flow-through 
    entity, or U.S. branch withholding certificate described in paragraph 
    (e)(3)(v) of this section;
        (2) That the payment is made outside the United States (within the 
    meaning of Sec. 1.6049-5(e)) with respect to an offshore account 
    (within the meaning of Sec. 1.6049-5(c)(1)) and the withholding agent 
    can reliably associate the payment with documentary evidence described 
    in Secs. 1.1441-6(c)(3) or (4), or 1.6049-5(c)(1) relating to the 
    beneficial owner;
        (3) That the withholding agent can reliably associate the payment 
    with the category of assets described in paragraph (e)(5)(v)(B)(1) of 
    this section that the qualified intermediary has represented, in 
    accordance with paragraphs (e) (3)(ii)(E) and (5)(v) of this section as 
    being allocable to foreign persons for whom the qualified intermediary 
    is holding valid documentation;
    
    [[Page 53436]]
    
        (4) That the withholding agent can reliably associate the payment 
    with a withholding certificate described in Sec. 1.1441-5(c)(3)(iii) 
    from a foreign partnership claiming that the payment is effectively 
    connected income;
        (5) That the withholding agent identifies the payee as a U.S. 
    branch described in paragraph (b)(2)(iv) of this section, the payment 
    to which it treats as effectively connected income in accordance with 
    Sec. 1.1441-4(a) (2)(ii) or (3);
        (6) That the withholding agent identifies the payee as an 
    international organization (or any wholly-owned agency or 
    instrumentality thereof) as defined in section 7701(a)(18) that has 
    been designated as such by executive order (pursuant to 22 U.S.C. 288 
    through 288(f)); or
        (7) That the withholding agent pays interest from bankers' 
    acceptances and identifies the payee as a foreign central bank of issue 
    (as defined in Sec. 1.861-2(b)(4)).
        (B) Additional requirements. In order for a payment described in 
    paragraph (e)(1)(ii)(A) of this section to be treated as made to a 
    foreign beneficial owner, the withholding agent must hold the 
    documentation (if required) prior to the payment, comply with the 
    electronic confirmation procedures described in paragraph (e)(4)(v) of 
    this section (if required), and must not have been notified by the IRS 
    that any of the information on the withholding certificate or other 
    documentation is incorrect or unreliable. If the withholding agent has 
    been so notified, it may rely on the withholding certificate or other 
    documentation only to the extent provided under procedures prescribed 
    by the IRS (see Sec. 601.601(d)(2) of this chapter). See paragraph 
    (b)(2)(vii) of this section for rules regarding reliable association of 
    a payment with a withholding certificate or other appropriate 
    documentation.
        (2) Beneficial owner withholding certificate--(i) In general. A 
    beneficial owner withholding certificate is a statement by which the 
    beneficial owner of the payment represents that it is a foreign person 
    and, if applicable, claims a reduced rate of withholding under section 
    1441. A separate withholding certificate must be submitted to each 
    withholding agent. If the beneficial owner receives more than one type 
    of payment from a single withholding agent, the beneficial owner may 
    have to submit more than one withholding certificate to the single 
    withholding agent for the different types of payments as may be 
    required by the applicable forms and instructions, or as the 
    withholding agent may require (such as to facilitate the withholding 
    agent's compliance with its obligations to determine withholding under 
    this section or the reporting of the amounts under Sec. 1.1461-1 (b) 
    and (c)). For example, if a beneficial owner claims that some but not 
    all of the income it receives is effectively connected with the conduct 
    of a trade or business in the United States, it may be required to 
    submit two separate withholding certificates, one for income that is 
    not effectively connected and one for income that is so connected. See 
    Sec. 1.1441-6(b)(4)(ii) for special rules for determining who must 
    furnish a beneficial owner withholding certificate when a benefit is 
    claimed under an income tax treaty. See paragraph (e)(4)(ix) of this 
    section for reliance rules in the case of certificates held by another 
    person or at a different branch location of the same person.
        (ii) Requirements for validity of certificate. A beneficial owner 
    withholding certificate is valid only if it is provided on a Form W-8, 
    or a Form 8233 in the case of personal services income described in 
    Sec. 1.1441-4(b) or certain scholarship or grant amounts described in 
    Sec. 1.1441-4(c) (or a substitute form described in paragraph 
    (e)(4)(vi) of this section, or such other form as the IRS may 
    prescribe). A Form W-8 is valid only if its validity period has not 
    expired, it is signed under penalties of perjury by the beneficial 
    owner, and it contains all of the information required on the form. The 
    required information is the beneficial owner's name, permanent 
    residence address, and TIN (if required), the country under the laws of 
    which the beneficial owner is created, incorporated, or governed (if a 
    person other than an individual), the classification of the entity, and 
    such other information as may be required by the regulations under 
    section 1441 or by the form or accompanying instructions in addition 
    to, or in lieu of, the information described in this paragraph 
    (e)(2)(ii). A person's permanent residence address is an address in the 
    country where the person claims to be a resident for purposes of that 
    country's income tax. In the case of a certificate furnished in order 
    to claim a reduced rate of withholding under an income tax treaty, the 
    residence must be determined in the manner prescribed under the 
    applicable treaty. See Sec. 1.1441-6(b)(4)(i). The address of a 
    financial institution with which the beneficial owner maintains an 
    account, a post office box, or an address used solely for mailing 
    purposes is not a residence address for this purpose. If the beneficial 
    owner is an individual who does not have a tax residence in any 
    country, the permanent residence address is the place at which the 
    beneficial owner normally resides. If the beneficial owner is not an 
    individual and does not have a tax residence in any country, then the 
    permanent residence address is the place at which the person maintains 
    its principal office. See paragraph (e)(4)(vii) of this section for 
    circumstances in which a TIN is required on a beneficial owner 
    withholding certificate. See paragraph (f)(2)(i) of this section for 
    continued validity of certificates during a transition period.
        (3) Intermediary, flow-through, or U.S. branch withholding 
    certificate--(i) In general. An intermediary withholding certificate is 
    a Form W-8 by which a payee represents that it is a foreign person and 
    that it is an intermediary with respect to a payment and not the 
    beneficial owner. A flow-through withholding certificate is a Form W-8 
    furnished by a flow-through entity under Sec. 1.1441-5(c)(2) or (3) for 
    a partnership or under Sec. 1.1441-5(e) for a foreign estate or trust. 
    See paragraph (c)(6)(ii)(C) of this section for a definition of a flow-
    through entity. A U.S. branch certificate is a Form W-8 by which the 
    payee represents that it is a U.S. branch described in paragraph 
    (b)(2)(iv) (A) or (E) of this section and that the payment is not 
    effectively connected with the conduct of its trade or business in the 
    United States. An intermediary withholding certificate is used by an 
    intermediary either to make representations regarding the status of 
    beneficial owners of the amount paid or to transmit appropriate 
    documentation to the withholding agent. A flow-through certificate is 
    used by a flow-through entity to establish its status as a foreign 
    person or the status of its partners or beneficiaries, if required, 
    and, if applicable, to claim a reduced rate of withholding. An 
    intermediary means, with respect to a payment that it receives, a 
    person that, for that payment, acts as a custodian, broker, nominee, or 
    otherwise as an agent for another person, regardless of whether such 
    other person is the beneficial owner of the amount paid, a flow-through 
    entity, or another intermediary. See paragraph (e)(4)(viii) of this 
    section for applicable reliance rules.
        (ii) Intermediary withholding certificate from a qualified 
    intermediary. An intermediary withholding certificate from a person 
    representing to be a qualified intermediary (described in paragraph 
    (e)(5)(ii) of this section) is valid only if it is furnished on a Form 
    W-8 (or an
    
    [[Page 53437]]
    
    acceptable substitute form or such other form as the IRS may 
    prescribe), it is signed under penalties of perjury by an officer of 
    the qualified intermediary with authority to sign for the intermediary, 
    its validity has not expired, and it contains the following 
    information, statement, and certifications:
        (A) The name, permanent residence address (as described in 
    paragraph (e)(2)(ii) of this section), and the employer identification 
    number of the intermediary, and the country under the laws of which the 
    intermediary is created, incorporated, or governed.
        (B) A certification that the person whose name is on the Form W-8 
    is not acting for its own account and is acting as a qualified 
    intermediary within the meaning of paragraph (e)(5)(ii) of this 
    section.
        (C) A certification that the intermediary has obtained the 
    appropriate certificates (such as Forms W-8 or W-9) or other 
    appropriate documentation in the manner required in its withholding 
    agreement with the IRS for those account holders that are covered by 
    the certificate and whose assets are identified as being allocable to 
    the categories described in paragraph (e)(5)(v)(B) (1) or (2) (in 
    accordance with paragraph (e)(5)(v) of this section or otherwise).
        (D) A certification whether the qualified intermediary is assuming 
    primary withholding responsibility for the amounts to which the 
    certificate relates.
        (E) A statement attached to the certificate that provides such 
    information as may be required by the form and accompanying 
    instructions, including sufficient information for the withholding 
    agent to determine the amount required to be withheld from amounts paid 
    to the intermediary and reported to the IRS. See paragraph (e)(5)(v) of 
    this section for requirement of a statement and rules applicable 
    thereto.
        (F) Any other information or certification as may be required by 
    the form or accompanying instructions in addition to, or in lieu of, 
    the information and certifications described in this paragraph 
    (e)(3)(ii).
        (iii) Intermediary withholding certificate from an intermediary 
    that is not a qualified intermediary. An intermediary withholding 
    certificate from a person that does not represent to be a qualified 
    intermediary within the meaning of paragraph (e)(5)(ii) of this section 
    is valid only if it is furnished on a Form W-8 (or an acceptable 
    substitute form, or such other form as the IRS may prescribe), it is 
    signed under penalties of perjury by a person authorized to sign for 
    the intermediary, it contains the information, statement, and 
    certifications described in this paragraph (e)(3)(iii), its validity 
    has not expired, and the withholding certificates and other appropriate 
    documentation for all the persons to whom the certificate relates are 
    attached to the certificate. Appropriate documentation consists of 
    beneficial owner withholding certificates described in paragraph 
    (e)(2)(i) of this section, intermediary withholding certificates 
    described in paragraph (e)(3)(i) of this section, flow-through 
    certificates described in Sec. 1.1441-5(c)(2)(iv), (3)(iii), and (e), 
    documentary evidence described in Sec. 1.1441-6(b)(2)(i) or in 
    Sec. 1.6049-5(c)(1) related to the beneficial owner (or documentary 
    evidence described in Sec. 1.6049-5(c)(4) for purposes of information 
    reporting under chapter 61 of the Code), and other documentation or 
    certificate applicable under other provisions of the Code or 
    regulations that certify or establish the status of the payee or 
    beneficial owner as a U.S. or a foreign person. If the intermediary is 
    acting on behalf of another intermediary that is not a qualified 
    intermediary or on behalf of a partnership that is not a withholding 
    foreign partnership described in Sec. 1.1441-5(c)(2)(i), then the 
    intermediary must attach to its own withholding certificate the 
    intermediary withholding certificate or the partnership withholding 
    certificate to which all the withholding certificates and other 
    appropriate documentation required to be attached under this paragraph 
    (e)(3)(iii) or in Sec. 1.1441-5(c)(3)(iii) or (e) are also attached. 
    Nothing in this paragraph (e)(3)(iii) shall require an intermediary to 
    furnish original documentation. Copies of certificates or documentary 
    evidence may be passed up to the U.S. withholding agent, in which case 
    the intermediary must retain the original documentation for the same 
    time period that the copy is required to be retained by the withholding 
    agent under paragraph (e)(4)(iii) of this section and must provide it 
    to the withholding agent upon request. For purposes of this paragraph 
    (e)(3)(iii), a valid intermediary withholding certificate also includes 
    a statement described in Sec. 1.871-14(c)(2)(v) furnished in order for 
    interest to qualify as portfolio interest for purposes of sections 
    871(h) and 881(c) or in order for amounts described in Sec. 1.1441-
    6(b)(2)(ii) to qualify as amounts paid to a foreign person. The 
    information and certification required on a Form W-8 described in this 
    paragraph (e)(3)(iii) (or on an acceptable substitute form or such 
    other form as the IRS may prescribe) are as follows:
        (A) The name and permanent resident address (as described in 
    paragraph (e)(2)(ii) of this section) of the intermediary, and the 
    country under the laws of which the intermediary is created, 
    incorporated, or governed.
        (B) A certification that the person whose name is on the Form W-8 
    is not acting for its own account and is using the certificate as a 
    form to transmit withholding certificates and other appropriate 
    documentation for the payment to which the form relates.
        (C) If furnishing an intermediary certificate to transmit 
    withholding certificates or other appropriate documentation for more 
    than one person, a statement attached to the Form W-8 that provides 
    such information as may be required by the form and accompanying 
    instructions, including sufficient information for the withholding 
    agent to determine the amount required to be withheld from amounts paid 
    to the intermediary. See paragraph (e)(3)(iv) of this section for rules 
    applicable to such a statement.
        (D) A certification either that the attached withholding 
    certificates and other appropriate documentation represent all of the 
    persons to whom the intermediary withholding certificate relates or 
    that the amounts allocable to persons covered by the intermediary 
    withholding certificate and for whom withholding certificates or other 
    appropriate documentation are lacking or unreliable are separately 
    identified.
        (E) Any other information or certification as may be required by 
    the form or accompanying instructions in addition to, or in lieu of, 
    the information and certification described in this paragraph 
    (e)(3)(iii).
        (iv) Information to the withholding agent regarding assets owned by 
    beneficial owners, etc.--(A) General rule. An intermediary that has not 
    represented that it is acting as a qualified intermediary within the 
    meaning of paragraph (e)(5)(ii) of this section must provide 
    information sufficient for the withholding agent to determine the 
    proportion of each payment of reportable amounts (as described in 
    paragraph (e)(3)(vi) of this section) that is allocable to each person 
    to whom the intermediary withholding certificate relates, including 
    persons for whom the intermediary has not attached a withholding 
    certificate or other appropriate documentation. The withholding agent 
    may rely on such information in order to determine the amount of 
    withholding on the payment
    
    [[Page 53438]]
    
    and how to report this payment under chapter 3 or 61 of the Code and 
    the regulations thereunder. The sum of all the proportions indicated by 
    the intermediary, expressed as a percentage, must equal, but not 
    exceed, one hundred percent of the payment. The information for persons 
    for whom a withholding certificate or other appropriate documentation 
    is lacking or unreliable may be provided in the aggregate and need not 
    be provided separately for each such person. The foreign intermediary 
    is not required to disclose the names of the persons for whom it 
    collects the payment, unless it has actual knowledge that any such 
    person is a U.S. person that is not an exempt recipient. In such a 
    case, the intermediary must state separately the information for such 
    U.S. person even though such person has not provided a Form W-9 to the 
    intermediary in the manner described in paragraph (d)(2) of this 
    section. The information may be furnished in any manner that the 
    parties choose. For example, if the withholding agent maintains 
    separate accounts for different types of income or withholding rates, 
    the intermediary must provide sufficient information so that the 
    withholding agent may allocate assets appropriately among the relevant 
    accounts. If the withholding agent does not maintain separate accounts, 
    it may require the intermediary to attach a statement to the 
    intermediary withholding certificate under paragraphs (e)(3)(iii)(C) 
    and (D) of this section providing the information described in this 
    paragraph (e)(3)(iv).
        (B) Updating the information. The intermediary must update the 
    information furnished to the withholding agent in accordance with 
    paragraph (e)(3)(iv)(A) of this section as often as is necessary in 
    order to enable the withholding agent to withhold at the appropriate 
    rate on each payment and to report such income for purposes of chapter 
    3 or 61 of the Code and sections 3402, 3405 and 3406 (and the 
    regulations under those provisions). Any update of the information as 
    required under this paragraph (e)(3)(iv)(B) shall be treated as an 
    integral part of the intermediary withholding certificate with which it 
    is associated. See paragraph (e)(4)(ii)(D) of this section regarding 
    how changes in the information described in this paragraph (e)(3)(iv) 
    may affect the validity of withholding certificates. See paragraph 
    (b)(3)(v)(C) of this section for consequences if the information is not 
    updated as required.
    
        (C) Examples. The rules of paragraph (e)(3)(iii) of this section 
    and of this paragraph (e)(3)(iv) are illustrated by the following 
    examples:
        Example 1. A U.S. withholding agent, W, pays U.S. source 
    dividends to foreign intermediary X who, in turn, pays to foreign 
    intermediary Y, who collects on behalf of foreign beneficial owners, 
    A and B. A and B have each furnished a beneficial owner Form W-8 to 
    Y. Y must furnish to X an intermediary Form W-8 described in 
    paragraph (e)(3)(iii) of this section, to which it must attach the 
    original or copies of A's and B's Forms W-8. X, in turn, must 
    furnish to W its own intermediary Form W-8 described in paragraph 
    (e)(3)(iii) of this section, to which it must attach the original or 
    copies of the intermediary Form W-8 received from Y and A's and B's 
    Forms W-8.
        Example 2. A foreign bank, X, acts as an intermediary for five 
    different persons, A, B, C, D, and E, who each own securities from 
    which they receive U.S. source dividends. The distributions are paid 
    by a U.S. financial institution, W, as custodian of the securities 
    for X. A's, B's, C's, D's, and E's respective claimed ownership 
    interest in the securities is 20-percent each. X has furnished to W 
    an intermediary Form W-8 described in paragraph (e)(3)(iii) of this 
    section, to which it has attached a statement described in this 
    paragraph (e)(3)(iv) stating each of A', B's, and C's interest in 
    the securities with respect to which distributions are made 
    periodically. The respective ownership interests of D and E are not 
    stated separately because X has not received a valid withholding 
    certificate or other appropriate documentation from D or E. 
    Therefore, on the statement, D's and E's interest in the securities 
    is stated in the aggregate (i.e., 40-percent attributable to 
    undocumented owners). X has attached a Form W-8 for A and 
    documentary evidence for B (who each claim a reduced rate of 
    withholding under an income tax treaty), and a Form W-9 for C. In 
    determining the amount to be withheld from the amount paid to X, W 
    may rely on X's intermediary Form W-8, the allocation statement 
    attached to the Form W-8, and the attached Form W-8, documentary 
    evidence, and Form W-9 for each of A, B, and C. Based on paragraphs 
    (b)(1), (b)(2)(v), (b)(2)(vii), (d)(4)(i), and (e)(1)(ii)(A)(1) of 
    this section, W may withhold as follows on the payment to X: no 
    withholding on 20-percent of the payment on the basis of C's Form W-
    9, withholding at the reduced treaty rate on 40-percent of the 
    payment on the basis of A's Form W-8 and B's documentary evidence, 
    and 30-percent on 40-percent of the payment to the undocumented 
    owners group formed by D and E in accordance with the presumptions 
    described in paragraph (b)(3)(v)(B) of this section (i.e., due to 
    the lack of documentation for D and E). Under paragraph (e)(3)(iii) 
    of this section, X is not required to identify D or E to W. For 
    purposes of making a return under Sec. 1.1461-1(c), W would prepare 
    a single Form 1042-S for the group of undocumented owners, D and E 
    (if the names are undisclosed, the Form 1042-S should be made in the 
    name of X and state that the return is made for unknown owners (see 
    Sec. 1.1461-1(c)(4)(iv)). Because X has not furnished required 
    documentation for D and E, X does not qualify under paragraph (b)(6) 
    of this section for relief from an obligation to make a report on a 
    Form 1042-S (to the extent D and E are presumed to be foreign 
    persons under paragraph (b)(3)(iii) of this section) when X makes 
    the payment to D and E (however, because a full 30-percent amount 
    was withheld under this section, X does not have to withhold an 
    additional amount under the facts of this example). In contrast, 
    under paragraph (b)(6) of this section, X is not required to make a 
    report on Form 1042-S for its payments to A or B. Under Sec. 1.6042-
    3(b)(1)(vi), X is not required to report C's share of the payment on 
    Form 1099 (unless X has actual knowledge that W has not reported the 
    portion of payment allocable to C in accordance with Sec. 1.6042-2).
        Example 3. The facts are the same as in Example 2, except that 
    D's name is D Insurance Company whom X knows is a U.S. person. 
    Because of D's name, X may treat D as an exempt recipient on an 
    eyeball test basis under Secs. 1.6042-3(b)(1)(vii) and 1.6049-
    4(c)(1)(ii)(A)(1). However, even if those facts are disclosed to W, 
    W must withhold 30-percent of the portion of the payment allocable 
    to D because W is making a payment to a foreign person (X). Under 
    paragraph (b)(1) of this section, W may reduce the rate of 
    withholding only if it can associate the payment with documentation 
    upon which it can rely to treat the beneficial owner as a U.S. 
    person or as a foreign person entitled to a reduced rate of 
    withholding. Because X has not furnished documentation for D, W does 
    not have the proper documentation with which it can associate the 
    payment allocable to D. Thus, insofar as W is concerned, the portion 
    of the payment allocable to D is treated as a payment to an 
    undocumented owner that W must presume to be a foreign person under 
    paragraph (b)(3)(v)(B) of this section. Accordingly, under this 
    paragraph (e)(3)(iv), W need not identify the information for D 
    separately and can aggregate the portion of the payment allocable to 
    D and E. W's reporting requirements for the portion of the payment 
    allocable to D and E are the same as under Example 2. When X makes 
    the payment to D, X does not benefit from the relief from reporting 
    under Sec. 1.6042-3(b)(1)(vi). However, X is not required to report 
    the payment to D on Form 1099 under section 6042 because, under 
    Sec. 1.6042-3(b)(1)(vii), X can treat D as an exempt recipient.
        (v) Withholding certificate from certain U.S. branches. A U.S. 
    branch certificate is a representation by the U.S. branch whose name is 
    on the certificate that the payment it receives is not effectively 
    connected with the conduct of a trade or business in the United States 
    and that it is using the certificate either to transmit the appropriate 
    documentation for the persons for whom the branch receives the payment 
    (i.e., as an intermediary) or as evidence of its agreement with the 
    withholding agent to be treated as a U.S. person with respect to any 
    payment associated with the certificate. A U.S. branch withholding 
    certificate is valid only if it
    
    [[Page 53439]]
    
    is furnished on a Form W-8 (or an acceptable substitute form, or such 
    other form as the IRS may prescribe), it is signed under penalties of 
    perjury by a person authorized to sign for the branch, its validity has 
    not expired, and it contains the information, statement, and 
    certifications described in this paragraph (e)(3)(v). If the 
    certificate is furnished to transmit withholding certificates and other 
    documentation, it must contain the information and certifications 
    described in paragraphs (e)(3)(v) (A) through (C) of this section and 
    in paragraphs (e)(3)(iii) (C) and (D) of this section. If the 
    certificate is furnished pursuant to an agreement to treat the U.S. 
    branch as a U.S. person, the information and certification required on 
    the Form W-8 (or an acceptable substitute form or such other form as 
    the IRS may prescribe) are limited to the following--
        (A) The name of the person of which the branch is a part and the 
    address of the branch in the United States;
        (B) A certification that the payments associated with the 
    certificate are not effectively connected with the conduct of its trade 
    or business in the United States; and
        (C) Any other information or certification as may be required by 
    the form or accompanying instructions in addition to, or in lieu of, 
    the information and certification described in this paragraph 
    (e)(3)(v).
        (vi) Reportable amounts. For purposes of this section, the term 
    reportable amount means an amount subject to withholding within the 
    meaning of Sec. 1.1441-2(a), bank deposit interest (including original 
    issue discount) and similar types of deposit interest described in 
    section 871(i)(2)(A) or 881(d) that are from sources within the United 
    States, and any amount of interest or original issue discount from 
    sources within the United States on certain short-term obligations 
    described in section 871(g)(1)(B) or 881(a)(3). For purposes of this 
    paragraph (e)(3)(vi), however, reportable amounts do not include 
    payments with respect to deposits with banks and other financial 
    institutions that remain on deposit for a period of two weeks or less, 
    to amounts of original issue discount arising from a sale and 
    repurchase transaction that is completed within a period of two weeks 
    or less, or to amounts described in Sec. 1.6049-5(b) (7), (10) or (11) 
    (relating to certain obligations issued in bearer form). While short-
    term OID and bank deposit interest are not subject to withholding under 
    chapter 3 of the Code, such amounts may be subject to information 
    reporting under section 6049 if paid to a U.S. person who is not an 
    exempt recipient described in Sec. 1.6049-4(c)(1)(ii) and to backup 
    withholding under section 3406 in the absence of documentation. See 
    Sec. 1.6049-5(d)(3)(iii) for applicable procedures when such amounts 
    are paid to a foreign intermediary.
        (4) Applicable rules. The provisions in this paragraph (e)(4) 
    describe procedures applicable to withholding certificates on Form W-8 
    or Form 8233 (or a substitute form) or documentary evidence furnished 
    to establish foreign status. These provisions do not apply to Forms W-9 
    (or their substitutes). For corresponding provisions regrading Form W-9 
    (or a substitute form), see section 3406 and the regulations under that 
    section.
        (i) Who may sign the certificate. A withholding certificate (or 
    other acceptable substitute) may be signed by any person authorized to 
    sign a declaration under penalties of perjury on behalf of the person 
    whose name is on the certificate as provided in section 6061 and the 
    regulations under that section (relating to who may sign generally for 
    an individual, estate, or trust, which includes certain agents who may 
    sign returns and other documents), section 6062 and the regulations 
    under that section (relating to who may sign corporate returns), and 
    section 6063 and the regulations under that section (relating to who 
    may sign partnership returns).
        (ii) Period of validity--(A) Three-year period. A withholding 
    certificate described in paragraph (e)(2)(i) of this section, a 
    certificate described in Sec. 1.871-14(c)(2)(v) (furnished to qualify 
    interest as portfolio interest for purposes of sections 871(h) and 
    881(c) or to qualify amounts paid on certain securities described in 
    Sec. 1.1441-6(b)(2)(ii) as paid to a foreign person), or documentary 
    evidence described in Sec. 1.1441-6(b)(2)(i) or in Sec. 1.6049-5(c)(1) 
    shall remain valid until the earlier of the last day of the third 
    calendar year following the year in which the certificate is signed or 
    the documentary evidence is created or the day that a change of 
    circumstances occurs that makes any information on the certificate or 
    documentary evidence incorrect. For example, a certificate signed on 
    September 30, 1999, remains valid through December 31, 2002, unless 
    circumstances change that make the information on the form no longer 
    correct.
        (B) Indefinite validity period. Notwithstanding paragraph 
    (e)(4)(ii)(A) of this section, the following certificates or parts of 
    certificates shall remain valid until the status of the person whose 
    name is on the certificate is changed in a way relevant to the 
    certificate or circumstances change that make the information on the 
    certificate no longer correct:
        (1) A beneficial owner withholding certificate described in 
    paragraph (e)(2)(ii) of this section that is furnished with a TIN if 
    the income for which such certificate is furnished is required to be 
    reported under Sec. 1.1461-1(c)(2)(i) or the TIN furnished on the 
    certificate is reported to the IRS under the procedures described in 
    Sec. 1.1461-1(d).
        (2) A certificate described in paragraph (e)(3)(ii) of this section 
    (dealing with a certificate from a person representing to be a 
    qualified intermediary).
        (3) A certificate described in paragraph (e)(3)(iii) of this 
    section (dealing with a certificate from a person representing to be a 
    non-qualified intermediary), but not including the withholding 
    certificates or documentary evidence required to be attached to the 
    certificate.
        (4) A certificate described in paragraph (e)(3)(v) of this section 
    (dealing with a certificate from a person representing to be a U.S. 
    branch), but not the withholding certificates or documentary evidence 
    required to be attached to the certificate.
        (5) A certificate described in Sec. 1.1441-5(c)(2)(iv) (dealing 
    with a certificate from a person representing to be a withholding 
    foreign partnership).
        (6) A certificate described in Sec. 1.1441-5(c)(3)(iii) (dealing 
    with a certificate from a person representing to be a foreign 
    partnership that is not a withholding foreign partnership), but not 
    including the withholding certificates or documentary evidence required 
    to be attached to the certificate.
        (7) A certificate furnished by a person representing to be an 
    integral part of a foreign government (within the meaning of 
    Sec. 1.892-2T(a)(2)) in accordance with Sec. 1.1441-8(b), or by a 
    person representing to be a foreign central bank of issue (within the 
    meaning of Sec. 1.861-2(b)(4)) or the Bank for International 
    Settlements in accordance with Sec. 1.1441-8(c)(1).
        (C) Withholding certificate for effectively connected income. 
    Notwithstanding paragraph (e)(4)(ii)(B)(1) of this section, the period 
    of validity of a withholding certificate furnished to a withholding 
    agent to claim a reduced rate of withholding for income that is 
    effectively connected with the conduct of a trade or business within 
    the United States shall be limited to the three-year period described 
    in paragraph (e)(4)(ii)(A) of this section.
        (D) Change in circumstances. If a change in circumstances makes any
    
    [[Page 53440]]
    
    information on a certificate or other documentation incorrect, then the 
    person whose name is on the certificate or other documentation must 
    inform the withholding agent within 30 days of the change and furnish a 
    new certificate or new documentation. A certificate or documentation 
    becomes invalid from the date that the withholding agent holding the 
    certificate or documentation knows or has reason to know that 
    circumstances affecting the correctness of the certificate or 
    documentation have changed. However, a withholding agent may choose to 
    apply the provisions of paragraph (b)(3)(iv) of this section regarding 
    the 90-day grace period as of that date while awaiting a new 
    certificate or documentation or while seeking information regarding 
    changes, or suspected changes, in the person's circumstances. If an 
    intermediary (including a U.S. branch described in paragraph 
    (b)(2)(iv)(A) of this section that passes through certificates to a 
    withholding agent) or a flow-through entity becomes aware that a 
    certificate or other appropriate documentation it has furnished to the 
    person from whom it collects the payment is no longer valid because of 
    a change in the circumstances of the person who issued the certificate 
    or furnished the other appropriate documentation, then the intermediary 
    or flow-through entity must notify the person from whom it collects the 
    payment of the change of circumstances. It must also obtain a new 
    withholding certificate or new appropriate documentation to replace the 
    existing certificate or documentation whose validity has expired due to 
    the change in circumstances. If a beneficial owner withholding 
    certificate is used to claim foreign status only (and not, also, 
    residence in a particular foreign country for purposes of an income tax 
    treaty), a change of address is a change in circumstances for purposes 
    of this paragraph (e)(4)(ii)(D) only if it changes to an address in the 
    United States. Further, a change of address within the same foreign 
    country is not a change in circumstances for purposes of this paragraph 
    (e)(4)(ii)(D). A change in the circumstances affecting the withholding 
    information provided to the withholding agent in accordance with the 
    provisions in paragraph (e) (3)(iv) or (5)(v) of this section or in 
    Sec. 1.1441-5(c)(3)(iv) shall terminate the validity of the withholding 
    certificate with respect to the information that is no longer reliable 
    unless the information is updated. A withholding agent may rely on a 
    certificate without having to inquire into possible changes of 
    circumstances that may affect the validity of the statement, unless it 
    knows or has reason to know that circumstances have changed. A 
    withholding agent may require a new certificate at any time prior to a 
    payment, even though the withholding agent has no actual knowledge or 
    reason to know that any information stated on the certificate has 
    changed.
        (iii) Retention of withholding certificate. A withholding agent 
    must retain each withholding certificate and other documentation 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.
        (iv) Electronic transmission of information. Under procedures 
    issued by the IRS (see Sec. 601.601(d)(2) of this chapter), a 
    withholding agent may be permitted to receive in electronic form the 
    information required to be included on a withholding certificate.
        (v) Electronic confirmation of taxpayer identifying number on 
    withholding certificate. The Commissioner may prescribe procedures in a 
    revenue procedure (see Sec. 601.601(d)(2) of this chapter) or other 
    appropriate guidance to require a withholding agent to confirm 
    electronically with the IRS information concerning any TIN stated on a 
    withholding certificate.
        (vi) Acceptable substitute form. A withholding agent may substitute 
    its own form instead of an official Form W-8 or 8233 (or such other 
    official form as the IRS may prescribe). Such a substitute for an 
    official form will be acceptable if it contains provisions that are 
    substantially similar to those of the official form, it contains the 
    same certifications relevant to the transactions as are contained on 
    the official form and these certifications are clearly set forth, and 
    the substitute form includes a signature-under-penalties-of-perjury 
    statement identical to the one stated on the official form. The 
    substitute form is acceptable even if it does not contain all of the 
    provisions contained on the official form, so long as it contains those 
    provisions that are relevant to the transaction for which it is 
    furnished. For example, a withholding agent that pays no income for 
    which treaty benefits are claimed may develop a substitute form that is 
    identical to the official form, except that it does not include 
    information regarding claim of benefits under an income tax treaty. A 
    withholding agent who uses a substitute form must furnish instructions 
    relevant to the substitute form only to the extent and in the manner 
    specified in the instructions to the official form. A withholding agent 
    may refuse to accept a certificate from a payee or beneficial owner 
    (including the official Form W-8 or 8233) if the certificate is not 
    provided the acceptable substitute form provided by the withholding 
    agent. However, a withholding agent may refuse to accept a certificate 
    provided by a payee or beneficial owner only if the withholding agent 
    furnishes the payee or beneficial owner with an acceptable substitute 
    form immediately upon receipt of an unacceptable form or within 5 
    business days of receipt of an unacceptable form from the payee or 
    beneficial owner. In that case, the substitute form is acceptable only 
    if it contains a notice that the withholding agent has refused to 
    accept the form submitted by the payee or beneficial owner and that the 
    payee or beneficial owner must submit the acceptable form provided by 
    the withholding agent in order for the payee or beneficial owner to be 
    treated as having furnished the required withholding certificate.
        (vii) Requirement of taxpayer identifying number. A TIN must be 
    stated on a withholding certificate when required by this paragraph 
    (e)(4)(vii). A TIN is required to be stated on a beneficial owner 
    certificate if the beneficial owner is claiming the benefit of a 
    reduced rate under an income tax treaty (other than for amounts 
    described in Sec. 1.1441-6(b)(2)(ii)), an exemption from withholding 
    because income is effectively connected with a U.S. trade or business, 
    an exemption under section 871(f) for certain annuities received under 
    qualified plans, or an exemption solely based on a foreign 
    organization's claim of tax exempt status under section 501(c) or 
    private foundation status. Thus, a TIN is not required from a foreign 
    private foundation that is subject to the 4-percent tax under section 
    4948(a) on income if that income is otherwise exempt under the Code. In 
    addition, a TIN is required to be stated on the withholding certificate 
    from a person representing to be a qualified intermediary described in 
    paragraph (e)(5)(ii) of this section, on the withholding certificate 
    from a person representing to be a withholding foreign partnership 
    described in Sec. 1.1441-5(c)(2)(i)), on the withholding certificate 
    from a person representing to be a foreign trust or foreign estate, or 
    from a fiduciary thereof, and on the withholding certificate from a 
    person representing to be a U.S. branch described in paragraph 
    (e)(3)(v) of this section. A TIN is an IRS individual taxpayer 
    identification number, an employer identification number, or a social 
    security number as described in section 6109 and Sec. 301.6109-1 of 
    this
    
    [[Page 53441]]
    
    chapter, or any other identifier that the Commissioner may designate.
        (viii) Reliance rules. A withholding agent may rely on the 
    information and certifications stated on withholding certificates or 
    other documentation without having to inquire into the truthfulness of 
    this information or certification, unless it has actual knowledge or 
    reason to know that the same is untrue. In the case of amounts 
    described in Sec. 1.1441-6(b)(2)(ii), a withholding agent described in 
    Sec. 1.1441-7(b)(2)(ii) has reason to know that the information or 
    certifications on a certificate are untrue only to the extent provided 
    in Sec. 1.1441-7(b)(2)(ii). See Sec. 1.1441-6(b)(4)(ii) for reliance on 
    representations regarding eligibility for a reduced rate under an 
    income tax treaty. Paragraphs (e)(4)(viii) (A) and (B) of this section 
    provide examples of such reliance.
        (A) Classification. A withholding agent may rely on the claim of 
    entity classification indicated on the withholding certificate that it 
    receives from or for the beneficial owner, unless it has actual 
    knowledge or reason to know that the classification claimed is 
    incorrect. A withholding agent may not rely on a person's claim of 
    classification other than as a corporation if the name of the 
    corporation indicates that the person is a per se corporation described 
    in Sec. 301.7701-2(b)(8)(i) of this chapter unless the certificate 
    contains a statement that the person is a grandfathered per se 
    corporation described in Sec. 301.7701-2(b)(8) of this chapter and that 
    its grandfathered status has not been terminated. In the absence of 
    reliable representation or information regarding the classification of 
    the payee or beneficial owner, see Sec. 1.1441-1(b)(3)(ii) for 
    applicable presumptions.
        (B) Status of payee as an intermediary or as a person acting for 
    its own account. A withholding agent may rely on the type of 
    certificate furnished as indicative of the payee's status as an 
    intermediary or as an owner, unless the withholding agent has actual 
    knowledge or reason to know otherwise. For example, a withholding agent 
    that receives a beneficial owner withholding certificate from a foreign 
    financial institution may treat the institution as the beneficial 
    owner, unless it has information in its records that would indicate 
    otherwise or the certificate contains information that is not 
    consistent with beneficial owner status (e.g., sub-account numbers or 
    names). If the financial institution also acts as an intermediary, the 
    withholding agent may request that the institution furnish two 
    certificates, i.e., a beneficial owner certificate described in 
    paragraph (e)(2)(i) of this section for the amounts that it receives as 
    a beneficial owner, and an intermediary withholding certificate 
    described in paragraph (e)(3)(i) of this section for the amounts that 
    it receives as an intermediary. In the absence of reliable 
    representation or information regarding the status of the payee as an 
    owner or as an intermediary, see paragraph (b)(3)(v)(A) for applicable 
    presumptions.
        (ix) Certificates to be furnished for each account unless exception 
    applies. Unless otherwise provided in this paragraph (e)(4)(ix), a 
    withholding agent that is a financial institution with which a customer 
    may open an account shall obtain withholding certificates or other 
    appropriate documentation on an account-by-account basis.
        (A) Coordinated account information system in effect. A withholding 
    agent may rely on the withholding certificate or other appropriate 
    documentation furnished by a customer for a pre-existing account under 
    any one or more of the circumstances described in this paragraph 
    (e)(4)(ix)(A).
        (1) A withholding agent may rely on documentation furnished by a 
    customer for another account if all such accounts are held at the same 
    branch location.
        (2) A withholding agent may rely on documentation furnished by a 
    customer for an account held at another branch location of the same 
    withholding agent or at a branch location of a person related to the 
    withholding agent if the withholding agent and the related person are 
    part of a universal account system that uses a customer identifier that 
    can be used to retrieve systematically all other accounts of the 
    customer. See Sec. 31.3406(c)1(c)(3)(ii) and (iii)(C) of this chapter 
    for an identical procedure for purposes of backup withholding. For 
    purposes of this paragraph (e)(4)(ix)(A), a withholding agent is 
    related to another person if it is related within the meaning of 
    section 267(b) or 707(b).
        (3) A withholding agent may rely on documentation furnished by a 
    customer for an account held at another branch location of the same 
    withholding agent or at a branch location of a person related to the 
    withholding agent if the withholding agent and the related person are 
    part of an information system other than a universal account system and 
    the information system is described in this paragraph (e)(4)(ix)(A)(3). 
    The system must allow the withholding agent to easily access data 
    regarding the nature of the documentation, the information contained in 
    the documentation, and its validity status, and must allow the 
    withholding agent to easily transmit data into the system regarding any 
    facts of which it becomes aware that may affect the reliability of the 
    documentation. The withholding agent must be able to establish how and 
    when it has accessed the data regarding the documentation and, if 
    applicable, how and when it has transmitted data regarding any facts of 
    which it became aware that may affect the reliability of the 
    documentation. In addition, the withholding agent or the related party 
    must be able to establish that any data it has transmitted to the 
    information system has been processed and appropriate due diligence has 
    been exercised regarding the validity of the documentation.
        (B) Family of mutual funds. An interest in a mutual fund that has a 
    common investment advisor or common principal underwriter with other 
    mutual funds (within the same family of funds) may, in the discretion 
    of the mutual fund, be represented by one single withholding 
    certificate where shares are acquired or owned in any of the funds. See 
    Sec. 31.3406(h)-3(a)(2) of this chapter for an identical procedures for 
    purposes of backup withholding.
        (C) Special rule for brokers. A withholding agent may rely on the 
    certification of a broker acting as the agent of a beneficial owner 
    that the broker holds a valid beneficial owner withholding certificate 
    described in paragraph (e)(2)(i) of this section or other documentation 
    for that beneficial owner. The certification must contain the date of 
    expiration of the certificate or documentation and be in writing or in 
    electronic form. For purposes of this paragraph (e)(4)(ix)(C), the term 
    broker shall have the same meaning as in Sec. 31.3406(h)-3(d) of this 
    chapter.
        (5) Qualified intermediaries--(i) General rule. A qualified 
    intermediary, as defined in paragraph (e)(5)(ii) of this section, may 
    furnish an intermediary withholding certificate to a withholding agent. 
    Such a certificate certifies on behalf of other persons (such as 
    beneficial owners, intermediaries, flow-through entities described in 
    Sec. 1.1441-5, or U.S. payees) for the purpose of claiming and 
    verifying reduced rates of withholding under section 1441 or 1442 and 
    for the purpose of reporting and withholding under other provisions of 
    the Code, such as the provisions under chapter 61 of the Code and 
    section 3406 (and the regulations under those provisions). Furnishing 
    such a certificate is in lieu of transmitting to a withholding agent 
    withholding certificates or other appropriate documentation for the 
    persons for whom the qualified intermediary receives the payment or for 
    its shareholders (in the case of claims of
    
    [[Page 53442]]
    
    benefits under an income tax treaty by a reverse hybrid entity). 
    Although the qualified intermediary is required to obtain withholding 
    certificates or other appropriate documentation from beneficial owners, 
    payees, or shareholders pursuant to its agreement with the IRS, it is 
    not required to attach such documentation to the intermediary 
    withholding certificate. However, the qualified intermediary must 
    disclose the names of those U.S. persons for whom the qualified 
    intermediary receives reportable payments (within the meaning of 
    paragraph (e)(3)(vi) of this section) and who are not exempt recipients 
    (as defined in Sec. 1.6049-4(c)(1)(ii) or an applicable provision under 
    section 6041, 6042, 6045, or 6050N), irrespective of local secrecy 
    laws. A person may claim qualified intermediary status before an 
    agreement is executed with the IRS if it has applied for such status 
    and the IRS authorizes such status on an interim basis under such 
    procedures as the IRS may prescribe.
        (ii) Definition of qualified intermediary. With respect to a 
    payment to a foreign person, the term qualified intermediary means a 
    person that is a party to a withholding agreement with the IRS and such 
    person is--
        (A) A foreign financial institution or a foreign clearing 
    organization (as defined in Sec. 1.163-5(c)(2)(i)(D)(8), without regard 
    to the requirement that the organization hold obligations for members), 
    other than a U.S. branch or U.S. office of such institution or 
    organization;
        (B) A foreign branch or office of a U.S. financial institution or a 
    foreign branch or office of a U.S. clearing organization (as defined in 
    Sec. 1.163-5(c)(2)(i)(D)(8), without regard to the requirement that the 
    organization hold obligations for members);
        (C) A foreign corporation for purposes of presenting claims of 
    benefits under an income tax treaty on behalf of its shareholders; or
        (D) Any other person acceptable to the IRS.
        (iii) Withholding agreement--(A) In general. The IRS may, upon 
    request, enter into a withholding agreement with a foreign person 
    described in paragraph (e)(5)(ii) of this section pursuant to such 
    procedures as the IRS may prescribe in published guidance (see 
    Sec. 601.601(d)(2) of this chapter). Under such withholding agreement, 
    a qualified intermediary shall be generally subject to the applicable 
    withholding and reporting provisions applicable to withholding agents 
    and payors under chapters 3 and 61 of the Code, and section 3406, and 
    the regulations under those provisions, and other withholding 
    provisions of the Code, except to the extent provided under the 
    agreement. A withholding agreement may apply to the entity as a whole 
    or to certain specified branches of the institution. The determination 
    of the scope of the agreement shall be made on a branch-by-branch 
    basis.
        (B) Terms of the withholding agreement. Generally, the agreement 
    shall specify the type of certification and documentation upon which 
    the qualified intermediary may rely to ascertain the nationality and 
    residence of beneficial owners and U.S. payees who receive payments 
    collected by the qualified intermediary and, if necessary, entitlement 
    to the benefits of a reduced rate under an income tax treaty. It shall 
    specify if the qualified intermediary may assume primary withholding 
    responsibility in accordance with paragraph (e)(5)(iv) of this section. 
    It shall specify the extent to which applicable return filing and 
    information reporting requirements are modified so that, in appropriate 
    cases, the qualified intermediary may report payments to the IRS on an 
    aggregated basis, without having to disclose the identity of individual 
    customers. However, the qualified intermediary may be required to 
    provide to the IRS the name and address of those foreign customers who 
    benefit from a reduced rate under an income tax treaty pursuant to the 
    qualified intermediary arrangement for purposes of verifying 
    entitlement to such benefits, particularly under an applicable 
    Limitation on Benefits provision. Under the agreement, a qualified 
    intermediary may agree to act as an acceptance agent to perform the 
    duties described in Sec. 301.6109-1(d)(3)(iv)(A) of this chapter. The 
    agreement may specify the manner in which applicable procedures for 
    adjustments for underwithholding and overwithholding, including refund 
    procedures apply in the context of a qualified intermediary arrangement 
    and the extent to which applicable procedures may be modified. In 
    particular, a withholding agreement may allow a qualified intermediary 
    to claim refunds of overwithheld amounts on behalf of its customers. If 
    relevant, the agreement shall specify the manner in which the qualified 
    intermediary may deal with payments to other intermediaries. In 
    addition, the agreement must specify the manner in which the IRS will 
    verify compliance with the agreement. In appropriate cases, the IRS may 
    agree to rely on audits performed by an intermediary's approved 
    auditor. In such a case, the IRS' audit may be limited to the audit of 
    the auditor's records (including work papers of the auditor and reports 
    prepared by the auditor indicating the methodology employed to verify 
    the entity's compliance with the agreement). For this purpose, the 
    agreement shall specify which auditor or class of auditors is approved. 
    Generally, an auditor will be approved if it is subject to regulatory 
    supervision under the laws of the country in which a significant part 
    of the intermediary activities under the agreement are expected to 
    occur, its internal procedures require it to verify that the 
    intermediary complies with the terms of the withholding agreement and 
    to report non-compliance findings under the agreement in the same 
    manner as it is required to report other findings of non-compliance 
    with applicable local laws and regulatory requirements, and its 
    relevant records (i.e., work papers and reports) are available to the 
    IRS. The agreement must include provisions for the assessment and 
    collection of tax in the event that failure to comply with the terms of 
    the agreement results in the failure by the withholding agent or the 
    qualified intermediary to withhold and deposit the required amount of 
    tax. Further, the agreement shall specify the procedures by which 
    deposits of amounts withheld are to be deposited, if different from 
    normally applicable deposit procedures under the Code and applicable 
    regulations. The agreement shall also specify the assets that the 
    qualified intermediary has in the United States or alternative means of 
    collection, if necessary. To determine the terms of any particular 
    withholding agreement, the IRS will consider appropriate factors 
    including whether or not the foreign person agrees to assume primary 
    responsibility as a withholding agent, the type of local know-your-
    customer laws and practices to which it is subject, the extent and 
    nature of supervisory and regulatory control exercised under the laws 
    of the foreign country over the foreign person, the volume of 
    investments in U.S. securities (determined in dollar amounts and number 
    of account holders), and financial condition of the foreign person.
        (iv) Assignment of primary withholding responsibility. A 
    withholding agent making a payment to a qualified intermediary must 
    presume that the withholding agent has full withholding responsibility 
    for that payment, except as otherwise specified in this paragraph 
    (e)(5)(iv). For this purpose, withholding responsibility means the 
    obligation to withhold as
    
    [[Page 53443]]
    
    required under the provisions of section 1441, 1442, or 1443, and the 
    regulations under those sections, and the related reporting obligations 
    under Sec. 1.1461-1(b)(2)(ii) and (c)(4)(ii) for payments identified or 
    treated as made to foreign persons. Withholding responsibility also 
    means obligations imposed on payors under chapter 61 of the Code (and 
    the regulations under those provisions) and, if applicable, under 
    section 3405 or 3406 (and the regulations under those sections). A 
    qualified intermediary that assumes primary withholding responsibility 
    vis-a-vis a withholding agent must assume such responsibility for all 
    payments made to any one account. Any qualified intermediary may agree 
    with the withholding agent to assume primary withholding 
    responsibility, but only if expressly permitted to do so under its 
    agreement with the IRS. Generally, reporting or withholding liability 
    arising from a payment to a U.S. person (or treated as or presumed to 
    be made to a U.S. person) under any provision of the Code or applicable 
    regulations thereunder may not be assigned to a qualified intermediary 
    except where the qualified intermediary is a foreign branch of a U.S. 
    financial institution or except to the extent that the qualified 
    intermediary has a branch in the United States and establishes to the 
    satisfaction of the IRS that its U.S. branch can adequately fulfill the 
    qualified intermediary's obligations on behalf of the qualified 
    intermediary regarding information reporting under chapter 61 of the 
    Code and the regulations under the applicable provisions of that 
    chapter and, if necessary, backup withholding under section 3406 and 
    the regulations under that section (even though the U.S. branch is not 
    a qualified intermediary).
        (v) Information to withholding agent regarding applicable 
    withholding rates--(A) General rule. The qualified intermediary must 
    separate the assets that generate payments of reportable amounts (as 
    described in paragraph (e)(3)(vi) of this section) that are associated 
    with its withholding certificate furnished to the withholding agent 
    into the categories described in paragraph (e)(5)(v)(B) of this 
    section, and provide that information to the withholding agent so that 
    the withholding agent may determine the applicable withholding rate 
    applicable to each category. The information may be furnished in any 
    manner that the parties choose. For example, if the withholding agent 
    maintains separate accounts for each category of assets described in 
    paragraph (e)(5)(v)(B) of this section, the intermediary must provide 
    information sufficient for the withholding agent to allocate assets 
    appropriately among the various accounts. If the withholding agent does 
    not maintain separate accounts, it may require the intermediary to 
    attach a statement to the intermediary withholding certificate under 
    paragraph (e)(3)(ii)(E) of this section providing the information 
    described in this paragraph (e)(5)(v).
        (B) Categories of assets. A payment of a reportable amount (as 
    defined in paragraph (e)(3)(vi) of this section) must be associated 
    with one of the three categories of assets set forth in paragraphs 
    (e)(5)(v)(B) (1) through (3) of this section and may be associated with 
    only one of these three categories. Additional or different categories 
    of assets may be specified, however, under procedures prescribed by the 
    IRS (see Sec. 602.602-1(d) of this chapter) or in the qualified 
    intermediary agreement. No information is required regarding assets 
    that do not generate a reportable amount described in paragraph 
    (b)(3)(vi) of this section. The information provided to the withholding 
    agent, and any update thereof, shall be considered an integral part of 
    the intermediary withholding certificate. The three categories of 
    assets required to be identified to the withholding agent are as 
    follows:
        (1) The first category of assets consists of assets that are 
    associated with non-U.S. payees to which the intermediary certificate 
    relates, and the applicable withholding rate. If different withholding 
    rates apply, the withholding agent must indicate the applicable rate 
    for each class of non-U.S. payees to which different withholding rates 
    apply and the assets associated with each class. In the case of a 
    qualified intermediary that has assumed primary withholding 
    responsibility, the intermediary must simply certify the amount of 
    assets for which it assumes primary withholding responsibility because 
    they are assets for which it holds the appropriate documentation and 
    are not described in the other two categories.
        (2) The second category of assets consists of assets that are 
    associated with all U.S. payees to which the certificate relates. The 
    qualified intermediary must furnish a Form W-9 (or an acceptable 
    substitute form) for each U.S. payee described in paragraph (d)(2) of 
    this section or, in the absence of a Form W-9, the name and address of 
    the U.S. payee or such information it has available regarding the 
    payee. The identity of U.S. payees described in paragraph (d)(3) of 
    this section need not be disclosed to the withholding agent.
        (3) The third category of assets consists of assets that are 
    associated with payees for whom the qualified intermediary holds no 
    documentation, or holds documentation that it knows or has reason to 
    know is unreliable and for which it has no actual knowledge that the 
    payees are U.S. persons. A qualified intermediary that has assumed 
    primary withholding responsibility need not furnish information 
    regarding this category of assets.
        (C) Updating the information. The intermediary must update the 
    information furnished to the withholding agent in accordance with this 
    paragraph (e)(5)(v) as often as is necessary in order to enable the 
    withholding agent to withhold at the appropriate rate on each payment 
    and to report such income for purposes of chapter 3 or 61 of the Code 
    and sections 3402, 3405 and 3406 (and the regulations under those 
    provisions). See paragraph (e)(4)(ii)(D) of this section regarding how 
    changes in the information affect the validity of a withholding 
    certificate. See Sec. 1.1441-1(b)(3)(v)(C) for consequences if the 
    information is not updated as required.
        (f) Effective date--(1) In general. This section applies to 
    payments made after December 31, 1998.
        (2) Transition rules--(i) Special rules for existing documentation. 
    For purposes of paragraphs (d)(3) and (e)(2)(i) of this section, a 
    withholding agent that on December 31, 1998, holds a Form W-8, 8233, 
    1001, 4224, 1078, or a statement described in Sec. 1.1441-5 in effect 
    prior to January 1, 1999 (see Sec. 1.1441-5 as contained in 26 CFR part 
    1, revised April 1, 1997) under the regulations in effect prior to 
    January 1, 1999 (see 26 CFR parts 1 and 35a, revised April 1, 1997), 
    that is a valid certificate or statement as determined under those 
    regulations may treat the certificate or statement as a valid 
    withholding certificate until its validity expires under those 
    regulations or, if earlier, until December 31, 1999. Further, the 
    validity of a withholding certificate or statement that is dated prior 
    to January 1, 1998, is valid on January 1, 1998, and would expire at 
    any time during 1998, is extended until December 31, 1998 (and is not 
    extended after December 31, 1998 by reason of the immediately preceding 
    sentence). The rule in this paragraph (f)(2)(i), however, does not 
    apply to extend the validity period of a withholding certificate that 
    expires in 1998 solely by reason of changes in the circumstances of the 
    person whose name is on the certificate. Notwithstanding the three 
    preceding sentences, a withholding agent may choose to not take 
    advantage of the
    
    [[Page 53444]]
    
    transition rule in this paragraph (f)(2)(i) with respect to one or more 
    withholding certificates and, therefore, to require new withholding 
    certificates conforming to the requirements described in this section.
        (ii) Lack of documentation for past years. A taxpayer may elect to 
    apply the provisions of paragraphs (b)(7)(i)(B), (ii), and (iii) of 
    this section, dealing with liability for failure to obtain 
    documentation timely, to all of its open tax years, including tax years 
    that are currently under examination by the IRS. The election is made 
    by simply taking action under those provisions in the same manner as 
    the taxpayer would take action for payments made after December 31, 
    1998.
    
    
    Sec. 1.1441-2  Amounts subject to withholding.
    
        (a) In general. For purposes of the regulations under chapter 3 of 
    the Internal Revenue Code (Code), the term amounts subject to 
    withholding means amounts from sources within the United States that 
    constitute either fixed or determinable annual or periodical income 
    described in paragraph (b) of this section or other amounts subject to 
    withholding described in paragraph (c) of this section. For purposes of 
    this paragraph (a), an amount shall not be treated as not being from 
    sources within the United States merely because the source of the 
    amount cannot be determined at the time of payment. See Sec. 1.1441-
    3(d)(1) for determining the amount to be withheld from a payment in the 
    absence of information at the time of payment regarding the source of 
    the amount. Amounts subject to withholding include amounts that are not 
    fixed or determinable annual or periodical income and upon which 
    withholding is specifically required under a provision of this section 
    or another section of the regulations under chapter 3 of the Code (such 
    as corporate distributions that do not constitute dividend income upon 
    which withholding is required under Sec. 1.1441-3(c)(1)). Amounts 
    subject to withholding do not include amounts described in Sec. 1.1441-
    1(b)(4)(i) to the extent they involve interest on obligations in bearer 
    form or on foreign-targeted registered obligations (but, in the case of 
    a foreign-targeted registered obligation, only to the extent of those 
    amounts paid to a registered owner that is a financial institution 
    within the meaning of section 871(h)(5)(B)), amounts described in 
    Sec. 1.1441-1(b)(4)(ii) (dealing with bank deposit interest and similar 
    types of interest (including original issue discount) described in 
    section 871(i)(2)(A) or 881(d)), amounts described in Sec. 1.1441-
    1(b)(4)(iv) (dealing with interest or original issue discount on 
    certain short-term obligations described in section 871(g)(1)(B) or 
    881(a)(3)), and amounts described in Sec. 1.1441-1(b)(4)(xx) (dealing 
    with income from certain gambling winnings exempt from tax under 
    section 871(j)).
        (b) Fixed or determinable annual or periodical income--(1) In 
    general--(i) Definition. For purposes of chapter 3 of the Code and the 
    regulations thereunder, fixed or determinable annual or periodical 
    income is all income included in gross income under section 61 
    (including original issue discount), except for the items specified in 
    paragraph (b)(2) of this section. Therefore, items of U.S. source 
    income that are excluded from gross income under any provision of law 
    without regard to the identity of the holder, such as interest excluded 
    from gross income under section 103(a), are not fixed or determinable 
    annual or periodical income. See Sec. 1.306-3(h) for treating income 
    from the disposition of section 306 stock as fixed or determinable 
    annual or periodical income.
        (ii) Manner of payment. The term fixed or determinable annual or 
    periodical is merely descriptive of the character of a class of income. 
    If an item of income falls within the class of income contemplated in 
    the statute and described in paragraph (a) of this section, it is 
    immaterial whether payment of that item is made in a series of payments 
    or in a single lump sum. Further, the income need not be paid annually 
    if it is paid periodically; that is to say, from time to time, whether 
    or not at regular intervals. The fact that a payment is not made 
    annually or periodically does not, however, prevent it from being fixed 
    or determinable annual or periodical income (e.g., a lump sum payment). 
    In addition, the fact that the length of time during which the payments 
    are to be made may be increased or diminished in accordance with 
    someone s will or with the happening of an event does not disqualify 
    the payment as determinable or periodical. For this purpose, the share 
    of the fixed or determinable annual or periodical income of an estate 
    or trust from sources within the United States which is required to be 
    distributed currently, or which has been paid or credited during the 
    taxable year, to a nonresident alien beneficiary of such estate or 
    trust constitutes fixed or determinable annual or periodical income.
        (iii) Determinability of amount. An item of income is fixed when it 
    is to be paid in amounts definitely pre-determined. An item of income 
    is determinable if the amount to be paid is not known but there is a 
    basis of calculation by which the amount may be ascertained at a later 
    time. For example, interest is determinable even if it is contingent in 
    that its amount cannot be determined at the time of payment of an 
    amount with respect to a loan because the calculation of the interest 
    portion of the payment is contingent upon factors that are not fixed at 
    the time of the payment. For purposes of this section, an amount of 
    income does not have to be determined at the time that the payment is 
    made in order to be determinable. An amount of income described in 
    paragraph (a) of this section which the withholding agent knows is part 
    of a payment it makes but which it cannot calculate exactly at the time 
    of payment, is nevertheless determinable if the determination of the 
    exact amount depends upon events expected to occur at a future date. In 
    contrast, a payment which may be income in the future based upon events 
    that are not anticipated at the time the payment is made is not 
    determinable. For example, loan proceeds may become income to the 
    borrower when and to the extent the loan is canceled without repayment. 
    While the cancellation of the debt is income to the borrower when it 
    occurs, it is not determinable at the time the loan proceeds are 
    disbursed to the borrower if the lack of repayment leading to the 
    cancellation of part or all of the debt was not anticipated at the time 
    of disbursement. The fact that the source of an item of income cannot 
    be determined at the time that the payment is made does not render a 
    payment not determinable. See Sec. 1.1441-3(d)(1) for determining the 
    amount to be withheld from a payment in the absence of information at 
    the time of payment regarding the source of the amount.
        (2) Exceptions. For purposes of chapter 3 of the Code and the 
    regulations thereunder, the items of income described in this paragraph 
    (b)(2) are not fixed or determinable annual or periodical income--
        (i) Gains derived from the sale of property (including market 
    discount and option premiums), except for gains described in paragraph 
    (b)(3) or (c) of this section;
        (ii) Insurance premiums within the meaning of section 4372 paid to 
    a foreign insurer or reinsurer; and
        (iii) Any other income that the Internal Revenue Service (IRS) may 
    determine, in published guidance (see Sec. 601.601(d)(2) of this 
    chapter), is not fixed or determinable annual or periodical income.
    
    [[Page 53445]]
    
        (3) Original issue discount--(i) General rule. An amount 
    representing original issue discount is fixed or determinable annual or 
    periodical income that is subject to withholding to the extent provided 
    in this paragraph (b)(3) if not otherwise excluded under paragraph (a) 
    of this section. Under sections 871(a)(1)(C) and 881(a)(3), an amount 
    of original issue discount is subject to tax to a foreign beneficial 
    owner of an obligation carrying original issue discount upon a taxable 
    sale or exchange of the obligation or when a payment is made on such 
    obligation. The amount taxable is the amount of original issue discount 
    that accrued while the foreign person held the obligation up to the 
    time that the obligation is sold or exchanged or that a payment is made 
    on the obligation, reduced by any amount of original issue discount 
    that was taken into account prior to that time (due to a payment made 
    on the obligation). In the case of a taxable event due to a payment 
    made on the obligation, the tax due on the amount of taxable original 
    issue discount may not exceed the payment less the tax imposed thereon. 
    A person who is a withholding agent with respect to a payment that, 
    under section 871(a)(1)(C) or 881(a)(3), is taxable to a foreign person 
    holding or disposing of an original issue discount obligation must 
    withhold to the extent provided in this paragraph (b)(3).
        (ii) Amounts actually known to the withholding agent. A withholding 
    agent must withhold on the taxable amount of original issue discount to 
    the extent that it has actual knowledge of the proportion of the 
    payment that is taxable to the beneficial owner under section 
    871(a)(1)(C) or 881(a)(3)(A). A withholding agent has actual knowledge 
    if it knows how long the beneficial owner has held the obligation, the 
    terms of the obligation, and the extent to which the beneficial owner 
    purchased the obligation at a premium. A withholding agent is treated 
    as having knowledge if the information is reasonably available. The 
    information is not considered reasonably available if the withholding 
    agent does not have a direct customer relationship with the foreign 
    beneficial owner or such other person who has actual knowledge of the 
    facts relevant to the determination of the amount taxable to the 
    foreign beneficial owner, and has no access to such information in the 
    ordinary course of its business due to the manner in which the 
    obligation is held (e.g., in street name or through intermediaries). In 
    the case of a withholding agent maintaining a direct account 
    relationship with the beneficial owner, knowledge regarding the 
    beneficial owner's holding period and acquisition premium is considered 
    to be reasonably available to the withholding agent. A withholding 
    agent may rely on the most recently published List of Original Issue 
    Discount Instruments (IRS Publication 1212 (available from the IRS 
    Forms Distribution Centers) or similar list) published by the IRS in 
    order to determine the amount of taxable OID in any particular 
    transaction.
        (iii) Amounts for which certain documentation is not furnished. 
    Notwithstanding lack of knowledge (within the meaning of paragraph 
    (b)(3)(ii) of this section), withholding is required on the entire 
    amount of stated interest, if any, and original issue discount on the 
    obligation as determined as of the date of original issue if the 
    withholding agent, pursuant to the provisions in Sec. 1.1441-1(b)(3), 
    treats the payment as made to a foreign payee because it cannot 
    reliably associate the payment with documentation and the amount would 
    qualify as portfolio interest if the withholding agent held 
    documentation described in Sec. 1.871-14(c)(2). A withholding agent may 
    rely on the most recently published List of Original Issue Discount 
    Instruments (IRS Publication 1212 (available from the IRS Forms 
    Distribution Centers) or similar list) published by the IRS in order to 
    determine the amount of taxable OID in any particular transaction. See 
    Sec. 1.1441-1(b)(8) for adjustments to any amount that has been 
    overwithheld.
        (iv) Exceptions to withholding. The obligation to withhold under 
    this paragraph (b)(3) shall apply only to obligations issued after 
    December 31, 1998, and payable more than 183 days from the date of 
    original issue. Any exemption from withholding pursuant to this 
    paragraph (b)(3) applies without a requirement that documentation be 
    furnished to the withholding agent. However, documentation may have to 
    be furnished for purposes of the information reporting provisions under 
    section 6049 and backup withholding under section 3406. See 
    Sec. 1.6049-5(b) (7) through (15).
        (4) Securities lending transactions and equivalent transactions. 
    See Secs. 1.871-7(b)(2) and 1.881-2(b)(2) regarding the character of 
    substitute payments as fixed and determinable annual or periodical 
    income. Such amounts constitute income subject to withholding to the 
    extent they are from sources within the United States, as determined 
    under section Secs. 1.861-2(a)(7) and 1.861-3(a)(6). See Secs. 1.6042-
    3(a)(2) and 1.6049-5(a)(5) for reporting requirements applicable to 
    substitute dividend and interest payments, respectively.
        (c) Other income subject to withholding. Withholding is also 
    required on the following items of income--
        (1) Gains described in sections 631 (b) or (c), relating to 
    treatment of gain on disposal of timber, coal, or domestic iron ore 
    with a retained economic interest; and
        (2) Gains subject to the 30-percent tax under section 871(a)(1)(D) 
    or 881(a)(4), relating to contingent payments received from the sale or 
    exchange of patents, copyrights, and similar intangible property.
        (d) Exceptions to withholding where no money or property is paid or 
    lack of knowledge--(1) General rule. A withholding agent who is not 
    related to the recipient or beneficial owner has an obligation to 
    withhold under section 1441 only to the extent that, at any time 
    between the date that the obligation to withhold would arise (but for 
    the provisions of this paragraph (d)) and the due date for the filing 
    of return on Form 1042 (including extensions) for the year in which the 
    payment occurs, it has control over, or custody of money or property 
    owned by the recipient or beneficial owner from which to withhold an 
    amount and has knowledge of the facts that give rise to the payment. 
    The exemption from the obligation to withhold under this paragraph (d) 
    shall not apply, however, to distributions with respect to stock or if 
    the lack of control or custody of money or property from which to 
    withhold is part of a pre-arranged plan known to the withholding agent 
    to avoid withholding under section 1441, 1442, or 1443. For purposes of 
    this paragraph (d), a withholding agent is related to the recipient or 
    beneficial owner if it is related within the meaning of section 482. 
    Any exemption from withholding pursuant to this paragraph (d) applies 
    without a requirement that documentation be furnished to the 
    withholding agent. However, documentation may have to be furnished for 
    purposes of the information reporting provisions under chapter 61 of 
    the Code and backup withholding under section 3406. The exemption from 
    withholding under this paragraph (d) is not a determination that the 
    amounts are not fixed or determinable annual or periodical income, nor 
    does it constitute an exemption from reporting the amount under 
    Sec. 1.1461-1 (b) and (c).
        (2) Cancellation of debt. A lender of funds who forgives any 
    portion of the loan is deemed to have made a payment
    
    [[Page 53446]]
    
    of income to the borrower under Sec. 1.61-12 at the time the event of 
    forgiveness occurs. However, based on the rules of paragraph (d)(1) of 
    this section, the lender shall have no obligation to withhold on such 
    amount to the extent that it does not have custody or control over 
    money or property of the borrower at any time between the time that the 
    loan is forgiven and the due date (including extensions) of the Form 
    1042 for the year in which the payment is deemed to occur. A payment 
    received by the lender from the borrower in partial settlement of the 
    debt obligation does not, for this purpose, constitute an amount of 
    money or property belonging to the borrower from which the withholding 
    tax liability can be satisfied.
        (3) Satisfaction of liability following underwithholding by 
    withholding agent. A withholding agent who, after failing to withhold 
    the proper amount from a payment, satisfies the underwithheld amount 
    out of its own funds may cause the beneficial owner to realize income 
    to the extent of such satisfaction or may be considered to have 
    advanced funds to the beneficial owner. Such determination depends upon 
    the contractual arrangements governing the satisfaction of such tax 
    liability (e.g., arrangements in which the withholding agent agrees to 
    pay the amount due under section 1441 for the beneficial owner) or 
    applicable laws governing the transaction. If the satisfaction of the 
    tax liability is considered to constitute an advance of funds by the 
    withholding agent to the beneficial owner and the withholding agent 
    fails to collect the amount from the beneficial owner, a cancellation 
    of indebtedness may result, giving rise to income to the beneficial 
    owner under Sec. 1.61-12. While such income is annual or periodical 
    fixed or determinable, the withholding agent shall have no liability to 
    withhold on such income to the extent the conditions set forth in 
    paragraphs (d) (1) and (2) of this section are satisfied with respect 
    to this income. Contrast the rules of this paragraph (d)(3) with the 
    rules in Sec. 1.1441-3(f)(1) dealing with a situation in which the 
    satisfaction of the beneficial owner's tax liability itself constitutes 
    additional income to the beneficial owner. See, also, Sec. 1.1441-
    3(c)(2)(ii)(B) for a special rule regarding underwithholding on 
    corporate distributions due to underestimating an amount of earnings 
    and profits.
        (e) Payment--(1) General rule. A payment is considered made to a 
    person if that person realizes income whether or not such income 
    results from an actual transfer of cash or other property. For example, 
    realization of income from cancellation of debt results in a deemed 
    payment. A payment is considered made when the amount would be 
    includible in the income of the beneficial owner under the U.S. tax 
    principles governing the cash basis method of accounting. A payment is 
    considered made whether it is made directly to the beneficial owner or 
    to another person for the benefit of the beneficial owner (e.g., to the 
    agent of the beneficial owner). Thus, a payment of income is considered 
    made to a beneficial owner if it is paid in complete or partial 
    satisfaction of the beneficial owner's debt to a creditor. In the event 
    of a conflict between the rules of this paragraph (e)(1) governing 
    whether a payment has occurred and its timing and the rules of 
    Sec. 31.3406(a)-4 of this chapter, the rules in Sec. 31.3406(a)-4 of 
    this chapter shall apply to the extent that the application of section 
    3406 is relevant to the transaction at issue.
        (2) Income allocated under section 482. A payment is considered 
    made to the extent income subject to withholding is allocated under 
    section 482. Further, income arising as a result of a secondary 
    adjustment made in conjunction with a reallocation of income under 
    section 482 from a foreign person to a related U.S. person is 
    considered paid to a foreign person unless the taxpayer to whom the 
    income is reallocated has entered into a repatriation agreement with 
    the IRS and the agreement eliminates the liability for withholding 
    under this section. For purposes of determining the liability for 
    withholding, the payment of income is deemed to have occurred on the 
    last day of the taxable year in which the transactions that give rise 
    to the allocation of income and the secondary adjustments, if any, took 
    place.
        (3) Blocked income. Income is not considered paid if it is blocked 
    under executive authority, such as the President's exercise of 
    emergency power under the Trading with the Enemy Act (50 U.S.C. App. 
    5), or the International Emergency Economic Powers Act (50 U.S.C. 1701 
    et seq). However, on the date that the blocking restrictions are 
    removed, the income that was blocked is considered constructively 
    received by the beneficial owner (and therefore paid for purposes of 
    this section) and subject to withholding under Sec. 1.1441-1. Any 
    exemption from withholding pursuant to this paragraph (e)(3) applies 
    without a requirement that documentation be furnished to the 
    withholding agent. However, documentation may have to be furnished for 
    purposes of the information reporting provisions under chapter 61 of 
    the Code and backup withholding under section 3406. The exemption from 
    withholding granted by this paragraph (e)(3) is not a determination 
    that the amounts are not fixed or determinable annual or periodical 
    income.
        (4) Special rules for dividends. For purposes of sections 1441 and 
    6042, in the case of stock for which the record date is earlier than 
    the payment date, dividends are considered paid on the payment date. In 
    the case of a corporate reorganization, if a beneficial owner is 
    required to exchange stock held in a former corporation for stock in a 
    new corporation before dividends that are to be paid with respect to 
    the stock in the new corporation will be paid on such stock, the 
    dividend is considered paid on the date that the payee or beneficial 
    owner actually exchanges the stock and receives the dividend. See 
    Sec. 31.3406(a)-4(a)(2) of this chapter.
        (5) Certain interest accrued by a foreign corporation. For purposes 
    of sections 1441 and 6049, a foreign corporation shall be treated as 
    having made a payment of interest as of the last day of the taxable 
    year if it has made an election under Sec. 1.884-4(c)(1) to treat 
    accrued interest as if it were paid in that taxable year.
        (6) Payments other than in U.S. dollars. For purposes of section 
    1441, a payment includes amounts paid in a medium other than U.S. 
    dollars. See Sec. 1.1441-3(e) for rules regarding the amount subject to 
    withholding in the case of such payments.
        (f) Effective date. This section applies to payments made after 
    December 31, 1998.
        Par. 8. Section 1.1441-3 is amended by:
        1. Revising the section heading, and paragraphs (a) through (f) and 
    (h).
        2. Removing paragraphs (g) and (i).
        3. Redesignating paragraph (j) as paragraph (g).
        4. Removing the language ``(j)'' and adding ``(g)'' in its place in 
    the fourth sentence of newly designated paragraph (g)(1) and in the 
    first sentence of newly designated paragraph (g)(2).
        5. Removing the language ``Sec. 1.1441-7(d)'' in the last sentence 
    of newly designated paragraph (g)(1) and adding ``Sec. 1.1441-7(f)'' in 
    its place.
        6. Removing the authority citation at the end of the section.
        The revisions read as follows:
    
    
    Sec. 1.1441-3  Determination of amounts to be withheld.
    
        (a) Withholding on gross amount. Except as otherwise provided in 
    regulations under section 1441, the amount subject to withholding under 
    Sec. 1.1441-1 is the gross amount of income subject to withholding that 
    is
    
    [[Page 53447]]
    
    paid to a foreign person. The gross amount of income subject to 
    withholding may not be reduced by any deductions, except to the extent 
    that one or more personal exemptions are allowed as provided under 
    Sec. 1.1441-4(b)(6).
        (b) Withholding on payments on certain obligations--(1) Withholding 
    at time of payment of interest. When making a payment on an interest-
    bearing obligation, a withholding agent must withhold under 
    Sec. 1.1441-1 upon the gross amount of stated interest payable on the 
    interest payment date, regardless of whether the payment constitutes a 
    return of capital or the payment of income within the meaning of 
    section 61. To the extent an amount was withheld on an amount of 
    capital rather than interest, see the rules for adjustments, refunds, 
    or credits under Sec. 1.1441-1(b)(8).
        (2) No withholding between interest payment dates--(i) In general. 
    A withholding agent is not required to withhold under Sec. 1.1441-1 
    upon interest accrued on the date of a sale of debt obligations when 
    that sale occurs between two interest payment dates (even though the 
    amount is treated as interest under Sec. 1.61-7 (c) or (d) and is 
    subject to tax under section 871 or 881). See Sec. 1.6045-1(c) for 
    reporting requirements by brokers with respect to sale proceeds. See 
    Sec. 1.61-7(c) regarding the character of payments received by the 
    acquirer of an obligation subsequent to such acquisition (that is, as a 
    return of capital or interest accrued after the acquisition). Any 
    exemption from withholding pursuant to this paragraph (b)(2)(i) applies 
    without a requirement that documentation be furnished to the 
    withholding agent. However, documentation may have to be furnished for 
    purposes of the information reporting provisions under section 6045 or 
    6049 and backup withholding under section 3406. The exemption from 
    withholding granted by this paragraph (b)(2) is not a determination 
    that the accrued interest is not fixed or determinable annual or 
    periodical income under section 871(a) or 881(a) nor does it constitute 
    an exemption from reporting under Sec. 1.1461-1 (b) and (c) the amount 
    of accrued interest paid.
        (ii) Anti-abuse rule. The exemption in paragraph (b)(2)(i) of this 
    section does not apply if the sale of securities is part of a plan the 
    principal purpose of which is to avoid tax by selling and repurchasing 
    securities and the withholding agent has actual knowledge or reason to 
    know of such plan.
        (c) Corporate distributions--(1) General rule. A corporation making 
    a distribution with respect to its stock or any intermediary (described 
    in Sec. 1.1441-1(e)(3)(i)) making a payment of such a distribution is 
    required to withhold under section 1441, 1442, or 1443 on the entire 
    amount of the distribution, unless it elects to reduce the amount of 
    withholding under the provisions of paragraph (c)(2) of this section. 
    The exemption from withholding provided by this paragraph (c) applies 
    without any requirement to furnish documentation to the withholding 
    agent. However, documentation may have to be furnished for purposes of 
    the information reporting provisions under section 6042 or 6045 and 
    backup withholding under section 3406. The exemption from withholding 
    granted by this paragraph (c) does not constitute a determination that 
    the exempted amounts are not fixed or determinable annual or periodical 
    income under sections 871(a) or 881(a) nor does it constitute an 
    exemption from reporting under Sec. 1.1461-1 (b) and (c) the amount of 
    the distribution.
        (2) Exception to withholding on distributions--(i) In general. An 
    election described in paragraph (c)(1) of this section is made by 
    actually reducing the amount of withholding at the time that the 
    payment is made. An intermediary that makes a payment of a distribution 
    is not required to reduce the withholding based on the distributing 
    corporation's estimate of earnings and profits, even if the 
    distributing corporation itself elects to reduce the withholding on 
    payments of distributions that it itself makes to foreign persons. 
    Conversely, an intermediary may elect to reduce the amount of 
    withholding with respect to the payment of a distribution even if the 
    distributing corporation does not so elect for the payments of 
    distributions that it itself makes of distributions to foreign persons. 
    The amounts with respect to which a distributing corporation or 
    intermediary may elect to reduce the withholding are as follows:
        (A) A distributing corporation or intermediary may elect to not 
    withhold on a distribution to the extent it represents a nontaxable 
    distribution payable in stock or stock rights.
        (B) A distributing corporation or intermediary may elect to not 
    withhold on a distribution to the extent it represents a distribution 
    in part or full payment in exchange for stock.
        (C) A distributing corporation or intermediary may elect to not 
    withhold on a distribution (actual or deemed) to the extent it is not 
    paid out of accumulated earnings and profits or current earnings and 
    profits, based on a reasonable estimate determined under paragraph 
    (c)(2)(ii) of this section.
        (D) A regulated investment company or intermediary may elect to not 
    withhold on a distribution representing a capital gain dividend (as 
    defined in section 852(b)(3)(C)) or an exempt interest dividend (as 
    defined in section 852(b)(5)(A)) based on the applicable procedures 
    described under paragraph (c)(3) of this section.
        (E) A U.S. Real Property Holding Corporation (defined in section 
    897(c)(2)) or a real estate investment trust (defined in section 856) 
    or intermediary may elect to not withhold on a distribution to the 
    extent it is subject to withholding under section 1445 and the 
    regulations under that section. See paragraph (c)(4) of this section 
    for applicable procedures.
        (ii) Reasonable estimate of accumulated and current earnings and 
    profits on the date of payment--(A) General rule. A reasonable estimate 
    for purposes of paragraph (c)(2)(i)(C) of this section is a 
    determination made by the distributing corporation at a time reasonably 
    close to the date of payment of the extent to which the distribution 
    will constitute a dividend, as defined in section 316. The 
    determination is based upon the anticipated amount of accumulated 
    earnings and profits and current earnings and profits for the taxable 
    year in which the distribution is made, the distributions made prior to 
    the distribution for which the estimate is made and all other relevant 
    facts and circumstances. A reasonable estimate may be made based on the 
    procedures described in Sec. 31.3406(b)(2)-4(c)(2) of this chapter.
        (B) Procedures in case of underwithholding. A distributing 
    corporation or intermediary that is a withholding agent with respect to 
    a distribution and that determines at the end of the taxable year in 
    which the distribution is made that it underwithheld under section 1441 
    on the distribution shall be liable for the amount underwithheld as a 
    withholding agent under section 1461. However, for purposes of this 
    section and Sec. 1.1461-1, any amount underwithheld paid by a 
    distributing corporation, its paying agent, or an intermediary shall 
    not be treated as income subject to additional withholding even if that 
    amount is treated as additional income to the shareholders unless the 
    additional amount is income to the shareholder as a result of a 
    contractual arrangement between the parties regarding the satisfaction 
    of the shareholder's tax liabilities. In addition, no penalties shall 
    be imposed for failure to withhold and deposit the tax if--
    
    [[Page 53448]]
    
        (1) The distributing corporation made a reasonable estimate as 
    provided in paragraph (c)(2)(ii)(A) of this section; and
        (2) Either--
        (i) The corporation or intermediary pays over the underwithheld 
    amount on or before the due date for filing a Form 1042 for the 
    calendar year in which the distribution is made, pursuant to 
    Sec. 1.1461-2(b); or
        (ii) The corporation or intermediary is not a calendar year 
    taxpayer and it files an amended return on Form 1042X (or such other 
    form as the Commissioner may prescribe) for the calendar year in which 
    the distribution is made and pays the underwithheld amount and interest 
    within 60 days after the close of the taxable year in which the 
    distribution is made.
        (C) Reliance by intermediary on reasonable estimate. For purposes 
    of determining whether the payment of a corporate distribution is a 
    dividend, a withholding agent that is not the distributing corporation 
    may, absent actual knowledge or reason to know otherwise, rely on 
    representations made by the distributing corporation regarding the 
    reasonable estimate of the anticipated accumulated and current earnings 
    and profits made in accordance with paragraph (c)(2)(ii)(A) of this 
    section. Failure by the withholding agent to withhold the required 
    amount due to a failure by the distributing corporation to reasonably 
    estimate the portion of the distribution treated as a dividend or to 
    properly communicate the information to the withholding agent shall be 
    imputed to the distributing corporation. In such a case, the Internal 
    Revenue Service (IRS) may collect from the distributing corporation any 
    underwithheld amount and subject the distributing corporation to 
    applicable interest and penalties as a withholding agent.
        (D) Example. The rules of this paragraph (c)(2) are illustrated by 
    the following example:
    
        Example. (i) Facts. Corporation X, a publicly traded corporation 
    with both U.S. and foreign shareholders and a calendar year 
    taxpayer, has an accumulated deficit in earnings and profits at the 
    close of 2000. In 2001, Corporation X generates $1 million of 
    current earnings and profits each month and makes an $18 million 
    distribution, resulting in a $12 million dividend. Corporation X 
    plans to make an additional $18 million distribution on October 1, 
    2002. Approximately one month before that date, Corporation X's 
    management receives an internal report from its legal and accounting 
    department concerning Corporation X's estimated current earnings and 
    profits. The report states that Corporation X should generate only 
    $5.1 million of current earnings and profits by the close of the 
    third quarter due to costs relating to substantial organizational 
    and product changes, but these changes will enable Corporation X to 
    generate $1.3 million of earnings and profits monthly for the last 
    quarter of the 2002 fiscal year. Thus, the total amount of current 
    and earnings and profits for 2002 is estimated to be $9 million.
        (ii) Analysis. Based on the facts in paragraph (i) of this 
    Example, including the fact that earnings and profits estimate was 
    made within a reasonable time before the distribution, Corporation X 
    can rely on the estimate under paragraph (c)(2)(ii)(A) of this 
    section. Therefore, Corporation X may treat $9 million of the $18 
    million of the October 1, 2002, distribution to foreign shareholders 
    as a non-dividend distribution.
    
        (3) Special rules in the case of distributions from a regulated 
    investment company--(i) General rule. If the amount of any 
    distributions designated as being subject to section 852(b)(3)(C) or 
    (5)(A) exceeds the amount that may be designated under those sections 
    for the taxable year, then no penalties will be asserted for any 
    resulting underwithholding if the designations were based on a 
    reasonable estimate (made pursuant to the same procedures as are 
    described in paragraph (c)(2)(ii)(A) of this section) and the 
    adjustments to the amount withheld are made within the time period 
    described in paragraph (c)(2)(ii)(B) of this section. Any adjustment to 
    the amount of tax due and paid to the IRS by the withholding agent as a 
    result of underwithholding shall not be treated as a distribution for 
    purposes of section 562(c) and the regulations thereunder. Any amount 
    of U.S. tax that a foreign shareholder is treated as having paid on the 
    undistributed capital gain of a regulated investment company under 
    section 852(b)(3)(D) may be claimed by the foreign shareholder as a 
    credit or refund under Sec. 1.1464-1.
        (ii) Reliance by intermediary on reasonable estimate. For purposes 
    of determining whether a payment is a distribution designated as 
    subject to section 852(b) (3)(C) or (5)(A), a withholding agent that is 
    not the distributing regulated investment company may, absent actual 
    knowledge or reason to know otherwise, rely on the designations that 
    the distributing company represents have been made in accordance with 
    paragraph (c)(3)(i) of this section. Failure by the withholding agent 
    to withhold the required amount due to a failure by the regulated 
    investment company to reasonably estimate the required amounts or to 
    properly communicate the relevant information to the withholding agent 
    shall be imputed to the distributing company. In such a case, the IRS 
    may collect from the distributing company any underwithheld amount and 
    subject the company to applicable interest and penalties as a 
    withholding agent.
        (4) Coordination with withholding under section 1445--(i) In 
    general. A distribution from a U.S. Real Property Holding Corporation 
    (USRPHC) (or from a corporation that was a USRPHC at any time during 
    the five-year period ending on the date of distribution) with respect 
    to stock that is a U.S. real property interest under section 897(c) or 
    from a Real Estate Investment Trust (REIT) with respect to its stock is 
    subject to the withholding provisions under section 1441 (or section 
    1442 or 1443) and section 1445. A USRPHC making a distribution shall be 
    treated as satisfying its withholding obligations under both sections 
    if it withholds in accordance with one of the procedures described in 
    either paragraph (c)(4)(i) (A) or (B) of this section. A USRPHC must 
    apply the same withholding procedure to all the distributions made 
    during the taxable year. However, the USRPHC may change the applicable 
    withholding procedure from year to year. For rules regarding 
    distributions by REITs, see paragraph (c)(4)(i)(C) of this section.
        (A) Withholding under section 1441. The USRPHC may choose to 
    withhold on a distribution only under section 1441 (or 1442 or 1443) 
    and not under section 1445. In such a case, the USRPHC must withhold 
    under section 1441 (or 1442 or 1443) on the full amount of the 
    distribution, whether or not any portion of the distribution represents 
    a return of basis or capital gain. If a reduced tax rate under an 
    income tax treaty applies to the distribution by the USRPHC, then the 
    applicable rate of withholding on the distribution shall be no less 
    than 10-percent, unless the applicable treaty specifies an applicable 
    lower rate for distributions from a USRPHC, in which case the lower 
    rate may apply.
        (B) Withholding under both sections 1441 and 1445. As an 
    alternative to the procedure described in paragraph (c)(4)(i)(A) of 
    this section, a USRPHC may choose to withhold under both sections 1441 
    (or 1442 or 1443) and 1445 under the procedures set forth in this 
    paragraph (c)(4)(i)(B). The USRPHC must make a reasonable estimate of 
    the portion of the distribution that is a dividend under paragraph 
    (c)(2)(ii)(A) of this section, and must--
        (1) Withhold under section 1441 (or 1442 or 1443) on the portion of 
    the distribution that is estimated to be a dividend under paragraph 
    (c)(2)(ii)(A) of this section; and
    
    [[Page 53449]]
    
        (2) Withhold under section 1445(e)(3) and Sec. 1.1445-5(e) on the 
    remainder of the distribution or on such smaller portion based on a 
    withholding certificate obtained in accordance with Sec. 1.1445-
    5(e)(2)(iv).
        (C) Coordination with REIT withholding. Withholding is required 
    under section 1441 (or 1442 or 1443) on the portion of a distribution 
    from a REIT that is not designated as a capital gain dividend or return 
    of basis. Withholding is required under section 1445 on the portion of 
    the distribution designated by a REIT as a capital gain dividend. See 
    Sec. 1.1445-8.
        (ii) Intermediary reliance rule. A withholding agent that is not 
    the distributing USRPHC must withhold under paragraph (c)(4)(i) of this 
    section, but may, absent actual knowledge or reason to know otherwise, 
    rely on representations made by the USRPHC regarding the determinations 
    required under paragraph (c)(4)(i) of this section. Failure by the 
    withholding agent to withhold the required amount due to a failure by 
    the distributing USRPHC to make these determinations in a reasonable 
    manner or to properly communicate the determinations to the withholding 
    agent shall be imputed to the distributing USRPHC. In such a case, the 
    IRS may collect from the distributing USRPHC any underwithheld amount 
    and subject the distributing USRPHC to applicable interest and 
    penalties as a withholding agent.
        (d) Withholding on payments that include an undetermined amount of 
    income--(1) In general. Where the withholding agent makes a payment and 
    does not know at the time of payment the amount that is subject to 
    withholding because the determination of the source of the income or 
    the calculation of the amount of income subject to tax depends upon 
    facts that are not known at the time of payment, then the withholding 
    agent must withhold an amount under Sec. 1.1441-1 based on the entire 
    amount paid that is necessary to assure that the tax withheld is not 
    less than 30 percent (or other applicable percentage) of the amount 
    that will subsequently be determined to be from sources within the 
    United States or to be income subject to tax. The amount so withheld 
    shall not exceed 30 percent of the amount paid. In the alternative, the 
    withholding agent may make a reasonable estimate of the amount from 
    U.S. sources or of the taxable amount and set aside a corresponding 
    portion of the amount due under the transaction and hold such portion 
    in escrow until the amount from U.S. sources or the taxable amount can 
    be determined, at which point withholding becomes due under 
    Sec. 1.1441-1. See Sec. 1.1441-1(b)(8) regarding adjustments in the 
    case of overwithholding. The provisions of this paragraph (d)(1) shall 
    not apply to the extent that other provisions of the regulations under 
    chapter 3 of the Internal Revenue Code (Code) specify the amount to be 
    withheld, if any, when the withholding agent lacks knowledge at the 
    time of payment (e.g., lack of reliable knowledge regarding the status 
    of the payee or beneficial owner, addressed in Sec. 1.1441-1(b)(3), or 
    lack of knowledge regarding the amount of original issue discount under 
    Sec. 1.1441-2(b)(3)).
        (2) Withholding on certain gains. Absent actual knowledge or reason 
    to know otherwise, a withholding agent may rely on a claim regarding 
    the amount of gain described in Sec. 1.1441-2(c) if the beneficial 
    owner withholding certificate, or other appropriate withholding 
    certificate, states the beneficial owner's basis in the property giving 
    rise to the gain. In the absence of a reliable representation on a 
    withholding certificate, the withholding agent must withhold an amount 
    under Sec. 1.1441-1 that is necessary to assure that the tax withheld 
    is not less than 30 percent (or other applicable percentage) of the 
    recognized gain. For this purpose, the recognized gain is determined 
    without regard to any deduction allowed by the Code from the gains. The 
    amount so withheld shall not exceed 30 percent of the amount payable by 
    reason of the transaction giving rise to the recognized gain. See 
    Sec. 1.1441-1(b)(8) regarding adjustments in the case of 
    overwithholding.
        (e) Payments other than in U.S. dollars--(1) In general. The amount 
    of a payment made in a medium other than U.S. dollars is measured by 
    the fair market value of the property or services provided in lieu of 
    U.S. dollars. The withholding agent may liquidate the property prior to 
    payment in order to withhold the required amount of tax under section 
    1441 or obtain payment of the tax from an alternative source. However, 
    the obligation to withhold under section 1441 is not deferred even if 
    no alternative source can be located. Thus, for purposes of withholding 
    under chapter 3 of the Code, the provisions of Sec. 31.3406(h)-
    2(b)(2)(ii) of this chapter (relating to backup withholding from 
    another source) shall not apply. If the withholding agent satisfies the 
    tax liability related to such payments, the rules of paragraph (f) of 
    this section apply.
        (2) Payments in foreign currency. If the amount subject to 
    withholding tax is paid in a currency other than the U.S. dollar, the 
    amount of withholding under section 1441 shall be determined by 
    applying the applicable rate of withholding to the foreign currency 
    amount and converting the amount withheld into U.S. dollars on the date 
    of payment at the spot rate (as defined in Sec. 1.988-1(d)(1)) in 
    effect on that date. A withholding agent making regular or frequent 
    payments in foreign currency may use a month-end spot rate or a monthly 
    average spot rate. A spot rate convention must be used consistently for 
    all non-dollar amounts withheld and from year to year. Such convention 
    cannot be changed without the consent of the Commissioner. The U.S. 
    dollar amount so determined shall be treated by the beneficial owner as 
    the amount of tax paid on the income for purposes of determining the 
    final U.S. tax liability and, if applicable, claiming a refund or 
    credit of tax.
        (f) Tax liability of beneficial owner satisfied by withholding 
    agent--(1) General rule. In the event that the satisfaction of a tax 
    liability of a beneficial owner by a withholding agent constitutes 
    income to the beneficial owner and such income is of a type that is 
    subject to withholding, the amount of the payment deemed made by the 
    withholding agent for purposes of this paragraph (f) shall be 
    determined under the gross-up formula provided in this paragraph 
    (f)(1). Whether the payment of the tax by the withholding agent 
    constitutes a satisfaction of the beneficial owner's tax liability and 
    whether, as such, it constitutes additional income to the beneficial 
    owner, must be determined under all the facts and circumstances 
    surrounding the transaction, including any agreements between the 
    parties and applicable law. The formula described in this paragraph 
    (f)(1) is as follows:
    [GRAPHIC] [TIFF OMITTED] TR14OC97.000
    
        (2) Example. The following example illustrates the provisions of 
    this paragraph (f):
    
        Example. College X awards a qualified scholarship within the 
    meaning of section 117(b) to foreign student, FS, who is in the 
    United States on an F visa. FS is a resident of a country that does 
    not have an income tax treaty with the United States. The 
    scholarship is $20,000 to be applied to tuition, mandatory fees and 
    books, plus benefits in kind consisting of room and board and 
    roundtrip air transportation. College X agrees to pay any U.S. 
    income tax owed by FS with respect to the scholarship. The fair 
    market value of the room and board measured by the amount College X 
    charges non-scholarship students is $6,000. The cost
    
    [[Page 53450]]
    
    of the roundtrip air transportation is $2,600. Therefore, the total 
    fair market value of the scholarship received by FS is $28,600. 
    However, the amount taxable is limited to the fair market value of 
    the benefits in kind ($8,600) because the portion of the scholarship 
    amount for tuition, fees, and books is not included in gross income 
    under section 117. The applicable rate of withholding is 14 percent 
    under section 1441(b). Therefore, under the gross-up formula, 
    College X is deemed to make a payment of $10,000 ($8,600 divided by 
    (1-.14). The U.S. tax that must be deducted and withheld from the 
    payment under section 1441(b) is $1,400 (.14 x $10,000). College X 
    reports scholarship income of $30,000 and $1,400 of U.S. tax 
    withheld on Forms 1042 and 1042-S.
    * * * * *
        (h) Effective date. Except as otherwise provided in paragraph (g) 
    of this section, this section applies to payments made after December 
    31, 1998.
        Par. 9. Section 1.1441-4 is amended by:
        1. Revising the section heading, and paragraph (a).
        2. Paragraph (b)(1) is amended by:
        a. Revising of paragraphs (b)(1)(i) and (b)(1)(ii).
        b. Removing the period at the end of paragraph (b)(1)(iii) and 
    adding a semicolon in its place.
        c. Removing the language ``or'' at the end of paragraph (b)(1)(iv) 
    and adding a semicolon in its place.
        d. Removing the period at the end of paragraph (b)(1)(v) and adding 
    `` ; or'' in its place.
        e. Adding paragraph (b)(1)(vi).
        3. Adding four sentences at the end of paragraph (b)(2)(i).
        4. Paragraph (b)(2)(ii) is amended by:
        a. Revising paragraph (b)(2)(ii) heading and introductory text, and 
    paragraph (b)(2)(ii)(A).
        b. Redesignating paragraph (b)(2)(ii)(H) as paragraph (b)(2)(ii)(J) 
    and amending newly designated paragraph (b)(2)(ii)(J) by removing the 
    period and adding ``; and'' in its place.
        c. Redesignating paragraphs (b)(2)(ii) (B), (C), (D), (E), (F) and 
    (G) as paragraphs (b)(2)(ii)(D), (E), (F), (G), (H) and (I), 
    respectively.
        d. Adding new paragraphs (b)(2)(ii)(B), (C), and (K).
        e. Removing the period at the end of newly designated paragraph 
    (b)(2)(ii)(D) and the comma at the end of newly designated paragraphs 
    (b)(2)(ii)(E), (F), (G), and (H) and adding a semicolon in each place.
        f. Removing the language ``, and'' and adding a semicolon in its 
    place in newly designated paragraph (b)(2)(ii)(I).
        5. Removing the concluding text immediately following paragraph 
    (b)(2)(iv)(C).
        6. Revising paragraph (b)(2)(v).
        7. Removing the language ``statement'' and adding the language 
    ``withholding certificate'' in each place in paragraph (b)(2)(i).
        8. Removing the language ``Director of the Foreign Operations 
    District'' in paragraphs (b)(2)(i) fourth sentence, (b)(2)(iii) fourth 
    and fifth sentences, and (b)(3) first sentence, and adding the language 
    ``Assistant Commissioner (International)'' in each place.
        9. Adding paragraph (b)(6).
        10. Revising paragraphs (c), (d), (e), (f), and (g) .
        11. Removing paragraphs (h) and (i).
        12. Removing the OMB parenthetical and the authority citation at 
    the end of the section.
        The revisions and additions read as follows:
    
    
    Sec. 1.1441-4  Exemptions from withholding for certain effectively 
    connected income and other amounts.
    
        (a) Certain income connected with a U.S. trade or business--(1) In 
    general. No withholding is required under section 1441 on income 
    otherwise subject to withholding if the income is (or is deemed to be) 
    effectively connected with the conduct of a trade or business within 
    the United States and is includible in the beneficial owner's gross 
    income for the taxable year. For purposes of this paragraph (a), an 
    amount is not deemed to be includible in gross income if the amount is 
    (or is deemed to be) effectively connected with the conduct of a trade 
    or business within the United States and the beneficial owner claims an 
    exemption from tax under an income tax treaty because the income is not 
    attributable to a permanent establishment in the United States. To 
    claim a reduced rate of withholding because the income is not 
    attributable to a permanent establishment, see Sec. 1.1441-6(b)(1). 
    This paragraph (a) does not apply to income of a foreign corporation to 
    which section 543(a)(7) applies for the taxable year or to compensation 
    for personal services performed by an individual. See paragraph (b) of 
    this section for compensation for personal services performed by an 
    individual.
        (2) Withholding agent's reliance on a claim of effectively 
    connected income--(i) In general. Absent actual knowledge or reason to 
    know otherwise, a withholding agent may rely on a claim of exemption 
    based upon paragraph (a)(1) of this section if, prior to the payment to 
    the foreign person, the withholding agent can reliably associate the 
    payment with a Form W-8 upon which it can rely to treat the payment as 
    made to a foreign beneficial owner in accordance with Sec. 1.1441-
    1(e)(1)(ii). For purposes of this paragraph (a), a withholding 
    certificate is valid only if, in addition to other applicable 
    requirements, it includes the taxpayer identifying number of the person 
    whose name is on the Form W-8 and represents, under penalties of 
    perjury, that the amounts for which the certificate is furnished are 
    effectively connected with the conduct of a trade or business in the 
    United States. In the absence of a reliable claim that the income is 
    effectively connected with the conduct of a trade or business in the 
    United States, the income is presumed not to be effectively connected, 
    except as otherwise provided in paragraph (a) (2)(ii) or (3) of this 
    section. See Sec. 1.1441-1(e)(4)(ii)(C) for the period of validity 
    applicable to a certificate provided under this section and 
    Sec. 1.1441-1(e)(4)(ii)(D) for changes in circumstances arising during 
    the taxable year indicating that the income to which the certificate 
    relates is not, or is no longer expected to be, effectively connected 
    with the conduct of a trade or business within the United States. A 
    withholding certificate shall be effective only for the item or items 
    of income specified therein. The provisions of Sec. 1.1441-1(b)(3)(iv) 
    dealing with a 90-day grace period shall apply for purposes of this 
    section.
        (ii) Special rules for U.S. branches of foreign persons--(A) U.S. 
    branches of certain foreign banks or foreign insurance companies. A 
    payment to a U.S. branch described in Sec. 1.1441-1(b)(2)(iv)(A) is 
    presumed to be effectively connected with the conduct of a trade or 
    business in the United States without the need to furnish a 
    certificate, unless the U.S. branch provides a U.S. branch withholding 
    certificate described in Sec. 1.1441-1(e)(3)(v) that represents 
    otherwise. If no certificate is furnished but the income is not, in 
    fact, effectively connected income, then the branch must withhold 
    whether the payment is collected on behalf of other persons or on 
    behalf of another branch of the same entity. See Sec. 1.1441-1(b) 
    (2)(iv) and (6) for general rules applicable to payments to U.S. 
    branches of foreign persons.
        (B) Other U.S. branches. See Sec. 1.1441-1(b)(2)(iv)(E) for similar 
    procedures for other U.S. branches to the extent provided in a 
    determination letter from the district director or the Assistant 
    Commissioner (International).
        (3) Income on notional principal contracts--(i) General rule. A 
    withholding agent that pays amounts attributable to a notional 
    principal contract described in Sec. 1.863-7(a) or 1.988-2(e) shall 
    have no obligation to
    
    [[Page 53451]]
    
    withhold on the amounts paid under the terms of the notional principal 
    contract regardless of whether a withholding certificate is provided. 
    However, a withholding agent must file returns under Sec. 1.1461-1(b) 
    and (c) reporting the income that it must treat as paid to a foreign 
    person and as effectively connected with the conduct of a trade or 
    business in the United States under the provisions of this paragraph 
    (a)(3). Except as otherwise provided in paragraph (a)(3)(ii) of this 
    section, a withholding agent must so treat the income unless it can 
    reliably associate the payment with a withholding certificate upon 
    which it can rely to treat the payment as an amount that is not 
    effectively connected. Income on a notional principal contract does not 
    include the amount characterized as interest under the provisions of 
    Sec. 1.446-3(g)(4).
        (ii) Exception for certain payments. A payment to a foreign 
    financial institution (within the meaning of Sec. 1.165-12(c)(1)(iv)) 
    shall not be treated as effectively connected with the conduct of a 
    trade or business within the United States for purposes of paragraph 
    (a)(3)(i) of this section even if no withholding certificate is 
    furnished if the payee provides a representation in a master agreement 
    that governs the transactions in notional principal contracts between 
    the parties (for example an International Swaps and Derivatives 
    Association (ISDA) Agreement, including the Schedule thereto) or in the 
    confirmation on the particular notional principal contract transaction 
    that the counterparty is a U.S. person or a non-U.S. branch of a 
    foreign person.
        (b) * * * (1) * * *
        (i) Such compensation is subject to withholding under section 3402 
    (relating to withholding on wages) and the regulations under that 
    section;
        (ii) Such compensation would be subject to withholding under 
    section 3402 but for the provisions of section 3401(a) (not including 
    paragraph (a)(6) of that section) and the regulations under that 
    section. This paragraph (b)(1)(ii) does not apply to payments to a 
    nonresident alien individual from any trust described in section 
    401(a), any annuity plan described in section 403(a), or any annuity, 
    custodial account, or retirement income account described in section 
    403(b). Instead, these payments are subject to withholding under this 
    section to the extent they are exempted from the definition of wages 
    under section 3401(a)(12) or to the extent they are from an annuity, 
    custodial account, or retirement income account described in section 
    403(b). Thus, for example, payments to a nonresident alien individual 
    from a trust described in section 401(a) are subject to withholding 
    under section 1441 and not under section 3405 or 3406;
    * * * * *
        (vi) Compensation that is exempt from withholding under section 
    3402 by reason of section 3402(e), provided that the employee and his 
    employer enter into an agreement under section 3402(p) to provide for 
    the withholding of income tax upon payments of amounts described in 
    Sec. 31.3401(a)-3(b)(1) of this chapter. An employee who desires to 
    enter into such an agreement should furnish his employer with Form W-4 
    (withholding exemption certificate) (or such other form as the Internal 
    Revenue Service (IRS) may prescribe). See section 3402(f) and the 
    regulations thereunder and Sec. 31.3402(p)-1 of this chapter.
        (2) * * * (i) * * * The withholding agent may rely on an accepted 
    withholding certificate only if the IRS has not objected to the 
    certificate. For purposes of this paragraph (b)(2)(i), the IRS will be 
    considered to have not objected to the certificate if it has not 
    notified the withholding agent within a 10-day period beginning from 
    the date that the withholding certificate is forwarded to the IRS 
    pursuant to paragraph (b)(2)(v) of this section. After expiration of 
    the 10-day period, the withholding agent may rely on the withholding 
    certificate retroactive to the date of the first payment covered by the 
    certificate. The fact that the IRS does not object to the withholding 
    certificate within the 10-day period provided in this paragraph 
    (b)(2)(i) shall not preclude the IRS from examining the withholding 
    agent at a later date in light of facts that the withholding agent knew 
    or had reason to know regarding the payment and eligibility for a 
    reduced rate and that were not disclosed to the IRS as part of the 10-
    day review process.
        (ii) Withholding certificate claiming withholding exemption. The 
    statement claiming an exemption from withholding shall be made on Form 
    8233 (or an acceptable substitute or such other form as the IRS may 
    prescribe). Form 8233 shall be dated, signed by the beneficial owner 
    under penalties of perjury, and contain the following information--
        (A) The individual's name, permanent residence address, taxpayer 
    identifying number (or a copy of a completed Form W-7 or SS-5 showing 
    that a number has been applied for), and the U.S. visa number, if any;
        (B) The individual's current immigration status and visa type;
        (C) The individual's original date of entry into the United States;
    * * * * *
        (K) Any other information as may be required by the form or 
    accompanying instructions in addition to, or in lieu of, the 
    information described in this paragraph (b)(2)(ii).
    * * * * *
        (v) Copies of Form 8233. The withholding agent shall forward one 
    copy of each Form 8233 that is accepted under paragraph (b)(2)(iv) of 
    this section to the Assistant Commissioner (International), within five 
    days of such acceptance. The withholding agent shall retain a copy of 
    Form 8233.
    * * * * *
        (6) Personal exemption--(i) In general. To determine the tax to be 
    withheld at source under Sec. 1.1441-1 from remuneration paid for 
    personal services performed within the United States by a nonresident 
    alien individual and from scholarship and fellowship income described 
    in paragraph (c) of this section, a withholding agent may take into 
    account one personal exemption pursuant to sections 873(b)(3) and 151 
    regardless of whether the income is effectively connected. For purposes 
    of withholding under section 1441 on remuneration for personal 
    services, the exemption must be prorated upon a daily basis for the 
    period during which the personal services are performed within the 
    United States by the nonresident alien individual by dividing by 365 
    the number of days in the period during which the individual is present 
    in the United States for the purpose of performing the services and 
    multiplying the result by the amount of the personal exemption in 
    effect for the taxable year. See Sec. 31.3402(f)(6)-1 of this chapter.
        (ii) Multiple exemptions. More than one personal exemption may be 
    claimed in the case of a resident of a contiguous country or a national 
    of the United States under section 873(b)(3). In addition, residents of 
    a country with which the United States has an income tax treaty in 
    effect may be eligible to claim more than one personal exemption if the 
    treaty so provides. Claims for more than one personal exemption shall 
    be made on the withholding certificate furnished to the withholding 
    agent. The exemption must be prorated on a daily basis in the same 
    manner as described in paragraph (b)(6)(i) of this section.
        (iii) Special rule where both certain scholarship and compensation 
    income are received. The fact that both non-compensatory scholarship 
    income and compensation income (including
    
    [[Page 53452]]
    
    compensatory scholarship income) are received during the taxable year 
    does not entitle the taxpayer to claim more than one personal exemption 
    amount (or more than the additional amounts permitted under paragraph 
    (b)(6)(ii) of this section). Thus, if a nonresident alien student 
    receives non-compensatory taxable scholarship income from one 
    withholding agent and compensation income from another withholding 
    agent, no more than the total personal exemption amount permitted under 
    the Internal Revenue Code or under an income tax treaty may be taken 
    into account by both withholding agents. For this purpose, the 
    withholding agent may rely on a representation from the beneficial 
    owner that the exemption amount claimed does not exceed the amount 
    permissible under this section.
        (c) Special rules for scholarship and fellowship income--(1) In 
    general. Under section 871(c), certain amounts paid as a scholarship or 
    fellowship for study, training, or research in the United States to a 
    nonresident alien individual temporarily present in the United States 
    as a nonimmigrant under section 101(a)(15) (F), (J), (M), or (Q) of the 
    Immigration and Nationality Act are treated as income effectively 
    connected with the conduct of a trade or business within the United 
    States. The amounts described in the preceding sentence are those 
    amounts that do not represent compensation for services. Such amounts 
    (as described in the second sentence of section 1441(b)) are subject to 
    withholding under section 1441, but at the lower rate of 14 percent. 
    That rate may be reduced under the provisions of an income tax treaty. 
    Claims of a reduced rate under an income tax treaty shall be made under 
    the procedures described in Sec. 1.1441-6(b)(1). Therefore, claims for 
    reduction in withholding under an income tax treaty on amounts 
    described in this paragraph (c)(1) may not be made on a Form 8233. 
    However, if the payee is receiving both compensation for personal 
    services (including compensatory scholarship income) and non-
    compensatory scholarship income described in this paragraph (c)(1) from 
    the same withholding agent, claims for reduction of withholding on both 
    types of income may be made on Form 8233.
        (2) Alternate withholding election. A withholding agent may elect 
    to withhold on the amounts described in paragraph (c)(1) of this 
    section at the rates applicable under section 3402, as if the income 
    were wages. Such election shall be made by obtaining a Form W-4 (or an 
    acceptable substitute or such other form as the IRS may prescribe) from 
    the beneficial owner. The fact that the withholding agent asks the 
    beneficial owner to furnish a Form 
    W-4 for such fellowship or scholarship income or to take such income 
    into account in preparing such Form 
    W-4 shall serve as notice to the beneficial owner that the income is 
    being treated as wages for purposes of withholding tax under section 
    1441.
        (d) Annuities received under qualified plans. Withholding is not 
    required under section Sec. 1.1441-1 in the case of any amount received 
    as an annuity if the amount is exempt from tax under section 871(f) and 
    the regulations under that section. The withholding agent may exempt 
    the payment from withholding if, prior to payment, it can reliably 
    associate the payment with documentation upon which it can rely to 
    treat the payment as made to a beneficial owner in accordance with 
    Sec. 1.1441-1(e)(1)(ii). A beneficial owner withholding certificate 
    furnished for purposes of claiming the benefits of the exemption under 
    this paragraph (d) is valid only if, in addition to other applicable 
    requirements, it contains a taxpayer identifying number.
        (e) Per diem of certain alien trainees. Withholding is not required 
    under section 1441(a) and Sec. 1.1441-1 on per diem amounts paid for 
    subsistence by the United States Government (directly or by contract) 
    to any nonresident alien individual who is engaged in any program of 
    training in the United States under the Mutual Security Act of 1954, as 
    amended (22 U.S.C. chapter 24). This rule shall apply even though such 
    amounts are subject to tax under section 871. Any exemption from 
    withholding pursuant to this paragraph (e) applies without a 
    requirement that documentation be furnished to the withholding agent. 
    However, documentation may have to be furnished for purposes of the 
    information reporting provisions under section 6041 and backup 
    withholding under section 3406. The exemption from withholding granted 
    by this paragraph (e) is not a determination that the amounts are not 
    fixed or determinable annual or periodical income.
        (f) Failure to receive withholding certificates timely or to act in 
    accordance with applicable presumptions. See applicable procedures 
    described in Sec. 1.1441-1(b)(7) in the event the withholding agent 
    does not hold an appropriate withholding certificate or other 
    appropriate documentation at the time of payment or does not act in 
    accordance with applicable presumptions described in paragraph (a) 
    (2)(i), (2)(ii), or (3) of this section.
        (g) Effective date--(1) General rule. This section applies to 
    payments made after December 31, 1998.
        (2) Transition rules. A withholding agent that on December 31, 
    1998, holds a Form 4224 or 8233 that is a valid certificate as 
    determined under the regulations in effect prior to January 1, 1999 
    (see CFR part 1 revised, April 1, 1997), may treat the certificate as a 
    valid withholding certificate until its validity expires under those 
    regulations or, if earlier, until December 31, 1999. Further, the 
    validity of a withholding certificate or statement that is dated prior 
    to January 1, 1998, is valid on January 1, 1998, and would expire at 
    any time during 1998, is extended until December 31, 1998 (and is not 
    extended after December 31, 1998 by reason of the immediately preceding 
    sentence). The rule in this paragraph (g)(2), however, does not apply 
    to extend the validity period of a withholding certificate that expires 
    in 1998 solely by reason of changes in the circumstances of the person 
    whose name is on the certificate. Notwithstanding the three preceding 
    sentences, a withholding agent may choose to not take advantage of the 
    transition rule in this paragraph (g)(2) with respect to one or more 
    withholding certificates and, therefore, to require new withholding 
    certificates conforming to the requirements described in this section.
    
    
    Sec. 1.1441-4T  [Removed]
    
        Par. 10. Section 1.1441-4T is removed.
        Par. 11. Sections 1.1441-5 and 1.1441-6 are revised to read as 
    follows:
    
    
    Sec. 1.1441-5  Withholding on payments to partnerships, trusts, and 
    estates.
    
        (a) Rules of withholding applicable to payments to partnerships. 
    This paragraph (a) describes the determinations that a withholding 
    agent must make when making a payment to a person that may be a 
    partnership (as defined in Sec. 1.1441-1(c)(6)(ii)(C)). Such 
    determinations are made in order to determine a withholding agent's 
    obligations under chapters 3 and 61 of the Internal Revenue Code (Code) 
    and sections 3402, 3405, and 3406 (and applicable regulations under 
    those provisions) to withhold and report payments of amounts subject to 
    withholding under chapter 3 of the Code and the regulations thereunder. 
    The reliance provisions stated in this paragraph (a) are subject to the 
    presumptions described in Sec. 1.1441-1(b)(3) and paragraph (d) of this 
    section, including Sec. 1.1441-1(b)(3)(ix) regarding
    
    [[Page 53453]]
    
    the withholding agent's actual knowledge or reason to know that the 
    presumptions are not correct. For similar presumptions for reporting 
    and withholding on amounts not subject to withholding under chapter 3 
    of the Code (e.g., foreign source income, broker proceeds) that may be 
    paid to a foreign partnership, see Sec. 1.6049-5(d) (2) through (5).
        (1) The withholding agent must determine whether the payee is a 
    U.S. or a foreign person. For this purpose, the withholding agent may 
    treat the payee as U.S. or foreign if it can reliably associate the 
    payment with a Form W-9 described in Sec. 1.1441-1(d) or a Form W-8 
    described in Sec. 1.1441-1(e)(2)(i) or (3)(i). In the absence of 
    documentation, see Sec. 1.1441-1(b)(3) and paragraph (d) of this 
    section for applicable presumptions of foreign or U.S. status and other 
    relevant characteristics.
        (2) If the payee is determined to be a foreign person, the 
    withholding agent must determine whether the foreign payee is acting 
    for its own account or for the account of others (i.e., as an 
    intermediary, as defined in Sec. 1.1441-1(e)(3)(i)). The withholding 
    agent may treat the payee as a foreign intermediary if it can reliably 
    associate the payment with a Form W-8 described in Sec. 1.1441-1(e)(3) 
    (ii), (iii), or (v), within the meaning of Sec. 1.1441-1(b)(3)(v)(A).
        (3) If the foreign payee is determined to act as an intermediary 
    described in Sec. 1.1441-1(e)(3)(i), the withholding agent must 
    determine whether or not the payee is a qualified intermediary. The 
    withholding agent may treat the payee as a qualified intermediary only 
    if it can reliably associate the payment with a Form W-8 described in 
    Sec. 1.1441-1(e)(3)(ii). A foreign payee that is treated as an 
    intermediary with respect to a payment is subject to the provisions 
    applicable to intermediaries in Sec. 1.1441-1(e) (3) or (5). In such a 
    case, the provisions of paragraph (c) of this section do not apply to 
    the payment.
        (4) If the foreign payee is determined to act for its own account 
    (or is so presumed), the withholding agent must determine the status of 
    the payee as a partnership. The withholding agent may treat the payee 
    as a domestic or as a foreign partnership if it can reliably associate 
    the payment with a Form W-9 furnished in accordance with Sec. 1.1441-
    1(d) (2) or (4) (for a domestic partnership) or a Form W-8 described in 
    paragraph (c) (2)(iv) or (3)(iii) of this section (for a foreign 
    partnership). See Sec. 1.1441-1(e)(4)(viii) for reliance on the payee's 
    representations on a Form W-8. In the absence of documentation, see 
    Sec. 1.1441-1(b)(3)(ii) and paragraph (d)(2) of this section for 
    applicable presumptions of status.
        (5) If the foreign payee is determined to be a foreign partnership 
    and the withholding agent has determined (or presumes) that the 
    partnership is acting for the account of its partners, then the 
    withholding agent must determine whether the payment represents income 
    effectively connected with the partnership's conduct of a U.S. trade or 
    business. The withholding agent may treat the payment as effectively 
    connected if it can reliably associate the payment with a Form W-8 
    described in paragraph (c)(3)(iii) of this section representing that 
    the income is effectively connected or if it so presumes in accordance 
    with the provisions in Sec. 1.1441-4(a) (2)(ii) or (3). In the absence 
    of documentation, the payment is generally presumed to be non-
    effectively connected. See Sec. 1.1441-4(a)(2)(i). See Secs. 1.1461-
    1(c)(2)(ii)(A), 1.6031-1 and 1.6031(b)-1T for reporting requirements 
    applicable to the withholding agent and to the partnership.
        (6) If the withholding agent cannot reliably treat the payment as 
    effectively connected income nor presume that it is so connected, then 
    the withholding agent must determine whether the partnership is a 
    withholding foreign partnership described in paragraph (c)(2)(i) of 
    this section. The withholding agent may treat the foreign partnership 
    as a withholding partnership if it can reliably associate the payment 
    with a Form W-8 described in paragraph (c)(2)(iv) of this section. In 
    the absence of a reliable Form W-8, the foreign partnership is presumed 
    to be a non-withholding foreign partnership described in paragraph 
    (c)(3)(i) of this section. In such a case, under paragraph (c)(1)(i) of 
    this section, the withholding agent must treat the partners, rather 
    than the partnership, as payees. See paragraph (d) of this section for 
    determining the status of the partners as U.S. or foreign persons in 
    the absence of documentation. See Sec. 1.1461-1(c)(2)(ii)(A), 1.6031-1 
    and 1.6031(b)-1T for reporting requirements applicable to the 
    withholding agent and to the partnership.
        (7) If the withholding agent determines that the payee is a U.S. 
    partnership, or so presumes in accordance with paragraph (d)(2) of this 
    section in the absence of documentation, the withholding agent is not 
    required to withhold under paragraph (b)(1) of this section because the 
    partnership is treated as a U.S. payee. See paragraph (b)(2) of this 
    section for withholding requirements applicable to a domestic 
    partnership with foreign partners. See Secs. 1.1461-1(c)(2)(ii)(A), 
    1.6031-1 and 1.6031(b)-1T for reporting requirements applicable to the 
    withholding agent and to the partnership.
        (8) In order to determine whether to rely on a claim for a reduced 
    rate under a tax treaty by a person that the withholding agent treats 
    as a partnership or as a partner in a partnership, the withholding 
    agent must apply the provisions of Sec. 1.894-1T(d). For applicable 
    procedures regarding reliance by a withholding agent on a claim for 
    benefits under a tax treaty in such a situation, see Sec. 1.1441-
    6(b)(4).
        (b) Domestic partnerships--(1) Exemption from withholding on 
    payment to domestic partnerships. A payment to a person that the 
    withholding agent may treat as a domestic partnership is treated as a 
    payment to a U.S. payee. Therefore, a payment to a domestic partnership 
    is not subject to withholding under section 1441 even though it may 
    have partners that are foreign persons. A withholding agent may treat 
    the person to whom the payment is made as a domestic partnership if it 
    can reliably associate the payment with a Form W-9 furnished by the 
    partnership in accordance with the procedures under Sec. 1.1441-1(d) 
    (2) or (4) or based upon the presumptions described in paragraph (d)(2) 
    of this section.
        (2) Withholding by a domestic partnership--(i) In general. A 
    domestic partnership is required to withhold under Sec. 1.1441-1 as a 
    withholding agent on the gross amount of items of income subject to 
    withholding that are includible in the distributive share of income of 
    a partner that is a foreign person. Pursuant to the authority provided 
    under section 702(a), each partner shall take into account separately 
    its distributive share of amounts subject to withholding, and thus the 
    partnership, pursuant to section 703(a)(1), shall separately state 
    these amounts when computing its taxable income. A partnership shall 
    withhold when any distributions that include amounts subject to 
    withholding are made or when guaranteed payments are made. To the 
    extent a foreign partner's distributive share of an amount subject to 
    withholding has not been actually distributed, the partnership is 
    required to withhold on the partner's distributive share of that amount 
    on the earlier of the date that the statement required under section 
    6031(b) and Sec. 1.6031(b)-1T to be provided to that partner is mailed 
    or otherwise furnished to the partner or the due date for furnishing 
    that statement as provided under Sec. 1.6031(b)-1T. If a
    
    [[Page 53454]]
    
    partnership withholds on a distributive share before the amount is 
    actually distributed to the partner, then withholding is not required 
    when the amount is subsequently distributed. Withholding on items of 
    income that are effectively connected income in the hands of the 
    partners who are foreign persons is governed by section 1446 and not by 
    this section. In such a case, partners in a domestic partnership are 
    not required to furnish a withholding certificate in order to claim an 
    exemption from withholding under section 1441(c)(1) and Sec. 1.1441-4.
        (ii) Determination by the domestic partnership of the partners' 
    status. For purposes of determining whether the partners or some other 
    persons are the payees of the partners' distributive shares of any 
    payment made to the partnership and the status of the partners, the 
    partnership shall apply the rules of Sec. 1.1441-1(b) (2) and (3), and 
    of paragraphs (c)(1) and (d) of this section (in the case of a partner 
    that is a foreign partnership) and of paragraph (e) of this section (in 
    the case of a partner that is a foreign estate or a foreign trust) in 
    the same manner as if the partnership were making a payment directly to 
    the partners other than in their capacity as partners.
        (iii) Reliance on a partner's claim for reduced withholding. Absent 
    actual knowledge or reason to know otherwise, a domestic partnership 
    may rely on a claim for reduced withholding under chapter 3 of the Code 
    by a partner, if prior to the time the partnership is required to 
    withhold, the partnership can reliably associate the partner's 
    distributive share of the partnership items with documentation upon 
    which it may rely to treat the partner or another person as a U.S. 
    person under Sec. 1.1441-1(d) (2) or (3), as a U.S. beneficial owner 
    under Sec. 1.1441-1(d)(4), or as a foreign beneficial owner under 
    Sec. 1.1441-1(e)(1)(ii).
        (iv) Rules for reliably associating a payment with documentation. 
    For rules regarding the reliable association of a payment with 
    documentation, see Sec. 1.1441-1(b)(2)(vii).
        (v) Coordination with chapter 61 of the Internal Revenue Code and 
    section 3406. A domestic partnership is not a payor for purposes of 
    chapter 61 of the Code or section 3406 with respect to payments to its 
    partners in their capacity as partners. Thus, it is not required to 
    make an information return on Form 1099 nor to backup withhold with 
    respect to its partners' distributive share of partnership items. 
    However, it must file returns under section 6031. Such returns are in 
    lieu of making returns under Sec. 1.1461-1 (b) and (c). See 
    Sec. 1.1461-1(c)(2)(ii)(A).
        (c) Foreign partnerships--(1) Determination of payee--(i) Payments 
    treated as made to partners. Except as otherwise provided in paragraph 
    (c)(1)(ii) of this section, a payment to a person that the withholding 
    agent may treat as a foreign partnership in accordance with paragraph 
    (c)(2)(i), (3)(i), or (d)(2) of this section is treated as a payment to 
    the partners (looking through partners that are foreign flow-through 
    entities) as follows--
        (A) If the withholding agent can reliably associate the partner's 
    distributive share of the payment with a Form W-9, a Form W-8, or other 
    appropriate documentation upon which it can rely to treat the payment 
    as made to a U.S. or foreign beneficial owner under Sec. 1.1441-1 
    (d)(4) or (e)(1)(ii), then the beneficial owner so identified is 
    treated as the payee;
        (B) If the withholding agent can reliably associate the partner's 
    distributive share with an intermediary certificate described in 
    Sec. 1.1441-1(e)(3) (ii), (iii), or (v), then the rules of Sec. 1.1441-
    1(b)(2)(v) shall apply to determine who the payee is in the same manner 
    as if the partner's distributive share of the payment had been paid 
    directly to such intermediary;
        (C) If the withholding agent can reliably associate the partner's 
    distributive share with a partnership certificate described in 
    paragraph (c)(2)(iv) or (3)(iii) of this section, then the rules of 
    paragraph (c)(1) (i) or (ii) of this section shall apply to determine 
    whether the payment is treated as made to the partners of the higher-
    tier partnership under this paragraph (c)(1)(i) or to the higher tier 
    partnership (under the rules of paragraph (c)(1)(ii) of this section), 
    in the same manner as if the partner's distributive share of the 
    payment had been paid directly to such foreign partnership;
        (D) If the withholding agent can reliably associate the partner's 
    distributive share with a withholding certificate described in 
    Sec. 1.1441-1(e)(3)(i) regarding a foreign trust or estate, then the 
    rules of paragraph (e) of this section shall apply to determine who the 
    payees are; and
        (E) If the withholding agent cannot reliably associate the 
    partner's distributive share with a withholding certificate or other 
    appropriate documentation, the partners are considered to be the payees 
    and the presumptions described in paragraph (d)(3) of this section 
    shall apply to determine the status of the partners.
        (ii) Payments treated as made to the partnership. A payment to a 
    person that the withholding agent may treat as a foreign partnership in 
    accordance with paragraph (c) (2)(i), (3)(i), or (d)(2) of this section 
    is treated as a payment to the foreign partnership and not to its 
    partners only if--
        (A) The withholding agent can reliably associate the payment with a 
    withholding certificate described in paragraph (c)(2)(iv) of this 
    section (dealing with a certificate from a person representing to be a 
    withholding foreign partnership); or
        (B) The withholding agent can reliably associate the payment with a 
    withholding certificate described in paragraph (c)(3)(iii) of this 
    section certifying that the payment is income that is effectively 
    connected with the conduct of a trade or business in the United States.
        (iii) Rules for reliably associating a payment with documentation. 
    For rules regarding the reliable association of a payment with 
    documentation, see Sec. 1.1441-1(b)(2)(vii). In the absence of 
    documentation, see Sec. 1.1441-1(b)(3) and paragraph (d) of this 
    section for applicable presumptions.
        (iv) Example. The rules of paragraphs (c)(1) (i) and (ii) of this 
    section are illustrated by the following example:
    
        Example. (i) Facts. A foreign partnership, P, has two partners, 
    a corporation, C, and a partnership, P1, both organized in country 
    X. P1 has three partners, a foreign pension fund, a domestic 
    partnership, P2, and a foreign partnership, P3, organized in country 
    Y. P2's partners are foreign pension funds. P holds U.S. Treasury 
    obligations in registered form, on which it receives interest from 
    U.S. custodian, Z. P1 is not a withholding foreign partnership and 
    it does not certify that the interest is effectively connected with 
    the conduct of a U.S. trade or business. P3 is a withholding foreign 
    partnership. P has furnished a valid withholding certificate 
    described in paragraph (c)(3)(iii) of this section to which it has 
    attached valid withholding certificates for C (beneficial owner Form 
    W-8 described in Sec. 1.1441-1(e)(2)(i)), P1, and P1's three 
    partners (a Form W-9 for P2, a withholding certificate described in 
    paragraph (c)(2)(iv) of this section for P3 and a beneficial owner 
    Form W-8 described in Sec. 1.1441-1(e)(2)(i) for the foreign pension 
    fund). P has furnished appropriate information in accordance with 
    paragraph (c)(3)(iv) of this section upon which the withholding 
    agent can rely to determine which portion of the payment is 
    associated with each withholding certificate.
        (ii) Analysis. The payment to P is treated as a payment to its 
    partners because none of the conditions described in paragraph 
    (c)(1)(ii) exist under the facts to treat P as the payee (i.e., it 
    is not a withholding foreign partnership and, although it has 
    furnished a withholding certificate described under paragraph 
    (c)(3)(iii) of this section, it is not claiming that the interest is 
    effectively connected with the conduct of a U.S. trade
    
    [[Page 53455]]
    
    or business). Under paragraph (c)(1)(i)(A) of this section, C, as a 
    partner of P, is treated as a payee because it is not a flow-through 
    entity or an intermediary (based on the documentation furnished for 
    C). Under paragraph (c)(1)(i)(C) of this section, P1 is not treated 
    as a payee because it is a foreign partnership and none of the 
    conditions described under paragraph (c)(1)(ii) of this section 
    exist under the facts to treat P as the payee. Instead, P2 (under 
    paragraph (c)(1)(i)(A) of this section), P3 (under paragraph 
    (c)(1)(ii)(A) of this section), and the foreign pension fund that is 
    a partner of P1 (under paragraph (c)(1)(i)(A) of this section), are 
    treated as the payees of P1's distributive share of the payment to 
    P. P2 is a payee because, although a flow-through entity, it is a 
    domestic partnership (see paragraph (b)(1) of this section). P3 is 
    treated as a payee under paragraph (c)(1)(ii)(A) of this section, 
    irrespective of who its partners are, because it has furnished a 
    valid withholding certificate as a withholding foreign partnership. 
    The foreign pension fund is treated as a payee under paragraph 
    (c)(1)(i)(A) of this section because it has furnished a beneficial 
    owner Form W-8 described in Sec. 1.1441-1(e)(2)(i).
    
        (2) Withholding foreign partnerships--(i) Reliance on claim of 
    withholding foreign partnership status. A withholding foreign 
    partnership is a foreign partnership that has entered into an agreement 
    with the Internal Revenue Service (IRS), as described in paragraph 
    (c)(2)(ii) of this section. A withholding agent that can reliably 
    associate a payment with a certificate described in paragraph 
    (c)(2)(iv) of this section may treat the person to whom it makes the 
    payment as a withholding foreign partnership for purposes of 
    withholding under chapter 3 of the Code, information reporting under 
    chapter 61 of the Code, backup withholding under section 3406, and 
    withholding under other provisions of the Internal Revenue Code. 
    Furnishing such a certificate is in lieu of transmitting to a 
    withholding agent withholding certificates or other appropriate 
    documentation for its partners. Although the withholding foreign 
    partnership generally will be required to obtain withholding 
    certificates or other appropriate documentation from its partners 
    pursuant to its agreement with the IRS, it is not required to attach 
    such documentation to the partnership withholding certificate.
        (ii) Withholding agreement--(A) In general. A foreign partnership 
    may claim withholding foreign partnership status before an agreement is 
    executed with the IRS if it has applied for such status and the IRS 
    authorizes such status on an interim basis under such procedures as the 
    IRS may issue. A withholding foreign partnership must file a 
    partnership return under section 6031(a) to the extent required under 
    the regulations under that section and furnish statements on Form K-1 
    to its partners under section 6031(b) to the extent required under the 
    regulations under that section. See Secs. 1.6031-1 and 1.6031(b)-1T. 
    See Sec. 1.1461-1(c)(2)(ii)(A) for an exemption from filing Forms 1042 
    and 1042-S. A foreign withholding partnership that wishes to also be a 
    qualified intermediary under Sec. 1.1441-1(e)(5) for payments it 
    receives for persons other than its partners may combine both 
    agreements into one single agreement.
        (B) Terms of withholding agreement. The IRS may, upon request, 
    enter into a withholding agreement with a foreign partnership pursuant 
    to such procedures as the IRS may prescribe in published guidance (see 
    Sec. 601.601(d)(2) of this chapter). Under such withholding agreement, 
    a foreign partnership shall generally be subject to the applicable 
    withholding and reporting provisions applicable to withholding agents 
    and payors under chapters 3 and 61 of the Code, and section 3406, and 
    the regulations under those provisions, and other withholding 
    provisions of the Code, except to the extent provided under the 
    agreement. In particular, the agreement must include provisions for 
    reporting of information on Form 1065 and furnishing K-1 statements to 
    the partners in the manner required under section 6031 and the 
    regulations under that section. Under the agreement, a foreign 
    partnership may agree to act as an acceptance agent to perform the 
    duties described in Sec. 301.6109-1(d)(3)(iv)(A) of this chapter. The 
    agreement may specify the manner in which applicable procedures for 
    adjustments for underwithholding and overwithholding, including refund 
    procedures apply to the foreign partnership and its partners and the 
    extent to which applicable procedures may be modified. In particular, a 
    withholding agreement may allow a qualified intermediary to claim 
    refunds of overwithheld amounts on behalf of its customers. In 
    addition, the agreement must specify the manner in which the IRS will 
    audit the foreign partnership's books and records in order to verify 
    the accuracy of the Forms 1065 filed by the partnership and K-1 
    statements furnished to the partners as required under section 6031 and 
    the regulations under that section. The agreement shall also specify 
    the assets that the foreign partnership has in the United States or 
    alternative means of collection, if necessary.
        (iii) Withholding responsibility. A withholding foreign partnership 
    must assume primary withholding responsibility for all payments that 
    are made to it and, therefore, is not required to provide information 
    to the withholding agent regarding each partner's distributive share of 
    the payment (see paragraph (c)(3)(iv) of this section for the 
    requirement to provide distributive share information to the 
    withholding agent in the case of other foreign partnerships). The 
    partnership shall be a withholding agent with respect to each of its 
    partner's distributive share of income subject to withholding that is 
    paid to the partnership. Therefore, the withholding agent is not 
    required to withhold any amount under chapter 3 of the Code on a 
    payment to a foreign partnership that has furnished a withholding 
    certificate representing that it is a withholding foreign partnership, 
    unless it has actual knowledge or reason to know that the certificate 
    is incorrect. The foreign partnership shall withhold the payments under 
    the same procedures and at the same time as is prescribed for 
    withholding by a domestic partnership under paragraph (b)(2) of this 
    section, except that, for purposes of determining the partner's status, 
    the provisions of paragraph (d)(4)(iv) of this section shall apply and 
    paragraph (b)(2)(ii) of this section shall not apply.
        (iv) Withholding certificate from a withholding foreign 
    partnership. The rules of Sec. 1.1441-1(e)(4) shall apply to 
    withholding certificates described in this paragraph (c)(2)(iv). A 
    withholding certificate furnished by a withholding foreign partnership 
    is valid with regard to any partner on whose behalf the certificate is 
    furnished only if it is furnished on a Form W-8 (or an acceptable 
    substitute form or such other form as the IRS may prescribe), it is 
    signed under penalties of perjury by a partner with authority to sign 
    for the partnership, its validity has not expired, and it contains the 
    information, statement, and certifications described in this paragraph 
    (c)(2)(iv) as follows--
        (A) The name, permanent residence address (as described in 
    Sec. 1.1441-1(e)(2)(ii)), and the employer identification number of the 
    partnership, and the country under the laws of which the partnership is 
    created or governed;
        (B) A certification that the partnership is a withholding foreign 
    partnership within the meaning of paragraph (c)(2)(i) of this section; 
    and
        (C) Any other information or certification as may be required by 
    the form or accompanying instructions in addition to, or in lieu of, 
    the information and certifications described in this paragraph 
    (c)(2)(iv).
    
    [[Page 53456]]
    
        (3) Other foreign partnerships--(i) Reliance on claim of foreign 
    partnership status. A withholding agent that can reliably associate a 
    payment with a certificate described in paragraph (c)(3)(iii) of this 
    section may treat the person to whom it makes the payment as a foreign 
    partnership that is not a withholding foreign partnership. Such 
    reliance is permitted for purposes of withholding under chapter 3 of 
    the Code, information reporting under chapter 61 of the Code, backup 
    withholding under section 3406, and withholding under other provisions 
    of the Internal Revenue Code. For purposes of this paragraph (c)(3)(i), 
    a payment that the withholding agent can reliably associate with a 
    withholding certificate described in paragraph (c)(3)(iii) of this 
    section that would be valid except for the fact that some or all of the 
    withholding certificates or other appropriate documentation required to 
    be attached are lacking or are unreliable, or that information for 
    allocating the payment among the partners is lacking or is unreliable, 
    shall nevertheless be treated as a payment to a foreign partnership.
        (ii) Reliance on claim of reduced withholding by a partnership for 
    its partners. This paragraph (c)(3)(ii) describes the manner in which a 
    withholding agent may rely on a claim of reduced withholding when 
    making a payment to a foreign partnership that is not a withholding 
    foreign partnership. To the extent that a withholding agent treats a 
    payment to a foreign partnership as a payment to its partners in 
    accordance with paragraph (c)(1) of this section, it may rely on a 
    claim for reduced withholding by a partner if, prior to the payment, 
    the withholding agent can reliably associate the payment with a 
    withholding certificate described in paragraph (c)(3)(iii) of this 
    section pertaining to the partner unless the withholding agent has 
    actual knowledge or reason to know that the withholding certificate is 
    unreliable. The certificate will be considered to pertain to the 
    partner if the appropriate withholding certificate for the partner is 
    attached to the partnership's withholding certificate. An appropriate 
    withholding certificate for a partner includes a beneficial owner 
    withholding certificate described in Sec. 1.1441-1(e)(2)(i) or, if 
    applicable, documentary evidence described in Sec. 1.1441-6(b)(2)(i) or 
    in Sec. 1.6049-5(c)(1) (for a partner claiming to be a foreign person 
    and a beneficial owner, determined under the provisions of Sec. 1.1441-
    1(c)(6)), the applicable certificates described in Sec. 1.1441-1(d)(2) 
    or (3) (for a partner claiming to be a U.S. payee), an intermediary 
    withholding certificate described in Sec. 1.1441-1(e)(3)(ii) or (iii), 
    a U.S. branch withholding certificate described in Sec. 1.1441-
    1(e)(3)(v), or a partnership withholding certificate described in 
    paragraph (c)(2)(iv) or (3)(iii) of this section. Except where the 
    partnership certificate is provided for income claimed to be 
    effectively connected with the conduct of a trade or business in the 
    United States, a claim must be presented for each portion of the 
    payment that represents an item of income includible in the 
    distributive share of the partner as required under paragraph 
    (c)(3)(iii)(C) of this section. When making a claim for several 
    partners, the partnership may present a single partnership withholding 
    certificate to which the partners' certificates are attached. Where the 
    partnership certificate is provided for income claimed to be 
    effectively connected with the conduct of a trade or business in the 
    United States, the claim may be presented without having to identify 
    the partner's distributive share of the payment if the certificate 
    contains the certification described in paragraph (c)(3)(iii)(E) of 
    this section.
        (iii) Withholding certificate from a foreign partnership that is 
    not a withholding foreign partnership. A withholding certificate 
    furnished by a foreign partnership that is not a withholding foreign 
    partnership is valid only if it is furnished on a Form W-8 (or an 
    acceptable substitute form or such other form as the IRS may 
    prescribe), it is signed under penalties of perjury by a partner with 
    authority to sign for the partnership, its validity has not expired, it 
    contains the information, statement, and certifications described in 
    this paragraph (c)(3)(iii), and the withholding certificates or other 
    appropriate documentation for all of the partners are attached (except 
    that certificates for partners are not required to be attached for a 
    certificate furnished solely for income claimed to be effectively 
    connected with the conduct of a trade or business in the United States, 
    regardless of any partner's status as a U.S. person). The rules of 
    Sec. 1.1441-1(e)(4) shall apply to withholding certificates described 
    in this paragraph (c)(3)(iii). The information, statement, and 
    certifications required on the withholding certificate are as follows:
        (A) The name, permanent residence address (as described in 
    Sec. 1.1441-1(e)(2)(ii)), and the employer identification number of the 
    partnership, and the country under the laws of which the partnership is 
    created or governed.
        (B) A representation that the person whose name is on the 
    certificate is a foreign partnership.
        (C) A statement attached to the certificate that provides such 
    information as may be required by the form and accompanying 
    instructions, including sufficient information to the withholding agent 
    to determine the amount required to be withheld from amounts paid to 
    the partnership, such as each partner's distributive share of amounts 
    to which the certificate relates, prepared in the manner described in 
    paragraph (c)(3)(iv) of this section. No statement is required for a 
    certificate furnished for income claimed to be effectively connected 
    with the conduct of a trade or business in the United States.
        (D) If the withholding certificates are required to be attached to 
    the partnership's withholding certificate, a statement either that the 
    attached withholding certificates represent all of the partners or that 
    the partners for whom withholding certificates are lacking are 
    separately identified in the statement required under paragraph 
    (c)(3)(iv) of this section.
        (E) A certification that the income is effectively connected with 
    the conduct of a trade or business in the United States, if applicable.
        (F) Any other information or certification as may be required by 
    the form or accompanying instructions in addition to, or in lieu of, 
    the information and certifications described in this paragraph 
    (c)(3)(iii).
        (iv) Information to the withholding agent regarding each partner's 
    distributive share. The partnership must furnish information sufficient 
    for the withholding agent to determine each partner's distributive 
    share of reportable amounts (described in Sec. 1.1441-1(e)(3)(vi)). The 
    sum of all partners' distributive shares, expressed as a percentage, 
    must equal, but not exceed one hundred percent. For purposes of this 
    paragraph (c)(3)(iv), the rules of Sec. 1.1441-1(e)(3)(iv) regarding 
    the information to furnish to the withholding agent shall apply.
        (v) Withholding by a foreign partnership. A foreign partnership 
    described in this paragraph (c)(3) that receives an amount subject to 
    withholding under chapter 3 of the Code shall be deemed to have 
    satisfied any obligation under such chapter to withhold on the amount 
    with respect to any partner to the extent that the partner's 
    distributive share of the payment can be reliably associated with a 
    withholding certificate described in paragraph (c)(3)(iii) of this 
    section pertaining to the partner that the
    
    [[Page 53457]]
    
    partnership has furnished to a withholding agent and the partnership 
    does not know and has no reason to know that the correct amount has not 
    been withheld under chapter 3 of the Code and the regulations under 
    such chapter.
        (d) Presumptions regarding payee's status in the absence of 
    documentation--(1) In general. This paragraph (d) contains the 
    applicable presumptions for determining the status of the partnership 
    and its partners in the absence of documentation. The provisions of 
    Sec. 1.1441-1(b)(3)(iv) (regarding the 90-day grace period) and 
    Sec. 1.1441-1(b)(3) (vii) through (ix) shall apply for purposes of this 
    paragraph (d).
        (2) Determination of partnership status as domestic or foreign in 
    the absence of documentation. In the absence of a valid representation 
    of domestic partnership status in accordance with paragraph (b)(1) of 
    this section and of foreign partnership status in accordance with 
    paragraph (c)(2)(i) or (3)(i) of this section, the withholding agent 
    shall determine the status of the payee as a corporation, a partnership 
    or otherwise, based upon the presumptions set forth in Sec. 1.1441-
    1(b)(3)(ii). If, based upon these presumptions, the withholding agent 
    treats the payee as a partnership, the partnership shall be presumed to 
    be a foreign partnership if the withholding agent has actual knowledge 
    of the payee's employer identification number and that number begins 
    with the two digits ``98,'' if the withholding agent's communications 
    with the payee are mailed to an address in a foreign country, or if the 
    payment is made outside the United States (as defined in Sec. 1.6049-
    5(e)). For rules regarding reliable association with a withholding 
    certificate from a domestic or a foreign partnership, see Sec. 1.1441-
    1(b)(2)(vii).
        (3) Determination of partners' status in the absence of certain 
    documentation. If the withholding agent treats the payee as a foreign 
    partnership in accordance with paragraph (c)(2)(i), (3)(i), or (d)(2) 
    of this section, the presumptions described in this paragraph (d)(3) 
    shall apply when the withholding agent cannot reliably associate a 
    payment with partner documentation. The provisions of paragraphs (d) 
    (3)(i), (ii), and (iii) of this section are not relevant to a payment 
    that a withholding agent can reliably associate with a withholding 
    certificate described in paragraph (c)(2)(iv) of this section.
        (i) Documentation regarding the status of a partner is lacking or 
    unreliable. Any portion of a payment that the withholding agent cannot 
    reliably associate with a partner because a withholding certificate or 
    other appropriate documentation for that partner is lacking or 
    unreliable is presumed to be made to foreign payee. Therefore, under 
    Sec. 1.1441-1(b)(1), the withholding agent must withhold 30 percent 
    from payments to the partnership of amounts subject to withholding that 
    are allocable to such partner or group of partners.
        (ii) Information regarding the allocation of payment is lacking or 
    unreliable. If a withholding agent can reliably associate a payment 
    with a group of partners but lacks reliable information to determine 
    how much of the payment is allocable to each partner in the group, the 
    payment, to the extent it cannot reliably be allocated, is presumed to 
    be allocable entirely to the partner in the group with the highest 
    applicable withholding rate or, if the rates are equal, to the partner 
    in the group with the highest U.S. tax liability, as the withholding 
    agent shall estimate, based on its knowledge and available information. 
    If a withholding certificate attached to the partnership certificate is 
    another partnership certificate or an intermediary certificate 
    described in Sec. 1.1441-1(e)(3)(iii), the rules of this paragraph 
    (d)(3)(ii) apply by treating the share of the payment allocable to the 
    other partnership or the intermediary certificate as if the payment 
    were made directly to the foreign partnership or intermediary.
        (iii) Certification that the foreign partnership has furnished 
    documentation for all of the persons to whom the intermediary 
    certificate relates is lacking or unreliable. If the certification 
    required under paragraph (c)(3)(iii)(D) of this section (that the 
    attached withholding certificates and other appropriate documentation 
    represent all of the partners in the partnership) is lacking or is 
    unreliable and, as a result, the withholding agent cannot reliably 
    determine how much of the payment is allocable to each of the partners 
    or group of partners for which the withholding agent holds a 
    withholding certificate or other appropriate documentation, then none 
    of the payment can reliably be associated with any one partner and the 
    entire payment is presumed to be made to a foreign payee.
        (iv) Determination by a withholding foreign partnership of the 
    status of its partners. For purposes of determining whether the 
    partners or some other persons are the payees of the partners' 
    distributive shares of any payment made to a withholding foreign 
    partnership, the partnership shall apply the rules of Sec. 1.1441-
    1(b)(2), and of paragraph (c)(1) of this section (in the case of a 
    partner that is a foreign partnership) and of paragraph (e) (in the 
    case of a partner that is a foreign estate or a foreign trust), in the 
    same manner as if the partnership were making a payment directly to the 
    partners other than in their capacity as partners. Further, the 
    provisions of paragraphs (d)(3) (i), (ii), and (iii) of this section 
    shall apply to determine the status of partners and the applicable 
    withholding rates to the extent that, at the time the foreign 
    partnership is required to withhold on the amount, it cannot reliably 
    associate the amount with documentation for any one or more of its 
    partners. See Secs. 1.6031-1 and 1.6031-1T for reporting and filing 
    requirements applicable to a withholding foreign partnership.
        (4) Examples. The rules of this paragraph (d) may be illustrated by 
    the following examples:
    
        Example 1. (i) Facts. FP is a foreign partnership receiving U.S. 
    source interest that would qualify as portfolio interest described 
    in section 871(h)(2)(B) if the statement described in section 
    871(h)(5) were furnished. FP has three partners, A, B, and C. FP 
    furnishes to the withholding agent a partnership withholding 
    certificate described in paragraph (c)(3)(iii) of this section to 
    which it attaches a Form W-9 for A and a beneficial owner Form W-8 
    for B. Nothing on A's Form W-9 indicates that A is an exempt 
    recipient within the meaning of Sec. 1.6049-4(c)(1)(i). No 
    documentation is attached for C. The partnership has one single 
    account with the withholding agent. It furnishes a statement to the 
    withholding agent under paragraph (c)(3)(iv) of this section 
    indicating that A's, B's, and C's respective distributive shares of 
    the payments are 40%, 40%, and 20% and represents, in accordance 
    with paragraph (c)(3)(iii)(D) of this section, that there are only 
    three partners.
        (ii) Analysis. Absent actual knowledge or reason to know 
    otherwise, the withholding agent may rely on FP's withholding 
    certificate and A's Form W-9 to treat A as a U.S. beneficial owner 
    under Sec. 1.1441-1(d)(4)(i) and as a U.S. payee under paragraph 
    (c)(1)(i)(A) of this section to the extent of 40 percent of the 
    payment. Under Sec. 1.1441-1(b)(1), the withholding agent is not 
    required to withhold on A's share of the payment. Under Sec. 1.6049-
    4(a), the withholding agent must comply with information reporting 
    obligations (i.e., file a Form 1099) with respect to A who is 
    treated as a U.S. payee under paragraph (c)(1)(i)(A) of this section 
    and Sec. 1.6049-5(d)(1) for purposes of the information reporting 
    provisions of chapter 61 of the Code and the regulations thereunder. 
    Absent actual knowledge or reason to know otherwise, the withholding 
    agent may also rely on FP's withholding certificate and B's Form W-8 
    to treat B as a foreign beneficial owner under Sec. 1.1441-
    1(e)(1)(ii)(A)(1) and paragraph (c)(1)(i)(A) of this section. Thus, 
    under Sec. 1.1441-1(b)(1), the withholding agent may rely on B's 
    claim for portfolio interest
    
    [[Page 53458]]
    
    treatment for B's share of the payment. Under Sec. 1.1461-1(b)(1) 
    and (c)(1), the withholding agent must report the payment to B on 
    Forms 1042 and 1042-S unless, under section 6031 and the regulations 
    under that section, the partnership is required to file a return. 
    Because the withholding agent cannot associate the documentation (as 
    defined in Sec. 1.1441-1(b)(3)(vii)) for C's share of the interest 
    income, the withholding agent must, under paragraph (d)(3)(i) of 
    this section, treat that amount as a payment made to an unidentified 
    foreign partner and withhold 30 percent under section 1441 in 
    accordance with Sec. 1.1441-1(b)(1).
        Example 2. The facts are the same as in Example 1, but the 
    partnership has furnished no information under paragraph (c)(3)(iv) 
    of this section regarding how much of the payment to the foreign 
    partnership is attributable to A and C. Under paragraph (d)(3)(ii) 
    of this section, the payment allocable to group A-C is presumed made 
    entirely to A or to C, depending of who of A or C is subject to the 
    highest withholding rate. A is not subject to withholding because it 
    has furnished a valid Form W-9. C is subject to a 30-percent 
    withholding rate under Sec. 1.1441-1(b)(1) because it is presumed to 
    be an unidentified foreign partner under paragraph (d)(3)(i) of this 
    section. Therefore, under paragraph (d)(3)(ii) of this section, the 
    portion of the payment that the withholding agent can associate with 
    A and C is subject to withholding at a 30-percent rate. The 
    withholding agent may ignore the fact that A has furnished a valid 
    Form W-9 supporting his claim of exemption from withholding as a 
    U.S. person because it has no reliable information on how much of 
    the payment is allocable to A. Because the withholding agent has a 
    Form W-9 for the U.S. individual partner, it must also report A's 
    distributive share on a Form 1099. To the extent that A's exact 
    share is not known, the entire amount should be reported on the Form 
    1099.
    
        (e) Trusts and estates. [Reserved]
        (f) Failure to receive withholding certificate timely or to act in 
    accordance with applicable presumptions. See applicable procedures 
    described in Sec. 1.1441-1(b)(7) in the event the withholding agent 
    does not hold an appropriate withholding certificate or other 
    appropriate documentation at the time of payment or fails to rely on 
    the presumptions set forth in Sec. 1.1441-1(b)(3) or in paragraph (d) 
    or (e) of this section.
        (g) Effective date--(1) General rule. This section applies to 
    payments made after December 31, 1998.
        (2) Transition rules. A withholding agent that on December 31, 
    1998, holds a withholding certificate that is valid under the 
    regulations in effect prior to January 1, 1999 (see 26 CFR parts 1 and 
    35a, revised April 1, 1997), may treat it as a valid withholding 
    certificate until its validity expires under those regulations or, if 
    earlier, until December 31, 1999. Further, the validity of a 
    withholding certificate or statement that is dated prior to January 1, 
    1998, is valid on January 1, 1998, and would expire at any time during 
    1998, is extended until December 31, 1998 (and is not extended after 
    December 31, 1998 by reason of the immediately preceding sentence). The 
    rule in this paragraph (g)(2), however, does not apply to extend the 
    validity period of a withholding certificate that expires in 1998 
    solely by reason of changes in the circumstances of the person whose 
    name is on the certificate. Notwithstanding the three preceding 
    sentences, a withholding agent may choose to not take advantage of the 
    transition rule in this paragraph (g)(2) with respect to one or more 
    withholding certificates and, therefore, to require new withholding 
    certificates conforming to the requirements described in this section.
    
    
    Sec. 1.1441-6  Claim of reduced withholding under an income tax treaty.
    
        (a) In general. The rate of withholding on a payment of income 
    subject to withholding may be reduced to the extent provided under an 
    income tax treaty in effect between the United States and a foreign 
    country. Most benefits under income tax treaties are to foreign persons 
    who reside in the treaty country. In some cases, benefits are available 
    under an income tax treaty to U.S. citizens or U.S. residents or to 
    residents of a third country.
        See paragraph (b)(5) of this section for claims of benefits by U.S. 
    persons. If the requirements of this section are met, the amount 
    withheld from the payment may be reduced at source to account for the 
    treaty benefit. See also Sec. 1.1441-4(b)(2) for rules regarding claims 
    of reduced rate of withholding under an income tax treaty in the case 
    of compensation from personal services.
        (b) Reliance on claim of reduced withholding under an income tax 
    treaty--(1) In general. Absent actual knowledge or reason to know 
    otherwise, a withholding agent may rely on a claim that a beneficial 
    owner is entitled to a reduced rate of withholding based upon an income 
    tax treaty if, prior to the payment, the withholding agent can reliably 
    associate the payment with documentation upon which it can rely to 
    treat the payment as made to a foreign beneficial owner in accordance 
    with Sec. 1.1441-1(e)(1)(ii) (not including 1.1441-1(e)(1)(ii)(B) 
    relating to documentary evidence). Except as otherwise provided in 
    paragraph (b)(2) or (3) of this section, for purposes of this paragraph 
    (b)(1), a beneficial owner withholding certificate described in 
    Sec. 1.1441-1(e)(2)(i) is valid only if it includes the beneficial 
    owner's taxpayer identifying number and certifies that the taxpayer has 
    complied with the advance ruling requirements described in paragraph 
    (e) of this section (if applicable), and, if the beneficial owner is a 
    person related to the withholding agent within the meaning of section 
    482, that the beneficial owner will file the statement required under 
    Sec. 301.6114-1(d) of this chapter (if applicable). The requirement to 
    file an information statement under section 6114 for income subject to 
    withholding applies only to amounts received during the calendar year 
    that, in the aggregate, exceed $500,000. See Sec. 301.6114-1(d) of this 
    chapter. The Internal Revenue Service (IRS) may apply the provisions of 
    Sec. 1.1441-1(e)(1)(ii)(B) to notify the withholding agent that the 
    certificate cannot be relied upon to grant benefits under an income tax 
    treaty. A beneficial owner's taxpayer identifying number on a 
    withholding certificate is valid for purposes of establishing proof of 
    residence in a treaty country only if the taxpayer identifying number 
    is certified by the IRS in accordance with the procedures set forth in 
    paragraph (c) of this section. However, absent actual knowledge or 
    reason to know otherwise, a withholding agent may rely on a taxpayer 
    identifying number without having to inquire as to whether the taxpayer 
    identifying number is certified, if the number appears correct on its 
    face and the permanent residence address on the certificate is in the 
    country whose tax treaty with the United States is invoked. See 1.1441-
    1(e)(4)(viii) regarding reliance on a withholding certificate by a 
    withholding agent. The provisions of Sec. 1.1441-1(b)(3)(iv) dealing 
    with a 90-day grace period shall apply for purposes of this section.
        (2) Exemption from requirement to furnish a taxpayer identifying 
    number and special documentary evidence rules for certain income--(i) 
    General rule. In the case of income described in paragraph (b)(2)(ii) 
    of this section, a withholding agent may rely on a beneficial owner 
    withholding certificate described in paragraph (b)(1) of this section 
    even if the person whose name is on the certificate has not provided a 
    taxpayer identifying number. In the case of payments made outside the 
    United States (as defined in Sec. 1.6049-5(e)) with respect to an 
    offshore account (as defined in Sec. 1.6049-5(c)(1)), a withholding 
    agent may, as an alternative to a withholding certificate described in 
    paragraph (b)(1) of this section, rely on a certificate of residence 
    described in paragraph (c)(3) of this section or documentary evidence 
    described in paragraph (c)(4) of this section, relating
    
    [[Page 53459]]
    
    to the beneficial owner, that the withholding agent has reviewed and 
    maintains in its records in accordance with Sec. 1.1441-1(e)(4)(iii). 
    In the case of a payment to a person other than an individual, the 
    certificate of residence or documentary evidence must be accompanied by 
    the certifications described in paragraphs (c)(5) (i) and (ii) of this 
    section regarding limitation on benefits and whether the amount paid is 
    derived by such person or by one of its interest holders. The 
    withholding agent maintains the reviewed documents by retaining either 
    the documents viewed or a photocopy thereof and noting in its records 
    the date on which, and by whom, the documents were received and 
    reviewed. This paragraph (b)(2)(i) shall not apply to amounts that are 
    exempt from withholding based on a claim that the income is effectively 
    connected with the conduct of a trade or business in the United States.
        (ii) Income to which special rules apply. The income to which 
    paragraph (b)(2)(i) of this section applies is dividends and interest 
    from stocks and debt obligations that are actively traded, dividends 
    from any redeemable security issued by an investment company registered 
    under the Investment Company Act of 1940 (15 U.S.C. 80a-1), dividends, 
    interest, or royalties from units of beneficial interest in a unit 
    investment trust that are (or were, upon issuance) publicly offered and 
    are registered with the Securities and Exchange Commission under the 
    Securities Act of 1933 (15 U.S.C. 77a) and amounts paid with respect to 
    loans of securities described in this paragraph (b)(2)(ii). For 
    purposes of this paragraph (b)(2)(ii), a stock or debt obligation is 
    actively traded if it is actively traded within the meaning of section 
    1092(d) and Sec. 1.1092(d)-1 when documentation is provided.
        (3) Competent authority agreements. The procedures described in 
    this section may be modified to the extent the U.S. competent authority 
    may agree with the competent authority of a country with which the 
    United States has an income tax treaty in effect.
        (4) Eligibility for reduced withholding under an income tax treaty 
    in the case of a payment to a person other than an individual--(i) 
    General rule. The withholding imposed under section 1441, 1442, or 1443 
    on any payment to a foreign person is eligible for reduction under the 
    terms of an income tax treaty only to the extent that such payment is 
    treated as derived by a resident of an applicable treaty jurisdiction, 
    such resident is a beneficial owner of the payment, and all other 
    applicable requirements for benefits under the treaty are satisfied. A 
    payment received by an entity is treated as derived by a resident of an 
    applicable treaty jurisdiction to the extent that the payment is 
    subject to tax in the hands of a resident of that jurisdiction. For 
    this purpose, a payment received directly by an entity that is treated 
    as fiscally transparent by the applicable treaty jurisdiction shall be 
    considered a payment subject to tax in the hands of a resident of the 
    jurisdiction to the extent that the interest holders in the entity are 
    residents of the jurisdiction. For purposes of the preceding sentence, 
    interest holders do not include any direct or indirect interest holders 
    that are themselves treated as fiscally transparent entities by the 
    applicable treaty jurisdiction. A payment received by an entity that is 
    not treated as fiscally transparent by the applicable treaty 
    jurisdiction shall be considered a payment subject to tax in the hands 
    of a resident of such jurisdiction only if the entity is itself a 
    resident of that jurisdiction. If the entity is a wholly-owned entity 
    that is disregarded for federal tax purposes under Sec. 301.7701-
    2(c)(2) of this chapter as an entity separate from its owner and whose 
    single member is a foreign person, amounts paid to such entity may 
    nevertheless be treated as derived by a resident of a treaty country if 
    the entity is treated by the applicable treaty country as deriving the 
    income as a resident of that country. The provisions of Sec. 1.894-
    1T(d) (1) through (4) shall apply for purposes of determinations made 
    under this paragraph (b)(4).
        (ii) Withholding certificates--(A) In general. The type of 
    withholding certificate or other appropriate documentation that must be 
    furnished by a person claiming a reduced rate of withholding under an 
    income tax treaty depends upon the status of the entity under the laws 
    of the applicable treaty jurisdiction. For example, if the person 
    receiving the payment is a foreign entity but the persons eligible for 
    benefits under the applicable income tax treaty are the entity's 
    interest holders in the foreign entity receiving the payment, rather 
    than the entity itself, then the entity shall be treated as a foreign 
    partnership for purposes of determining which withholding certificate 
    is appropriate irrespective of the fact that the entity may be treated 
    as a corporation for U.S. tax purposes. If, conversely, the person 
    eligible for benefits under an income tax treaty is the entity rather 
    than the interest holders, then the entity shall be treated as a 
    corporation for purposes of determining which withholding certificate 
    is appropriate irrespective of the fact that the entity may be treated 
    as a partnership for U.S. tax purposes. In the event of a claim for 
    dual treatment described in paragraph (b)(4)(iii) of this section, 
    multiple withholding certificates may have to be furnished. Multiple 
    withholding certificates may also have to be furnished if the entity 
    receives income for which a reduction of withholding is claimed under a 
    provision of the Internal Revenue Code (e.g., portfolio interest) and 
    income for which a reduction of withholding is claimed under an income 
    tax treaty. Absent actual knowledge or reason to know otherwise, a 
    withholding agent may rely on the representations on the certificate 
    that the beneficial owner derives the income and is a resident of the 
    applicable treaty country, within the meaning of Sec. 1.894-1T(d) and 
    the applicable income tax treaty, without having to inquire into the 
    truthfulness of these representations or to research foreign law.
        (B) Certification by qualified intermediary. A foreign corporation 
    that is a qualified intermediary described in Sec. 1.1441-
    1(e)(5)(ii)(C) for purposes of claiming reduced rates of withholding 
    under an income tax treaty for its shareholders (who are treated as 
    deriving the income paid to the corporation as resident of an 
    applicable treaty jurisdiction) may furnish a single Form W-8 for its 
    shareholders for amounts for which it claims the benefit of a reduced 
    rate of withholding under an applicable income tax treaty. The Form W-8 
    shall be one described under Sec. 1.1441-1(e)(3)(ii).
        (iii) Multiple claims of treaty benefits. A withholding agent may 
    make a payment to a foreign entity that is simultaneously claiming a 
    reduced rate of tax on its own behalf for a portion of the payment and 
    a reduced rate on behalf of persons in their capacity as interest 
    holders in that entity for the same or for another portion of the 
    payment. In the case of concurrent and inconsistent claims of treaty 
    benefits for the same amount, the withholding agent may choose to 
    reject the claim and request that a consistent claim be submitted or it 
    may choose which reduction to apply. In the case of concurrent and 
    consistent claims (e.g., the entity that is paid the amount claims a 
    reduced rate for a portion of the payment and an interest holder claims 
    a different reduced rate for the balance of the payment), the 
    withholding agent may, at its option, accept such dual claim based, as 
    appropriate, on withholding certificates furnished by such persons with 
    respect to their respective shares of such payment, even
    
    [[Page 53460]]
    
    though the withholding agent holds different withholding certificates 
    that requires it to treat the entity inconsistently with respect to 
    different payments or with respect to different portions of the same 
    payment. See paragraph (b)(4)(iv) Example 2 of this section. If the 
    withholding agent does not accept claims of reduced rate presented by 
    any one or more of the interest holders, or by the entity, any interest 
    holder or the entity may subsequently claim a refund or credit of any 
    amount so withheld to the extent the holder's or entity's share of such 
    withholding exceeds the amount of tax due under section 894 (in the 
    case of a foreign person) or under section 1 or 11 (in the case of a 
    U.S. person).
        (iv) Examples. This paragraph (b)(4) is illustrated by the 
    following examples:
    
        Example 1. (i) Facts. Entity A is a business organization formed 
    under the laws of country Y that has an income tax treaty with the 
    United States. A receives U.S. source royalties from withholding 
    agent R and claims a reduced rate of withholding under the U.S.-Y 
    tax treaty on its own behalf (rather than on behalf of its interest 
    holders). A furnishes a beneficial owner withholding certificate 
    described in paragraph (b)(1) of this section that represents that A 
    is a resident of country Y (within the meaning of the U.S.-Y tax 
    treaty) and the beneficial owner of the royalties (within the 
    meaning of the U.S.-Y tax treaty).
        (ii) Analysis. Absent actual knowledge or reason to know 
    otherwise, R may rely on the representation that A is a resident of 
    country Y and a beneficial owner of the royalty income within the 
    meaning of the U.S.-Y tax treaty.
        Example 2. (i) Facts. The facts are the same as under Example 1, 
    except that one of A's interest holders, T, is an entity organized 
    in country Z. The U.S.-Z tax treaty reduces the rate on royalties to 
    zero whereas the rate on royalties under the U.S.-Y tax treaty is 
    only reduced to 5 percent. T furnishes a beneficial owner 
    withholding certificate to A that represents that T is deriving its 
    distributive share of the royalty income paid to A as a resident of 
    country Z (within the meaning of Sec. 1.894-1T(d)(1) and the U.S.-Z 
    tax treaty) and is the beneficial owner of the royalty income 
    (within the meaning of the U.S.-Z tax treaty). A furnishes to R an 
    intermediary withholding certificate described in Sec. 1.1441-
    1(e)(3)(iii) to which it attaches T's beneficial owner withholding 
    certificate for the portion of the payment that T claims as its 
    distributive share of the royalty income. A also furnishes to R a 
    beneficial owner withholding certificate for itself for the portion 
    of the payment that T does not claim as its distributive share.
        (ii) Analysis. Absent actual knowledge or reason to know 
    otherwise, R may rely on the documentation furnished by A in order 
    to treat the royalty payment to a single foreign entity (A) as 
    derived by different residents of tax treaty countries as a result 
    of concurrent and consistent claims presented under different 
    treaties. R may, at its option, grant dual treatment, that is, a 
    reduced rate of zero percent under the U.S.-Z treaty on the portion 
    of the royalty payment that T claims to derive as a resident of 
    country Z and a reduced rate of 5 percent under the U.S.-Y treaty 
    for the balance. However, under paragraph (b)(4)(iii) of this 
    section, R may, at its option, treat A as the only relevant person 
    deriving the royalty and grant benefits under the U.S.-Y treaty 
    only.
        Example 3. (i) Facts. Entity A is a business organization formed 
    under the laws of the United States and is classified as a 
    partnership for U.S. tax purposes. A's partners are S and T. S is an 
    entity organized in country Z. T is an entity organized in country 
    X. Under the laws of country Z, A is treated as an entity taxable at 
    the entity level. Therefore, S is treated as a shareholder for 
    purposes of the laws of country Z and is not required to take A's 
    income into account for purposes of determining its tax liability 
    under those laws. Distributions from A are treated as distributions 
    from a corporate entity for purposes of the tax laws of Country Z. 
    Under the laws of country X, A is treated as a fiscally transparent 
    entity and T is required to take into account its distributive share 
    of A's income for purposes of determining its tax liability under 
    those laws. A receives U.S. source royalties that are not connected 
    with a trade or business. The United States has a tax treaty with 
    countries Z and X under which the rate on royalties is reduced to 
    zero. Both S and T furnish a beneficial owner certificate to A 
    representing that they are resident of their respective countries 
    and a beneficial owner of their respective distributive share of 
    royalty income. A has actual knowledge of the tax treatment of S and 
    T in their respective countries.
        (ii) Analysis. Because A is a partnership for U.S. tax purposes, 
    S and T are each taxable on their respective distributive share of 
    the royalty income under section 881(a). However, under Sec. 1.1441-
    5(b)(1), the payment of royalty to A is not a payment subject to 
    withholding. Instead, under Sec. 1.1441-5(b)(2), A must withhold on 
    each partner's distributive share of U.S. source royalty income and 
    may apply the rules of this section to determine the extent to which 
    the 30-percent withholding rate under section 1442 should be reduced 
    under the income tax treaties with countries Z and X. Because A has 
    actual knowledge of the tax treatment of S in country Z as a 
    shareholder of A and not as a partner (or owner of a fiscally 
    transparent entity), A may not rely on the certificate furnished by 
    S in order to reduce the rate of withholding under the U.S.-Z tax 
    treaty. Therefore, it withholds 30 percent of S's distributive share 
    of royalty income. A may rely on T's certificate to treat T as 
    deriving its distributive share of A's royalty income as a resident 
    of country X and as a beneficial owner. Therefore, A withholds on 
    T's distributive share of royalty income at the reduced rate under 
    the U.S.-X tax treaty.
        Example 4. (i) Facts. Entity A is a business organization formed 
    under the laws of country Y. A receives from withholding agent R 
    U.S. source royalties and U.S. source interest income that is 
    potentially eligible for the portfolio interest exemption under 
    section 871(h) and 881(c). A's interest holders are S, an individual 
    who resides in country Y, T, an individual who resides in country Z, 
    and U, an individual resident in the United States. The United 
    States has a tax treaty with both country Y and country Z. The U.S.-
    Y tax treaty reduces the rate on royalties to 5 percent, and the 
    U.S.-Z tax treaty reduces the rate to zero. A is classified as a 
    partnership under U.S. tax principles. Under the tax laws of country 
    Y, A is treated as a fiscally transparent entity and S is required 
    to include in income his distributive share of A's income. A 
    furnishes to R an intermediary withholding certificate described in 
    Sec. 1.1441-5(c)(3)(iii) to which it attaches--
        (A) A Form W-9 for U; and
        (B) Beneficial owner withholding certificates for S and T that 
    represent that S and T are foreign persons. For purposes of claiming 
    the reduced rate under each applicable tax treaty, each of S's and 
    T's certificates represents that S and T are deriving their 
    distributive share of the royalty income as a resident of their 
    respective countries (within the meaning of Sec. 1.894-1T(d)(1) and 
    of the applicable tax treaty) and as a beneficial owner (within the 
    meaning of the applicable tax treaty).
        (ii) Analysis. Absent actual knowledge or reason to know 
    otherwise, R may rely on the representations that S and T derive a 
    distributive share of the royalty income as resident of their 
    respective countries and are the beneficial owners of the income. 
    Therefore, R may withhold on S's distributive share of the royalty 
    income paid to A at the 5-percent rate under the U.S.-Y tax treaty. 
    R may withhold on T's distributive share of the royalty income paid 
    to A at the zero rate under the U.S.-Z tax treaty, even though A is 
    not organized in, or a resident of, country Z. R may rely on U's 
    Form W-9 to treat U as a U.S. person. Therefore, R does not withhold 
    on U's share of the royalty payment. R also does not withhold on any 
    portion of the interest paid to A because S and T have furnished 
    beneficial owner certificates and U has furnished a Form W-9.
        Example 5. (i) Facts. The facts are the same as in Example 4, 
    except that A represents that it derives the royalty income it 
    receives from R as a resident of country Y (within the meaning of 
    Sec. 1.894-1T(d)(1) and the U.S.-Y tax treaty) and as a beneficial 
    owner of the income (within the meaning of the U.S.-Y tax treaty). 
    Neither T nor S represent to derive the royalty income as resident 
    of their respective country. A furnishes an intermediary withholding 
    certificate described in Sec. 1.1441-1(e)(3)(iii) to which it 
    attaches a Form W-9 for U and beneficial owner withholding 
    certificates for S and T. No claims of reduced rate under a tax 
    treaty are made on S's or T's certificates. A also furnishes to R 
    its own beneficial withholding certificate in order to claim the 
    reduced rate under the U.S.-Y tax treaty for the royalty income.
        (ii) Analysis. Absent actual knowledge or reason to know 
    otherwise, R may rely on A's intermediary certificate and the 
    certificates attached thereto in order to treat S and T as
    
    [[Page 53461]]
    
    foreign beneficial owners for purposes of treating the interest as 
    portfolio interest and to treat U as a U.S. payee. Therefore, R does 
    not withhold on the payment of interest to A. In addition, absent 
    actual knowledge or reason to know otherwise, R may rely on A's 
    beneficial owner certificate in order to reduce the rate of 
    withholding on the royalty income under the U.S.-Y tax treaty.
    
        (5) Claim of benefits under an income tax treaty by a U.S. person. 
    In certain cases, a U.S. person may claim the benefit of an income tax 
    treaty. For example, under certain treaties, a U.S. citizen residing in 
    the treaty country may claim a reduced rate of U.S. tax on certain 
    amounts representing a pension or an annuity from U.S. sources. Claims 
    of treaty benefits by a U.S. person may be made by furnishing a Form W-
    9 to the withholding agent or such other form as the IRS may prescribe 
    in published guidance (see Sec. 601.601(d)(2) of this chapter).
        (c) Proof of tax residence in a treaty country and certification of 
    entitlement to treaty benefits--(1) In general. A beneficial owner 
    establishes proof of its tax residence in a treaty country for purposes 
    of its claim to the withholding agent that a reduced rate of tax 
    applies under an income tax treaty by complying with the procedures 
    described in this paragraph (c) or with such other procedures as the 
    IRS may prescribe in published guidance (see Sec. 601.601(d)(2) of this 
    chapter). For purposes of this section, the residence of a beneficial 
    owner must be determined in accordance with the provisions of the 
    applicable U.S. income tax treaty as may be clarified by any applicable 
    regulations thereunder, or technical explanations thereof, or other 
    published guidance.
        (2) Certification of taxpayer identifying number--(i) In general. A 
    taxpayer may certify its taxpayer identifying number as required under 
    paragraph (b)(1) of this section by having the number certified by the 
    IRS either directly as provided under paragraph (c)(2)(ii) of this 
    section or through a qualified intermediary as provided in paragraph 
    (c)(2)(iii) of this section.
        (ii) IRS-certified TIN. The IRS shall certify a taxpayer 
    identifying number (TIN) upon a certificate of residence described in 
    paragraph (c)(3) of this section to which it shall attach the 
    certifications described in paragraphs (c)(5) (i) and (ii) of this 
    section, if applicable. The taxpayer may provide documentary evidence 
    described in paragraph (c)(4) of this section instead of a certificate 
    of residence. However, a taxpayer (other than a person organized as a 
    corporate body in the applicable treaty jurisdiction) may furnish 
    documentary evidence instead of a certificate of residence only if a 
    certificate of residence is not available to the taxpayer.
        A certificate of residence is not available for purposes of this 
    paragraph (c)(2)(ii) if the tax administration of the country where the 
    taxpayer claims to be a resident does not have a procedure in effect by 
    which such certificates are routinely issued or the taxpayer 
    establishes that obtaining such certificate would require an 
    unreasonable amount of time or costs relative to the taxpayer's 
    circumstances (e.g., amount of investments in the United States). A 
    person organized as a corporate body in the applicable treaty 
    jurisdiction may, instead of a certificate of residence, furnish a 
    certificate of incorporation, articles of incorporation, or other 
    official document reflecting the taxpayer's status as a corporate body 
    in that jurisdiction, regardless of whether a certificate of residence 
    described in paragraph (c)(3) of this section is otherwise available. 
    The certificate or documentary evidence must be furnished to the IRS 
    by, or on behalf of, the beneficial owner upon application for the 
    taxpayer identifying number or at any other time, as permitted under 
    such procedures as the IRS may prescribe in published guidance (see 
    Sec. 601.601(d)(2) of this chapter). If the tax residence of the 
    beneficial owner changes, the beneficial owner shall notify the IRS of 
    that change within 30 days thereof. This requirement is in addition to 
    the notification requirements described in Sec. 1.1441-1(e)(4)(ii)(D) 
    regarding notification to a withholding agent in the event of changes 
    in the beneficial owner s circumstances. The IRS may, under the 
    exchange of information provisions of an applicable income tax treaty, 
    exchange information with the relevant foreign competent authority for 
    the purpose of confirming with appropriate tax officials of the other 
    country that the beneficial owner continues to be a tax resident of 
    that country. The IRS may from time to time, in its discretion, request 
    that the beneficial owner reconfirm its residence in the treaty 
    country.
        (iii) Special rules for qualified intermediaries. The IRS may 
    certify a taxpayer identifying number based upon the certification of a 
    qualified intermediary described in Sec. 1.1441-1(e)(5)(ii) regarding 
    the tax residence of any of its account holders, under procedures 
    agreed upon with the IRS. If a new account holder has a TIN at the time 
    it opens an account, the qualified intermediary may rely on a statement 
    by the account or interest holder that appropriate proof of tax 
    residence in the treaty jurisdiction was previously provided to the 
    IRS. In such case, the qualified intermediary must notify the IRS each 
    time that the account or interest holder's address changes to another 
    country or when the account or interest holder terminates its 
    relationship with the qualified intermediary within 30 days of that 
    change.
        (3) Certificate of residence. A certificate of residence referred 
    to in paragraph (b)(2)(i) or (c)(2)(ii) of this section is a 
    certification issued by the competent authority (or another appropriate 
    tax official) of the treaty country of which the taxpayer claims to be 
    a resident that the taxpayer has filed its most recent income tax 
    return as a resident of that country (within the meaning of the 
    applicable tax treaty). A certificate of residence is valid for a 
    period of three years or such longer period as the IRS may prescribe in 
    published guidance (see Sec. 601.601(d)(2) of this chapter). The 
    competent authorities may agree to a different procedure for certifying 
    residence, in which case such procedure shall govern for payments made 
    to a person claiming to be a resident of the country with which such an 
    agreement is in effect.
        (4) Documentary evidence establishing residence in the treaty 
    country--(i) Individuals. For purposes of this paragraph (c)(4), 
    documentary evidence establishes the residence of an individual in a 
    treaty country if it includes the name, address, and photograph of the 
    person seeking to prove residence, is an official document issued by an 
    authorized governmental body (i.e., a government or agency thereof, or 
    a municipality), and has been issued no more than three years prior to 
    presentation to the IRS or the withholding agent. A document older than 
    three years may be relied upon as proof of residence only if it is 
    accompanied by additional evidence of the person's residence in the 
    treaty country (e.g., a bank statement, utility bills, or medical 
    bills). Documentary evidence must be in the form of original documents 
    or certified copies thereof. Documentary evidence must be accompanied 
    by an affidavit of the taxpayer signed under penalties of perjury that 
    the documentary evidence submitted is true and complete.
        (ii) Persons other than individuals. For purposes of this paragraph 
    (c)(4), documentary evidence establishes the residence in a treaty 
    country of a person other than an individual if it includes the name of 
    the entity and the address of its principal office in the treaty
    
    [[Page 53462]]
    
    country, and is an official document issued by an authorized 
    governmental body (e.g., a government or agency thereof, or a 
    municipality).
        (5) Certifications regarding entitlement to treaty benefits--(i) 
    Certification regarding conditions under a Limitation on Benefits 
    Article. A taxpayer that is not an individual must certify to the IRS 
    by way of an affidavit attached to its request for certification of its 
    employer identification number that it meets one or more of the 
    conditions set forth in the Limitation on Benefits Article (if any, or 
    in a similar provision) contained in the applicable tax treaty. The 
    affidavit must describe sufficient facts for the IRS to determine which 
    condition the taxpayer claims to satisfy. The affidavit must be signed 
    by the taxpayer under penalties of perjury.
        (ii) Certification regarding whether the taxpayer derives the 
    income. A taxpayer that is not an individual shall certify to the IRS 
    by way of an affidavit attached to its request for certification of its 
    employer identification number that any income for which it intends to 
    claim benefits under an applicable income tax treaty is income that 
    will properly be treated as derived by itself as a resident of the 
    applicable treaty jurisdiction within the meaning of Sec. 1.894-
    1T(d)(1). The affidavit must be signed under penalties of perjury. This 
    requirement does not apply if the taxpayer furnishes a certificate of 
    residence that certifies that fact.
        (d) Joint owners. In the case of a payment to joint owners, each 
    owner must furnish a withholding certificate or, if applicable, 
    documentary evidence or a certificate of residence. The applicable rate 
    of tax on a payment of income to joint owners shall be the highest 
    applicable rate.
        (e) Related party dividends under U.S.-Denmark income tax treaty. 
    Article VI(3) of the income tax treaty between the United States and 
    Denmark (see 1950-1 C.B. 77; see also Sec. 601.601(d)(2) of this 
    chapter) reduces the rate of tax on dividends between related 
    corporations to 5 percent subject to the condition that the 
    relationship between the domestic and foreign corporations was not 
    arranged or maintained for the purpose of securing the reduced rate. A 
    domestic corporation that makes a distribution derived by a resident of 
    Denmark may treat this condition as satisfied if, prior to the payment, 
    a request has been made to the IRS for a private letter ruling 
    determining that the relationship between the corporation and the 
    Danish resident was not arranged or maintained for such purpose and the 
    IRS has either issued a favorable ruling (and the ruling has not been 
    revoked) or is considering the ruling request.
        (f) Failure to receive withholding certificate timely. See 
    applicable procedures described in Sec. 1.1441-1(b)(7) in the event the 
    withholding agent does not hold an appropriate withholding certificate 
    or other appropriate documentation at the time of payment.
        (g) Effective date--(1) General rule. This section applies to 
    payments made after December 31, 1998.
        (2) Transition rules. For purposes of this section, a withholding 
    agent that on December 31, 1998, holds a Form 1001 or 8233 that is 
    valid under the regulations in effect prior to January 1, 1999 (see 26 
    CFR parts 1 and 35a, revised April 1, 1997), may treat it as a valid 
    withholding certificate until its validity expires under those 
    regulations or, if earlier, until December 31, 1999. Further, the 
    validity of a withholding certificate or statement that is dated prior 
    to January 1, 1998, is valid on January 1, 1998, and would expire at 
    any time during 1998, is extended until December 31, 1998 (and is not 
    extended after December 31, 1998 by reason of the immediately preceding 
    sentence). The rule in this paragraph (g)(2), however, does not apply 
    to extend the validity period of a withholding certificate that expires 
    in 1998 solely by reason of changes in the circumstances of the person 
    whose name is on the certificate or in interpretation of the law under 
    the regulations under Sec. 1.894-1T(d). Notwithstanding the three 
    preceding sentences, a withholding agent may choose to not take 
    advantage of the transition rule in this paragraph (g)(2) with respect 
    to one or more withholding certificates and, therefore, to require new 
    withholding certificates conforming to the requirements described in 
    this section. Certificates issued prior to April 1, 1998, that expire 
    at any time after March 31, 1998 (other than by reason of changes in 
    the circumstances of the person whose name is on the certificate) shall 
    remain valid until December 31, 1998.
        Par. 12. Section 1.1441-7 is amended by
        1. Revising paragraphs (a) through (c).
        2. Redesignating paragraph (d) as paragraph (f).
        3. Adding new paragraph (d), and paragraphs (e) and (g).
        4. Removing the language ``(j)'' and adding ``(g)'' in its place in 
    the first sentence of newly designated paragraph (f)(1).
        5. Removing the language ``(d)'' and adding ``(f)'' in its place in 
    the first sentence of newly designated paragraph (f)(1), in the first 
    sentence of newly designated paragraph (f)(2)(i), and in the first 
    sentence of newly designated paragraph (f)(3).
        6. Removing the authority citation at the end of the section.
        The revisions read as follows:
    
    
    Sec. 1.1441-7  General provisions relating to withholding agents.
    
        (a) Withholding agent defined. For purposes of chapter 3 of the 
    Internal Revenue Code (Code) and the regulations under such chapter, 
    the term withholding agent means any person, U.S. or foreign, that has 
    the control, receipt, custody, disposal, or payment of an item of 
    income of a foreign person subject to withholding, including (but not 
    limited to) a foreign intermediary described in Sec. 1.1441-1(e)(3)(i), 
    a foreign partnership, or a U.S. branch described in Sec. 1.1441-
    1(b)(2)(iv) (A) or (E). See Sec. 1.1441-1(b) (1) and (2) for 
    determining whether a payment is considered made to a foreign person. 
    Any person who meets the definition of a withholding agent is required 
    to deposit any tax withheld under Sec. 1.1461-1(a) and to make the 
    returns prescribed by Sec. 1.1461-1 (b) and (c), as modified by the 
    terms of an agreement with a qualified intermediary (in the case of a 
    qualified intermediary) or, in the case of a foreign partnership, to 
    make the returns prescribed under section 6031 and the regulations 
    thereunder. When several persons qualify as withholding agents with 
    respect to a single payment, only one tax is required to be withheld 
    and, generally, only one return (on Form 1042, as required under 
    Sec. 1.1461-1(b)), is required to be made. See Sec. 1.1461-1(b)(2) and 
    (c)(4) for filing procedures when multiple withholding agents are 
    involved. In the case of a withholding agent paying to partners of a 
    withholding foreign partnership described in Sec. 1.1441-5(c)(2)(i), 
    the withholding agent may arrange with the partnership to withhold if 
    it is provided the information by the partnership, in which case the 
    partnership does not have to withhold. However, the partnership must 
    still file a partnership return under section 6031(a) and the 
    regulations under that section. The withholding agent does not have to 
    file Forms 1042-S (but does have to file a Form 1042) since the 
    withholding foreign partnership furnishes FormsK-1 to its partners 
    pursuant to section 6031(b) and Sec. 1.6031(b)-1T. For purposes of this 
    section and any requirement to withhold under chapter 3 of the Code and 
    the regulations thereunder, a person who, as a nominee described in 
    Sec. 1.6031(c)-1T, has furnished to a partnership all of the 
    information required to be furnished
    
    [[Page 53463]]
    
    under Sec. 1.6031(c)-1T(a) shall not be treated as a withholding agent 
    if it has notified the partnership that it is treating the provision of 
    information to the partnership as a discharge of its obligations as a 
    withholding agent.
        (b) Standards of knowledge--(1) In general. A withholding agent 
    must withhold at the full 30-percent rate under section 1441, 1442, or 
    1443(a) or at the full 4-percent rate under section 1443(b) if it has 
    actual knowledge or reason to know that a claim of U.S. status or of a 
    reduced rate of withholding under section 1441, 1442, or 1443 is 
    incorrect. A withholding agent shall be liable for tax, interest, and 
    penalties to the extent provided under sections 1461 and 1463 and the 
    regulations under those sections if it fails to withhold the correct 
    amount despite its actual knowledge or reason to know the amount 
    required to be withheld. For purposes of the regulations under sections 
    1441, 1442, and 1443, a withholding agent may rely on information or 
    certifications contained in, or attached to, a withholding certificate 
    or other documentation furnished by or for a beneficial owner or payee 
    unless the withholding agent has actual knowledge or reason to know 
    that the information or certifications are not correct and, if based on 
    such knowledge or reason to know, it should withhold (under chapter 3 
    of the Code or another withholding provision of the Code) an amount 
    greater than would be the case if it relied on the information or 
    certifications, or it should report (under chapter 3 of the Code or 
    under another provision of the Code) an amount that would not otherwise 
    be reportable if it relied on the information or certifications. See 
    Sec. 1.1441-1(e)(4)(viii) for applicable reliance rules. A withholding 
    agent that has received notification by the Internal Revenue Service 
    (IRS) that a claim of U.S. status or of a reduced rate is incorrect has 
    actual knowledge beginning on the date that is 30 calendar days after 
    the date the notice is received. A withholding agent that fails to act 
    in accordance with the presumptions set forth in Secs. 1.1441-1(b)(3), 
    1.1441-4(a), 1.1441-5 (d) and (e), or 1.1441-9(b)(3) may also be liable 
    for tax, interest, and penalties. See Sec. 1.1441-1(b)(3)(ix) and (7).
        (2) Reason to know--(i) In general. A withholding agent shall be 
    considered to have reason to know if its knowledge of relevant facts or 
    statements contained in the withholding certificates or other 
    documentation is such that a reasonably prudent person in the position 
    of the withholding agent would question the claims made.
        (ii) Limits on reason to know in certain cases. Except as otherwise 
    provided in paragraph (b)(3) of this section, a withholding agent that 
    is a financial institution (including a regulated investment company) 
    with which a customer may open an account has a reason to know with 
    respect to payments of amounts described in Sec. 1.1441-6(b)(2)(ii) 
    that a beneficial owner withholding certificate or documentary evidence 
    for a beneficial owner is not reliable only if any one or more of the 
    circumstances described in this paragraph (b)(2)(ii) exist for a 
    withholding certificate. In such a case, the withholding agent may 
    require a new withholding certificate. In the absence of a new 
    certificate, a withholding agent may rely on the withholding 
    certificate only after documentation is provided in support of the 
    claim of foreign status, classification, or reduced rate of tax under a 
    tax treaty.
        (A) The permanent residence address on the withholding certificate 
    is an address in the United States. In the case of an individual, 
    trust, or estate, the withholding agent may rely on information in its 
    files that is less than three years old and that supports the 
    beneficial owner's claim of foreign status, despite a U.S. address (for 
    example, a bank has evidence of the diplomatic status of a customer). 
    In the absence of evidence in the withholding agent's files, the agent 
    meets its due diligence obligation for purposes of this paragraph 
    (b)(2)(ii)(A) if it contacts the beneficial owner or its agent in the 
    United States and obtains an explanation in writing supporting the 
    foreign status of the beneficial owner (for example, the beneficial 
    owner is a nonresident alien individual temporarily present in the 
    United States as a teacher; see Sec. 301.7701(b)-3(b)(3) of this 
    chapter) and documentation supporting the claim of foreign status is 
    attached to the beneficial owner's statement (for example, in the case 
    of a nonresident alien individual teacher, a copy of the relevant pages 
    of the beneficial owner's passport showing the individual's U.S. visa 
    status or a copy of relevant INS documents). In the case of a 
    beneficial owner other than an individual, trust, or estate, the 
    withholding agent must inquire as to whether the person whose name is 
    on the certificate is actually organized or created under the laws of a 
    foreign country.
        (B) The payment is directed to a P.O. Box, an in-care-of address, 
    or a U.S. address. In the case of an individual, the withholding agent 
    may rely, for example, on documentary evidence of a type described in 
    Sec. 1.1441-6(c) (3) or (4) supporting the beneficial owner's claim of 
    residence in a foreign country to ascertain that the individual is a 
    nonresident alien individual. In the case of a person other than an 
    individual, the withholding agent may rely on other evidence to 
    ascertain that the person whose name is on the certificate is not a 
    U.S. person.
        (C) In the case of income for which benefits are claimed under an 
    income tax treaty, the permanent residence address or mailing address 
    is not in the corresponding treaty country. In such a case, the 
    withholding agent may rely, for example, on documentary evidence of a 
    type described in Sec. 1.1441-6(c) (3) or (4) supporting the beneficial 
    owner's claim of residence in the country whose benefits under an 
    income tax treaty with the United States are invoked.
        (D) The mailing address on the withholding certificate is in the 
    United States or the beneficial owner notifies the withholding agent of 
    a new address for mailing or residential purposes that is in the United 
    States, a P.O. box, or an in-care-address, or, in the case of income 
    for which benefits are claimed under an income tax treaty, the mailing 
    address on the certificate or the new mailing or residential address 
    notified to the withholding agent is not in the treaty country. The 
    withholding agent may, however, rely on documentary evidence of a type 
    described in Sec. 1.1441-6(c) (3) or (4) supporting the beneficial 
    owner's claim of residence in a foreign country.
        (E) The name of the person on the withholding certificate or 
    documentary evidence indicates that the person's status is a 
    corporation, partnership, trust, estate, or an individual, and the 
    person's claim of status is not consistent with such indication. For 
    example, a person whose name indicates that it is a per se corporation 
    described in Sec. 301.7701-2(b)(8)(i) of this chapter represents on a 
    Form W-8 that it is a partnership.
        (F) Such other circumstances as the IRS may prescribe in published 
    guidance (see Sec. 601.601(d)(2) of this chapter).
        (3) Coordinated account information systems. See Sec. 1.1441-
    1(e)(4)(ix) for application of these rules other than on an account-by-
    account basis so that a withholding agent that relies on a coordinated 
    account information system for documentation is considered to know or 
    have reason to know the facts recorded in the system.
        (c) Authorized agent--(1) In general. The acts of an agent of a 
    withholding agent (including the receipt of withholding certificates, 
    the payment of
    
    [[Page 53464]]
    
    amounts of income subject to withholding, and the deposit of tax 
    withheld) are imputed to the withholding agent on whose behalf it is 
    acting. However, if the agent is a foreign person, a withholding agent 
    that is a U.S. person may treat the acts of the foreign agent as its 
    own for purposes of determining whether it has complied with the 
    provisions of this section, but only if the agent is an authorized 
    foreign agent, as defined in paragraph (c)(2) of this section. An 
    authorized foreign agent cannot apply the provisions of this paragraph 
    (c) to appoint another person its authorized foreign agent with respect 
    to the payments it receives from the withholding agent.
        (2) Authorized foreign agent. An agent is an authorized foreign 
    agent only if--
        (i) There is a written agreement between the withholding agent and 
    the foreign person acting as agent;
        (ii) The notification procedures described in paragraph (c)(3) of 
    this section have been complied with;
        (iii) Books and records and relevant personnel of the foreign agent 
    are available (on a continuous basis, including after termination of 
    the relationship) for examination by the IRS in order to evaluate the 
    withholding agent's compliance with the provisions of chapters 3 and 61 
    of the Code, section 3406, and the regulations under those provisions; 
    and
        (iv) The U.S. withholding agent remains fully liable for the acts 
    of its agent and does not assert any of the defenses that may otherwise 
    be available, including under common law principles of agency in order 
    to avoid tax liability under the Internal Revenue Code.
        (3) Notification. A withholding agent that appoints an authorized 
    agent to act on its behalf for purposes of Sec. 1.871-14(c)(2), the 
    withholding provisions of chapter 3 of the Code, section 3406 or other 
    withholding provisions of the Internal Revenue Code, or the reporting 
    provisions of chapter 61 of the Code, is required to file notice of 
    such appointment with the Office of the Assistant Commissioner 
    (International). Such notice shall be filed before the first payment 
    for which the authorized agent acts as such. Such notice shall 
    acknowledge the withholding agent liability as provided in paragraph 
    (c)(2)(iv) of this section.
        (4) Liability of U.S. withholding agent. An authorized foreign 
    agent is subject to the same withholding and reporting obligations that 
    apply to any withholding agent under the provisions of chapter 3 of the 
    Code and the regulations thereunder. In particular, an authorized 
    foreign agent does not benefit from the special procedures or 
    exceptions that may apply to a qualified intermediary. A withholding 
    agent acting through an authorized foreign agent is liable for any 
    failure of the agent, such as failure to withhold an amount or make 
    payment of tax, in the same manner and to the same extent as if the 
    agent's failure had been the failure of the U.S. withholding agent. For 
    this purpose, the foreign agent's actual knowledge or reason to know 
    shall be imputed to the U.S. withholding agent. The U.S. withholding 
    agent's liability shall exist irrespective of the fact that the 
    authorized foreign agent is also a withholding agent and is itself 
    separately liable for failure to comply with the provisions of the 
    regulations under section 1441, 1442, or 1443. However, the same tax, 
    interest, or penalties shall not be collected more than once.
        (5) Filing of returns. See Sec. 1.1461-1(b)(2)(iii) and (c)(4)(iii) 
    regarding returns required to be made where a U.S. withholding agent 
    acts through an authorized foreign agent.
        (d) United States obligations. If the United States is a 
    withholding agent for an item of interest, including original issue 
    discount, on obligations of the United States or of any agency or 
    instrumentality thereof, the withholding obligation of the United 
    States is assumed and discharged by--
        (1) The Commissioner of the Public Debt, for interest paid by 
    checks issued through the Bureau of the Public Debt;
        (2) The Treasurer of the United States, for interest paid by him or 
    her, whether by check or otherwise;
        (3) Each Federal Reserve Bank, for interest paid by it, whether by 
    check or otherwise; or
        (4) Such other person as may be designated by the IRS.
        (e) Assumed obligations. If, in connection with the sale of a 
    corporation's property, payment on the bonds or other obligations of 
    the corporation is assumed by a person, then that person shall be a 
    withholding agent to the extent amounts subject to withholding are paid 
    to a foreign person. Thus, the person shall withhold such amounts under 
    Sec. 1.1441-1 as would be required to be withheld by the seller or 
    corporation had no such sale or assumption been made.
    * * * * *
        (g) Effective date. Except as otherwise provided in paragraph 
    (f)(3) of this section, this section applies to payments made after 
    December 31, 1998.
        Par. 13. Section 1.1441-8T is redesignated as Sec. 1.1441-8 and 
    amended as follows:
        1. The section heading and paragraph (b) are revised.
        2. Paragraphs (c), (d), (e) and (f) are added.
        The revisions and additions read as follows:
    
    
    Sec. 1.1441-8  Exemption from withholding for payments to foreign 
    governments, international organizations, foreign central banks of 
    issue, and the Bank for International Settlements.
    
    * * * * *
        (b) Reliance on claim of exemption by foreign government. Absent 
    actual knowledge or reason to know otherwise, the withholding agent may 
    rely upon a claim of exemption made by the foreign government if, prior 
    to the payment, the withholding agent can reliably associate the 
    payment with documentation upon which it can rely to treat the payment 
    as made to a beneficial owner in accordance with Sec. 1.1441-
    1(e)(1)(ii). A Form W-8 furnished by a foreign government for purposes 
    of claiming an exemption under this paragraph (b) is valid only if, in 
    addition to other applicable requirements, it certifies that the income 
    is, or will be, exempt from taxation under section 892 and the 
    regulations under that section and whether the person whose name is on 
    the certificate is an integral part of a foreign government (as defined 
    in Sec. 1.892-2T(a)(2)) or a controlled entity (as defined in 
    Sec. 1.892-2T(a)(3)).
        (c) Income of a foreign central bank of issue or the Bank for 
    International Settlements--(1) Certain interest income. Section 895 
    provides for the exclusion from gross income of certain income derived 
    by a foreign central bank of issue, or by the Bank for International 
    Settlements, from obligations of the United States or of any agency or 
    instrumentality thereof or from interest on deposits with persons 
    carrying on the banking business if the bank is the owner of the 
    obligations or deposits and does not hold the obligations or deposits 
    for, or use them in connection with, the conduct of a commercial 
    banking function or other commercial activity by such bank. See 
    Sec. 1.895-1. Absent actual knowledge or reason to know that a foreign 
    central bank of issue, or the Bank for International Settlements, is 
    operating outside the scope of the exclusion granted by section 895 and 
    the regulations under that section, the withholding agent may rely on a 
    claim of exemption if, prior to the payment, the withholding agent can 
    reliably associate the payment with documentation upon which it can 
    rely to treat the foreign central bank of issue or the Bank for 
    International
    
    [[Page 53465]]
    
    Settlements as the beneficial owner of the payment in accordance with 
    Sec. 1.1441-1(e)(1)(ii). A Form W-8 furnished by a foreign central bank 
    of issue or the Bank for International Settlements for purposes of 
    claiming an exemption under this paragraph (c)(1) is valid only if, in 
    addition to other applicable requirements, it certifies that the person 
    whose name is on the certificate is a foreign central bank of issue, or 
    the Bank for International Settlements, and that the bank does not, and 
    will not, hold the obligations or the bank deposits covered by the Form 
    W-8 for, or use them in connection with, the conduct of a commercial 
    banking function or other commercial activity.
        (2) Bankers acceptances. Interest derived by a foreign central bank 
    of issue from bankers acceptances is exempt from tax under sections 
    871(i)(2)(C) and 881(d) and Sec. 1.861-2(b)(4). With respect to 
    bankers' acceptances, a withholding agent may treat a payee as a 
    foreign central bank of issue without requiring a withholding 
    certificate if the name of the payee and other facts surrounding the 
    payment reasonably indicate that the payee or beneficial owner is a 
    foreign central bank of issue, as defined in Sec. 1.861-2(b)(4).
        (d) Exemption for payments to international organizations. A 
    payment to an international organization (within the meaning of section 
    7701(a)(18)) is exempt from withholding on any payment. A withholding 
    agent may treat a payee as an international organization without 
    requiring a withholding certificate if the name of the payee is one 
    that is designated as an international organization by executive order 
    (pursuant to 22 U.S.C. 288 through 288(f)) and other facts surrounding 
    the transaction reasonably indicate that the international organization 
    is the beneficial owner of the payment.
        (e) Failure to receive withholding certificate timely and other 
    applicable procedures. See applicable procedures described in 
    Sec. 1.1441-1(b)(7) in the event the withholding agent does not hold a 
    valid withholding certificate described in paragraph (b) or (c)(1) of 
    this section or other appropriate documentation at the time of payment. 
    Further, the provisions of Sec. 1.1441-1(e)(4) shall apply to 
    withholding certificates and other documents related thereto furnished 
    under the provisions of this section.
        (f) Effective date--(1) In general. This section applies to 
    payments made after December 31, 1998.
        (2) Transition rules. For purposes of this section, a withholding 
    agent that on December 31, 1998, holds a Form 8709 that is valid under 
    the regulations in effect prior to January 1, 1999 (see 26 CFR part 1, 
    revised April 1, 1997), may treat it as a valid withholding certificate 
    until its validity expires under those regulations or, if earlier, 
    until December 31, 1999. Further, the validity of a withholding 
    certificate or statement that is dated prior to January 1, 1998, is 
    valid on January 1, 1998, and would expire at any time during 1998, is 
    extended until December 31, 1998 (and is not extended after December 
    31, 1998 by reason of the immediately preceding sentence). The rule in 
    this paragraph (f)(2), however, does not apply to extend the validity 
    period of a withholding certificate that expires in 1998 solely by 
    reason of changes in the circumstances of the person whose name is on 
    the certificate. Notwithstanding the three preceding sentences, a 
    withholding agent may choose to not take advantage of the transition 
    rule in this paragraph (f)(2) with respect to one or more withholding 
    certificates and, therefore, to require new withholding certificates 
    conforming to the requirements described in this section.
        Par. 14. Section 1.1441-9 is added to read as follows.
    
    
    Sec. 1.1441-9  Exemption from withholding on exempt income of a foreign 
    tax-exempt organization, including foreign private foundations.
    
        (a) Exemption from withholding for exempt income. No withholding is 
    required under section 1441(a) or 1442, and the regulations under those 
    sections, on amounts paid to a foreign organization that is described 
    in section 501(c) to the extent that the amounts are not income 
    includable under section 512 in computing the organization's unrelated 
    business taxable income. See, however, Sec. 1.1443-1 for withholding on 
    payments of unrelated business income to foreign tax-exempt 
    organizations and on payments subject to tax under section 4948. For a 
    foreign organization to claim an exemption from withholding under 
    section 1441(a) or 1442 based on its status as an organization 
    described in section 501(c), it must furnish the withholding agent with 
    a withholding certificate described in paragraph (b)(2) of this 
    section. A foreign organization described in section 501(c) may choose 
    to claim a reduced rate of withholding under the procedures described 
    in other sections of the regulations under section 1441 and not under 
    this section. In particular, if an organization chooses to claim 
    benefits under an income tax treaty, the withholding procedures 
    applicable to claims of such a reduced rate are governed solely by the 
    provisions of Sec. 1.1441-6 and not of this section.
        (b) Reliance on foreign organization's claim of exemption from 
    withholding--(1) General rule. A withholding agent may rely on a claim 
    of exemption under this section only if, prior to the payment, the 
    withholding agent can reliably associate the payment with a valid 
    withholding certificate described in paragraph (b)(2) of this section.
        (2) Withholding certificate. A withholding certificate under this 
    paragraph (b)(2) is valid only if it is a Form W-8 and if, in addition 
    to other applicable requirements, the Form W-8 includes the taxpayer 
    identifying number of the organization whose name is on the 
    certificate, and it certifies that the Internal Revenue Service (IRS) 
    has issued a favorable determination letter (and the date thereof) that 
    is currently in effect, what portion, if any, of the amounts paid 
    constitute income includable under section 512 in computing the 
    organization's unrelated business taxable income, and, if the 
    organization is described in section 501(c)(3), whether it is a private 
    foundation described in section 509. Notwithstanding the preceding 
    sentence, if the organization cannot certify that it has been issued a 
    favorable determination letter that is still in effect, its withholding 
    certificate is nevertheless valid under this paragraph (b)(2) if the 
    organization attaches to the withholding certificate an opinion that is 
    acceptable to the withholding agent from a U.S. counsel concluding that 
    the organization is described in section 501(c). If the determination 
    letter or opinion of counsel to which the withholding certificate 
    refers concludes that the organization is described in section 
    501(c)(3), and the certificate further certifies that the organization 
    is not a private foundation described in section 509, an affidavit of 
    the organization setting forth sufficient facts concerning the 
    operations and support of the organization for the Internal Revenue 
    Service (IRS) to determine that such organization would be likely to 
    qualify as an organization described in section 509(a) (1), (2), (3), 
    or (4) must be attached to the withholding certificate. An organization 
    that provides an opinion of U.S. counsel or an affidavit may provide 
    the same opinion or affidavit to more than one withholding agent 
    provided that the opinion is acceptable to each withholding agent who 
    receives it in conjunction with a withholding certificate. Any such 
    opinion of counsel or affidavit must be renewed whenever the 
    certificate to
    
    [[Page 53466]]
    
    which it is attached is required to be renewed.
        (3) Presumptions in the absence of documentation. Notwithstanding 
    paragraph (b)(1) of this section, if the organization's certification 
    with respect to whether amounts paid constitute income includable under 
    section 512 in computing the organization's unrelated business taxable 
    income is not reliable or is lacking but all other certifications are 
    reliable, the withholding agent may rely on the certificate but the 
    amounts paid are presumed to be income includable under section 512 in 
    computing the organization's unrelated business taxable income. If the 
    certification regarding private foundation status is not reliable, the 
    withholding agent may rely on the certificate but the amounts paid are 
    presumed to be paid to a foreign beneficial owner that is a private 
    foundation.
        (4) Reason to know. Reliance by a withholding agent on the 
    information and certifications stated on a withholding certificate is 
    subject to the agent's actual knowledge or reason to know that such 
    information or certification is incorrect as provided in Sec. 1.1441-
    7(b). For example, a withholding agent must cease to treat a foreign 
    organization's claim for exemption from withholding based on the 
    organization's tax-exempt status as valid beginning on the earlier of 
    the date on which such agent knows that the IRS has given notice to 
    such foreign organization that it is not an organization described in 
    section 501(c) or the date on which the IRS gives notice to the public 
    that such foreign organization is not an organization described in 
    section 501(c). Similarly, a withholding agent may no longer rely on a 
    certification that an amount is not subject to tax under section 4948 
    beginning on the earlier of the date on which such agent knows that the 
    IRS has given notice to such foreign organization that it is subject to 
    tax under section 4948 or the date on which the IRS gives notice that 
    such foreign organization is a private foundation within the meaning of 
    section 509(a).
        (c) Failure to receive withholding certificate timely and other 
    applicable procedures. See applicable procedures described in 
    Sec. 1.1441-1(b)(7) in the event the withholding agent does not hold a 
    valid withholding certificate or other appropriate documentation at the 
    time of payment. Further, the provisions of Sec. 1.1441-1(e)(4) shall 
    apply to withholding certificates and other documents related thereto 
    furnished under the provisions of this section.
        (d) Effective date--(1) In general. This section applies to 
    payments made after December 31, 1998.
        (2) Transition rules. For purposes of this section, a withholding 
    agent that on December 31, 1998, holds a Form W-8, 1001 or 4224 or a 
    statement that is valid under the regulations in effect prior to 
    January 1, 1999,( see 26 CFR parts 1 and 35a, revised April 1, 1997), 
    may treat it as a valid withholding certificate until its validity 
    expires under those regulations or, if earlier, until December 31, 
    1999. Further, the validity of a withholding certificate or statement 
    that is dated prior to January 1, 1998, is valid on January 1, 1998, 
    and would expire at any time during 1998, is extended until December 
    31, 1998 (and is not extended after December 31, 1998, by reason of the 
    immediately preceding sentence). The rule in this paragraph(d)(2), 
    however, does not apply to extend the validity period of a withholding 
    certificate that expires in 1998 solely by reason of changes in the 
    circumstances of the person whose name is on the certificate. 
    Notwithstanding the three preceding sentences, a withholding agent may 
    choose to not take advantage of the transition rule in this paragraph 
    (d)(2) with respect to one or more withholding certificates and, 
    therefore, to require new withholding certificates conforming to the 
    requirements described in this section.
        Par. 15. Sections 1.1442-1 and 1.1442-2 are revised to read as 
    follows:
    
    
    Sec. 1.1442-1  Withholding of tax on foreign corporations.
    
        For regulations concerning the withholding of tax at source under 
    section 1442 in the case of foreign corporations, foreign governments, 
    international organizations, foreign tax-exempt corporations, or 
    foreign private foundations, see Secs. 1.1441-1 through 1.1441-9.
    
    
    Sec. 1.1442-2  Exemption under a tax treaty.
    
        For regulations providing for a claim of reduced withholding tax 
    under section 1442 by certain foreign corporations pursuant to the 
    provisions of an income tax treaty, see Sec. 1.1441-6.
        Par. 16. Section 1.1442-3 is added to read as follows:
    
    
    Sec. 1.1442-3  Tax exempt income of a foreign tax-exempt corporations
    
        For regulations providing for a claim of exemption for income 
    exempt from tax under section 501(a) of a foreign tax-exempt 
    corporation, see Sec. 1.1441-9. See Sec. 1.1443-1 for withholding rules 
    applicable to foreign private foundations and to the unrelated business 
    income of foreign tax-exempt organizations.
        Par. 17. Section 1.1443-1 is revised to read as follows:
    
    
    Sec. 1.1443-1  Foreign tax-exempt organizations.
    
        (a) Income includible under section 512 in computing unrelated 
    business taxable income. In the case of a foreign organization that is 
    described in section 501(c), amounts paid to the organization 
    includible under section 512 in computing the organization's unrelated 
    business taxable income are subject to withholding under Secs. 1.1441-
    1, 1.1441-4, and 1.1441-6 in the same manner as payments of the same 
    amounts to any foreign person that is not a tax-exempt organization. 
    Therefore, a foreign organization receiving amounts includible under 
    section 512 in computing the organization's unrelated business taxable 
    income may claim an exemption from withholding or a reduced rate of 
    withholding with respect to that income in the same manner as a foreign 
    person that is not a tax-exempt organization. See Sec. 1.1441-9(b)(3) 
    for presumption that amounts are includible under section 512 in 
    computing the organization's unrelated business taxable income in the 
    absence of a reliable certification.
        (b) Income subject to tax under section 4948--(1) In general. The 
    gross investment income (as defined in section 4940(c)(2)) of a foreign 
    private foundation is subject to withholding under section 1443(b) at 
    the rate of 4 percent to the extent that the income is from sources 
    within the United States and is subject to the tax imposed by section 
    4948(a) and the regulations under that section. Withholding under this 
    paragraph (b) is required irrespective of the fact that the income may 
    be effectively connected with the conduct of a trade or business in the 
    United States by the foreign organization. See Sec. 1.1441-9(b)(3) for 
    applicable presumptions that amounts are subject to tax under section 
    4948. The withholding imposed under this paragraph (b)(1) does not 
    obviate a private foundation's obligation to file any return required 
    by law with respect to such organization, such as the form that the 
    foundation is required to file under section 6033 for the taxable year.
        (2) Reliance on a foreign organization's claim of foreign private 
    foundation status. For reliance by a withholding agent on a foreign 
    organization's claim of foreign private foundation status, see 
    Sec. 1.1441-9 (b) and (c).
        (3) Applicable procedures. A withholding agent withholding the 4-
    percent amount pursuant to paragraph (b)(1) of this section shall treat 
    such
    
    [[Page 53467]]
    
    withholding as withholding under section 1441(a) or 1442(a) for all 
    purposes, including reporting of the payment on a Form 1042 and a Form 
    1042-S pursuant to Sec. 1.1461-1 (b) and (c). Similarly, the foreign 
    private foundation shall treat the 4-percent withholding as withholding 
    under section 1441(a) or 1442(a), including for purposes of claims for 
    refunds and credits.
        (4) Claim of benefits under an income tax treaty. The withholding 
    procedures applicable to claims of a reduced rate under an income tax 
    treaty are governed solely by the provisions of Sec. 1.1441-6 and not 
    by this section.
        (c) Effective date--(1) In general. This section applies to 
    payments made after December 31, 1998.
        (2) Transition rules. For purposes of this section, a withholding 
    agent that on December 31, 1998, holds an affidavit or opinion of 
    counsel described in Sec. 1.1443-1(b)(4)(i) in effect prior to January 
    1, 1999 (see Sec. 1.1443-1(b)(4)(i) as contained in 26 CFR part 1, 
    revised April 1, 1997) that is valid under these provisions may treat 
    it as a valid withholding certificate until December 31, 1999. However, 
    a withholding agent may choose to not take advantage of the transition 
    rule in this paragraph (c)(2) with respect to one or more withholding 
    certificates and, therefore, to require new withholding certificates 
    conforming to the requirements described in this section.
        Par. 18. Section 1.1445-5 is amended by revising the second 
    sentence of paragraph (b)(1) to read as follows:
    
    
    Sec. 1.1445-5  Special rules concerning distributions and other 
    transactions by corporations, partnerships, trusts, and estates.
    
    * * * * *
        (b) * * * (1) * * * For rules coordinating the withholding under 
    section 1441 (or section 1442 or 1443) and under section 1445 on 
    distributions from a corporation, see Sec. 1.1441-3(b)(4). * * *
    * * * * *
        Par. 19. Sections 1.1461-1 and 1.1461-2 are revised to read as 
    follows:
    
    
    Sec. 1.1461-1  Payment and returns of tax withheld.
    
        (a) Payment of withheld tax--(1) Deposits of tax. Every withholding 
    agent who withholds tax pursuant to chapter 3 of the Internal Revenue 
    Code (Code) and the regulations under such chapter shall deposit such 
    amount of tax with a Federal reserve bank or authorized financial 
    institution as provided in Sec. 1.6302-2(a). If for any reason the 
    total amount of tax required to be returned for any calendar year 
    pursuant to paragraph (b) of this section has not been deposited 
    pursuant to Sec. 1.6302-2, the withholding agent shall pay the balance 
    of tax due for such year at such place as the Internal Revenue Service 
    (IRS) shall specify. The tax shall be paid when filing the return 
    required under paragraph (b)(1) of this section for such year, unless 
    the IRS specifies otherwise. See paragraph (b)(2) of this section when 
    there are multiple withholding agents.
        (2) Penalties for failure to pay tax. For penalties and additions 
    to the tax for failure to timely pay the tax required to be withheld 
    under chapter 3 of the Code, see sections 6656, 6672, and 7202 and the 
    regulations under those sections.
        (b) Income tax return--(1) General rule. A withholding agent shall 
    make an income tax return on Form 1042 (or such other form as the IRS 
    may prescribe) for income paid during the preceding calendar year that 
    the withholding agent is required to report on an information return on 
    Form 1042-S (or such other form as the IRS may prescribe) under 
    paragraph (c)(1) of this section. See section 6011 and Sec. 1.6011-
    1(c). The withholding agent must file the return on or before March 15 
    of the calendar year following the year in which the income was paid. 
    The return must show the aggregate amount of income paid and tax 
    withheld required to be reported on all the Forms 1042-S for the 
    preceding calendar year by the withholding agent, in addition to such 
    information as is required by the form and accompanying instructions. 
    Withholding certificates or other statements or information provided to 
    a withholding agent are not required to be attached to the return. A 
    return must be filed under this paragraph (b)(1) even though no tax was 
    required to be withheld during the preceding calendar year. The 
    withholding agent must retain a copy of Form 1042 for the applicable 
    statute of limitations on assessments and collection with respect to 
    the amounts required to be reported on the Form 1042. See section 6501 
    and the regulations thereunder for the applicable statute of 
    limitations. Adjustments to the total amount of tax withheld, as 
    described in Sec. 1.1461-2, shall be stated on the return as prescribed 
    by the form and accompanying instructions.
        (2) Multiple withholding agents--(i) General rule. Except as 
    otherwise provided in paragraph (b)(2)(ii), (iii), (iv), or (v) of this 
    section, no Form 1042 is required to be filed under paragraph (b)(1) of 
    this section if a return is filed by another withholding agent 
    reporting the same income in compliance with the provisions of this 
    paragraph (b) and any remaining tax due is paid by such other 
    withholding agent with the return in accordance with the provisions of 
    paragraph (a) of this section.
        (ii) Payment to a qualified intermediary. A U.S. withholding agent 
    making a payment to a qualified intermediary (as defined in 
    Sec. 1.1441-1(e)(5)(ii)) must file a return under paragraph (b)(1) of 
    this section, regardless of whether the qualified intermediary assumes 
    primary withholding responsibility for the payment, as described in 
    Sec. 1.1441-1(e)(5)(iv) and regardless of whether the qualified 
    intermediary is also required to file a return under the terms of its 
    agreement with the IRS. A qualified intermediary's agreement with the 
    IRS shall specify the extent, if any, to which the intermediary is 
    subject to filing requirements under this section.
        (iii) Payment to a non-qualified intermediary. A withholding agent 
    making a payment to a foreign intermediary that is not a qualified 
    intermediary described in Sec. 1.1441-1(e)(5)(ii) must file a return 
    under paragraph (b)(1) of this section to report such payments. The 
    foreign intermediary is not required to make a return to report the 
    payments that it itself makes to the persons for whom it collects the 
    payments to the extent that the withholding agent represents to the 
    intermediary that it will file such a return or that it has done so.
        (iv) Payment to or through an authorized foreign agent. Both the 
    U.S. withholding agent making a payment to or through an authorized 
    foreign agent (defined in Sec. 1.1441-7(c)) and the authorized foreign 
    agent are required to file a return under paragraph (b)(1) of this 
    section.
        (v) Payments to foreign partnerships. A withholding agent making a 
    payment to a foreign partnership shall file a return under paragraph 
    (b)(1) of this section in the same manner as is required for a 
    withholding agent making a payment to a qualified intermediary.
        (vi) Payments to a U.S. branch of certain foreign banks, securities 
    dealers, or insurance companies. A withholding agent making a payment 
    to a U.S. branch described in Sec. 1.1441-1(b)(2)(iv) must file a 
    return under paragraph (b)(1) of this section, irrespective of the fact 
    that the branch is treated as a U.S. person or is presumed to receive 
    income that is effectively connected with its conduct of a trade or 
    business in the United States.
        (3) Payments to wholly-owned entities. A withholding agent making a 
    payment to a wholly-owned entity that
    
    [[Page 53468]]
    
    is disregarded for Federal tax purposes under Sec. 301.7701-2(c)(2) of 
    this chapter as an entity separate from its owner and whose single 
    owner is a foreign person shall file a return under paragraph (b)(1) of 
    this section.
        (4) Amended returns. An amended return may be filed on a Form 1042X 
    or such other form as the IRS may prescribe. An amended return must 
    include such information as the form or accompanying instructions shall 
    require, including, with respect to any information that has changed 
    from the time of the filing of the return, the information that was 
    shown on the original return and the corrected information.
        (c) Information returns--(1) Filing requirement--(i) In general. A 
    withholding agent (other than an individual who is not acting in the 
    course of a trade or business with respect to the payment) must make an 
    information return on Form 1042-S (or such other form as the IRS may 
    prescribe) to report the amounts specified in paragraph (c)(2) of this 
    section that were paid during the preceding calendar year. One Form 
    1042-S shall be prepared for each beneficial owner (except as otherwise 
    provided in paragraph (c)(4) of this section regarding multiple 
    withholding agents). The Form 1042-S shall be prepared in such manner 
    as the form and accompanying instructions prescribe. One copy of the 
    Form 1042-S shall be filed with the IRS on or before March 15 of the 
    calendar year following the year in which the item of income was paid. 
    It shall be filed with a transmittal form as provided in the 
    instructions to the Form 1042-S and to the transmittal form. 
    Withholding certificates or other statements or documentation provided 
    to a withholding agent are not required to be attached to the 
    information return. Another copy of the Form 1042-S shall be furnished 
    to the payee on or before March 15 of the calendar year following the 
    year in which the item of income was paid.
        The withholding agent shall retain a copy of each Form 1042-S for 
    the statute of limitations on assessment and collection applicable to 
    the Form 1042 to which the Form 1042-S relates.
        (ii) Joint owners. In the case of joint owners, a single Form 1042-
    S may be prepared. However, upon request of any one of the owners, the 
    withholding agent shall furnish to such owner its own Form 1042-S. 
    Where more than one Form 1042-S is issued with respect to a single 
    payment to joint owners, the aggregate amount of items paid and tax 
    withheld reported on the Forms 1042-S cannot exceed the amounts paid to 
    the joint owners and tax withheld thereon. If a single Form 1042-S is 
    prepared, the form shall state the name of only one owner and that name 
    shall be that of any person whose status the withholding agent relied 
    upon to determine the applicable rate of withholding tax.
        (2) Amounts subject to reporting--(i) In general. Subject to the 
    exceptions described in paragraph (c)(2)(ii) of this section, the 
    amounts required to be reported on a Form 1042-S are amounts paid to 
    foreign persons (including persons who are presumed to be foreign) that 
    consist of amounts subject to withholding (as defined in Sec. 1.1441-
    2(a)) under section 1441, 1442, or 1443. This includes (but is not 
    limited to)--
        (A) The entire amount of corporate distributions (whether deemed or 
    actual) paid to a foreign person, irrespective of any estimate of the 
    portion of the distribution that represents a taxable dividend;
        (B) Amounts deemed paid to a foreign person as described in 
    Sec. 1.1441-2(d) (dealing with exceptions to withholding where no money 
    or property is paid), except where the amount is exempt from 
    withholding due to lack of knowledge;
        (C) Amounts that are (or are presumed to be) effectively connected 
    with the conduct of a trade or business in the United States, 
    irrespective of the fact that no withholding certificate is required to 
    be furnished by the payee or beneficial owner. In the case of amounts 
    paid on a notional principal contract described in Sec. 1.1441-4(a)(3) 
    that are presumed to be effectively connected with the conduct of a 
    trade or business in the United States, the amount required to be 
    reported is limited to the net income from the notional principal 
    contract as described in Sec. 1.446-3(d). Effectively connected non-
    periodic payments are reportable for the year in which an actual 
    payment is made;
        (D) Interest (including original issue discount) that is not exempt 
    from reporting as provided under Sec. 1.6049-8, dealing with certain 
    interest on deposits with banks paid to Canadian residents;
        (E) Amounts representing interest paid on an obligation that is 
    sold between interest payment dates;
        (F) Amounts paid to foreign governments, international 
    organizations, or the Bank for International Settlements, whether or 
    not documentation must be provided;
        (G) Interest (including original issue discount) paid with respect 
    to foreign-targeted registered obligations described in Sec. 1.871-
    14(e)(2) to the extent the documentation requirements described in 
    Sec. 1.871-14(e)(3) and (4) are satisfied (taking into account the 
    provisions of Sec. 1.871-14(e)(4)(ii), if applicable).
        (ii) Exceptions to reporting. The amounts listed in paragraphs 
    (c)(2)(ii)(A) through
        (G) of this section are not required to be reported on a Form 1042-
    S--
        (A) Any item paid by a partnership, trust or estate to the extent 
    the item is required to be reported by the partnership under section 
    6031 or by the trust or estate under sections 6012(a) and 6034A, and 
    the regulations under those sections;
        (B) Any item required to be reported on a Form W-2, including an 
    item required to be shown on Form W-2 solely by reason of Sec. 1.6041-2 
    (relating to return of information as to payments to employees) or 
    Sec. 1.6052-1 (relating to information regarding payment of wages in 
    the form of group-term life insurance);
        (C) Any item required to be reported on Form 1099, and such other 
    forms as are prescribed pursuant to the information reporting 
    provisions of sections 6041 through 6050P and the regulations under 
    these sections;
        (D) Amounts paid on a notional principal contract described in 
    Sec. 1.1441-4(a)(3)(i) that are not effectively connected with the 
    conduct of a trade or business in the United States (or treated as not 
    effectively connected pursuant to Sec. 1.1441-4(a)(3)(ii));
        (E) Amounts required to be reported on Form 8288 (U.S. Withholding 
    Tax Return for Dispositions by Foreign Persons of U.S. Real Property 
    Interests) or Form 8804 (Annual Return for Partnership Withholding Tax 
    (Section 1446)). A withholding agent that must report a distribution 
    partly on a Form 8288 or 8804 and partly on a Form 1042-S may elect to 
    report the entire amount on a Form 8288 or 8804;
        (F) Original issue discount for which no withholding is required 
    under Sec. 1.1441-2(b)(3); and
        (G) Amounts described in Sec. 1.1441-1(b)(4)(xviii) (dealing with 
    certain amounts paid by the U.S. government).
        (3) Required information. The information required to be furnished 
    under this paragraph (c)(3) shall be based upon the information 
    provided by or on behalf of the beneficial owner (e.g., a beneficial 
    owner withholding certificate or documentary evidence), as corrected 
    and supplemented based on the withholding agent's actual knowledge. The 
    Form 1042-S must include the following information, if applicable--
    
    [[Page 53469]]
    
        (i) The name, address, and taxpayer identifying number of the 
    withholding agent;
        (ii) A description of each category of income paid (e.g., interest, 
    dividends, royalties, etc.) and the aggregate amount in each category 
    expressed in U.S. dollars;
        (iii) The rate of withholding applied;
        (iv) The name and permanent residence address of the beneficial 
    owner (or of the payee if the beneficial owner is unknown, or of the 
    person receiving the amount if the payee is also unknown);
        (v) The taxpayer identifying number of the beneficial owner if 
    required under Sec. 1.1441-1(e)(4)(vii) to be stated on a beneficial 
    owner withholding certificate (or if actually known to the withholding 
    agent making the return). In the case of a financial institution, 
    actual knowledge exists with respect to accounts maintained for 
    customers only if such taxpayer identifying number was stated on a Form 
    W-8 furnished for another payment made through the same account or 
    through another account, the information for which can be retrieved 
    through a centralized account information system (as described in 
    Sec. 1.1441-1(e)(4)(ix)) containing both accounts; and
        (vi) Such information as the form or the instructions may require 
    in addition to, or in lieu of, information required under this 
    paragraph (c)(3).
        (4) Multiple withholding agents--(i) In general. Except as 
    otherwise provided in this paragraph (c)(4), no information return is 
    required to be made under paragraph (c)(1)(i) of this section if a 
    return is filed by another withholding agent reporting the same amount 
    pursuant to the provisions of this paragraph (c).
        (ii) Payments to a qualified intermediary or a withholding foreign 
    partnership. A withholding agent making a payment to a qualified 
    intermediary (described in Sec. 1.1441-1(e)(5)(ii)) or to a withholding 
    foreign partnership (described in Sec. 1.1441-5(c)(2)(i)) must report 
    the payment on a single Form 1042-S or as otherwise directed by the 
    form or the accompanying instructions to the form and must provide a 
    copy of the Form 1042-S to the intermediary or partnership (but is not 
    required to provide the Form 1042-S to the beneficial owners or 
    partners). The Form 1042-S must report the different categories of 
    payments based on different types of income and applicable withholding 
    rates.
        (iii) Payments to an authorized foreign agent--(A) Filing 
    obligation of foreign authorized agent. An authorized foreign agent (as 
    described in Sec. 1.1441-7(c)(2)) is subject to the filing requirements 
    described in paragraph (c)(1)(i) of this section because it is a 
    withholding agent. Therefore, to the extent the U.S. withholding agent 
    for which it is acting is not reporting the information required under 
    this paragraph (c), it must report the information required to be 
    reported under paragraph (c)(3) or (4)(vi) of this section.
        (B) Filing obligations of the U.S. withholding agent. A U.S. 
    withholding agent making a payment to an authorized foreign agent is 
    exempted from the requirement under paragraph (c)(4)(iv) of this 
    section to make a return on Form 1042-S for each beneficial owner and 
    may, instead, make a return on a single Form 1042-S to report the 
    payment made to the authorized foreign agent. The exemption in this 
    paragraph (c)(4)(iii)(B) shall apply only to the extent the authorized 
    foreign agent complies with the filing requirements under paragraph 
    (c)(4)(iii)(A) of this section.
        (iv) Payments to other intermediaries or foreign partnerships. 
    Payment of an amount to a foreign intermediary described in 
    Sec. 1.1441-1(e)(3)(i) that is not a qualified intermediary or to a 
    foreign partnership that is not a withholding foreign partnership 
    described in Sec. 1.1441-5(c)(2)(i) may not be shown on a single Form 
    1042-S but must be reported on separate Forms 1042-S for each 
    beneficial owner or payee whose name appears on a withholding 
    certificate attached to the intermediary's or partnership withholding 
    certificate that is from a qualified intermediary or a withholding 
    foreign partnership. Payments to an intermediary for the account of 
    undocumented owners or to a foreign partnership for the account of 
    undocumented partners should be reported on a single Form 1042-S made 
    out to the intermediary and bearing the mention ``unknown owners''.
        (v) Payments to a U.S. branch of certain foreign entities. Payment 
    of an amount to the U.S. branch of a foreign entity described in 
    Sec. 1.1441-1(b)(2)(iv) shall be reported--
        (A) On a single Form 1042-S as effectively connected income if the 
    withholding agent cannot reliably associate documentation with the 
    payment to the U.S. branch;
        (B) On a single Form 1042-S as an amount paid to an intermediary if 
    the withholding agent can reliably associate the payment with a U.S. 
    branch withholding certificate described in Sec. 1.1441-1(e)(3)(v) 
    furnished as evidence of an agreement between the branch and the 
    withholding agent to treat the branch as a U.S. person; or
        (C) On separate Forms 1042-S for each beneficial owner or payee 
    whose name appears on a withholding certificate or other appropriate 
    documentation attached to the U.S. branch withholding certificate.
        (vi) Required information. An information return on a Form 1042-S 
    by a withholding agent reporting payments to an intermediary, to a 
    foreign partnership, or to a U.S. branch must contain the information 
    contained in this paragraph (c)(4)(vi). The information on the Form 
    1042-S must be based upon the withholding certificates furnished by the 
    payee, as corrected and supplemented by the withholding agent based on 
    its actual knowledge or reason to know other facts:
        (A) The name, address, and taxpayer identifying number of the 
    withholding agent.
        (B) A description of each category of income paid (e.g., interest, 
    dividends, royalties, etc.) and the aggregate amount in each category 
    expressed in U.S. dollars.
        (C) The rate of withholding applied.
        (D) The basis for not withholding or withholding at a reduced rate.
        (E) The name, address, and taxpayer identifying number of the 
    payee.
        (F) In the case of payments described in paragraph (c)(4)(iv) of 
    this section, the information described in paragraphs (c)(3)(iv) and 
    (v) of this section regarding the person for whom a Form 1042-S is 
    required to be prepared under paragraph (c)(4)(iv).
        (G) Such information as the form or instructions may require in 
    addition to, or in lieu of, the information required under this 
    paragraph (c)(4)(vi).
        (5) Payments to single-member entity. A withholding agent that, 
    upon reliance on a valid withholding certificate, treats a payment as 
    made to a wholly-owned entity that is disregarded to federal tax 
    purposes under Sec. 301.7701-2(c)(2) of this chapter as an entity 
    separate from its owner and whose single owner is a foreign person 
    shall make an information return on Form 1042-S in the name of the 
    foreign single owner, using the owner's taxpayer identifying number if 
    such a number is required to be stated on the form.
        (6) Special rules in the case of claims of treaty benefits by 
    hybrid entities or their interest holders. A withholding agent must 
    make an information return on a Form 1042-S for each beneficial owner 
    (within the meaning of the applicable tax treaty) upon whose 
    withholding certificate or other appropriate documentation the
    
    [[Page 53470]]
    
    withholding agent relies to reduce the rate of withholding under a tax 
    treaty. Therefore, in the case of concurrent and consistent claims of 
    reduced rates under several tax treaties by the entity and by one or 
    more interest holders, the withholding agent must make an information 
    return for the entity and for each of the interest holders claiming to 
    derive an allocable share of amounts paid to the entity as a resident 
    of an applicable treaty country.
        (7) Effect of grace period on filing requirements. A withholding 
    agent who relies on the provisions of Sec. 1.1441-1(b)(3)(iv) to treat 
    the payee as a foreign person during a 90-day grace period while 
    awaiting the documentation must make an information return on a Form 
    1042-S to report all payments to such person during the grace period 
    even if such person is (or is presumed to be) a U.S. person based upon 
    documentation furnished to the withholding agent when the grace period 
    expired or subsequently, or based upon applicable presumptions in 
    Sec. 1.1441-1(b)(3).
        (8) Magnetic media reporting. A withholding agent that makes 250 or 
    more Form 1042-S information returns for a taxable year must file Form 
    1042-S returns on magnetic media. See Sec. 301.6011-2 of this chapter 
    for requirements applicable to a withholding agent that files Forms 
    1042-S with the IRS on magnetic media and publications of the IRS 
    relating to magnetic media filing.
        (d) Report of taxpayer identifying numbers. When so required under 
    procedures that the IRS may prescribe in published guidance (see 
    Sec. 601.601(d)(2) of this chapter), a withholding agent must attach to 
    the Form 1042 a list of all the taxpayer identifying numbers (and 
    corresponding names) that have been furnished to the withholding agent 
    and upon which the withholding agent has relied to grant a reduced rate 
    of withholding and that are not otherwise required to be reported on a 
    Form 1042-S under the provisions of this section.
        (e) Indemnification of withholding agent. A withholding agent is 
    indemnified against the claims and demands of any person for the amount 
    of any tax it deducts and withholds in accordance with the provisions 
    of chapter 3 of the Code and the regulations under that chapter. A 
    withholding agent that withholds based on a reasonable belief that such 
    withholding is required under chapter 3 of the Code and the regulations 
    under that chapter is treated for purposes of section 1461 and this 
    paragraph (e) as having withheld tax in accordance with the provisions 
    of chapter 3 of the Code and the regulations under that chapter. In 
    addition, a withholding agent is indemnified against the claims and 
    demands of any person for the amount of any payments made in accordance 
    with the grace period provisions set forth in Sec. 1.1441-1(b)(3)(iv). 
    This paragraph (e) does not apply to relieve a withholding agent from 
    tax liability under chapter 3 of the Code or the regulations under that 
    chapter.
        (f) Amounts paid not constituting gross income. Any amount withheld 
    in accordance with Sec. 1.1441-3 shall be reported and paid in 
    accordance with this section, even though the amount paid to the 
    beneficial owner may not constitute gross income in whole or in part. 
    For this purpose, a reference in this section and Sec. 1.1461-2 to an 
    amount shall, where appropriate, be deemed to refer to the amount 
    subject to withholding under Sec. 1.1441-3.
        (g) Extensions of time to file Forms 1042 and 1042-S. The IRS may 
    grant an extension of time in which to file a Form 1042 or a Form 1042-
    S. Form 2758, Application for Extension of Time to File Certain Excise, 
    Income, Information, and Other Returns (or such other form as the IRS 
    may prescribe), must be used to request an extension of time for a Form 
    1042. Form 8809, Request for Extension of Time to File Information 
    Returns (or such other form as the IRS may prescribe) must be used to 
    request an extension of time for a Form 1042-S. The request must 
    contain a statement of the reasons for requesting the extension and 
    such other information as the forms or instructions may require. It 
    must be mailed or delivered not later than March 15 of the year 
    following the end of the calendar year for which the return will be 
    filed.
        (h) Penalties. For penalties and additions to the tax for failure 
    to file returns or furnish statements in accordance with this section, 
    see sections 6651, 6662, 6663, 6721, 6722, 6723, 6724(c), 7201, 7203, 
    and the regulations under those sections.
        (i) Effective date. This section shall apply to returns required 
    for payments made after December 31, 1998.
    
    
    Sec. 1.1461-2  Adjustments for overwithholding or underwithholding of 
    tax.
    
        (a) Adjustments of overwithheld tax--(1) In general. A withholding 
    agent that has overwithheld under chapter 3 of the Internal Revenue 
    Code (Code) and made a deposit of the tax as provided in Sec. 1.6302-
    2(a) may adjust the overwithheld amount either pursuant to the 
    reimbursement procedure described in paragraph (a)(2) of this section 
    or pursuant to the set-off procedure described in paragraph (a)(3) of 
    this section. Adjustments under this paragraph (a) may only be made 
    within the time prescribed under paragraph (a) (2) or (3) of this 
    section. After such time, an adjustment to the amount overwithheld can 
    only be claimed by the beneficial owner with the Internal Revenue 
    Service (IRS) pursuant to the procedures described in chapter 65 of the 
    Code. For purposes of this section, the term overwithholding means any 
    amount actually withheld (determined before application of the 
    adjustment procedures under this section) from an item of income 
    pursuant to chapter 3 of the Code or the regulations thereunder in 
    excess of the actual tax liability due, regardless of whether such 
    overwithholding was in error or appeared correct at the time it 
    occurred.
        (2) Reimbursement of tax--(i) General rule. Under the reimbursement 
    procedure, the withholding agent repays the beneficial owner or payee 
    for the amount overwithheld. 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 tax 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. Any such reduction that occurs 
    for a payment period in the calendar year following the calendar year 
    of overwithholding shall be allowed only if--
        (A) The withholding agent states, on a timely filed (not including 
    extensions) Form 1042-S for the calendar year of overwithholding, the 
    amount of tax withheld and the amount of any actual repayment; and
        (B) The withholding agent states on a timely filed (not including 
    extensions) Form 1042 for the calendar year of overwithholding, that 
    the filing of the Form 1042 constitutes a claim for credit in 
    accordance with Sec. 1.6414-1.
        (ii) Record maintenance. If the beneficial owner is repaid an 
    amount of withholding tax under the provisions of this paragraph 
    (a)(2), the withholding agent shall keep as part of its records a 
    receipt showing the date and amount of repayment and the withholding 
    agent must provide a copy of such receipt to the beneficial owner. For 
    this purpose, a canceled check or an entry in a statement is sufficient 
    provided that the check or statement contains a specific notation that 
    it is a refund of tax overwithheld.
        (3) Set-offs. Under the set-off procedure, the withholding agent 
    may repay the beneficial owner by applying the amount overwithheld 
    against any
    
    [[Page 53471]]
    
    amount which otherwise would be required under chapter 3 of the Code or 
    the regulations thereunder to be withheld from income paid by the 
    withholding agent to such person before the earlier of the due date 
    (without regard to extensions) for filing the Form 1042-S for the 
    calendar year of overwithholding or the date that the Form 1042-S is 
    actually filed with the IRS. For purposes of making a return on Form 
    1042 or 1042-S (or an amended form) for the calendar year of 
    overwithholding and for purposes of making a deposit of the amount 
    withheld, the reduced amount shall be considered the amount required to 
    be withheld from such income under chapter 3 of the Code and the 
    regulations thereunder.
        (4) Examples. The principles of this paragraph (a) are illustrated 
    by the following examples:
    
        Example 1. (i) N is a nonresident alien individual who is a 
    resident of the United Kingdom. In December 1999, a domestic 
    corporation C pays a dividend of $100 to N, at which time C 
    withholds $30 and remits the balance of $70 to N. On February 10, 
    2000, prior to the time that C files its Form 1042, N furnishes a 
    valid Form W-8 described in Sec. 1.1441-1(e)(2)(i) upon which C may 
    rely to reduce the rate of withholding to 15 percent under the 
    provisions of the U.S.-U.K. tax treaty. Consequently, N advises C 
    that its tax liability is only $15 and not $30 and requests 
    reimbursement of $15. Although C has already deposited the $30 that 
    was withheld, as required by Sec. 1.6302-2(a)(1)(iv), C repays N in 
    the amount of $15.
        (ii) During 1999, C makes no other payments upon which tax is 
    required to be withheld under chapter 3 of the Code; accordingly, 
    its return on Form 1042 for such year, which is filed on March 15, 
    2000, shows total tax withheld of $30, an adjusted total tax 
    withheld of $15, and $30 previously paid for such year. Pursuant to 
    Sec. 1.6414-1(b), C claims a credit for the overpayment of $15 shown 
    on the Form 1042 for 1999. Accordingly, it is permitted to reduce by 
    $15 any deposit required by Sec. 1.6302-2 to be made of tax withheld 
    during the calendar year 2000. The Form 1042-S required to be filed 
    by C with respect to the dividend of $100 paid to N in 1999 is 
    required to show tax withheld of $30 and tax released of $15.
        Example 2. The facts are the same as in Example 1. In addition, 
    during 2000, C makes payments to N upon which it is required to 
    withhold $200 under chapter 3 of the Code, all of which is withheld 
    in June 2000. Pursuant to Sec. 1.6302-2(a)(1)(iii), C deposits the 
    amount of $185 on July 15, 2000 ($200 less the $15 for which credit 
    is claimed on the Form 1042 for 1999). On March 15, 2001, C 
    Corporation files its return on Form 1042 for calendar year 2000, 
    which shows total tax withheld of $200, $185 previously deposited by 
    C, and $15 allowable credit.
        Example 3. The facts are the same as in Example 1. Under 
    Sec. 1.6032-2(a)(1)(ii)), C is required to deposit on a quarter-
    monthly basis the tax withheld under chapter 3 of the Code. C 
    withholds tax of $100 between February 8 and February 15, 2000, and 
    deposits $75 [($100 x 90 percent) less $15] of the withheld tax 
    within 3 banking days after February 15, 2000, and by depositing $10 
    [($100-$15) less $75] within 3 banking days after March 15, 2000.
    
        (b) Withholding of additional tax when underwithholding occurs. A 
    withholding agent may withhold from future payments made to a 
    beneficial owner the tax that should have been withheld from previous 
    payments to such beneficial owner. In the alternative, the withholding 
    agent may satisfy the tax from property that it holds in custody for 
    the beneficial owner or property over which it has control. Such 
    additional withholding or satisfaction of the tax owed may only be made 
    before the date that the Form 1042 is required to be filed (not 
    including extensions) for the calendar year in which the 
    underwithholding occurred. See Sec. 1.6302-2 for making deposits of tax 
    or Sec. 1.1461-1(a) for making payment of the balance due for a 
    calendar year.
        (c) Definition. For purposes of this section, the term payment 
    period means the period for which the withholding agent is required by 
    Sec. 1.6302-2(a)(1) to make a deposit of tax withheld under chapter 3 
    of the Code.
        (d) Effective date. This section applies to payments made after 
    December 31, 1998.
    
    
    Secs. 1.1461-3 and 1.1461-4  [Removed]
    
        Par. 20. Sections 1.1461-3 and 1.1461-4 are removed.
        Par. 21. Sections 1.1462-1 and 1.1463-1 are revised to read as 
    follows:
    
    
    Sec. 1.1462-1  Withheld tax as credit to recipient of income.
    
        (a) Creditable tax. The entire amount of the income from which the 
    tax is required to be withheld (including amounts calculated under the 
    gross-up formula in Sec. 1.1441-3(f)(1)) shall be included in gross 
    income in the return required to be made by the beneficial owner of the 
    income, without deduction for the amount required to be or actually 
    withheld, but the amount of tax actually withheld shall be allowed as a 
    credit against the total income tax computed in the beneficial owner's 
    return.
        (b) Amounts paid to persons who are not the beneficial owner. 
    Amounts withheld at source under chapter 3 of the Internal Revenue Code 
    (Code) on payments to a fiduciary, partnership, or intermediary is 
    deemed to have been paid by the taxpayer ultimately liable for the tax 
    upon such income. Thus, for example, if a beneficiary of a trust is 
    subject to the taxes imposed by section 1, 2, 3, or 11 upon any portion 
    of the income received from a foreign trust, the part of any amount 
    withheld at source which is properly allocable to the income so taxed 
    to such beneficiary shall be credited against the amount of the income 
    tax computed upon the beneficiary's return, and any excess shall be 
    refunded. Further, if a partnership withholds an amount under chapter 3 
    of the Code with respect to the distributive share of a partner that is 
    a partnership or with respect to the distributive share of partners in 
    an upper tier partnership, such amount is deemed to have been withheld 
    by the upper tier partnership.
        (c) Effective date. This section applies to payments made after 
    December 31, 1998.
    
    
    Sec. 1.1463-1  Tax paid by recipient of income.
    
        (a) Tax paid. If the tax required to be withheld under chapter 3 of 
    the Internal Revenue Code is paid by the beneficial owner of the income 
    or by the withholding agent, it shall not be re-collected from the 
    other, regardless of the original liability therefor. However, this 
    section does not relieve the person that did not withhold tax from 
    liability for interest or any penalties or additions to tax otherwise 
    applicable. See Sec. 1.1441-7(b)(7) for additional applicable rules.
        (b) Effective date. This section applies to failures to withhold 
    occurring after December 31, 1989.
        Par. 23. Section 1.6041-1 is amended by:
        1. Revising paragraph (a)(1).
        2. Adding a sentence at the end of paragraph (a)(2) .
        3. Revising paragraphs (d)(1) introductory text and (d)(3).
        4. Adding a heading for paragraphs (d)(2) and (d)(4).
        5. Adding paragraph (d)(5).
        The additions and revisions read as follows:
    
    
    Sec. 1.6041-1  Return of information as to payments of $600 or more
    
        (a) General rule--(1) Information returns required--(i) Payments 
    required to be reported. Except as otherwise provided in Secs. 1.6041-3 
    and 1.6041-4, every person engaged in a trade or business shall make an 
    information return for each calendar year with respect to payments it 
    makes during the calendar year in the course of its trade or business 
    to another person of fixed or determinable income described in 
    paragraph (a)(1)(i) (A) or (B) of this section. For purposes of the 
    regulations under this section, the person described in this paragraph 
    (a)(1)(i) is a payor.
        (A) Salaries, wages, commissions, fees, and other forms of 
    compensation
    
    [[Page 53472]]
    
    for services rendered aggregating $600 or more.
        (B) Interest (including original issue discount), rents, royalties, 
    annuities, pensions, and other gains, profits, and income aggregating 
    $600 or more.
        (ii) Information returns required under other provisions of the 
    Internal Revenue Code. The payments described in paragraphs (a)(1)(i) 
    (A) and (B) of this section shall not include any payments of amounts 
    with respect to which an information return is required by, or may be 
    required under authority of, section 6042(a) (relating to dividends), 
    section 6043(a)(2) (relating to distributions in liquidation), section 
    6044(a) (relating to patronage dividends), section 6045 (relating to 
    brokers' transactions with customers), sections 6049(a) (1) and (2) 
    (relating to interest), section 6050N(a) (relating to royalties), or 
    section 6050P (a) or (b) (relating to cancellation of indebtedness). In 
    addition, the payments described in paragraphs (a)(1)(i) (A) and (B) of 
    this section shall not include amounts excepted from the definition of 
    dividends under section 6042(b)(2) and Sec. 1.6042-3(b)(1), amounts 
    described in section 6044(b), amounts excepted from reporting under 
    Sec. 1.6045-1(g), amounts excepted from the definition of interest 
    under section 6049(b)(2) (C) or (D), Sec. 1.6049-4(c), or 1.6049-
    5(b)(6) through (15). Notwithstanding the preceding sentence, interest 
    with respect to a notional principal contract excluded from the 
    definition of interest under Sec. 1.6049-5(b)(15) is reportable under 
    this section. The term interest as used in this paragraph (a)(1)(ii) 
    otherwise includes all interest, other than interest coming within the 
    definition of interest provided in Sec. 1.6049-5(a). For example, a 
    closely held corporation borrows money from one of its officers on a 
    promissory note not in registered form bearing annual stated interest 
    of $300. The corporation also pays royalties to the officer amounting 
    to $400 a year. An information return is required under this paragraph 
    (a)(1) to report the payments to the officer because the interest does 
    not come within the definition of interest in Sec. 1.6049-5(a) and the 
    aggregate of interest and royalties exceeds $600.
        (2) * * * For the requirement to submit the information required by 
    Form 1099 on magnetic media for payments after December 31, 1983, see 
    section 6011(e) and Sec. 301.6011-2 of this chapter (Procedure and 
    Administration Regulations).
    * * * * *
        (d) * * * (1) In general. Amounts paid in respect of life 
    insurance, endowment, or annuity contracts are required to be reported 
    in returns of information under this section--
    * * * * *
        (2) Professional fees. * * *
        (3) Prizes and awards. Amounts paid as prizes and awards that are 
    required to be included in gross income under section 74 and Sec. 1.74-
    1 when paid in the course of a trade or business are required to be 
    reported in returns of information under this section.
        (4) Disability payments. * * *
        (5) Notional principal contracts. Amounts paid after December 31, 
    1998, with respect to notional principal contracts referred to in 
    Secs. 1.863-7 or 1.988-2(e) to persons who are not described in 
    Sec. 1.6049-4(c)(1)(ii) are required to be reported in returns of 
    information under this section. However, a payment made outside the 
    United States (as defined in Sec. 1.6049-5(e)) by a non-U.S. payor or a 
    non-U.S. middleman, or by a U.S. payor or U.S. middleman that is not a 
    U.S. person (such as a controlled foreign corporation defined in 
    section 957(a) or certain foreign corporations or foreign partnerships 
    engaged in a U.S. trade or business) or is a foreign branch of a U.S. 
    bank is not reportable under this section if, in the case of a person 
    that is a U.S. payor, a U.S. middleman, or a foreign branch of a U.S. 
    institution, the payor has no actual knowledge that the payee is a U.S. 
    person. The amount required to be reported under this paragraph (d)(5) 
    is limited to the net income from the notional principal contract as 
    described in Sec. 1.446-3(d). A non-periodic payment is reportable for 
    the year in which an actual payment is made. Any amount of interest 
    determined under the provisions of Sec. 1.446-3(g)(4) (dealing with 
    interest in the case of a significant non-periodic payment) is 
    reportable under this paragraph (d)(5) and not under section 6049 (see 
    Sec. 1.6049-5(b)(15)). See Sec. 1.6041-4(a)(4) for reporting exceptions 
    regarding payments to foreign persons. See, however, Sec. 1.1461-
    1(c)(1) for reporting amounts described under this paragraph (d)(5) 
    that are paid to foreign persons. The provisions of Sec. 1.6049-5(d) 
    shall apply for determining whether a payment with respect to a 
    notional principal contract is made to a foreign person. See 
    Sec. 1.6049-4(a) for a definition of payor. For purposes of this 
    paragraph (d)(5), a payor includes a middleman defined in Sec. 1.6049-
    4(f)(4). See Sec. 1.6049-5(c)(5) for a definition of a U.S. payor, a 
    U.S. middleman, a non-U.S. payor, and a non-U.S. middleman.
    * * * * *
        Par. 24. Section 1.6041-2 is amended by revising paragraph (c) to 
    read as follows:
    
    
    Sec. 1.6041-2  Return of information as to payments to employees.
    
    * * * * *
        (c) Payments to foreign persons. See Sec. 1.6041-4 for reporting 
    exemptions regarding payments to foreign persons. See Sec. 1.6049-5(d) 
    for determining whether a payment is made to a foreign person.
        Par. 25. Section 1.6041-3 is amended by:
        1. Revising the introductory text of the section.
        2. Revising paragraphs (a) and (b).
        3. Removing the semicolon at the end of paragraphs (d) through (f), 
    and (h) through (j), and adding a period in its place; and removing the 
    language ``; and'' at the end of paragraph (o), and adding a period in 
    its place.
        4. Removing paragraphs (c) and (l).
        5. Redesignating paragraphs (d), (e), (f), (g), (h), (i), (j), (k), 
    (m), (n), (o), and (p) as paragraphs (c), (d), (e), (f), (g), (h), (i), 
    (j), (k), (l), (m), and (n), respectively.
        6. Revising newly designated paragraphs (f) and (j).
        7. Adding new paragraphs (o) and (p), and paragraph (q).
        The addition and revisions read as follows:
    
    
    Sec. 1.6041-3  Payments for which no return of information is required 
    under section 6041.
    
        Returns of information are not required under section 6041 and 
    Secs. 1.6041-1 and 1.6041-2 for payments described in paragraphs (a) 
    through (q) of this section. See Sec. 1.6041-4 for reporting exemptions 
    regarding payments to foreign persons. See Sec. 1.6041-4 for reporting 
    exemptions regarding foreign persons.
        (a) Payments of income required to be reported on Forms 1120-S, 
    941, W-2, and W-3 (however, see Sec. 1.6041-2(a) with respect to Forms 
    W-2 and W-3).
        (b) Payments by a broker to his customer (but for reporting 
    requirements as to certain of such payments, see sections 6042, 6045, 
    and 6049 and the regulations thereunder in this part).
    * * * * *
        (f) Compensation and profits paid or distributed by a partnership 
    to the individual partners (but for reporting requirements, see 
    Sec. 1.6031-1).
    * * * * *
        (j) Payments of interest on corporate bonds (but for reporting 
    requirements as
    
    [[Page 53473]]
    
    to payments of interest on certain corporate bonds, see Sec. 1.6049-5).
    * * * * *
        (o) Payments to individuals as scholarships or fellowship grants 
    within the meaning of section 117(b)(1), whether or not ``qualified 
    scholarships'' as described in section 117(b). This exception does not 
    apply to any amount of a scholarship or fellowship grant that 
    represents payment for services within the meaning of section 117(c). 
    Instead, these amounts are required to be reported as wages on Form W-
    2. See Sec. 1.1461-1(c) for applicable reporting requirements for 
    amounts paid to foreign persons.
        (p) Per diem of certain alien trainees described under section 
    1441(c)(6).
        (q) Payments made to the following persons:
        (1) A corporation described in Sec. 1.6049-4(c)(1)(ii)(A), except a 
    corporation engaged in providing medical and health care services or 
    engaged in the billing and collecting of payments in respect to the 
    providing of medical and health care services. However, no reporting is 
    required where payment is made to a hospital or extended care facility 
    described in section 501(c)(3) which is exempt from taxation under 
    section 501(a) or to a hospital or extended care facility owned and 
    operated by the United States, a State, the District of Columbia, a 
    possession of the United States, or a political subdivision, agency or 
    instrumentality of any of the foregoing. For reporting requirements as 
    to payments by cooperatives, and to certain other payments, see 
    sections 6042, 6044, and 6049 and the regulations thereunder in this 
    part.
        (2) An organization exempt from taxation under section 501(a), as 
    described in Sec. 1.6049-4(c)(1)(ii)(B)(1), or an individual retirement 
    plan, as described in Sec. 1.6049-4(c)(1)(ii)(C).
        (3) The United States, as described in Sec. 1.6049-4(c)(1)(ii)(D).
        (4) A State, the District of Columbia, a possession of the United 
    States, or any political subdivision of any of the foregoing, as 
    described in Sec. 1.6049-4(c)(1)(ii)(E).
        (5) A foreign government or political subdivision of a foreign 
    government, as described in Sec. 1.6049-4(c)(1)(ii)(F).
        (6) An international organization, as described in Sec. 1.6049-
    4(c)(1)(ii)(G).
        (7) A foreign central bank of issue, as described in Sec. 1.6049-
    4(c)(1)(ii)(H) and the Bank for International Settlements.
        (8) Any wholly owned agency or instrumentality of any person 
    described in paragraph (q) (2), (3), (4), (5), (6), or (7) of this 
    section.
        Par. 26. Section 1.6041-4 is revised to read as follows:
    
    
    Sec. 1.6041-4  Foreign-related items and other exceptions
    
        (a) Exempted foreign-related items--(1) Returns of information are 
    not required for payments that a payor can, prior to payment, associate 
    with documentation upon which it may rely to treat as made to a foreign 
    beneficial owner in accordance with Sec. 1.1441-1(e)(1)(ii) or as made 
    to a foreign payee in accordance with Sec. 1.6049-5(d)(1) or presumed 
    to be made to a foreign payee under Sec. 1.6049-5(d)(2), (3), (4), or 
    (5). However, such payments may be reportable under Sec. 1.1461-1(b) 
    and (c). For purposes of this paragraph (a)(1), the provisions in 
    Sec. 1.6049-5(c) (regarding rules applicable to documentation of 
    foreign status and definition of U.S. payor and non-U.S. payor) shall 
    apply. See Sec. 1.1441-1(b)(3)(iii)(B) and (C) for special payee rules 
    regarding scholarships, grants, pensions, annuities, etc. The 
    provisions of Sec. 1.1441-1 shall apply by substituting the term payor 
    for the term withholding agent and without regard to the fact that the 
    provisions apply only to amounts subject to withholding under chapter 3 
    of the Internal Revenue Code and the regulations under that chapter.
        (2) Returns of information are not required for payments of amounts 
    from sources outside the United States (determined under the provisions 
    of part I, subchapter N, chapter 1 of the Internal Revenue Code and the 
    regulations under those provisions) made by a non-U.S. payor or non-
    U.S. middleman outside the United States. For a definition of non-U.S. 
    payor and non-U.S. middleman, see Sec. 1.6049-5(c)(5). For 
    circumstances in which a payment is considered to be made outside the 
    United States, see Sec. 1.6049-5(e).
        (3) Returns of information are not required for amounts paid by a 
    foreign intermediary described in Sec. 1.1441-1(e)(3)(i) that it has 
    received in its capacity as an intermediary and that are associated 
    with a valid withholding certificate described in Sec. 1.1441-
    1(e)(3)(ii) or (iii) and payments made by a U.S. branch of a foreign 
    bank or of a foreign insurance company described in Sec. 1.1441-
    1(b)(2)(iv) that are associated with a valid withholding certificate 
    described in Sec. 1.1441-1(e)(3)(v), which certificate the intermediary 
    or branch has furnished to the payor or middleman from whom it has 
    received the payment, unless, and to the extent, the intermediary or 
    branch knows that the payments are required to be reported under 
    Sec. 1.6041-1 and were not so reported.
        (4) Returns of information are not required for amounts paid with 
    respect to notional principal contracts referred to in Sec. 1.863-7 or 
    1.988-2(e) which the payor may treat as effectively connected income of 
    a foreign payee under the provisions of Sec. 1.1441-4(a)(3) or if the 
    payee provides a representation in a master agreement that governs the 
    transactions in notional principal contracts between the parties (for 
    example, an International Swap and Derivatives Association (ISDA) 
    Agreement, including the Schedule thereto) or in the confirmation on 
    the particular notional principal contract transaction that the 
    counterparty is a foreign person. See, however, Sec. 1.1461-1(c)(2)(i) 
    for applicable reporting requirements.
        (5) Returns of information are not required for the period that the 
    amounts paid represent assets blocked as described in Sec. 1.1441-
    2(e)(3). The exemption in this paragraph (a)(5) shall terminate when 
    payment is deemed to occur in accordance with the provisions of 
    Sec. 1.1441-2(e)(3).
        (b) Joint owners. Amounts paid to joint owners for which a 
    certificate or documentation is required as a condition for being 
    exempt from reporting under paragraph (a) of this section are presumed 
    made to U.S. payees who are not exempt recipients if, prior to payment, 
    the payor or middleman cannot reliably associate the payment either 
    with a Form W-9 furnished by one of the joint owners in the manner 
    required in Secs. 31.3406(d)-1 through 31.3406(d)-5 of this chapter, or 
    with documentation described in paragraph (a)(1) of this section 
    furnished by each joint owner upon which the payor or middleman can 
    rely to treat each joint owner as a foreign payee or foreign beneficial 
    owner.
        (c) Conversion into United States dollars of amounts paid in 
    foreign currency. For rules concerning foreign currency conversion, see 
    Sec. 1.6049-4(d)(3)(i).
        (d) Effective date. The provisions of this section apply to 
    payments made after December 31, 1998.
        Par. 27. Section 1.6041-7 is amended by revising the section 
    heading and adding a sentence to the end of paragraph (a) to read as 
    follows:
    
    
    Sec. 1.6041-7  Magnetic media requirement.
    
        (a) * * * High-volume filers of information returns must file their 
    returns on magnetic media. See section 6011(e) and Sec. 301.6011-2 of 
    this chapter (Procedure and Administration
    
    [[Page 53474]]
    
    Regulations) for the requirements for filing on magnetic media.
    * * * * *
        Par. 28. Section 1.6041-8 is added to read as follows:
    
    
    Sec. 1.6041-8  Cross-reference to penalties.
    
        For provisions relating to the penalty provided for failure to file 
    timely a correct information return required under section 6041(a) or 
    (b), see Sec. 301.6721-1 of this chapter (Procedure and Administration 
    Regulations). For provisions relating to the penalty provided for 
    failure to furnish timely a correct payee statement required under 
    section 6041(d), see Sec. 301.6722-1 of this chapter. See 
    Sec. 301.6724-1 of this chapter for the waiver of a penalty if the 
    failure is due to reasonable cause and is not due to willful neglect.
        Par. 29. Section 1.6041A-1 is added to read as follows:
    
    
    Sec. 1.6041A-1  Returns regarding payments of remuneration for services 
    and certain direct sales.
    
        (a) through (c) [Reserved].
        (d) Exceptions to return requirement. [Reserved].
        (1) and (2) [Reserved].
        (3) Foreign transactions--(i) In general. No return shall be 
    required under section 6041A with respect to payments described in this 
    paragraph (d)(3).
        (A) Returns of information are not required for payments that a 
    payor can, prior to payment, associate with documentation upon which it 
    may rely to treat as made to a foreign beneficial owner in accordance 
    with Sec. 1.1441-1(e)(1)(ii) or as made to a foreign payee in 
    accordance with Sec. 1.6049-5(d)(1) or presumed to be made to a foreign 
    payee under Sec. 1.6049-5(d)(2), (3), (4), or (5). However, such 
    payments may be reportable under Sec. 1.1461-1(b) and (c). For purposes 
    of this paragraph (d)(3)(i)(A), the provisions in Sec. 1.6049-5(c) 
    (regarding rules applicable to documentation of foreign status and 
    definition of U.S. payor and non-U.S. payor) shall apply. The 
    provisions of Sec. 1.1441-1 shall apply by substituting the term payor 
    for the term withholding agent.
        (B) Returns of information are not required for payments of 
    remuneration for services and certain direct sales from sources outside 
    the United States (determined under the provisions of part I, 
    subchapter N, chapter 1 of the Internal Revenue Code and the 
    regulations under those provisions) if payments made outside the United 
    States by a non-U.S. payor or non-U.S. middleman. For a definition of 
    non-U.S. payor or non-U.S. middleman, see Sec. 1.6049-5(c)(5). For 
    circumstances in which a payment is considered to be made outside the 
    United States, see Sec. 1.6049-5(e).
        (ii) Payor. The term payor has the same meaning as described in 
    Sec. 1.6049-4(a)(2).
        (iii) Joint owners. Amounts paid to joint owners for which a 
    certificate or documentation is required as a condition for being 
    exempt from reporting under paragraph (d)(3)(i) of this section are 
    presumed made to U.S. payees who are not exempt recipients if, prior to 
    payment, the payor or middleman cannot reliably associate the payment 
    either with a Form W-9 furnished by one of the joint owners in the 
    manner required in Secs. 31.3406(d)-1 through 31.3406(d)-5 of this 
    chapter, or with documentation described in paragraph (d)(3)(i)(A) of 
    this section furnished by each joint owner upon which it can rely to 
    treat each joint owner as a foreign payee or foreign beneficial owner.
        (iv) Conversion into United States dollars of amount paid in 
    foreign currency. For rules concerning foreign currency conversion, see 
    Sec. 1.6049-4(d)(3)(i).
        (v) Effective date. The provisions of this paragraph (d)(3) apply 
    to payments made after December 31, 1998.
        (e) [Reserved].
        (f) Statements to be furnished to persons with respect to whom 
    information is required to be furnished--(1) [Reserved].
        (2) Time for furnishing statement. [Reserved].
        (3) Contents of statement. [Reserved].
        (g) [Reserved].
        (h) Cross-reference to penalties. For provisions relating to the 
    penalty provided for failure to file timely a correct information 
    return required under section 6041A(a) or (b), see Sec. 301.6721-1 of 
    this chapter (Procedure and Administration Regulations). For provisions 
    relating to the penalty provided for failure to furnish timely a 
    correct payee statement required under section 6041A(e), see 
    Sec. 301.6722-1 of this chapter. See Sec. 301.6724-1 of this chapter 
    for the waiver of a penalty if the failure is due to reasonable cause 
    and is not due to willful neglect.
        Par. 30. Section 1.6042-2 is amended by:
        1. Revising the section heading, adding introductory text to 
    paragraph (a)(1), and revising paragraphs (a)(1)(i) and (a)(1)(ii).
        2. Removing the language ``1099M'' in the first sentence of 
    paragraph (a)(1)(iii) and adding ``1099A'' in its place.
        3. Removing the language ``1087'' each time it appears in the 
    second sentence of paragraph (a)(4) and adding ``1099'' in each place, 
    and removing the last sentence.
        4. Revising paragraph (d).
        5. Revising the heading of paragraph (e) and adding a sentence to 
    the end of paragraph (e).
        The revisions and addition read as follows:
    
    
    Sec. 1.6042-2  Returns of information as to dividends paid.
    
        (a) Requirement of reporting--(1) In general. An information return 
    on Form 1099 shall be made under section 6042(a) by--
        (i) Every person who makes a payment of dividends (as defined in 
    Sec. 1.6042-3) to any other person during a calendar year. The 
    information return shall show the aggregate amount of the dividends, 
    the name, address, and taxpayer identifying number of the person to 
    whom paid, the amount of tax deducted and withheld under section 3406 
    from the dividends, if any, and such other information as required by 
    the forms. An information return is generally not required if the 
    amount of dividends paid to the other person during the calendar year 
    aggregates less than $10 or if the payment is made to a person who is 
    an exempt recipient described in Sec. 1.6049-4(c)(1)(ii) unless the 
    payor backup withholds under section 3406 on such payment (because, for 
    example, the payee has failed to furnish a Form W-9 on request), in 
    which case the payor must make a return under this section, unless the 
    payor refunds the amount withheld pursuant to Sec. 31.6413(a)-3 of this 
    chapter.
        (ii) Every person, except to the extent that he acts as a nominee 
    described in paragraph (a)(1)(iii) of this section, who receives 
    payments of dividends as a nominee on behalf of another person shall 
    make a return of information under this section for the calendar year 
    of the payment . The information return shall show the aggregate amount 
    of the dividends, the name, address, and taxpayer identification number 
    of the person on whose behalf the dividends are received, the amount of 
    tax deducted and withheld under section 3406 from the dividends, if 
    any, and such other information as required by the forms. An 
    information return is generally not required if the amount of the 
    dividends received on behalf of the other person during the calendar 
    year aggregates less than $10. However, a return of information is not 
    required under this section if--
        (A) The record owner is, pursuant to section 6012(a) (3) or (4) and 
    Sec. 1.6012-3, required to file a fiduciary return on
    
    [[Page 53475]]
    
    Form 1041 that is filed for the estate or trust disclosing the name, 
    address, and identifying number of both the record owner and actual 
    owner and furnishes Form K-1 to each actual owner containing the 
    information required to be shown on the form, including amounts 
    withheld under section 3406;
        (B) The record owner is a nominee of a banking institution or trust 
    company exercising trust powers, and such banking institution or trust 
    company is, pursuant to section 6012(a) (3) or (4) and Sec. 1.6012-3, 
    required to file a fiduciary return on Form 1041 that is filed for the 
    estate or trust disclosing the name, address, and identifying number of 
    both the record owner and the actual owner and furnishes Form K-1 to 
    each actual owner containing the information required to be shown on 
    the form, including amounts withheld under section 3406; or
        (C) The record owner is a banking institution or trust company 
    exercising trust powers, or a nominee thereof, and the actual owner is 
    an organization exempt from taxation under section 501(a) for which 
    such banking institution or trust company files an annual return but 
    only if the name, address, and identifying number of the record owner 
    are included on or with the annual return filed for the tax exempt 
    organization).
    * * * * *
        (d) Cross-reference to penalty. For provisions relating to the 
    penalty provided for failure to file timely a correct information 
    return required under section 6042(a), see Sec. 301.6721-1 of this 
    chapter (Procedure and Administration Regulations). See Sec. 301.6724-1 
    of this chapter for the waiver of a penalty if the failure is due to 
    reasonable cause and is not due to willful neglect.
        (e) Magnetic media requirement. * * * For the requirement to submit 
    the information required by Form 1099 on magnetic media for payments 
    after December 31, 1983, see section 6011(e) and Sec. 301.6011-2 of 
    this chapter (Procedure and Administration Regulations).
        Par. 31. Section 1.6042-3 is amended by:
        1. Revising paragraphs (a) introductory text and (a)(2).
        2. Removing the concluding text immediately following paragraph 
    (a)(2).
        3. Adding paragraph (a)(3).
        4. Revising paragraph (b).
        5. Removing the authority citation at the end of the section.
        The addition and revision read as follows:
    
    
    Sec. 1.6042-3  Dividends subject to reporting.
    
        (a) In general. Except as provided in paragraph (b) of this 
    section, the term dividend for purposes of this section and 
    Secs. 1.6042-2 and 1.6042-4 means the amounts described in the 
    following paragraphs (a) (1) through (3) of this section--
    * * * * *
        (2) Any payment made by a stockbroker to any person as a substitute 
    for a dividend. Such a payment includes any payment made in lieu of a 
    dividend to a person whose stock has been borrowed. See Sec. 1.6045-
    2(h) for coordination of the reporting requirements under sections 6042 
    and 6045(d) with respect to such payments; and
        (3) A distribution from a regulated investment company 
    (irrespective of the fact that any part of the distribution may not 
    represent ordinary income (i.e., may, for example, represent a capital 
    gain dividend as defined in section 852(b)(3)(C)).
        (b) Exceptions--(1) In general. For purposes of Secs. 1.6042-2 and 
    1.6042-4, the amounts described in paragraphs (b)(1)(i) through ( vii) 
    of this section are not dividends.
        (i) Amounts paid by an insurance company to a policyholder, other 
    than a dividend upon its capital stock.
        (ii) Payments (however denominated) by a mutual savings bank, 
    savings and loan association, or similar organization, in respect of 
    deposits, investment certificates, or withdrawable or repurchasable 
    shares. See, however, section 6049 and the regulations under that 
    section for provisions requiring reporting of these payments.
        (iii) Distributions or payments that a payor can, prior to payment, 
    reliably associate with documentation upon which it may rely to treat 
    as made to a foreign beneficial owner in accordance with Sec. 1.1441-
    1(e)(1)(ii) or as made to a foreign payee in accordance with 
    Sec. 1.6049-5(d)(1) or presumed to be made to a foreign payee under 
    Sec. 1.6049-5(d) (2), (3), (4), or (5). However, such payments may be 
    reportable under Sec. 1.1461-1(b) and (c). For purposes of this 
    paragraph (b)(1)(iii), the provisions in Sec. 1.6049-5(c) (regarding 
    rules applicable to documentation of foreign status and definition of 
    U.S. payor and non-U.S. payor) shall apply. The provisions of 
    Sec. 1.1441-1 shall apply by substituting the term payor for the term 
    withholding agent and without regard to the fact that the provisions 
    apply only to amounts subject to withholding under chapter 3 of the 
    Internal Revenue Code (Code).
        (iv) Distributions or payments from sources outside the United 
    States (as determined under the provisions of part I, subchapter N, 
    chapter 1 of the Code and the regulations under those provisions) paid 
    outside the United States by a non-U.S. payor or a non-U.S. middleman. 
    For a definition of non-U.S. payor and non-U.S. middleman, see 
    Sec. 1.6049-5(c)(5). For circumstances in which a payment is considered 
    to be made outside the United States, see Sec. 1.6049-5(e).
        (v) Distributions or payments for the period that the amounts 
    represent assets blocked as described in Sec. 1.1441-2(e)(3). The 
    exemption in this paragraph (b)(1)(v) shall terminate when payment is 
    deemed to occur in accordance with the rules of Sec. 1.1441-2(e)(3).
        (vi) Payments made by a foreign intermediary described in 
    Sec. 1.1441-1(e)(3)(i) that it has received in its capacity as an 
    intermediary and that are associated with a valid withholding 
    certificate described in Sec. 1.1441-1(e)(3) (ii) or (iii) and payments 
    made by a U.S. branch of a foreign bank or of a foreign insurance 
    company described in Sec. 1.1441-1(b)(2)(iv) that are associated with a 
    valid withholding certificate described in Sec. 1.1441-1(e)(3)(v), 
    which certificate the intermediary or branch has furnished to the payor 
    or middleman from whom it has received the payment, unless, and to the 
    extent, the intermediary or branch knows that the payments are required 
    to be reported under Sec. 1.6042-2 and were not so reported.
        (vii) With respect to amounts paid or credited after December 31, 
    1982, any amount paid or credited to any person described in 
    Sec. 1.6049-4(c)(1)(ii), unless a tax is withheld under section 3406 
    and is not refunded by the payor in accordance with Sec. 31.6413(a)-3 
    of this chapter (Employment Tax Regulations).
        (2) Payor. The term payor has the same meaning as described in 
    Sec. 1.6049-4(a)(2).
        (3) Joint owners. Amounts paid to joint owners for which a 
    certificate or documentation is required as a condition for being 
    exempt from reporting under this paragraph (b) are presumed made to 
    U.S. payees who are not exempt recipients if, prior to payment, the 
    payor or middleman cannot reliably associate the payment either with a 
    Form W-9 furnished by one of the joint owners in the manner required in 
    Secs. 31.3406(d)-1 through 31.3406(d)-5 of this chapter, or with 
    documentation described in paragraph (b)(1)(iii) of this section 
    furnished by each joint owner upon which it can rely to treat each 
    joint owner as a foreign payee or foreign beneficial owner. For 
    purposes of applying this paragraph (b)(3), the grace period described 
    in
    
    [[Page 53476]]
    
    Sec. 1.6049-5(d)(2)(ii) shall apply only if each payee qualifies for 
    such grace period.
        (4) Conversion into United States dollars of amounts paid in 
    foreign currency. For rules concerning foreign currency conversion, see 
    Sec. 1.6049-4(d)(3)(i).
        (5) Effective date--(i) General rule. The provisions of this 
    paragraph (b) apply to payments made after December 31, 1998.
        (ii) Transition rules. A payor that, on December 31, 1998, holds a 
    valid Form W-8 or other form upon which it is permitted to rely to hold 
    the payee as a foreign person pursuant to the regulations in effect 
    prior to January 1, 1999 (see 26 CFR parts 1 and 35a, revised April 1, 
    1997), may treat it as a valid certificate until its validity expires 
    under those regulations or, if earlier, until December 31, 1999. 
    Further, the validity of a Form W-8 or other form that is dated prior 
    to January 1, 1998, is valid on January 1, 1998, and would expire at 
    any time during 1998, is extended until December 31, 1998 (and is not 
    extended after December 31, 1998 by reason of the preceding sentence). 
    The rule in this paragraph (b)(5)(ii), however, does not apply to 
    extend the validity period of a withholding certificate that expires in 
    1998 solely by reason of changes in the circumstances of the person 
    whose name is on the certificate. Notwithstanding the three preceding 
    sentences, a payor may choose not to take advantage of the transition 
    rule in this paragraph (b)(5)(ii) with respect to one or more 
    withholding certificates and, therefore, to require new withholding 
    certificates conforming to the requirements described in this section.
    * * * * *
        Par. 32. Section 1.6042-4 is amended by revising paragraphs 
    (d)(2)(i)(F) and (f) to read as follows:
    
    
    Sec. 1.6042-4  Statement to recipients of dividend payments.
    
    * * * * *
        (d) * * *
        (2) * * *
        (i) * * *
        (F) Any document concerning the solicitation of the Form W-9, as 
    described in Sec. 31.3406(h)-3(a) of this chapter, or of the Form W-8 
    as described in Sec. 1.1441-1(e)(1).
    * * * * *
        (f) Cross-reference to penalty. For provisions relating to the 
    penalty provided for failure to furnish timely a correct payee 
    statement required under section 6042(c), see Sec. 301.6722-1 of this 
    chapter (Procedure and Administration Regulations). See Sec. 301.6724-1 
    of this chapter for the waiver of a penalty if the failure is due to 
    reasonable cause and is not due to willful neglect.
    * * * * *
    
    
    Sec. 1.6043-2  [Amended]
    
        Par. 33. In Sec. 1.6043-2, paragraph (a), the first, second, and 
    last sentences are amended by removing the reference to ``1099L'' and 
    adding ``966'' in each place.
        Par. 34. Section 1.6044-2 is amended by:
        1. Revising the section heading
        2. Adding two sentences at the end of paragraph (a)(1).
        3. Revising paragraph (e).
        4. Revising the heading for paragraph (f) and adding a sentence at 
    the beginning of paragraph (f).
        The revisions and additions read as follows:
    
    
    Sec. 1.6044-2  Returns of information as to payments of patronage 
    dividends.
    
        (a) Requirement of reporting--(1) In general. * * * The 
    organization is required to make an information return regardless of 
    the amount of the payment if the tax imposed by section 3406 is 
    required to be withheld. Thus, in the case of any amount subject to 
    backup withholding under section 3406 and not refunded by the payor 
    before the due date of the information return in accordance with the 
    regulations under section 3406, an information return shall be made 
    even if the payment is not generally reportable because it is made to 
    an exempt recipient described in Sec. 1.6049-4(c)(1)(ii) or the amount 
    paid during the calendar year to the recipient aggregates less than 
    $10.
    * * * * *
        (e) Cross-reference to penalty. For provisions relating to the 
    penalty provided for failure to file timely a correct information 
    return required under section 6044(a), see Sec. 301.6721-1 of this 
    chapter (Procedure and Administration Regulations). See Sec. 301.6724-1 
    of this chapter for the waiver of a penalty if the failure is due to 
    reasonable cause and is not due to willful neglect.
        (f) Magnetic media requirement. For the requirement to submit the 
    information required by Form 1099 on magnetic media for payments after 
    December 31, 1983, see section 6011(e) and Sec. 301.6011-2 of this 
    chapter (Procedure and Administration Regulations). * * *
        Par. 35. In Sec. 1.6044-3, paragraph (c) is revised to read as 
    follows:
    
    
    Sec. 1.6044-3  Amounts subject to reporting.
    
    * * * * *
        (c) Exceptions. An amount described in paragraph (a) of this 
    section does not include--
        (1) Any amount described in Sec. 1.6042-3(b); or
        (2) With respect to amounts paid or credited after December 31, 
    1982, any amount paid or credited to any person described in 
    Sec. 1.6049-4(c)(1)(ii).
    * * * * *
        Par. 36. In Sec. 1.6044-5, paragraph (c) is revised to read as 
    follows:
    
    
    Sec. 1.6044-5  Statements to recipients of patronage dividends.
    
    * * * * *
        (c) Cross-reference to penalty. For provisions relating to the 
    penalty provided for failure to furnish timely a correct payee 
    statement required under section 6044(e), see Sec. 301.6722-1 of this 
    chapter (Procedure and Administration Regulations). See Sec. 301.6724-1 
    of this chapter for the waiver of a penalty if the failure is due to 
    reasonable cause and is not due to willful neglect.
    * * * * *
        Par. 37. Section 1.6045-1 is amended by:
        1. Revising the heading of paragraph (a), paragraph (a) 
    introductory text, and paragraph (a)(1).
        2. Removing paragraph (a)(12) and redesignating paragraph (a)(13) 
    as paragraph (a)(12).
        3. Adding new paragraph (a)(13).
        4. Paragraph (b) is amended by redesignating Example (1) through 
    Example (8) as Example 1 through Example 8, respectively; removing 
    newly designated Example 1(ii); and redesignating Example 1(iii) 
    through (vi) as Example 1(ii) through (v), respectively.
        5. Paragraph (c) is amended by:
        a. Redesignating paragraphs (c)(5)(i)(a) through (c)(5)(i)(f) as 
    paragraphs (c)(5)(i)(A) through (c)(5)(i)(F), respectively.
        b. Redesignating paragraph (c)(5)(ii) and Example (1) through 
    Example (4) as paragraph (c)(5)(iii) and Example 1 through Example 4, 
    respectively.
        c. Adding new paragraph (c)(5)(ii).
        6. Paragraph (c)(6) is amended by:
        a. Redesignating paragraphs (c)(6)(i)(a) and (c)(6)(i)(b) as 
    paragraphs (c)(6)(i)(A) and (c)(6)(i)(B), respectively.
        b. Redesignating paragraphs (c)(6)(ii)(a) and (c)(6)(ii)(b) as 
    paragraphs (c)(6)(ii)(A) and (c)(6)(ii)(B), respectively.
        7. Revising paragraphs (d)(4), (d)(6), (f)(2)(iii) last sentence of 
    introductory text, and (g).
        8. In paragraph (h)(2), redesignating Example (1) and Example (2) 
    as paragraph (h)(2) Example 1 and Example 2, respectively.
    
    [[Page 53477]]
    
        9. Revising paragraphs (j), (k), and (l).
        10. Removing the authority citation at the end of the section.
        The revisions and additions read as follows:
    
    
    Sec. 1.6045-1  Returns of information of brokers and barter exchanges.
    
        (a) Definitions. The following definitions apply for purposes of 
    this section, Sec. 1.6045-2, and Sec. 5f.6045-1 of this chapter:
        (1) The term broker means any person (other than a person who is 
    required to report a transaction under section 6043), U.S. or foreign, 
    that, in the ordinary course of a trade or business during the calendar 
    year, stands ready to effect sales to be made by others. A broker 
    includes an obligor that regularly issues and retires its own debt 
    obligations or a corporation that regularly redeems its own stock. 
    However, with respect to a sale (including a redemption or retirement) 
    effected at an office outside the United States, a broker includes only 
    a person described as a U.S. payor or U.S. middleman in Sec. 1.6049-
    5(c)(5). In addition, a broker does not include an international 
    organization described in Sec. 1.6049-4(c)(1)(ii)(G) that redeems or 
    retires an obligation of which it is the issuer.
    * * * * *
        (13) The term person includes any governmental unit and any agency 
    or instrumentality thereof.
    * * * * *
        (c) * * *
        (5) * * *
        (ii) Determination of profit or loss from foreign currency 
    contracts. A broker effecting a closing transaction in foreign currency 
    contracts (as defined in section 1256(g)) shall report information with 
    respect to such contracts in the manner prescribed in paragraph 
    (c)(5)(i) of this section. If a foreign currency contract is closed by 
    making or taking delivery, the net realized profit or loss for purposes 
    of paragraph (c)(5)(i)(B) of this section is determined by comparing 
    the contract price to the spot price for the contract currency at the 
    time and place specified in the contract. If a foreign currency 
    contract is closed by entry into an offsetting contract, the net 
    realized profit or loss for purposes of paragraph (c)(5)(i)(B) of this 
    section is determined by comparing the contract price to the price of 
    the offsetting contract. The net unrealized profit or loss in a foreign 
    currency contract for purposes of paragraphs (c)(5)(i) (C) and (D) of 
    this section is determined by comparing the contract price to the 
    broker's price for similar contracts at the close of business of the 
    relevant year.
    * * * * *
        (d) * * *
        (4) Sale date. With respect to sales of property that are 
    reportable under this section, a broker must report a sale as occurring 
    on the date the sale is entered on the books of the broker.
    * * * * *
        (6) Conversion into United States dollars of proceeds paid in 
    foreign currency--(i) Conversion rules. When a payment is made in a 
    foreign currency, the U.S. dollar amount shall be determined by 
    converting such foreign currency into U.S. dollars on the date of 
    payment at the spot rate (as defined in Sec. 1.988-1(d)(1)) or pursuant 
    to a reasonable spot rate convention. For example, a withholding agent 
    may use a month-end spot rate or a monthly average spot rate. A spot 
    rate convention must be used consistently with respect to all non-
    dollar amounts withheld and from year to year. Such convention cannot 
    be changed without the consent of the Commissioner or his or her 
    delegate.
        (ii) Effect of identification under Sec. 1.988-5(a), (b), or (c) 
    where the taxpayer effects a sale and a hedge through the same broker--
    (A) In general. In lieu of the amount reportable under paragraph 
    (d)(6)(i) of this section, the amount subject to reporting shall be the 
    integrated amount computed under Sec. 1.988-5(a), (b) or (c) if--
        (1) A taxpayer effects through a broker a sale or exchange of 
    nonfunctional currency (as defined in Sec. 1.988-1(c)) and hedges all 
    or a part of such sale as provided in Sec. 1.988-5(a), (b) or (c) with 
    the same broker; and
        (2) The taxpayer complies with the requirements of Sec. 1.988-5(a), 
    (b) or (c) and so notifies the broker prior to the end of the calendar 
    year in which the sale occurs.
        (B) Effective date. The provisions of this paragraph (d)(6)(ii) 
    apply to transactions entered into after December 31, 1998.
    * * * * *
        (f) * * *
        (2) * * *
        (iii) Definition. * * * A barter exchange may treat a member or 
    client as a corporation (and therefore as a corporate member or client) 
    if such member or client provides an exemption certificate as described 
    in Sec. 31.3406(h)-3(a) of this chapter or provided that--
    * * * * *
        (g) Exempt foreign persons--(1) Brokers. No return of information 
    is required to be made by a broker with respect to a customer who is 
    considered to be an exempt foreign person under this paragraph (g)(1). 
    A broker may treat a customer as an exempt foreign person under the 
    circumstances described in paragraphs (g)(1)(i) through (iii) of this 
    section.
        (i) With respect to a sale effected at an office of a broker either 
    inside or outside the United States, the broker may treat the customer 
    as an exempt foreign person if the broker can, prior to the payment, 
    associate the payment with documentation upon which it can rely in 
    order to treat the customer as a foreign beneficial owner in accordance 
    with Sec. 1.1441-1(e)(1)(ii), or as made to a foreign payee in 
    accordance with Sec. 1.6049-5(d)(1) or presumed to be made to a foreign 
    payee under Sec. 1.6049-5(d) (2), (3), (4), or (5). For purposes of 
    this paragraph (g)(1)(i), the provisions in Sec. 1.6049-5(c) (regarding 
    rules applicable to documentation of foreign status and definition of 
    U.S. payor, U.S. middleman, non-U.S. payor, and non-U.S. middleman) 
    shall apply. The provisions of Sec. 1.1441-1 shall apply by 
    substituting the terms broker and customer for the terms withholding 
    agent and payee and without regard for the fact that the provisions 
    apply to amounts subject to withholding under chapter 3 of the Internal 
    Revenue Code (Code). The provisions of Sec. 1.6049-5(d) shall apply by 
    substituting the terms broker and customer for the terms payor and 
    payee. For purposes of this paragraph (g)(1)(i), the broker may rely on 
    a beneficial owner withholding certificate described in Sec. 1.1441-
    1(e)(2)(i) only to the extent that the certificate includes a 
    certification that the beneficial owner has not been and, at the time 
    the certificate is furnished, reasonably expects not to be present in 
    the United States for a period aggregating 183 days or more during each 
    calendar year to which the certificate pertains.
        (ii) With respect to a redemption or retirement of stock or an 
    obligation (the interest or original issue discount on, which is 
    described in Sec. 1.6049-5(b) (6), (7), (10), or (11) or the dividends 
    on, which are described in Sec. 1.6042-3(b)(1)(iv)) that is effected at 
    an office of a broker outside the United States by the issuer (or its 
    paying or transfer agent), the broker may treat the customer as an 
    exempt foreign person if the broker is not also acting in its capacity 
    as a custodian, nominee, or other agent of the payee.
        (iii) With respect to a sale effected by a broker at an office of 
    the broker either inside or outside the United States, the broker may 
    treat the customer as an exempt foreign person for the period that 
    those proceeds are assets blocked, as described in Sec. 1.1441-2(e)(3). 
    For purposes of this paragraph (g)(1)(iii) and section 3406, a sale is 
    deemed to occur
    
    [[Page 53478]]
    
    in accordance with paragraph (d)(4) of this section. The exemption in 
    this paragraph (g)(1)(iii) shall terminate when payment of the proceeds 
    is deemed to occur in accordance with the provisions of Sec. 1.1441-
    2(e)(3).
        (2) Barter exchange. No return of information is required by a 
    barter exchange with respect to a client or a member that the barter 
    exchange may treat as a foreign person pursuant to the procedures 
    described in paragraph (g)(1) of this section.
        (3) Applicable rules--(i) Joint owners. Amounts paid to joint 
    owners for which a certificate or documentation is required as a 
    condition for being exempt from reporting under paragraph (g) (1)(i) or 
    (2) of this section are presumed made to U.S. payees who are not exempt 
    recipients if, prior to payment, the broker or barter exchange cannot 
    reliably associate the payment either with a Form W-9 furnished by one 
    of the joint owners in the manner required in Secs. 31.3406(d)-1 
    through 31.3406(d)-5 of this chapter, or with documentation described 
    in paragraph (g)(1)(i) of this section furnished by each joint owner 
    upon which it can rely to treat each joint owner as a foreign payee or 
    foreign beneficial owner. For purposes of applying this paragraph 
    (g)(3)(i), the grace period described in Sec. 1.6049-5(d)(2)(ii) shall 
    apply only if each payee qualifies for such grace period.
        (ii) Special rules for determining who the customer is. For 
    purposes of this paragraph (g), the determination of who the customer 
    is shall be made on the basis of the provisions in Sec. 1.6049-5(d) by 
    substituting in that section the terms payor and payee with the terms 
    broker and customer.
        (iii) Place of effecting sale--(A) Sale outside the United States. 
    For purposes of this paragraph (g), a sale is considered to be effected 
    by a broker at an office outside the United States if, in accordance 
    with instructions directly transmitted to such office from outside the 
    United States by the broker's customer, the office completes the acts 
    necessary to effect the sale outside the United States. The acts 
    necessary to effect the sale may be considered to have been completed 
    outside the United States without regard to whether--
        (1) Pursuant to instructions from an office of the broker outside 
    the United States, an office of the same broker within the United 
    States undertakes one or more steps of the sale in the United States; 
    or
        (2) The gross proceeds of the sale are paid by a draft drawn on a 
    United States bank account or by a wire or other electronic transfer 
    from a United States account.
        (B) Sale inside the United States. For purposes of this paragraph 
    (g), a sale that is considered to be effected by a broker at an office 
    outside the United States under paragraph (g)(3)(iii)(A) of this 
    section shall nevertheless be considered to be effected by a broker at 
    an office inside the United States if either--
        (1) The customer has opened an account with a United States office 
    of that broker;
        (2) The customer has transmitted instructions concerning this and 
    other sales to the foreign office of the broker from within the United 
    States by mail, telephone, electronic transmission or otherwise (unless 
    the transmissions from the United States have taken place in isolated 
    and infrequent circumstances);
        (3) The gross proceeds of the sale are paid to the customer by a 
    transfer of funds into an account (other than an international account 
    as defined in Sec. 1.6049-5(e)(4)) maintained by the customer in the 
    United States or mailed to the customer at an address in the United 
    States;
        (4) The confirmation of the sale is mailed to a customer at an 
    address in the United States; or
        (5) An office of the same broker within the United States 
    negotiates the sale with the customer or receives instructions with 
    respect to the sale from the customer.
        (iv) Special rules where the customer is a foreign intermediary or 
    certain U.S. branches. A foreign intermediary, as defined in 
    Sec. 1.1441-1(e)(3)(i), is an exempt foreign person, except when the 
    broker has actual knowledge or reason to know (within the meaning of 
    Sec. 1.6049-5(c)(3)) that the person for whom the intermediary acts is 
    a U.S. person. For an example of this exception, see Sec. 1.6049-
    5(d)(3)(iv) Example 7. In addition, if a foreign intermediary (acting 
    as an intermediary) or a U.S. branch receives a payment from a payor or 
    middleman, which payment the payor or middleman can associate with a 
    valid withholding certificate described in Sec. 1.1441-1(e)(3) (ii), 
    (iii), or (v), or in Sec. 1.1441-5(c)(3)(iii) furnished by such 
    intermediary or U.S. branch, then the intermediary or U.S. branch is 
    not required to report such payment when it, in turn, pays the amount 
    to the person whose name is on the certificate furnished by the 
    intermediary or U.S. branch to the payor or middleman, unless, and to 
    the extent, the intermediary or U.S. branch knows that the payment is 
    required to be reported under this section and was not so reported. For 
    purposes of the preceding sentence, a foreign intermediary is one that 
    is described in Sec. 1.1441-1(e)(3)(i) and a U.S. branch is one that is 
    described in Sec. 1.1441-1(b)(2)(iv).
        (4) Examples. The application of the provisions of this paragraph 
    (g) may be illustrated by the following examples:
    
        Example 1. FC is a foreign corporation that is not a U.S. payor 
    or U.S. middleman described in Sec. 1.6049-5(c)(5) that regularly 
    issues and retires its own debt obligations. A is an individual 
    whose residence address is inside the United States, who holds a 
    bond issued by FC that is in registered form (within the meaning of 
    section 163(f) and the regulations under that section). The bond is 
    retired by FP, a foreign corporation that is a broker within the 
    meaning of paragraph (a)(1) of this section and the designated 
    paying agent of FC. FP mails the proceeds to A at A's U.S. address. 
    The sale would be considered to be effected at an office outside the 
    United States under paragraph (g)(3)(iii)(A) of this section except 
    that the proceeds of the sale are mailed to a U.S. address. For that 
    reason, the sale is considered to be effected at an office of the 
    broker inside the United States under paragraph (g)(3)(iii)(B) of 
    this section. Therefore, FC is a broker under paragraph (a)(1) of 
    this section with respect to this transaction because, although it 
    is not a U.S. payor or U.S. middleman, as described in Sec. 1.6049-
    5(c)(5), it is deemed to effect the sale in the United States. FP is 
    a broker for the same reasons. However, under the multiple broker 
    exception under Sec. 5f.6045-1(c)(3)(ii) of this chapter, FP, rather 
    than FC, is required to report the payment because FP is responsible 
    for paying the holder the proceeds from the retired obligations. 
    Under paragraph (g)(1)(i) of this section, FP may not treat A as an 
    exempt foreign person and must make an information return under 
    section 6045 with respect to the retirement of the FC bond, unless 
    FP obtains the certificate or documentation described in paragraph 
    (g)(1)(i) of this section.
        Example 2. The facts are the same as in Example 1 except that FP 
    mails the proceeds to A at an address outside the United States. 
    Under paragraph (g)(3)(iii)(A) of this section, the sale is 
    considered to be effected at an office of the broker outside the 
    United States. Therefore, under paragraph (a)(1) of this section, 
    neither FC nor FP is a broker with respect to the retirement of the 
    FC bond. Accordingly, neither is required to make an information 
    return under section 6045.
        Example 3. The facts are the same as in Example 2 except that FP 
    is also the agent of A. The result is the same as in Example 2. 
    Neither FP nor FC are brokers under paragraph (a)(1) of this section 
    with respect to the sale since the sale is effected outside the 
    United States and neither of them are U.S. payors (within the 
    meaning of Sec. 1.6049-5(c)(5)).
        Example 4. The facts are the same as in Example 1 except that 
    the registered bond held by A was issued by DC, a domestic 
    corporation that regularly issues and retires its own debt 
    obligations. Also, FP mails the proceeds to A at an address outside 
    the United States. Interest on the bond is not
    
    [[Page 53479]]
    
    described in paragraph (g)(1)(ii) of this section. The sale is 
    considered to be effected at an office outside the United States 
    under paragraph (g)(3)(iii)(A) of this section. DC is a broker under 
    paragraph (a)(1)(i)(B) of this section. DC is not required to report 
    the payment under the multiple broker exception under Sec. 5f.6045-
    1(c)(3)(ii) of this chapter. FP is not required to make an 
    information return under section 6045 because FP is not a U.S. payor 
    described in Sec. 1.6049-5(c)(5) and the sale is effected outside 
    the United States. Accordingly, FP is not a broker under paragraph 
    (a)(1) of this section.
        Example 5. The facts are the same as in Example 4 except that FP 
    is also the agent of A. DC is a broker under paragraph (a)(1) of 
    this section. DC is not required to report under the multiple broker 
    exception under Sec. 5f.6045-1(c)(3)(ii) of this chapter. FP is not 
    required to make an information return under section 6045 because FP 
    is not a U.S. payor described in Sec. 1.6049-5(c)(5) and the sale is 
    effected outside the United States and therefore FP is not a broker 
    under paragraph (a)(1) of this section.
        Example 6. The facts are the same as in Example 4 except that 
    the bond is retired by DP, a broker within the meaning of paragraph 
    (a)(1) of this section and the designated paying agent of DC. DP is 
    a U.S. payor under Sec. 1.6049-5(c)(5). DC is not required to report 
    under the multiple broker exception under Sec. 5f.6045-1(c)(3)(ii) 
    of this chapter. DP is required to make an information return under 
    section 6045 because it is the person responsible for paying the 
    proceeds from the retired obligations unless DP obtains the 
    certificate or documentary evidence described in paragraph (g)(1)(i) 
    of this section.
        Example 7. Customer A owns U.S. corporate bonds issued in 
    registered form after July 18, 1984 and carrying a stated rate of 
    interest. The bonds are held through an account with foreign bank, 
    X, and are held in street name. X is a wholly-owned subsidiary of a 
    U.S. company and is not a qualified intermediary within the meaning 
    of Sec. 1.1441-1(e)(5)(ii). X has no documentation regarding A. A 
    instructs X to sell the bonds. In order to effect the sale, X acts 
    through its agent in the United States, Y. Y sells the bonds and 
    remits the sales proceeds to X. X credits A's account in the foreign 
    country. X does not provide documentation to Y.
        (i) Y's obligations to withhold and report. Y is not required to 
    report the sales proceeds under the multiple broker exception under 
    Sec. 5f.6045-1(c)(3)(ii), because X is the person responsible for 
    paying the proceeds from the sale to A. However, the portion of the 
    payment that represents interest accrued on the obligation since the 
    last payment date and that is received as part of the total sales 
    proceeds from the transaction is reportable under Sec. 1.1461-1 (b) 
    and (c)(2)(i)(E), as an amount paid to a foreign person that is 
    subject to withholding under chapter 3 of the Code within the 
    meaning of Sec. 1.1441-2(a) (even though no withholding is required 
    under chapter 3 of the Code based on Sec. 1.1441-3(b)(2)(i), unless 
    Sec. 1.1441-3(b)(2)(ii) applies). The multiple broker exception 
    under the regulations under section 6045 does not affect a 
    withholding agent's obligation to report an amount otherwise 
    required to be reported under Sec. 1.1461-1 (b) and (c). Under 
    Sec. 1.1461-1(c)(3), Y must file Form 1042-S in the name of X who, 
    under Sec. 1.1441-1(b)(3)(v)(A), is presumed to be acting for its 
    own account because Y cannot associate the payment of interest with 
    a valid intermediary Form W-8 described in Sec. 1.1441-1(e)(3) (ii) 
    or (iii) from X.
        (ii) X's obligations to withhold and report. X may also have 
    reporting and withholding obligations when it credits A's account with 
    the sales proceeds. Although the sale is considered to be effected at 
    an office outside the United States under paragraph (g)(3)(iii)(A) of 
    this section, X is a broker with respect to the sale because, as a 
    wholly-owned subsidiary of a U.S. company, it meets the definition of a 
    broker under paragraph (a)(1) of this section. Under the presumptions 
    described in Sec. 1.6049-5(d)(2), X, as a U.S. payor, must presume 
    that, with respect to the sales proceeds, A is a U.S. person who is not 
    an exempt recipient. Therefore, the payment of sales proceeds to A by X 
    is reportable on a Form 1099 under paragraph (c)(2) of this section. X 
    has no obligation to backup withhold on the payment, based on the 
    exemption under Sec. 31.3406(g)-1(e), unless X has actual knowledge 
    that A is a U.S. person who is not an exempt recipient. X is also a 
    withholding agent with respect to the portion of the sales proceeds 
    that represents accrued interest on the bonds. Based on the 
    presumptions under Secs. 1.6049-5(d)(2) and 1.1441-1(b)(3)(iii)(D), X 
    must presume that A is a foreign person with respect to the interest 
    portion of the payment, because the interest amount is an amount 
    subject to withholding, within the meaning of Sec. 1.1441-2(a) (even 
    though a withholding agent is not required to withhold on such 
    amounts). Thus, X is required to file a Form 1042 and 1042-S with 
    respect to the interest portion of the payment. Y s filing of a Form 
    1042-S with respect to that portion of the payment to X does not meet 
    the conditions for the multiple withholding agent exception under 
    Sec. 1.1461-1(c)(4)(i) because Y did not report the payment to X as a 
    payment to an intermediary.
    
        (5) Effective date--(i) General rule. The provisions of this 
    paragraph (g) apply to payments made after December 31, 1998.
        (ii) Transition rules. A payor that, on December 31, 1998, holds a 
    valid Form W-8 or other form upon which the payor is permitted to rely 
    to hold the payee as a foreign person pursuant to the regulations in 
    effect prior to January 1, 1999 (see 26 CFR parts 1 and 35a, revised 
    April 1, 1997), may treat it as a valid certificate until its validity 
    expires under those regulations or, if earlier, until December 31, 
    1999. Further, the validity of a Form W-8 or other form that is dated 
    prior to January 1, 1998, is valid on January 1, 1998, and would expire 
    at any time during 1998, is extended until December 31, 1998 (and is 
    not extended after December 31, 1998 by reason of the preceding 
    sentence). The rule in this paragraph (g)(b)(ii), however, does not 
    apply to extend the validity period of a form that expires in 1998 
    solely by reason of changes in the circumstances of the person whose 
    name is on the certificate. Notwithstanding the three preceding 
    sentences, a payor may choose not to take advantage of the transition 
    rule in this paragraph (g)(5)(ii) with respect to one or more 
    withholding certificates and, therefore, to require new withholding 
    certificates conforming to the requirements described in this section.
    * * * * *
        (j) Time and place for filing; cross-reference to penalty. Forms 
    1096 and 1099 required under this section shall be filed after the last 
    calendar day of the reporting period elected by the broker or barter 
    exchange and on or before the end of the second calendar month 
    following the close of the calendar year of such reporting period with 
    the appropriate Internal Revenue Service Center, the address of which 
    is listed in the instructions for Form 1096. See paragraph (l) of this 
    section for the requirement to file certain returns on magnetic media. 
    For provisions relating to the penalty provided for the failure to file 
    timely a correct information return under section 6045(a), see 
    Sec. 301.6721-1 of this chapter. See Sec. 301.6724-1 of this chapter 
    for the waiver of a penalty if the failure is due to reasonable cause 
    and is not due to willful neglect.
        (k) Requirement and time for furnishing statement; cross-reference 
    to penalty--(1) General requirements. A broker or barter exchange 
    making a return of information under this section with respect to a 
    transaction shall furnish to the person whose identifying number is (or 
    is required to be) shown on such return a written statement showing the 
    information required by paragraph (c)(5), (d), (f), or (p) of this 
    section and containing a legend stating that such information is being 
    reported to the Internal Revenue Service. If the return of information 
    is not made on magnetic media, this requirement may be satisfied by 
    furnishing to such person a copy of all Forms 1099 with respect to such 
    person filed with the Internal Revenue Service Center. A statement
    
    [[Page 53480]]
    
    shall be considered to be furnished to a person to whom a statement is 
    required to be made under this paragraph (k) if it is mailed to such 
    person at the last address of such person known to the broker or barter 
    exchange.
        (2) Time for furnishing statements. A broker or barter exchange may 
    furnish the statements required by this paragraph (k) yearly, 
    quarterly, monthly, or on any other basis, without regard to the 
    reporting period elected by the broker or barter exchange, provided 
    that all statements required to be furnished under this paragraph (k) 
    for a calendar year shall be furnished on or before January 31 of the 
    following calendar year.
        (3) Cross-reference to penalty. For provisions for failure to 
    furnish timely a correct payee statement, see Sec. 301.6724-1 of this 
    chapter (Procedure and Administration Regulations). See Sec. 301.6724-1 
    of this chapter for the waiver of a penalty if the failure is due to 
    reasonable cause and is not due to willful neglect.
        (l) Magnetic media requirement. For information returns filed after 
    December 31, 1996, see Sec. 301.6011-2 of this chapter (Procedure and 
    Administration Regulations) for rules relating to filing information 
    returns on magnetic media. A broker or barter exchange that fails to 
    file a Form 1099 under this section on magnetic media, when required, 
    may be subject to a penalty for each such failure. See paragraph (j) of 
    this section.
    * * * * *
    
    
    Sec. 1.6045-1T  [Removed]
    
        Par. 38. Section 1.6045-1T is removed.
        Par. 39. Section 1.6045-2 is amended as follows:
        1. Paragraph (b)(2) is amended by:
        a. Removing the period at the end of paragraphs (b)(2)(i)(A), 
    (b)(2)(i)(B), and (b)(2)(i)(C), and adding semicolons in each place.
        b. Removing the period and the end of paragraph (b)(2)(i)(D) and 
    adding a semicolon in its place.
        c. Removing the language ``, or'' in paragraph (b)(2)(i)(E) and 
    adding a semicolon in its place.
        d. Removing the period at the end of paragraph (b)(2)(i)(F) and 
    adding ``, or'' in its place.
        e. Adding paragraph (b)(2)(i)(G).
        2. Revising paragraph (g)(2).
        3. Adding paragraph (g)(4).
        The revision and additions read as follows:
    
    
    Sec. 1.6045-2  Furnishing statement required with respect to certain 
    substitute payments.
    
    * * * * *
        (b) * * *
        (2) * * * (i) * * *
        (G) A foreign central bank of issue, as defined in Sec. 1.6049-
    4(c)(1)(ii)(H), or the Bank for International Settlements.
    * * * * *
        (g) * * *
        (2) Magnetic media requirement. For the requirement to submit the 
    information required by paragraph (a) of this section and by Form 1099 
    on magnetic media for information returns filed after December 31, 
    1996, see Sec. 301.6011-2 of this chapter (Procedure and Administration 
    Regulations). A broker or barter exchange that fails to file on 
    magnetic media, when required, may be subject to a penalty under 
    section 6721 for each such failure. See paragraph (g)(4) of this 
    section.
    * * * * *
        (4) Cross-reference to penalties. For provisions relating to the 
    penalty provided for failure to file timely a correct information 
    return required under section 6045(d) and Sec. 1.6045-2(g)(1), 
    including a failure to file on magnetic media, see Sec. 301.6721-1 of 
    this chapter. For provisions relating to the penalty provided for 
    failure to furnish timely a correct payee statement required under 
    section 6045(d) and Sec. 1.6045-2(a), see Sec. 301.6722-1 of this 
    chapter. See Sec. 301.6724-1 of this chapter for the waiver of a 
    penalty if the failure is due to reasonable cause and is not due to 
    willful neglect.
    * * * * *
    
    
    Sec. 1.6045-2T  [Removed]
    
        Par. 40. Section 1.6045-2T is removed.
        Par. 41. Section 1.6049-4 is amended by:
        1. Removing the reference ``section 3451'' and adding ``section 
    3406'' each place it appears in the following locations in Sec. 1.6049-
    4:
        a. Paragraph (b)(2) introductory text, third sentence.
        b. Paragraph (b)(2)(iv).
        c. Paragraph (b)(4), last sentence.
        d. Paragraph (c)(2)(i).
        e. Paragraph (c)(2)(ii) concluding text.
        f. Paragraph (e)(4), second and last sentences.
        g. Paragraph (e)(5)(iv).
        h. Paragraph (f)(4)(i), fourth sentence.
        2. Revising paragraphs (a), (b)(1), (b)(3), and (c)(1).
        3. Removing the reference ``Sec. 1.6049-5(c)'' in paragraphs 
    (b)(5)(i) last sentence, and (d)(2) and adding ``Sec. 1.6049-5(f)'' in 
    its place.
        4. Revising paragraph (d)(3).
        5. Revising the heading for paragraph (d)(7) and adding a sentence 
    to the end of the paragraph.
        6. Removing the reference ``Sec. 1.6049-5(b)(1)(ii)'' in the first 
    sentence of paragraph (d)(8) and adding ``1.6049-5(b)(2)'' in its 
    place.
        7. Removing the reference ``paragraph (d)(10)(i)'' in paragraph 
    (d)(9)(ii) introductory text, and adding ``paragraph (d)(9)(i)'' in its 
    place.
        8. Removing the reference ``paragraph (c)(1)(K)'' in the first 
    sentence of paragraph (f)(4)(i) and adding ``paragraph (c)(1)(ii)(M)'' 
    in its place; and revising the last two sentences of paragraph 
    (f)(4)(i).
        9. Revising the last sentence of the Example in paragraph 
    (f)(4)(ii).
        10. Adding paragraph (g)(3).
        The additions and revisions read as follows:
    
    
    Sec. 1.6049-4  Return of information as to interest paid and original 
    issue discount includible in gross income after December 31, 1982.
    
        (a) Requirement of reporting--(1) In general. Except as provided in 
    paragraph (c) of this section, an information return shall be made by a 
    payor, as defined in paragraph (a)(2) of this section, of amounts of 
    interest and original issue discount paid after December 31, 1982. Such 
    return shall contain the information described in paragraph (b) of this 
    section.
        (2) Payor. A payor is a person described in paragraph (a)(2) (i) or 
    (ii) of this section.
        (i) Every person who makes a payment of the type and of the amount 
    subject to reporting under this section (or under an applicable section 
    under this chapter) to any other person during a calendar year; 
    however, persons not treated as payors for purposes of Sec. 31.3406(a)-
    2 of this chapter shall not be treated as payors for purposes of this 
    paragraph (a)(2).
        (ii) Every person who collects on behalf of another person payments 
    of the type and of the amount subject to reporting under this section 
    (or under an applicable section under this chapter), including 
    middlemen treated as payors under Sec. 31.3406(a)-2 of this chapter, or 
    who otherwise acts as a middleman (as defined in paragraph (f)(4) of 
    this section) with respect to such payment.
        (b) Information to be reported--(1) Interest payments. Except as 
    provided in paragraphs (b) (3) and (5) of this section, in the case of 
    interest other than original issue discount treated as interest under 
    Sec. 1.6049-5(f), an information return on Form 1099 shall be made for 
    the calendar year showing the aggregate amount of the payments, the 
    name, address, and taxpayer identification number of the person to whom 
    paid, the amount of tax deducted and withheld under section 3406 from
    
    [[Page 53481]]
    
    the payments, if any, and such other information as required by the 
    forms. An information return is generally not required if the amount of 
    interest paid to a person aggregates less than $10 or if the payment is 
    made to a person who is an exempt recipient described in paragraph 
    (c)(1)(ii) of this section, unless the payor backup withholds under 
    section 3406 on such payment (because, for example, the payee (i.e., 
    exempt recipient) has failed to furnish a Form W-9 on request), in 
    which case the payor must make a return under this section, unless the 
    payor refunds the amount withheld pursuant to Sec. 31.6413(a)-3 of this 
    chapter (Employment Tax Regulations). For reporting interest paid to a 
    Canadian nonresident alien individual, see Sec. 1.6049-8.
    * * * * *
        (3) Returns made by middleman--(i) In general. Except as provided 
    in paragraph (b)(5) of this section, every person acting as a middleman 
    (as defined in paragraph (f)(4) of this section) shall make an 
    information return for the calendar year. In the case of interest 
    payments (other than original issue discount and other than interest 
    described in Sec. 1.6049-8), the information return shall be made on 
    Form 1099 and shall show the aggregate amount of the interest, the 
    name, address, and taxpayer identification number of the person on 
    whose behalf received, the amount of tax withheld under section 3406, 
    if any, and such other information as required by the forms. In the 
    case of original issue discount, the information return shall show the 
    information required to be shown for the person on whose behalf 
    received, as described in paragraph (b)(2) of this section. See 
    Sec. 1.6049-5(f) to determine whether a middleman is required to make 
    an information return with respect to original issue discount. A 
    middleman shall make an information return regardless of whether the 
    middleman receives a Form 1099. A middleman shall not be required to 
    make an information return if the payment of interest aggregates less 
    than $10 or if the payment is made to an exempt recipient described in 
    paragraph (c)(1)(ii) of this section, unless the payor backup withholds 
    under section 3406 on such payment (because, for example, the payee has 
    failed to furnish a Form W-9 on request), in which case the payor must 
    make a return under this section, unless the payor refunds the amount 
    withheld pursuant to Sec. 31.6413(a)-3 of this chapter (Employment Tax 
    Regulations).
        (ii) Forwarding of interest coupons and original issue discount 
    obligations. In the case of a middleman who, from within the United 
    States, forwards an interest coupon or discount obligation on behalf of 
    a payee for presentation, collection or payment outside the United 
    States, the middleman shall make an information return on Form 1099 for 
    the calendar year showing, in the case of an interest coupon, the 
    information required under paragraph (b)(3)(i) of this section and, in 
    the case of a discount obligation, information required under paragraph 
    (b)(2) of this section. For purposes of this paragraph (b)(3)(ii), a 
    middleman is considered to forward an interest coupon or discount 
    obligation on behalf of a payee for presentation, collection or payment 
    outside the United States if the middleman forwards the coupon or 
    obligations outside the United States on or after the date when the 
    payee is entitled to be paid or at an earlier date that is within 90 
    days of such date or if the middleman has actual knowledge that the 
    coupon or obligation is being forwarded outside the United States for 
    presentation, collection, or payment outside the United States. 
    However, the transfer, although subject to information reporting under 
    this section, is not subject to backup withholding under section 3406.
        (iii) Example. The following example illustrates the provisions of 
    paragraph (b)(3)(ii) of this section:
    
        Example. Individual F, who is entitled to payment on an interest 
    coupon, instructs an office of Bank M in the United States to 
    forward the coupon to Bank N for collection by Bank N outside the 
    United States. Bank M in the United States forwards the interest 
    coupon to Bank N outside the United States. Bank M is required to 
    make an information return for the calendar year under paragraph 
    (b)(3)(ii) of this section showing the aggregate amount of the 
    interest coupon forwarded, the name, address of the permanent 
    residence, and the taxpayer identification number, if any, of 
    Individual F and such other information as the form requires.
    * * * * *
        (c) Information returns not required--(1) Payment to exempt 
    recipient--(i) In general. No information return is required with 
    respect to any payment made to an exempt recipient described in 
    paragraph (c)(1)(ii) of this section, except to the extent otherwise 
    provided in Sec. 1.6049-5(d)(3) (ii) and (iii). However, if the payor 
    backup withholds under section 3406 on such payment (because, for 
    example, the payee has failed to furnish a Form W-9 on request), then 
    the payor is required to make a return under this section, unless the 
    payor refunds the amount withheld in accordance with Sec. 31.6413(a)-3 
    of this chapter (Employment Tax Regulations).
        (ii) Exempt recipient defined. The term exempt recipient means any 
    person described in paragraphs (c)(1)(ii) (A) through (Q) of this 
    section. An exempt recipient is generally exempt from information 
    reporting without filing a certificate claiming exempt status unless 
    the provisions of this paragraph (c)(1)(ii) require a payee to file a 
    certificate. A payor may in any case require a payee not otherwise 
    required to file a certificate under this paragraph (c)(1)(ii) to file 
    a certificate in order to qualify as an exempt recipient. See 
    Sec. 31.3406(h)-3 (a)(1)(iii) and (c)(2) of this chapter for the 
    certificate that a payee must provide when a payor requires it in order 
    to treat the payee as an exempt recipient under this paragraph 
    (c)(1)(ii). A payor may treat a payee as an exempt recipient based upon 
    a properly completed form as described in Sec. 31.3406(h)-3(e)(2) of 
    this chapter, its actual knowledge that the payee is a person described 
    in this paragraph (c)(1)(ii), or the indicators described in this 
    paragraph (c)(1)(ii).
        (A) Corporation. A corporation, as defined in section 7701(a)(3), 
    whether domestic or foreign, is an exempt recipient. In addition, for 
    purposes of this paragraph (c)(1), the term corporation includes a 
    partnership all of whose members are corporations described in this 
    paragraph (c)(1), but only if the partnership files with the payor a 
    certificate meeting the certification requirements of paragraphs 
    (c)(2)(ii)(A) (1) through (5) of this section. Absent actual knowledge 
    otherwise, a payor may treat a payee as a corporation (and, therefore, 
    as an exempt recipient) if one of the requirements of paragraph 
    (c)(1)(ii)(A) (1), (2), (3), or (4), of this section are met before a 
    payment is made.
        (1) The name of the payee contains an unambiguous expression of 
    corporate status that is Incorporated, Inc., Corporation, Corp., P.C., 
    (but not Company or Co.) or contains the term insurance company, 
    indemnity company, reinsurance company, or assurance company, or its 
    name indicates that it is an entity listed as a per se corporation 
    under Sec. 301.7701-2(b)(8)(i) of this chapter.
        (2) The payor has on file a corporate resolution or similar 
    document clearly indicating corporate status. For this purpose, a 
    similar document includes a copy of Form 8832, filed by the entity to 
    elect classification as an association under Sec. 301.7701-3(b) of this 
    chapter.
        (3) The payor receives a Form W-9 which includes an EIN and a 
    statement from the payee that it is a domestic corporation.
    
    [[Page 53482]]
    
        (4) The payor receives a withholding certificate described in 
    Sec. 1.1441-1(e)(2)(i), that includes a certification that the person 
    whose name is on the certificate is a foreign corporation.
        (B) Tax exempt organization--(1) In general. Any organization that 
    is exempt from taxation under section 501(a) is an exempt recipient. A 
    custodial account under section 403(b)(7) shall be considered an exempt 
    recipient under this paragraph. A payor may treat an organization as an 
    exempt recipient under this paragraph (c)(1)(ii)(B) without requiring a 
    certificate if the organization's name is listed in the compilation by 
    the Commissioner of organizations for which a deduction for charitable 
    contributions is allowed, if the name of the organization contains an 
    unambiguous indication that it is a tax-exempt organization, or if the 
    organization is known to the payor to be a tax-exempt organization.
        (2) Examples. The application of the provisions of this paragraph 
    (c)(1)(ii)(B) may be illustrated by the following examples:
    
        Example 1. The following persons maintain accounts at M Bank: N 
    College, O University, and P Church. M may treat N, O, and P as 
    exempt recipients even though such persons have not filed an 
    exemption certificate with M because the names of the organizations 
    contain an unambiguous indication that they are tax exempt 
    organizations.
        Example 2. Q is listed in the current edition of Internal 
    Revenue Service Publication 78 as an organization for which 
    deductions are permitted for charitable contributions under section 
    170(c). Such listing has not been revoked by an announcement 
    published in the Internal Revenue Bulletin (see Sec. 601.601(d)(2) 
    of this chapter). A payor may treat Q as an exempt recipient even 
    though Q has not filed an exemption certificate with the payor.
        Example 3. Employer R maintains a section 403(b)(7) custodial 
    account with Regulated Investment Company S on behalf of R's 
    employees. S may treat the account as an exempt recipient even 
    though R or its employees have not filed an exemption certificate 
    with S.
    
        (C) Individual retirement plan. An individual retirement plan as 
    defined in section 7701(a)(37) is an exempt recipient. A payor may 
    treat any such plan of which it is the trustee or custodian as an 
    exempt recipient under this paragraph (c)(1) without requiring a 
    certificate.
        (D) United States. The United States Government and any wholly-
    owned agency or instrumentality thereof are exempt recipients. A payor 
    may treat a person as an exempt recipient under this paragraph (c)(1) 
    without requiring a certificate if the name of such person reasonably 
    indicates it is described in this paragraph (c)(1).
        (E) State. A State, the District of Columbia, a possession of the 
    United States, a political subdivision of any of the foregoing, wholly-
    owned agency or instrumentality of any one or more of the foregoing, 
    and a pool or partnership composed exclusively of any of the foregoing 
    are exempt recipients. A payor may treat a person as an exempt 
    recipient under this paragraph (c)(1) without requiring a certificate 
    if the name of such person reasonably indicates it is described in this 
    paragraph (c)(1) or if such person is known generally in the community 
    to be a State, the District of Columbia, a possession of the United 
    States or a political subdivision or a wholly-owned agency or 
    instrumentality of any one or more of the foregoing (for example, an 
    account held in the name of ``Town of S'' or ``County of T'' may be 
    treated as held by an exempt recipient under this paragraph 
    (c)(1)(ii)(E)).
        (F) Foreign government. A foreign government, a political 
    subdivision of a foreign government, and any wholly-owned agency or 
    instrumentality of either of the foregoing are exempt recipients. A 
    payor may treat a foreign government or a political subdivision thereof 
    as an exempt recipient under this paragraph (c)(1) without requiring a 
    certificate provided that its name reasonably indicates that it is a 
    foreign government or provided that it is known to the payor to be a 
    foreign government or a political subdivision thereof (for example, an 
    account held in the name of the ``Government of V'' may be treated as 
    held by a foreign government).
        (G) International organization. An international organization and 
    any wholly-owned agency or instrumentality thereof are exempt 
    recipients. The term international organization shall have the meaning 
    ascribed to it in section 7701(a)(18). A payor may treat a payee as an 
    international organization without requiring a certificate if the payee 
    is designated as an international organization by executive order 
    (pursuant to 22 U.S.C. 288 through 288(f)).
        (H) Foreign central bank of issue. A foreign central bank of issue 
    is an exempt recipient. A foreign central bank of issue is a bank which 
    is by law or government sanction the principal authority, other than 
    the government itself, issuing instruments intended to circulate as 
    currency. See Sec. 1.895-1(b)(1). A payor may treat a person as a 
    foreign central bank of issue (and, therefore, as an exempt recipient) 
    without requiring a certificate provided that such person is known 
    generally in the financial community as a foreign central bank of issue 
    or if its name reasonably indicates that it is a foreign central bank 
    of issue.
        (I) Securities or commodities dealer. A dealer in securities, 
    commodities, or notional principal contracts, that is registered as 
    such under the laws of the United States or a State or under the laws 
    of a foreign country is an exempt recipient. A payor may treat a dealer 
    as an exempt recipient under this paragraph (c)(1) without requiring a 
    certificate if the person is known generally in the investment 
    community to be a dealer meeting the requirements set forth in this 
    paragraph (c)(1) (for example, a registered broker-dealer or a person 
    listed as a member firm in the most recent publication of members of 
    the National Association of Securities Dealers, Inc.).
        (J) Real estate investment trust. A real estate investment trust, 
    as defined in section 856 and Sec. 1.856-1, is an exempt recipient. A 
    payor may treat a person as a real estate investment trust (and, 
    therefore, as an exempt recipient) without requiring a certificate if 
    the person is known generally in the investment community as a real 
    estate investment trust.
        (K) Entity registered under the Investment Company Act of 1940. An 
    entity registered at all times during the taxable year under the 
    Investment Company Act of 1940, as amended (15 U.S.C. 80a-1), (or 
    during such portion of the taxable year that it is in existence), is an 
    exempt recipient. An entity that is created during the taxable year 
    will be treated as meeting the registration requirement of the 
    preceding sentence provided that such entity is so registered at all 
    times during the taxable year for which such entity is in existence. A 
    payor may treat such an entity as an exempt recipient under this 
    paragraph (c)(1) without requiring a certificate if the entity is known 
    generally in the investment community to meet the requirements of the 
    preceding sentence.
        (L) Common trust fund. A common trust fund, as defined in section 
    584(a), is an exempt recipient. A payor may treat the fund as an exempt 
    recipient without requiring a certificate provided that its name 
    reasonably indicates that it is a common trust fund or provided that it 
    is known to the payor to be a common trust fund.
        (M) Financial institution. A financial institution such as a bank, 
    mutual savings bank, savings and loan association, building and loan 
    association, cooperative bank,
    
    [[Page 53483]]
    
    homestead association, credit union, industrial loan association or 
    bank, or other similar organization, whether organized in the United 
    States or under the laws of a foreign country is an exempt recipient. A 
    financial institution also includes a clearing organization defined in 
    Sec. 1.163-5(c)(2)(i)(D)(8) and the Bank for International Settlements. 
    A payor may treat any person described in the preceding sentence as an 
    exempt recipient without requiring a certificate if the person's name 
    (including a foreign name, such as ``Banco'' or ``Banque'') reasonably 
    indicates the payee is a financial institution described in the 
    preceding sentence. In the case of a foreign person, a payor may also 
    treat a person on such list as the Internal Revenue Service may publish 
    or approve (such as in the Thomson Bank Directory or a list approved by 
    the Federal Reserve Board).
        (N) Trust. A trust which is exempt from tax under section 664(c) 
    (i.e., a charitable remainder annuity trust or a charitable remainder 
    unitrust) or is described in section 4947(a)(1) (relating to certain 
    charitable trusts) is an exempt recipient. A payor which is a trustee 
    of the trust may treat the trust as an exempt recipient without 
    requiring a certificate.
        (O) Nominees or custodians. A nominee or custodian.
        (P) Brokers. A broker as defined in section 6045(c) and 
    Sec. 1.6045-1(a)(1).
        (Q) Swap dealers. A dealer in notional principal contracts as 
    defined in Sec. 1.446-3(c)(4)(iii).
        (iii) Exempt recipient no longer exempt. Any person who ceases to 
    be an exempt recipient shall, no later than 10 days after such 
    cessation, notify the payor in writing when it ceases to be an exempt 
    recipient unless it reasonably appears that the person formerly 
    qualifying as an exempt recipient will not thereafter receive a 
    reportable payment from the payor. If a payor treats a person as an 
    exempt recipient by requiring the exempt recipient to file a 
    certificate claiming exempt status, that person shall revoke the 
    certificate as provided in the preceding sentence. If the exempt 
    recipient terminates its relationship with the payor prior to the time 
    that the notice of change in status is otherwise required, the exempt 
    recipient is not required to notify the payor. If, however, the person 
    who formerly qualified as an exempt recipient later reinstates the 
    relationship with the payor, the person must, prior to receiving a 
    reportable payment from such relationship, notify the payor that it no 
    longer qualifies as an exempt recipient in case the payor relies upon 
    the previous treatment.
    * * * * *
        (d) * * *
        (3) Conversion into United States dollars of amounts paid in 
    foreign currency--(i) Conversion rules. When a payment is made in 
    foreign currency, the U.S. dollar amount of the payment shall be 
    determined by converting such foreign currency into U.S. dollars on the 
    date of payment at the spot rate (as defined in Sec. 1.988-1(d)(1)) or 
    pursuant to a reasonable spot rate convention. For example, a 
    withholding agent may use a month-end spot rate or a monthly average 
    spot rate. A spot rate convention must be used consistently with 
    respect to all non-dollar amounts withheld and from year to year. Such 
    convention cannot be changed without the consent of the Commissioner or 
    the Commissioner's delegate.
        (ii) Special rule for Sec. 1.988-5(a) transactions where the payor 
    on both components of a qualified hedging transaction is the same 
    person--(A) In general. Interest or original issue discount on a 
    qualified debt instrument that is part of a qualified hedging 
    transaction under Sec. 1.988-5(a) shall be computed for section 6049 
    reporting purposes under the rules described in Sec. 1.988-5(a)(9)(ii) 
    if--
        (1) The payor on the qualified debt instrument and the counterparty 
    to the Sec. 1.988-5(a) hedge are the same person; and
        (2) The payee complies with the requirements of Sec. 1.988-5(a) and 
    so notifies its payor prior to the date required for filing Form 1099 
    as required by this section.
        (B) Effective date. The provisions of this paragraph (d)(3)(ii) 
    apply to transactions entered into after December 31, 1998.
    * * * * *
        (7) Magnetic media requirement. * * * For the requirement to submit 
    the information required by Form 1099 on magnetic media for payments 
    after December 31, 1983, see section 6011(e) and Sec. 301.6011-2 of 
    this chapter (Regulations on Procedure and Administration).
    * * * * *
        (f) * * *
        (4) * * * (i) * * * A person shall be considered to be a middleman 
    as to any portion of an interest payment made to such person which 
    portion is actually owned by another person, whether or not the other 
    person's name is also shown on the information return filed with 
    respect to such interest payment, except that a husband or wife will 
    not be considered as acting in the capacity of a middleman with respect 
    to his or her spouse. A person who, from within the United States, 
    forwards an interest coupon or discount obligation on behalf of a payee 
    for presentation, collection or payment outside the United States is 
    also a middleman for purposes of this section (but the transfer, 
    although subject to information reporting under this section, does not 
    make the payment subject to backup withholding under section 3406).
        (ii) * * *
    
        Example. * * * Broker B is required to make an information 
    return showing the amount of original issue discount treated as paid 
    to A under Sec. 1.6049-5(f).
    
        (g) * * *
        (3) Cross-reference to penalty. For provisions relating to the 
    penalty provided for failure to file timely a correct information 
    return required under section 6049(a) and Sec. 1.6049-4(a)(1), see 
    Sec. 301.6721-1 of this chapter (Procedure and Administration 
    Regulations). See Sec. 301.6724-1 of this chapter for the waiver of a 
    penalty if the failure is due to reasonable cause and is not due to 
    willful neglect.
    
        Par. 42. Section 1.6049-5 is amended by:
    
        1. Removing the reference ``section 3451'' in the third sentence of 
    paragraph (a)(6) and adding ``section 3406'' in its place.
        2. Removing the last sentence of paragraph (a)(6).
        3. Revising paragraph (b).
        4. Redesignating paragraph (c) as paragraph (f).
        5. Adding new paragraphs (c), (d), (e) and (g).
        The revisions and additions read as follows:
    
    
    Sec. 1.6049-5  Interest and original issue discount subject to 
    reporting after December 31, 1982.
    
    * * * * *
        (b) Interest excluded from reporting requirement. The term interest 
    or original issue discount (OID) does not include--
        (1) Interest on any obligation issued by a natural person as 
    defined in Sec. 1.6049-4(f)(2), irrespective of whether such interest 
    is collected on behalf of the holder of the obligation by a middleman.
        (2) Interest on any obligation if such interest is exempt from 
    taxation under section 103(a), relating to certain governmental 
    obligations, or interest which is exempt from taxation under any other 
    provision of law without regard to the identity of the holder. The 
    holder of a tax exempt obligation that is not in registered form must 
    provide
    
    [[Page 53484]]
    
    written certification to the payor (other than the issuer of the 
    obligation) that the obligation is exempt from taxation. A statement 
    that interest coupons are tax exempt on the envelope or shell commonly 
    used by financial institutions to process such coupons, signed by the 
    payee, will be sufficient for this purpose if the envelope is properly 
    completed (i.e., shows the name, address, and taxpayer identification 
    number of the payee). A payor may rely on such written certification in 
    treating such interest as tax exempt for purposes of section 6049. See 
    Sec. 1.6049-4(d)(8) with respect to the requirement that the issuer of 
    a taxable obligation shall make an information return if such issuer 
    receives an envelope which improperly claims that the interest coupons 
    contained therein are tax exempt.
        (3) Interest on amounts held in escrow to guarantee performance on 
    a contract or to provide security. However, interest on amounts held in 
    escrow with a person described in paragraph (a)(2) or (3) of this 
    section is interest subject to reporting under section 6049.
        (4) Interest that a governmental unit pays with respect to tax 
    refunds.
        (5) Interest on deposits for security, such as deposits posted with 
    a public utility company. However, interest on deposits posted for 
    security with a person described in paragraph (a)(2) or (3) of this 
    section is interest subject to reporting under section 6049.
        (6) Amounts from sources outside the United States (determined 
    under the provisions of part I, subchapter N, chapter 1 of the Internal 
    Revenue Code (Code) and the regulations under those provisions) paid 
    outside the United States by a non-U.S. payor or a non-U.S. middleman 
    (as defined in paragraph (c)(5) of this section). See paragraph (e) of 
    this section for circumstances in which a payment is considered to be 
    made outside the United States.
        (7) Portfolio interest, as defined in Sec. 1.871-14(b)(1), paid 
    with respect to obligations in bearer form described in section 
    871(h)(2)(A) or 881(c)(2)(A) or with respect to a foreign-targeted 
    registered obligation described in Sec. 1.871-14(e)(2) for which the 
    documentation requirements described in Sec. 1.871-14(e)(3) and (4) 
    have been satisfied (other than by a U.S. middleman (as defined in 
    paragraph (c)(5) of this section) that, as a custodian or nominee of 
    the payee, collects the amount for, or on behalf of, the payee, 
    regardless of whether the middleman is also acting as agent of the 
    payor).
        (8) Portfolio interest described in Sec. 1.871-14(c)(1)(ii), paid 
    with respect to obligations in registered form described in section 
    871(h)(2)(B) or 881(c)(2)(B) that is not described in paragraph (b)(7) 
    of this section.
        (9) Any amount paid by an international organization described in 
    Sec. 1.6049-4(c)(1)(ii)(G) (or its paying, transfer, or other agent 
    that is not also a payee's agent) with respect to an obligation of 
    which the international organization is the issuer.
        (10)(i) Amounts paid outside the United States (other than by a 
    U.S. middleman (as defined in paragraph (c)(5) of this section) that, 
    as a custodian or nominee or other agent of the payee, collects the 
    amount for, or on behalf of, the payee, regardless of whether the 
    middleman is also acting as agent of the payor) with respect to an 
    obligation that: Has a face amount or principal amount of not less than 
    $500,000 (as determined based on the spot rate on the date of issuance 
    if in foreign currency); has a maturity (at issue) of 183 days or less; 
    satisfies the requirements of sections 163(f)(2)(B)(i) and (ii)(I) and 
    the regulations thereunder (as if the obligation would otherwise be a 
    registration-required obligation within the meaning of section 
    163(f)(2)(A)) (however, an original issue discount obligation with a 
    maturity of 183 days or less from the date of issuance is not required 
    to satisfy the certification requirement of Sec. 1.163-
    5(c)(2)(i)(D)(3)) and is issued in accordance with the procedures of 
    Sec. 1.163-5(c)(2)(i)(D); and has on its face the following statement 
    (or a similar statement having the same effect):
    
        By accepting this obligation, the holder represents and warrants 
    that it is not a United States person (other than an exempt 
    recipient described in section 6049(b)(4) of the Internal Revenue 
    Code and regulations thereunder) and that it is not acting for or on 
    behalf of a United States person (other than an exempt recipient 
    described in section 6049(b)(4) of the Internal Revenue Code and the 
    regulations thereunder).
    
        (ii) If the obligation is in registered form, it must be registered 
    in the name of an exempt recipient described in Sec. 1.6049-
    4(c)(1)(ii). For purposes of this paragraph (b)(10), a middleman may 
    treat an obligation as described in section 163(f)(2)(B)(i) and (ii)(I) 
    and the regulations under that section if the obligation, or coupons 
    detached therefrom, whichever is presented for payment, contains the 
    statement described in this paragraph (b)(10).
        (11) Amounts paid with respect to an account or deposit with a U.S. 
    or foreign branch of a domestic or foreign corporation or partnership 
    that is paid with respect to an obligation described in either 
    paragraph (b)(11)(i) or (ii) of this section, if the branch is engaged 
    in the commercial banking business; and the interest or OID is paid 
    outside the United States (other than by a U.S. middleman (as defined 
    in paragraph (c)(5) of this section) that acts as a custodian, nominee, 
    or other agent of the payee, and collects the amount for, or on behalf 
    of, the payee, regardless of whether the middleman is also acting as 
    agent of the payor).
        (i) An obligation is described in this paragraph (b)(11)(i) if it 
    is not in registered form (within the meaning of section 163(f) and the 
    regulations under that section), is described in section 163(f)(2)(B) 
    and issued in accordance with the procedures of Sec. 1.163-
    5(c)(2)(i)(C) or (D), and, in the case of a U.S. branch, is part of a 
    larger single public offering of securities. For purposes of this 
    paragraph (b)(11)(i), a middleman may treat an obligation as described 
    in section 163(f)(2)(B) if the obligation, and any detachable coupons, 
    contains the statement described in section 163(f)(2)(B)(ii)(II) and 
    the regulations under that section.
        (ii)(A) An obligation is described in this paragraph (b)(11)(ii) if 
    it produces income described in section 871(i)(2)(A); has a face amount 
    or principal amount of not less than $500,000 (as determined based on 
    the spot rate on the date of issuance if in foreign currency); 
    satisfies the requirements of sections 163(f)(2)(B)(i) and (ii)(I) and 
    the regulations thereunder (as if the obligation would otherwise be a 
    registration-required obligation within the meaning of section 
    163(f)(2)(A)) and is issued in accordance with the procedures of 
    Sec. 1.163-5(c)(2)(i) (C) or (D) (however, an original issue discount 
    obligation with a maturity of 183 days or less from the date of 
    issuance is not required to satisfy the certification requirement of 
    Sec. 1.163-5(c)(2)(i)(D)(3)). For purposes of this paragraph 
    (b)(11)(ii), a middleman may treat an obligation as described in 
    sections 163(f)(2)(b) (i) and (ii) and the regulations under that 
    section if the obligation, or any detachable coupon, contains the 
    statement described in paragraph (b)(11)(ii)(b) of this section.
        (B) The obligation must have on its face, and on any detachable 
    coupons, the following statement (or a similar statement having the 
    same effect):
    
        By accepting this obligation, the holder represents and warrants 
    that it is not a United States person (other than an exempt 
    recipient described in section 6049(b)(4) and regulations under that 
    section) and that it is not acting for or on behalf of a United 
    States person (other than an exempt recipient described in section 
    6049(b)(4) and the regulations under that section).
    
        (C) If the obligation is in registered form, it must be registered 
    in the name
    
    [[Page 53485]]
    
    of an exempt recipient described in Sec. 1.6049-4(c)(1)(ii).
        (12) Returns of information are not required for payments that a 
    payor can, prior to payment, reliably associate with documentation upon 
    which it may rely to treat the payment as made to a foreign beneficial 
    owner in accordance with Sec. 1.1441-1(e)(1)(ii) or as made to a 
    foreign payee in accordance with paragraph (d)(1) of this section or 
    presumed to be made to a foreign payee under paragraph (d) (2), (3), 
    (4), or (5) of this section. However, such payments may be reportable 
    under Sec. 1.1461-1 (b) and (c). The provisions of Sec. 1.1441-1 shall 
    apply by substituting the term payor for the term withholding agent and 
    without regard to the fact that the provisions apply only to amounts 
    subject to withholding under chapter 3 of the Code. In the event of a 
    conflict between the provisions of Sec. 1.1441-1 and paragraph (d) of 
    this section in determining the foreign status of the payee, the 
    provisions of Sec. 1.1441-1 shall govern for payments of amounts 
    subject to withholding under chapter 3 of the Code and the provisions 
    of paragraph (d) of this section shall govern in other cases. This 
    paragraph (b)(12) does not apply to interest paid to a Canadian 
    nonresident alien individual as provided in Sec. 1.6049-8.
        (13) Amounts for the period that the debt obligation with respect 
    to which the interest arises represents an asset blocked as described 
    in Sec. 1.1441-2(e)(3). Payment of such amounts, including interest 
    that is past due and OID on obligations that mature on or before the 
    date that the assets are no longer blocked, is deemed to occur in 
    accordance with the rules of Sec. 1.1441-2(e)(3).
        (14) Payments made by a foreign intermediary described in 
    Sec. 1.1441-1(e)(3)(i) that it has received in its capacity as an 
    intermediary and that are associated with a valid withholding 
    certificate described in Sec. 1.1441-1(e)(3) (ii) or (iii) and payments 
    made by a U.S. branch of a foreign bank or of a foreign insurance 
    company described in Sec. 1.1441-1(b)(2)(iv) that are associated with a 
    valid withholding certificate described in Sec. 1.1441-1(e)(3)(v), 
    which certificate the intermediary or branch has furnished to the payor 
    or middleman from whom it has received the payment, unless, and to the 
    extent, the intermediary or branch knows that the payments are required 
    to be reported under Sec. 1.6049-4 and were not so reported.
        (15) Amounts of interest as determined under the provisions of 
    Sec. 1.446-3(g)(4) (dealing with interest in the case of a significant 
    non-periodic payment with respect to a notional principal contract). 
    Such amounts are governed by the provisions of section 6041. See 
    Sec. 1.6041-1(d)(5).
        (c) Applicable rules--(1) Documentary evidence for offshore 
    accounts. A payor may rely on documentary evidence described in this 
    paragraph (c)(1) instead of a beneficial owner withholding certificate 
    described in Sec. 1.1441-1(e)(2)(i) in the case of a payment made 
    outside the United States to an offshore account or, in the case of 
    broker proceeds described in Sec. 1.6045-1(c)(2), in the case of a sale 
    effected outside the United States (as defined in Sec. 1.6045-
    1(g)(3)(iii)(A)). For purposes of this paragraph (c)(1), an offshore 
    account means an account maintained at an office or branch of a U.S. or 
    foreign bank or other financial institution at any location outside the 
    United States (i.e., other than in any of the fifty States or the 
    District of Columbia) and outside of U.S. possessions. Thus, for 
    example, an account maintained in a foreign country at a branch of a 
    U.S. bank or of a foreign subsidiary of a U.S. bank is an offshore 
    account. For the definition of a payment made outside the United 
    States, see paragraph (e) of this section. A payor may rely on 
    documentary evidence if the payor has established procedures to obtain, 
    review, and maintain documentary evidence sufficient to establish the 
    identity of the payee and the status of that person as a foreign person 
    (including, but not limited to, documentary evidence described in 
    Sec. 1.1441-6(c) (3) or (4)); and the payor obtains, reviews, and 
    maintains such documentary evidence in accordance with those 
    procedures. A payor maintains the documents reviewed by retaining the 
    original, certified copy, or a photocopy (or microfiche or similar 
    means of record retention) of the documents reviewed and noting in its 
    records the date on which and by whom the document was received and 
    reviewed. Documentary evidence furnished for the payment of an amount 
    subject to withholding under chapter 3 of the Code must contain all of 
    the information that is necessary to complete a Form 1042-S for that 
    payment.
        (2) Other applicable rules. The provisions of Sec. 1.1441-
    1(e)(4)(i) through (ix) (regarding who may sign a certificate, validity 
    period of certificates, retention of certificates, etc.) shall apply 
    (by substituting the term payor for the term withholding agent and 
    disregarding the fact that the provisions under Sec. 1.1441-1(e)(4) 
    only apply to amounts subject to withholding under chapter 3 of the 
    Code) to withholding certificates and documentary evidence furnished 
    for purposes of this section. See Sec. 1.1441-1(b)(2)(vii) for 
    provisions dealing reliable association of a payment with 
    documentation.
        (3) Standards of knowledge. A payor may not rely on a withholding 
    certificate or documentary evidence described in paragraph (c)(1) or 
    (4) of this section if it has actual knowledge or reason to know that 
    any information or certification stated in the certificate or 
    documentary evidence is unreliable. A payor has reason to know that 
    information or certifications are unreliable only if the payor would 
    have reason to know under the provisions of Sec. 1.1441-7(b)(2)(ii) and 
    (3) that the information and certifications provided on the certificate 
    or in the documentary evidence are unreliable or, in the case of a Form 
    W-9 (or an acceptable substitute), it cannot reasonably rely on the 
    documentation as set forth in Sec. 31.3406(h)-3(e) of this chapter (see 
    the information and certification described in Sec. 31.3406(h)-
    3(e)(2)(i) through (iv) of this chapter that are required in order for 
    a payor reasonably to rely on a Form W-9). The provisions of 
    Sec. 1.1441-7(b)(2)(ii) and (3) shall apply for purposes of this 
    paragraph (c)(3) irrespective of the type of income to which 
    Sec. 1.1441-7(b)(2)(ii) is otherwise limited. The exemptions from 
    reporting described in paragraphs (b)(10) and (11) of this section 
    shall not apply if the payor has actual knowledge that the payee is a 
    U.S. person who is not an exempt recipient.
        (4) Special documentation rules for certain payments. This 
    paragraph (c)(4) modifies the provisions of this paragraph (c) for 
    payments to offshore accounts maintained at a bank or other financial 
    institution of amounts that are not subject to withholding under 
    chapter 3 of the Code, other than amounts described in (d)(3)(iii) of 
    this section (dealing with U.S. short-term OID and U.S. bank deposit 
    interest). Amounts are not subject to withholding under chapter 3 of 
    the Code if they are not included in the definition of amounts subject 
    to withholding under Sec. 1.1441-2(a) (e.g., deposit interest with 
    foreign branches of U.S. banks, foreign source income, or broker 
    proceeds).
        (i) Alternative documentary evidence. In the case of payments to 
    which this paragraph (c)(4) applies, the payor may, instead of a 
    beneficial owner withholding certificate described in Sec. 1.1441-
    1(e)(2)(i) or documentary evidence described in paragraph (c)(1) of 
    this section, rely on a customer's declaration of foreign status made 
    on an account opening form that contains the statement described in 
    this paragraph (c)(4)(i) (or such substitute statement as
    
    [[Page 53486]]
    
    the Internal Revenue Service may prescribe) if the mailing and 
    permanent residence address of the customer is in the country in which 
    the branch or office is located and, under the local laws, regulations, 
    or practices applicable to the type of account or transaction described 
    in this paragraph (c)(4), it is not customary to obtain documentary 
    evidence described in paragraph (c)(1) of this section or, it is 
    customary to obtain such documentary evidence, but it is not customary 
    to request that it be renewed periodically. Reliance on the documentary 
    evidence described in this paragraph (c)(4)(i) is permitted only if 
    there are no indications that the person opening the account is a U.S. 
    person (e.g., permanent residence address is in a foreign country, the 
    person does not have a mailing address in the United States, the person 
    is not employed by a U.S.-based multinational organization). If 
    reliance is not permitted because there are indications of U.S. status 
    (e.g., the person's permanent residence address is in the United 
    States, the person changes his mailing address to the United States, 
    the person is employed by a U.S.-based multinational organization) then 
    the payor must obtain either documentary evidence described in 
    paragraph (c)(1) of this section or a Form W-8 described in 
    Sec. 1.1441-1(e)(2)(i) in order to treat the customer as a foreign 
    payee. The form or documentary evidence must be renewed every three 
    years in accordance with the renewal procedures set forth in 
    Sec. 1.1441-1(e)(4)(ii)(A) for as long as indicia of U.S. status 
    continue to be present. The statement referred to in this paragraph 
    (c)(4)(i) must appear near the signature line and must read as follows:
    
        By opening this account and signing below, the account owner 
    represents and warrants that he/she/it is not a U.S. person for 
    purposes of U.S. federal income tax and that he/she/it is not acting 
    for or on behalf of a U.S. person. A false statement or 
    misrepresentation of tax status by a U.S. person could lead to 
    penalties under U.S. law. If your tax status changes and you become 
    a U.S. citizen or a resident, you must notify us within 30 days.
    
        (ii) Continuous validity of declaration of foreign status subject 
    to due diligence by financial institution. A declaration of foreign 
    status described in paragraph (c)(4)(i) of this section does not expire 
    if the financial institution complies with the mailing requirement 
    described in paragraph (c)(4)(iii) of this section, unless the 
    financial institution becomes aware of circumstances indicating that 
    the customer may be a U.S. person (including indications described in 
    Sec. 1.1441-7(b)(2)(ii), dealing with due diligence standards 
    applicable to financial institutions). If circumstances indicate that 
    the customer may be a U.S. person, then the financial institution may 
    rely on the foreign status of the customer only if it obtains 
    documentary evidence from the customer that is described in paragraph 
    (c)(1) of this section or a beneficial withholding certificate 
    described in Sec. 1.1441-1(e)(2)(i). Such documentary evidence or 
    certificate does not expire after the three-year validity period 
    otherwise prescribed for such documentation but must be renewed each 
    time new circumstances occur indicating that the customer may be a U.S. 
    person.
        (iii) Negative confirmation of change of status. In order for a 
    declaration of foreign status to remain valid, the financial 
    institution must include the following statement on a year-end 
    statement mailed to the customer:
    
        You have declared to us that you are not a U.S. person and, 
    unless you notify us to the contrary, we will continue to rely on 
    that declaration to treat the account as owned by a non-U.S. person. 
    You have an obligation to notify us if your status changes and you 
    become a U.S. citizen or a U.S. resident. A U.S. person who fails to 
    report earnings on the account could be subject to penalties under 
    U.S. law.
    
        (iv) Special rule when non-renewable documentary evidence is 
    customary. If it is customary in the country in which the branch or 
    office is located to obtain documentary evidence described in paragraph 
    (c)(1) of this section, but it is not customary for such documentary 
    evidence to be renewed, then a payor must request such documentary 
    evidence in lieu of the statement described in paragraph (c)(4)(i) of 
    this section. All other requirements described in paragraphs (c)(4)(ii) 
    and (c)(4)(iii) of this section shall apply.
        (v) Exception for existing accounts. The rules of paragraphs 
    (c)(4)(i) and (iv) of this section shall apply only to accounts opened 
    on or after January 1, 1999.
        (5) U.S. payor, U.S. middleman, non-U.S. payor, and non-U.S. 
    middleman. The terms payor and middleman have the meanings ascribed to 
    them under Sec. 1.6049-4(a). A non-U.S. payor or non-U.S. middleman 
    means a payor or middleman other than a U.S. payor or U.S. middleman. 
    The term U.S. payor or U.S. middleman means--
        (i) A person described in section 7701(a)(30) (including a foreign 
    branch or office of such person);
        (ii) The government of the United States or the government of any 
    State or political subdivision thereof (or any agency or 
    instrumentality of any of the foregoing);
        (iii) A controlled foreign corporation within the meaning of 
    section 957(a);
        (iv) A foreign partnership, if at any time during its tax year, one 
    or more of its partners are U.S. persons (as defined in Sec. 1.1441-
    1(c)(2)) who, in the aggregate hold more than 50 percent of the income 
    or capital interest in the partnership or if, at any time during its 
    tax year, it is engaged in the conduct of a trade or business in the 
    United States;
        (v) A foreign person 50 percent or more of the gross income of 
    which, from all sources for the three-year period ending with the close 
    of its taxable year preceding the collection or payment (or such part 
    of such period as the person has been in existence), was effectively 
    connected with the conduct of trade or business within the United 
    States; or
        (vi) A U.S. branch of a foreign bank or a foreign insurance company 
    described in Sec. 1.1441-1(b)(2)(iv).
        (6) Examples. The following examples illustrate the provisions of 
    paragraphs (b) and (c) of this section:
    
        Example 1. FC is a foreign corporation that is not engaged in a 
    trade or business in the United States during the current calendar 
    year. D, an individual who is a resident and citizen of the United 
    States, holds a registered obligation issued by FC in a public 
    offering. Interest is paid on the obligation within the United 
    States by DC, a U.S. corporation that is the designated paying agent 
    of FC. D does not have an account with DC. Although interest paid on 
    the obligation issued by FC is foreign source, the interest paid by 
    DC to D is considered to be interest for purposes of information 
    reporting under section 6049 because it is paid in the United 
    States.
        Example 2. The facts are the same as in Example 1 except that D 
    is a nonresident alien individual who has furnished DC with a Form 
    W-8 in accordance with the provisions of Sec. 1.1441-1(e)(1)(ii). By 
    reason of paragraph (b)(12) of this section, the payment of interest 
    by DC to D is not considered to be a payment of interest for 
    purposes of information reporting under section 6049. Therefore, DC 
    is not required to make an information return under section 6049.
        Example 3. The facts are the same as in Example 2 except that D 
    has not furnished a Form W-8 and DC pays interest on the obligation 
    at its branch outside the United States. The payment of interest by 
    DC to D is not considered to be a payment of interest for purposes 
    of information reporting under section 6049 because DC, although a 
    U.S. person is not a middleman or a payor within the meaning of 
    Sec. 1.6049-4(a) and (f)(4). Thus, the amount is described in 
    paragraph (b)(6) of this section. Therefore, DC is not required to 
    make an information return under section 6049.
        Example 4. The facts are the same as in Example 3 except that 
    the obligation of FC is held in a custodial account for D by FB,
    
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    a foreign branch of a U.S. financial institution. By reason of 
    paragraph (c)(5) of this section, FB is considered to be a U.S. 
    middleman. Therefore, FB is required to make an information return 
    unless FB may treat D as a beneficial owner that is a foreign person 
    in accordance with the provisions of Sec. 1.1441-1(e)(1)(ii).
        Example 5. The facts are the same as in Example 4 except that 
    the FC obligation is held for D by NC, in a custodial account at 
    NC's foreign branch. NC is a foreign corporation that is a non-U.S. 
    middleman described in paragraph (c)(5) of this section. Under 
    paragraph (b)(6) of this section, the payment by NC to D is not 
    considered to be a payment of interest for purposes of section 6049. 
    Therefore, NC is not required to make an information return under 
    section 6049 with respect to the payment.
    
        (d) Determination of status as U.S. or foreign payee and applicable 
    presumptions in the absence of documentation--(1) Identifying the 
    payee. The provisions of Sec. 1.1441-1(b)(2) shall apply (by 
    substituting the term payor for the term withholding agent) to identify 
    the payee for purposes of this section (and other sections of 
    regulations under this chapter to which this paragraph (d)(1) applies), 
    except to the extent provided in this paragraph (d)(1) in the case of 
    payments of amounts that are not subject to withholding under chapter 3 
    of the Code. Amounts are not subject to withholding under chapter 3 of 
    the Code if they are not included in the definition of amounts subject 
    to withholding under Sec. 1.1441-2(a) (e.g., deposit interest with 
    foreign branches of U.S. banks, foreign source income, or broker 
    proceeds). The exceptions to the application of Sec. 1.1441-1(b)(2) to 
    amounts that are not subject to withholding under chapter 3 of the Code 
    are as follows:
        (i) The provisions of Sec. 1.1441-1(b)(2)(ii), dealing with 
    payments to a U.S. agent of a foreign person, shall not apply. Thus, a 
    payment to a U.S. agent of a foreign person is treated as a payment to 
    a U.S. payee.
        (ii) Payments to U.S. branches of certain banks or insurance 
    companies described in Sec. 1.1441-1(b)(2)(iv) shall be treated as 
    payments to a foreign payee, irrespective of the fact that the U.S. 
    branch may have arranged with the payor to be treated as a U.S. person 
    for payments of amounts subject to withholding and irrespective of the 
    fact that the branch is treated as a U.S. payor for purposes of 
    paragraph (c)(5) of this section.
        (2) Presumptions of U.S. or foreign status in the absence of 
    documentation--(i) In general. For purposes of this section (and other 
    sections of regulations under this chapter to which this paragraph 
    (d)(2) applies), the provisions of Sec. 1.1441-1(b)(3)(i), (ii), (iii), 
    (vii), (viii), and (ix) shall apply (by substituting the term payor for 
    the term withholding agent) to determine the status of a payee as a 
    U.S. or a foreign person and its relevant characteristics (e.g., as an 
    owner or intermediary, or as an individual, corporation, or flow-
    through entity), irrespective of whether the payments are subject to 
    withholding under chapter 3 of the Code. In addition, the rules of 
    Sec. 1.1441-1(b)(2)(vii) shall apply for purposes of determining when a 
    payment can reliably be associated with documentation, by substituting 
    the term payor for the term withholding agent. For this purpose, the 
    documentary evidence described in paragraph (c)(4) of this section can 
    be treated as documentation with which a payment can be associated.
        (ii) Grace period in the case of indicia of a foreign payee. When 
    the conditions of this paragraph (d)(2)(ii) are satisfied, the 30-day 
    grace period provisions under section 3406(e) shall not apply and the 
    provisions of this paragraph (d)(2)(ii) shall apply instead. A payor 
    that, at any time during the grace period described in this paragraph 
    (d)(2)(ii), credits an account with amounts reportable under section 
    6042, 6045, or 6049 with respect to publicly traded securities, or 
    under section 6050N in the case of royalties from a unit investment 
    trust that are (or were upon issuance) publicly offered and are 
    registered with the Securities and Exchange Commission under the 
    Securities Act of 1933 (15 U.S.C. 77a) may, instead of treating the 
    account as owned by a U.S. person and applying backup withholding under 
    section 3406, choose, in its discretion, to treat the account as owned 
    by a foreign person if, at the beginning of the grace period, the 
    address that the payor has in its records for the account holder is in 
    a foreign country, the payor has been furnished the information 
    contained in a withholding certificate described in Sec. 1.1441-
    1(e)(2)(i) or (3)(i) (by way of a facsimile copy of the certificate or 
    other non-qualified electronic transmission of the information required 
    to be stated on the certificate), or the payor holds a withholding 
    certificate that is no longer reliable. In the case of a newly opened 
    account, the grace period begins on the date that the payor first 
    credits the account. In the case of an existing account for which the 
    payor holds a Form W-8 or documentary evidence of foreign status, the 
    grace period begins on the date that the payor first credits the 
    account after the existing documentation held with regard to the 
    account can no longer be relied upon (other than because the validity 
    period described in Sec. 1.1441-1(e)(4)(ii)(A) has expired). A new 
    account shall be treated as an existing account if the account holder 
    already holds an account at the branch location at which the new 
    account is opened. It shall also be treated as an existing account if 
    an account is held at another branch location if the institution 
    maintains a coordinated account information system described in 
    Sec. 1.1441-1(e)(4)(ix). The grace period terminates on the earlier of 
    the close of the 90th day from the date on which the grace period 
    begins, the date that the documentation is provided, or the last day of 
    the calendar year in which the grace period begins. The grace period 
    also terminates when the remaining balance in the account (due to 
    withdrawals or otherwise) is less than 31 percent of the total amounts 
    credited since the beginning of the grace period that would be subject 
    to backup withholding if the provisions of this paragraph (d)(2)(ii) 
    did not apply. At the end of the grace period, the payor shall treat 
    the amounts credited to the account during the grace period as paid to 
    a U.S. or foreign payee depending upon whether documentation has been 
    furnished and the nature of any such documentation furnished upon which 
    the payor may rely to treat the account as owned by a U.S. or foreign 
    payee. If the documentation has not been received on or before the date 
    of expiration of the grace period, the payor may also apply the 
    presumptions described in this paragraph (d) to amounts credited to the 
    account after the date on which the grace period expires (until such 
    time as the payor can reliably associate the documentation with amounts 
    credited). See Sec. 31.6413(a)-3(a)(1)(iv) of this chapter for treating 
    backup withheld amounts under section 3406 as erroneously withheld when 
    the documentation establishing foreign status is furnished prior to the 
    end of the calendar year in which backup withholding occurs. If the 
    provisions of this paragraph (d)(2)(ii) apply, the provisions of 
    Sec. 31.3406(d)-3 of this chapter shall not apply. For purposes of this 
    paragraph (d)(2)(ii), an account holder's reinvestment of gross 
    proceeds of a sale into other instruments constitutes a withdrawal and 
    a non-qualified electronic transmission of information on a withholding 
    certificate is a transmission that is not in accordance with the 
    provisions of Sec. 1.1441-1(e)(4)(iv). See Sec. 1.1092(d)-1 for a 
    definition of the term publicly
    
    [[Page 53488]]
    
    traded for purposes of this paragraph (d)(2)(ii).
        (iii) Joint owners. Amounts paid to accounts held jointly for which 
    a certificate or documentation is required as a condition for being 
    exempt from reporting under paragraph (b) of this section are presumed 
    made to U.S. payees who are not exempt recipients if, prior to payment, 
    the payor cannot reliably associate the payment either with a Form W-9 
    furnished by one of the joint owners in the manner required in 
    Secs. 31.3406(d)-1 through 31.3406(d)-5 of this chapter, or with 
    documentation described in paragraph (b)(12) of this section furnished 
    by each joint owner upon which it can rely to treat each joint owner as 
    a foreign payee or foreign beneficial owner. For purposes of applying 
    this paragraph (d)(2)(iii), the grace period described in paragraph 
    (d)(2)(ii) of this section shall apply only if each payee qualifies for 
    such grace period.
        (3) Payments to foreign intermediaries--(i) Payments of amounts 
    subject to withholding under chapter 3 of the Internal Revenue Code. In 
    the case of payments of amounts that are subject to withholding under 
    chapter 3 of the Code, the provisions of Sec. 1.1441-1(b) (2)(v) and 
    (3)(v) shall apply (by substituting the term payor for the term 
    withholding agent) to identify the payee and determine the applicable 
    presumptions for purposes of this section (and other sections of 
    regulations under this chapter to which this paragraph (d)(3) applies).
        (ii) Payments of amounts not subject to withholding under chapter 3 
    of the Internal Revenue Code. Amounts that are not subject to 
    withholding under chapter 3 of the Code that the payor may treat as 
    paid to a foreign intermediary in accordance with Sec. 1.1441-
    1(b)(3)(v)(A) shall be treated as made to an exempt recipient described 
    in Sec. 1.6049-4(c)(1)(ii) (M), (O), (P), or (Q) except to the extent 
    that the payor has actual knowledge that any person for whom the 
    intermediary is collecting the payment is a U.S. person who is not an 
    exempt recipient. In the case of such actual knowledge, the payor shall 
    treat the payment that it knows is allocable to such U.S. person as a 
    payment to a U.S. payee who is not an exempt recipient. If the payor 
    does not have sufficient reliable information regarding the portion of 
    the payment to the foreign intermediary that is allocable to such 
    presumed U.S. payee, then the payor shall treat the maximum portion of 
    the payment that could be allocable to such presumed U.S. payee as so 
    allocable.
        (iii) Special rule for payments of certain short-term original 
    issue discount and bank deposit interest--(A) General rule. A payment 
    of U.S. source original issue discount on an obligation with a maturity 
    from the date of issue of 183 days or less (short-term OID) described 
    in sections 871(g)(1)(B) or 881(a)(3) or of U.S. source interest 
    (including original issue discount) on deposits with banks and other 
    financial institutions described in sections 871(i)(2)(A) or 881(d) 
    that the payor may treat as paid to a foreign intermediary in 
    accordance with the provisions of Sec. 1.1441-1(b)(3)(v)(A) shall be 
    treated as paid to an exempt recipient only to the extent that the 
    payor can treat the payment as made to a foreign person that is a 
    beneficial owner in accordance with the provisions of Sec. 1.1441-
    1(e)(1)(ii), or can treat as a payment to a U.S. beneficial owner in 
    accordance with the provisions of Sec. 1.1441-1(d)(4) (except to the 
    extent that the payment is associated with a Form W-9 described in 
    Sec. 1.1441-1(d)(2) relating to a U.S. payee who is not an exempt 
    recipient), or can rely on the payee's claim that the payee assumes 
    withholding responsibility in accordance with Sec. 1.1441-1(e)(5)(iv).
        (B) Payee has not furnished reliable documentation. If the payment 
    is made to a person described in Sec. 1.6049-4(c)(1)(ii) that the payor 
    may treat as an exempt recipient without requiring documentation and 
    the payor may not treat the payee as a foreign intermediary in 
    accordance with the provisions of Sec. 1.1441-1(b)(3)(v)(A), then the 
    payee shall be treated as an exempt recipient only if the payor can 
    treat the person as a U.S. person, or if the person has furnished a 
    certificate as a U.S. branch described in Sec. 1.1441-1(b)(2)(iv), or 
    the person has furnished a certificate such that the payor can treat 
    the payment as a payment made to a foreign person that is a beneficial 
    owner, or if the payor can treat the person as a foreign person that 
    has furnished an indication to the payor that such person is receiving 
    the payment for its own account. A payor must treat the payee as a 
    foreign person for purposes of this paragraph (d)(3)(iii) if the payor 
    has actual knowledge of the person's employer identification number and 
    that number begins with the two digits ``98,'' if the payor's 
    communications with the person are mailed to an address in a foreign 
    country, or if the payment is made outside the United States (as 
    defined in paragraph (e) of this section). The payor may treat as a 
    U.S. person any person not described in the preceding sentence for 
    purposes of this paragraph (d)(3)(iii). If the payee is treated as a 
    foreign person under this paragraph (d)(3)(iii)(B), it must be treated 
    as not acting for its own account unless it furnishes an indication of 
    beneficial ownership in any manner that the payor and the person may 
    choose, provided the indication is documented in the payor's records. 
    The indication is not required to be under penalties of perjury. The 
    provisions of this paragraph (d)(3)(iii) shall not apply to deposits 
    with banks and other financial institutions that remain on deposit for 
    a period of two weeks or less, to amounts of original issue discount 
    arising from a sale and repurchase transaction that is completed within 
    a period of two weeks or less, or to amounts described in paragraphs 
    (b)(7), (10) and (11) of this section (relating to certain obligations 
    issued in bearer form).
        (iv) Examples. The rules of this paragraph (d)(3) are illustrated 
    by the following example:
    
        Example 1. A payor, X, makes a payment to Y of U.S. source 
    interest on debt obligations issued prior to July 18, 1984. 
    Therefore, the interest does not qualify as portfolio interest under 
    sections 871(h) or 881(d). Y is a non-qualified foreign intermediary 
    that has furnished to X a valid intermediary withholding certificate 
    described in Sec. 1.1441-1(e)(3)(iii) to which it has attached a 
    valid Form W-9 for A, and two valid beneficial owner Forms W-8, one 
    for B and one for C. Y's withholding certificate does not contain 
    reliable information regarding B and C's share of the payment. B's 
    withholding certificate (attached to Y's withholding certificate) 
    indicates that B is a foreign pension fund, exempt from U.S. tax 
    under the U.S. income tax treaty with Country T. C's withholding 
    certificate (attached to Y's withholding certificate) indicates that 
    C is a foreign corporation not entitled to a reduced rate of 
    withholding. Under paragraph (b)(12) of this section, X may rely on 
    the withholding certificates to determine the status of A, B, and C 
    for purposes of deciding whether the amounts paid are interest 
    within the meaning of this section. However, because X cannot 
    reliably determine how much of the payment is allocable to B and C, 
    it must presume under paragraph (d)(3)(i) of this section and 
    Sec. 1.1441-1(b)(3)(v)(C) that 80 percent of the payment (i.e., all 
    of the payment less A's share) is allocable to C because the rate of 
    withholding applicable to the payment to C is the highest of the 
    withholding rates applicable to B and C. Thus, based on such 
    presumption, X may treat C as a foreign payee under paragraph 
    (b)(12) of this section and, therefore, may treat the payment as not 
    being interest reportable under Sec. 1.6049-4(a).
        Example 2. The facts are the same as in Example 1, except that X 
    can reliably determine C's allocable share, but cannot reliably 
    determine A's and B's share. No withholding is required under 
    chapter 3 of the Code or under section 3406 on the payment to A or B 
    since A is a U.S. person who has furnished a valid Form W-9 and B is 
    an exempt recipient (as defined in
    
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    Sec. 1.6049-4(c)(1)(ii)(B)) and a foreign tax-exempt organization 
    exempt from chapter 3 withholding (see Sec. 1.1441-9). However, X 
    estimates that A, as a U.S. person, is subject to a higher U.S. tax 
    liability with respect to the payment than B is, since B is a 
    foreign tax-exempt organization. Therefore, X must presume under 
    paragraph (d)(3)(i) of this section and Sec. 1.1441-1(b)(3)(v)(C) 
    that 70 percent of the payment (i.e., all of the payment less C's 
    share) is allocable to A. Consequently, X must report all of the 
    payment on the Form 1099 filed for A under Sec. 1.6049-4(a).
        Example 3. A payor, X, makes a payment of foreign source 
    interest to Y, a non-qualified foreign intermediary that has 
    furnished an intermediary withholding certificate described in 
    Sec. 1.1441-1(e)(3)(iii) to which it has attached a withholding 
    certificate described in Sec. 1.1441-1(e)(3)(iii) for Z, that is 
    also a non-qualified foreign intermediary. Beneficial owner 
    certificates are attached to Z's certificate. Under paragraph (d)(1) 
    of this section, X must rely on the provisions of Sec. 1.1441-
    1(b)(2)(v) to treat the payment as made to the persons whose 
    withholding certificates are attached to Z's certificate to the 
    extent both Y and Z have reliably certified in accordance with 
    Sec. 1.1441-1(e)(3)(iii)(D) that the certificates that each of them 
    has attached to their respective intermediary withholding 
    certificate represent all of the persons to whom the intermediary 
    withholding certificate relates. X must rely on the provisions of 
    Sec. 1.1441-1(b)(2)(v) even though the payment is not an amount 
    subject to withholding under chapter 3 of the Code.
        Example 4. A payor, X, makes a payment to Y of foreign source 
    interest and U.S. source dividends. Y has furnished to X a qualified 
    intermediary withholding certificate described in Sec. 1.1441-
    1(e)(3)(ii) for itself. Y indicates that 10 percent of each type of 
    payments is allocable to the category described in Sec. 1.1441-
    1(e)(5)(v)(B)(3), relating to assets owned by persons for whom the 
    qualified intermediary does not hold the documentation. X has no 
    actual knowledge that the persons owning the assets are U.S. 
    persons. With respect to the payment of foreign source interest (an 
    amount that is not subject to withholding under chapter 3 of the 
    Code), X must, under paragraph (d)(3)(ii) of this section, treat the 
    payment as made to a foreign payee. Such treatment is effective for 
    purposes of paragraph (b)(12) of this section, meaning that the 10-
    percent amount is not treated as interest for purposes of reporting 
    under Sec. 1.6049-4(a). With respect to the amount of U.S. source 
    dividends, X must, under paragraph (d)(3)(i) of this section, treat 
    the payment as made to a foreign payee (based upon paragraph 
    (d)(3)(i)'s cross-reference to Sec. 1.1441-1(b)(3)(v)(B)). Such 
    treatment is effective for purposes of Sec. 1.6042-3(b)(1)(iii), 
    meaning that the 10-percent amount is not treated as a dividend for 
    purposes of reporting under Sec. 1.6042-2(a).
        Example 5. A payor, X, makes a payment of foreign source 
    interest to Y, a non-qualified foreign intermediary that has 
    furnished an intermediary withholding certificate described in 
    Sec. 1.1441-1(e)(3)(iii) to which it has attached beneficial owner 
    Forms W-8. In its withholding certificate, Y represents to X that 30 
    percent of the payment is allocable to a U.S. person who has not 
    furnished a Form W-9 and whom Y cannot treat as an exempt recipient. 
    Under paragraph (d)(3)(ii) of this section, X must treat 70 percent 
    of the payment as made to a foreign payee. X, however, may not rely 
    on the rule of paragraph (d)(3)(ii) of this section to treat the 
    remainder of the payment as made to a foreign payee because X has 
    actual knowledge that the remainder of the payment is allocable to a 
    U.S. person. Under paragraph (d)(3)(ii) of this section, X must 
    treat 30 percent of the payment as made to a U.S. payee who is not 
    an exempt recipient.
        Example 6. A payor, X, holds a valid withholding certificate 
    from Y, a qualified intermediary, with which it reliably associates 
    payments made to A, a U.S. individual who maintains an account 
    relationship with Y and who has furnished a valid Form W-9 to Y. Y 
    has furnished A's Form W-9 to X who has set up a separate account 
    for those assets held in Y's name, and which Y has indicated are 
    allocable to A. The assets consist of 10,000 shares of stock of 
    domestic corporation T, publicly traded on a U.S. stock exchange. 
    When dividends are paid on the T stock held in the Y/A account, X 
    credits the dividend amounts to the account and reports the dividend 
    amounts credited to that account on a Form 1099-DIV under section 
    6042, treating A as the payee in accordance with paragraph (d)(1) of 
    this section (cross-referencing Sec. 1.1441-1(b)(2)(v)). When A 
    later instructs Y to sell the shares, X effects the sale and credits 
    the Y/A account with the gross proceeds from the sale of 10,000 
    shares of the T stock. Under Sec. 1.6045-1(c)(2) and paragraph 
    (d)(3)(ii) of this section, X must report the gross proceeds 
    credited to the Y/A account on a Form 1099--B made in the name of A 
    since it has actual knowledge that the gross proceeds are paid to a 
    U.S. person who is not an exempt recipient. See section 1.6045-
    1(g)(3)(iv).
        Example 7. A payor, X, holds a valid withholding certificate 
    from Y, a non-qualified intermediary, and can reliably associate a 
    payment of U.S. short-term OID and proceeds from the sale of shares 
    with the certificate. Y has not attached any certificates or 
    documentary evidence to its certificate and informs X that the 
    payment is allocable to persons for whom it holds no documentation. 
    Under paragraph (d)(3)(iii) of this section, X must, for purposes of 
    this section and section 3406, treat the payment of short-term OID 
    as made to a U.S. payee who is not an exempt recipient. However, 
    under paragraph (d)(3)(ii) of this section, the payment of gross 
    proceeds from the sale of shares is treated as made to a foreign 
    payee. X must rely on this treatment for purposes of determining its 
    reporting obligations under section 6045 and the regulations under 
    that section (see Sec. 1.6045-1(g)(1)(i)) and, consequently, its 
    withholding obligations under section 3406 and the regulations under 
    that section.
    
        (4) Determination of partnership and partners status in the absence 
    of documentation--(i) Payments of amounts subject to withholding under 
    chapter 3 of the Internal Revenue Code. In the case of payments of 
    amounts that are subject to withholding under chapter 3 of the Code, 
    the provisions of Secs. 1.1441-1(b)(3)(ii) and 1.1441-5(c)(1), and (d) 
    shall apply (by substituting the term payor for the term withholding 
    agent) to determine the status of the payee as a partnership, as a 
    domestic or foreign partnership, and the status of its partners for 
    purposes of this section (and other sections of regulations under this 
    chapter to which this paragraph (d)(4) applies).
        (ii) Payments of amounts not subject to withholding under chapter 3 
    of the Internal Revenue Code. In the case of amounts that are not 
    subject to withholding under chapter 3 of the Code, the provisions of 
    Secs. 1.1441-1(b)(3)(ii) and 1.1441-5(c)(1), and (d) shall also apply 
    (by substituting the term payor for the term withholding agent), 
    subject to the following exceptions--
        (A) If, in the absence of documentation, the payor treats the payee 
    as a partnership in accordance with the presumptions set forth in 
    Sec. 1.1441-1(b)(3)(ii), the presumptions of Sec. 1.1441-5(d)(2) shall 
    not apply to treat the partnership as a foreign partnership; instead, 
    the person treated as a partnership shall be presumed to be a domestic 
    partnership; and
        (B) In the case of payments described in Sec. 1.1441-5(d)(3)(i) 
    (dealing with lacking or unreliable documentation regarding the status 
    of partners) or in Sec. 1.1441-5(d)(3)(iii), dealing with lacking or 
    unreliable information regarding the number of partners represented by 
    the withholding certificate), the partners are presumed to be U.S. 
    payees who are not exempt recipients and not foreign payees.
        (5) Presumptions for payments to or by foreign trusts or estates. 
    [Reserved]
        (e) Determination of whether amounts are considered paid outside 
    the United States--(1) In general. For purposes of section 6049 and 
    this section, an amount is considered to be paid by a payor or 
    middleman outside the United States if the payor or middleman completes 
    the acts necessary to effect payment outside the United States. See 
    paragraphs (e)(2), (3), and (4) of this section for further 
    clarification of where amounts are considered paid. A payment shall not 
    be considered to be made within the United States for purposes of 
    section 6049 merely by reason of the fact that it is made on a draft 
    drawn on a United States bank account or by a wire or other electronic 
    transfer from a United States account. However, without regard to the 
    location
    
    [[Page 53490]]
    
    of the account from which the amount is drawn, an amount that is 
    described in paragraph (e)(1) (i) or (ii) of this section and paid by 
    transfer to an account maintained by the payee in the United States or 
    by mail to a United States address is not considered to be paid outside 
    the United States.
        (i) The amount is paid by an issuer or the paying agent of the 
    issuer and the obligation is either--
        (A) Issued by a U.S. payor, as defined in paragraph (c)(5) of this 
    section;
        (B) Registered under the Securities Act of 1933 (15 U.S.C. 77a); or
        (C) Listed on an exchange that is registered as a national 
    securities exchange in the United States or included in an interdealer 
    quotation system in the United States.
        (ii) The amount is paid by a U.S. middleman (as defined in 
    paragraph (c)(5) of this section) that, as a custodian, nominee, or 
    other agent of a payee, collects the amount for or on behalf of the 
    payee.
        (2) Amounts paid with respect to deposits or accounts with banks 
    and other financial institutions. Notwithstanding paragraph (e)(1) of 
    this section, an amount paid by a bank or other financial institution 
    with respect to a deposit or with respect to an account with the 
    institution is considered paid at the branch or office at which the 
    amount is credited unless the amount is collected by the financial 
    institution as the agent of the payee. However, an amount will not be 
    considered to be paid at the branch or office where the amount is 
    considered to be credited unless the branch or office is a permanent 
    place of business that is regularly maintained, occupied, and used to 
    carry on a banking or similar financial business; the business is 
    conducted by at least one employee of the branch or office who is 
    regularly in attendance at such place of business during normal 
    business hours; and the branch or office receives deposits and engages 
    in one or more of the other activities described in Sec. 1.864-
    4(c)(5)(i). In addition, an amount paid by a bank or other financial 
    institution with respect to a deposit or an account with the 
    institution is not considered paid at a branch or office outside the 
    United States if the customer has transmitted instructions to an agent, 
    branch, or office of the institution from inside the United States by 
    mail, telephone, electronic transmission, or otherwise concerning the 
    deposit or account (unless the transmission from the United States has 
    taken place in isolated and infrequent circumstances).
        (3) Coupon bonds and discount obligations in bearer form. 
    Notwithstanding paragraph (e)(1) of this section, an amount paid with 
    respect to a bond with coupons attached (including a certificate of 
    deposit with detachable interest coupons) or a discount obligation that 
    is not in registered form (within the meaning of section 163(f) and the 
    regulations thereunder) is considered to be paid where the coupon or 
    the discount obligation is presented to the payor or its paying agent 
    for payment. However, without regard to where the coupon or discount 
    obligation is presented for payment, an amount paid with respect to 
    either a bond with coupons attached or a discount obligation by 
    transfer to an account maintained by the payee in the United States or 
    by mail to the United States is considered paid in the United States if 
    the payment is described in paragraphs (e)(3) (i) and (ii) of this 
    section.
        (i) The amount is paid by an issuer or the paying agent of the 
    issuer and the obligation is either--
        (A) Issued by a U.S. payor, as defined in paragraph (c)(5) of this 
    section;
        (B) Registered under the Securities Act of 1933 (15 U.S.C. 77a); or
        (C) Listed on an exchange that is registered as a national 
    securities exchange in the United States or included in a interdealer 
    quotation system in the United States.
        (ii) The amount is paid by a U.S. middleman (as defined in 
    paragraph (c)(5) of this section) that, as a custodian, nominee, or 
    other agent of payee, collects the amount for or on behalf of the 
    payee.
        (4) Foreign-targeted registered obligations. Notwithstanding 
    paragraph (e)(1) of this section, where the payor is the issuer or the 
    issuer's agent, an amount is considered paid outside the United States 
    with respect to a foreign-targeted registered obligation, as described 
    in Sec. 1.871-14(e)(2), if either the amount is paid by transfer to an 
    account maintained by the registered owner outside the United States, 
    or by mail to an address of the registered owner outside the United 
    States, or by credit to an international account. For purposes of this 
    paragraph (e)(4), the term international account means the book-entry 
    account of a financial institution (within the meaning of section 
    871(h)(4)(B)) or of an international financial organization with the 
    Federal Reserve Bank of New York for which the Federal Reserve Bank of 
    New York maintains records that specifically identifies an 
    international financial organization or a financial institution (within 
    the meaning of section 871(h)(4)(B)) as either a non-United States 
    person or a foreign branch of a United States person as registered 
    owner. An international financial organization is a central bank or 
    monetary authority of a foreign government or a public international 
    organization of which the United States is a member to the extent that 
    such central bank, authority, or organization holds obligations solely 
    for its own account and is exempt from tax under section 892 or 895.
        (5) Examples. The application of the provisions of this paragraph 
    (e) are illustrated by the following examples:
    
        Example 1. FC is a foreign corporation that is not a U.S. payor 
    or U.S. middleman, as defined in paragraph (c)(5) of this section. A 
    holds FC coupon bonds that are not in registered form under section 
    163(f) and the regulations thereunder, that were issued by FC in a 
    public offering outside the United States, that are not registered 
    under the Securities Act of 1933 (15 U.S.C. 77a), and that are 
    neither listed on an exchange that is registered as a national 
    securities exchange in the United States nor included in an 
    interdealer quotation system. DC, a U.S. corporation that is engaged 
    in a commercial banking business, is the designated fiscal agent for 
    FC. FB, a foreign branch of DC, is the designated paying agent with 
    respect to the bonds issued by FC. A does not have an account with 
    FB. A presents a coupon from a FC bond for payment to FB at its 
    office outside the United States. FB pays A with a check drawn 
    against a bank account maintained in the United States. For purposes 
    of section 6049, the place of payment of interest on the FC bond by 
    FB to A is considered to be outside the United States under 
    paragraph (e)(3) of this section.
        Example 2. The facts are the same as in Example 1 except that A 
    presents the coupon to FB at its office outside the United States 
    with instructions to transfer funds in payment to a bank account 
    maintained by A in the United States. FB transfers the funds in 
    accordance with A's instructions. Even though the amount is credited 
    to an account in the United States, the place of payment of interest 
    on the FC bonds is considered to be outside the United States under 
    paragraph (e)(3) of this section because the coupon is presented for 
    payment outside the United States; because FC is a foreign person 
    that is not a U.S. payor or U.S. middleman, as defined in paragraph 
    (d)(1) of this section; because FB is not acting as A's agent; and 
    because the obligation is not registered under the Securities Act of 
    1933 (15 U.S.C. 77a), listed on a securities exchange that is 
    registered as a national securities exchange in the United States, 
    or included in an interdealer quotation system.
        Example 3. FC is a foreign corporation that is not a U.S. payor 
    or U.S. middleman, as defined in paragraph (d)(1) of this section. 
    B, a United States citizen, holds a bond issued by FC in registered 
    form under section 163(f) and the regulations thereunder and 
    registered under the Securities Act of 1933 (15 U.S.C. 77a). The 
    bond is not a foreign-targeted registered obligation as defined in 
    Sec. 1.871-14(e)(2). DB, a United States branch of a
    
    [[Page 53491]]
    
    foreign corporation engaged in the commercial banking business, is 
    the registrar of the bonds issued by FC. DB supplies FC with a list 
    of the holders of the FC bonds. Interest on the FC bonds is paid to 
    B and other bondholders by checks prepared by FC at its principal 
    office outside the United States, and B's check is mailed from there 
    to his designated address in the United States. The bond is 
    described in paragraph (e)(1)(i)(B) of this section. The place of 
    payment to B by FC of the interest on the FC bonds is considered to 
    be inside the United States under paragraph (e)(1) of this section.
        Example 4. The facts are the same as in Example 3 except that 
    the checks are prepared and mailed in the United States by DC, a 
    U.S. corporation engaged in the commercial banking business that is 
    the designated paying agent with respect to the bonds issued by FC, 
    and B's check is mailed to his designated address outside the United 
    States. For purposes of section 6049, the place of payment by DC of 
    the interest on the FC bonds is considered to be within the United 
    States under paragraph (e)(1) of this section.
        Example 5. Individual C deposits funds in an account with FB, a 
    foreign country X branch of DB, a U.S. corporation engaged in the 
    commercial banking business. FB maintains an office and employees in 
    foreign country X, accepts deposits, and conducts one or more of the 
    other activities listed in Sec. 1.864-4(c)(5)(i). The terms of C's 
    deposit provide that it will be payable in six months with accrued 
    interest. On the day that the interest is credited to C's account 
    with FB, C telephones DB from inside the United States and asks DB 
    to direct FB to transfer the funds in his account with FB to an 
    account C maintains in the United States with DB. Transmissions from 
    the United States concerning this account have taken place in 
    isolated and infrequent circumstances. Under paragraph (e)(2) of is 
    section, FB is considered to have paid the interest on C's deposit 
    outside the United States.
        Example 6. The facts are the same as in Example 5 except that C 
    has placed his deposit with FB for an indefinite period of time. 
    Interest will be credited to C's account daily. C has instructed FB 
    to wire the interest at 90-day intervals to C's account with DB 
    within the United States. FB is considered to have paid the interest 
    credited to A's account within the United States under paragraph 
    (e)(2) of this section because the regular crediting of the account 
    disqualifies the transmission from being isolated or infrequent.
        Example 7. DC, a U.S. corporation engaged in the commercial 
    banking business, maintains FB, a branch in foreign country X. FB 
    has an office and employees in foreign country X, accepts deposits, 
    and engages in one or more of the other activities listed in 
    Sec. 1.864-4(c)(5)(i). D, a United States citizen, purchases a 
    certificate of deposit issued in 1980 by FB. The certificate of 
    deposit has a maturity of 20 years and has detachable interest 
    coupons payable at six-month intervals. D presents some of the 
    coupons at the U.S. office of DC and receives payment in cash. 
    Because the coupon is presented to DC for payment within the United 
    States, DC is considered to have made the payment within the United 
    States under paragraph (e)(3) of this section.
        Example 8. FB is recognized by both foreign country X and by the 
    Federal Reserve Bank as a foreign country X branch of DC, a U.S. 
    corporation engaged in the commercial banking business. A local 
    foreign country X bank serves as FB's resident agent in Country X. 
    FB maintains no physical office or employees in foreign country X. 
    All the records, accounts, and transactions of FB are handled at the 
    United States office of DC. E deposits funds in an amount maintained 
    with FB. Interest earned on the deposit is periodically credited to 
    E's account with FB by employees of DC. For purposes of section 
    6049, the place of payment of the interest on E's deposit with FB is 
    considered to be within the United States by reason of paragraphs 
    (e)(1) and (2) of this section.
        Example 9. DC is a U.S. corporation. a holds bonds that were 
    issued by DC in registered form under section 163(f) and the 
    regulations thereunder and that are foreign-targeted registered 
    obligations as defined in Sec. 1.871-14(e)(2). DB, a commercial 
    banking business, is the registrar of bonds issued by DC. Interest 
    on the DC bonds is paid to a and other bondholders by check prepared 
    by DB at its principal office inside the United States and mailed 
    from there to a's address outside the United States. The check is 
    drawn on a United States account maintained by DC with DB within the 
    United States. The place of payment to a by DB of the interest on 
    the DC bonds is considered to be outside the United States under 
    paragraph (e)(4) of this section.
    * * * * *
        (g) Effective date--(1) General rule. The provisions of paragraphs 
    (b)(6) through (15), (c), (d), and (e) of this section apply to 
    payments made after December 31, 1998.
        (2) Transition rules. A payor that, on December 31, 1998, holds a 
    valid Form W-8 or other form upon which it is permitted to rely to hold 
    the payee as a foreign person pursuant to the regulations in effect 
    prior to January 1, 1999 (see 26 CFR parts 1 and 35a, revised April 1, 
    1997), may treat it as a valid certificate until its validity expires 
    under those regulations or, if earlier, until December 31, 1999. 
    Further, the validity of a Form W-8 or other form that is dated prior 
    to January 1, 1998, is valid on January 1, 1998, and would expire at 
    any time during 1998, is extended until December 31, 1998 (and is not 
    extended after December 31, 1998 by reason of the immediately preceding 
    sentence). The rule in this paragraph (g)(2), however, does not apply 
    to extend the validity period of a withholding certificate that expires 
    in 1998 solely by reason of changes in the circumstances of the person 
    whose name is on the certificate. Notwithstanding the three preceding 
    sentences, a payor may choose not to take advantage of the transition 
    rule in this paragraph (g)(2) with respect to one or more withholding 
    certificates and, therefore, may require new withholding certificates 
    conforming to the requirements described in this section.
        Par. 43. Section 1.6049-6 is amended by:
        1. Removing the language, ``a reasonable facsimile thereof'' in the 
    first sentence of paragraph (d) and adding ``an acceptable substitute'' 
    in its place.
        2. Revising paragraph (e)(3).
        The revision reads as follows:
    
    
    Sec. 1.6049-6  Statements to recipients of interest payments and 
    holders of obligations for attributed original issue discount.
    
    * * * * *
        (e) * * *
        (3) Cross-reference to penalty. For provisions relating to the 
    penalty provided for failure to furnish timely a correct payee 
    statement required under section 6049(c) and Sec. 1.6049-6(a), see 
    Sec. 301.6722-1 of this chapter (Procedure and Administration 
    Regulations). See Sec. 301.6724-1 of this chapter for the waiver of a 
    penalty if the failure is due to reasonable cause and is not due to 
    willful neglect.
    * * * * *
        Par. 44. Section 1.6049-7 is amended by revising paragraph (c)(4) 
    to read as follows:
    
    
    Sec. 1.6049-7  Returns of information with respect to REMIC regular 
    interests and collateralized debt obligations.
    
    * * * * *
        (c) * * *
        (4) A foreign central bank of issue (as defined in Sec. 1.895-
    1(b)(1)) or the Bank for International Settlements;
    * * * * *
        Par. 45. In Sec. 1.6049-8, paragraph (a) is amended by removing the 
    last two sentences and adding four sentences in their place to read as 
    follows:
    
    
    Sec. 1.6049-8  Interest and original issue discount paid to residents 
    of Canada.
    
        (a) Interest subject to reporting requirement. * * * The payor or 
    middleman may rely upon the permanent residence address (as defined in 
    Sec. 1.1441-1(e)(2)(ii)) as stated on the Form W-8 described in 
    Sec. 1.1441-1(e)(2)(i) in order to determine whether the payment is 
    made to a Canadian nonresident alien individual. If the permanent 
    residence address stated on the certificate is in Canada, or if the 
    payor has actual knowledge of the individual's residence address in 
    Canada, the payor must presume that the individual resides in Canada. 
    Amounts described in this paragraph (a) are not subject to backup 
    withholding
    
    [[Page 53492]]
    
    under section 3406. See Sec. 31.3406(g)-1(d) of this chapter.
    * * * * *
        Par. 46. Section 1.6050A-1 is amended by
        1. Removing the language ``Form 1099F'' each place it appears and 
    adding ``Form 1099-MISC'' in its place in paragraphs (a) introductory 
    text, (a) concluding text, (b) and (c)(1) first and second sentences.
        2. Adding paragraph (d) to read as follows:
    
    
    Sec. 1.6050A-1  Reporting requirements of certain fishing boat 
    operators.
    
    * * * * *
        (d) Cross-reference to penalties. For provisions relating to the 
    penalty provided for failure to file timely a correct information 
    return required under section 6050A(a) and Sec. 1.6050A-1(a), see 
    Sec. 301.6721-1 of this chapter (Procedure and Administration 
    Regulations). For provisions relating to the penalty provided for 
    failure to furnish timely a correct payee statement required under 
    section 6050A(b) and Sec. 1.6050A-1(c), see Sec. 301.6722-1 of this 
    chapter. See Sec. 301.6724-1 of this chapter for the waiver of a 
    penalty if the failure is due to reasonable cause and is not due to 
    willful neglect.
    
    
    Sec. 1.6050H-1  [Amended]
    
        Par. 47. Section 1.6050H-1 is amended by:
        1. Removing the language Sec. 35a.9999-4T, Q/A-5(iii) and adding 
    Sec. 1.6049-5(c) in its place in paragraph (d)(2)(ii)(A).
        2. Removing the language ``Sec. 1.6049-5(b)(2)(iv) and adding 
    Sec. 1.1441-1(e)(1) in its place in paragraph (d)(2)(ii)(B).
        Par. 48. Section 1.6050N-1 is amended by:
        1. Revising the section heading.
        2. Revising paragraphs (c) and (d).
        3. Adding paragraph (e).
        The addition and revisions read as follows:
    
    
    Sec. 1.6050N-1  Statement to recipients of royalties paid after 
    December 31, 1986.
    
    * * * * *
        (c) Exempted foreign-related items--(1) In general. No return shall 
    be required under paragraph (a) of this section for payments of the 
    items described in paragraphs (c)(1)(i) through (iv ) of this section.
        (i) Returns of information are not required for payments of 
    royalties that a payor can, prior to payment, associate with 
    documentation upon which it may rely to treat as made to a foreign 
    beneficial owner in accordance with Sec. 1.1441-1(e)(1)(ii) or as made 
    to a foreign payee in accordance with Sec. 1.6049-5(d)(1) or presumed 
    to be made to a foreign payee under Sec. 1.6049-5(d)(2), (3), (4), or 
    (5). However, such payments may be reportable under Sec. 1.1461-1(b) 
    and (c).
        For purposes of this paragraph (c)(1)(i), the provisions in 
    Sec. 1.6049-5(c) (regarding rules applicable to documentation of 
    foreign status and definition of U.S. payor and non-U.S. payor) shall 
    apply. See Sec. 1.1441-1(b)(3)(iii)(B) and (C) for special payee rules 
    regarding scholarships, grants, pensions, annuities, etc. The 
    provisions of Sec. 1.1441-1 shall apply by substituting the term payor 
    for the term withholding agent and without regard to the fact that the 
    provisions apply only to amounts subject to withholding under chapter 3 
    of the Internal Revenue Code.
        (ii) Returns of information are not required for payments of 
    royalties from sources outside the United States (determined under Part 
    I of subchapter N and the regulations under these provisions) made 
    outside the United States by a non-U.S. payor or non-U.S. middleman. 
    For a definition of non-U.S. payor or non-U.S. middleman, see 
    Sec. 1.6049-5(c)(5). For circumstances in which a payment is considered 
    to be made outside the United States, see Sec. 1.6049-5(e).
        (iii) Returns of information are not required for payments made by 
    a foreign intermediary described in Sec. 1.1441-1(e)(3)(i) that it has 
    received in its capacity as an intermediary and that are associated 
    with a valid withholding certificate described in Sec. 1.1441-
    1(e)(3)(ii) or (iii) and payments made by a U.S. branch of a foreign 
    bank or of a foreign insurance company described in Sec. 1.1441-
    1(b)(2)(iv) that are associated with a valid withholding certificate 
    described in Sec. 1.1441-1(e)(3)(v), which certificate the intermediary 
    or branch has furnished to the payor or middleman from whom it has 
    received the payment, unless, and to the extent, the intermediary or 
    branch knows that the payments are required to be reported and were not 
    so reported.
        (2) Definitions--(i) Payor. For purposes of this section, the term 
    payor shall have the meaning ascribed to it under Sec. 1.6049-4(a).
        (ii) Joint owners. Amounts paid to joint owners for which a 
    certificate or documentation is required as a condition for being 
    exempt from reporting under this paragraph (c) of this section are 
    presumed made to U.S. payees who are not exempt recipients if, prior to 
    payment, the payor cannot reliably associate the payment either with a 
    Form W-9 furnished by one of the joint owners in the manner required in 
    Secs. 31.3406(d)-1 through 31.3406(d)-5 of this chapter, or with 
    documentation described in paragraph (c)(1)(i) of this section 
    furnished by each joint owner upon which it can rely to treat each 
    joint owner as a foreign payee or foreign beneficial owner. For 
    purposes of applying this paragraph (c)(2)(ii), the grace period 
    described in Sec. 1.6049-5(d)(2)(ii) shall apply only if each payee 
    qualifies for such grace period.
        (d) Cross-reference to penalties. For provisions relating to the 
    penalty provided for failure to file timely a correct information 
    return required under section 6050N(a), see Sec. 301.6721-1 of this 
    chapter (Procedure and Administration Regulations). For provisions 
    relating to the penalty provided for failure to furnish timely a 
    correct payee statement required under section 6050N(b) and 
    Sec. 1.6050N-1(a), see Sec. 301.6722-1 of this chapter. See 
    Sec. 301.6724-1 of this chapter for the waiver of a penalty if the 
    failure is due to reasonable cause and is not due to willful neglect.
        (e) Effective date--This section, except paragraph (c) , is applies 
    to payee statements due after December 31, 1995, without regard to 
    extensions. For further guidance regarding the substantially similar 
    statement mailing requirements that apply with respect to forms 
    required to be filed after October 22, 1986, and before January 1, 1996 
    (see Rev. Proc. 84-70 (1984-2 C.B. 716) and Sec. 601.601(d)(2) of this 
    chapter). The provisions of paragraph (c) of this section apply to 
    payments made after December 31, 1998.
        Par. 49. Section 1.6071-1, is amended by revising paragraphs 
    (c)(7), (c)(8),(c)(11), (c)(13), and (c)(15) to read as follows:
    
    
    Sec. 1.6071-1  Time for filing returns and other documents.
    
    * * * * *
        (c) * * *
        (7) For provisions relating to the time for filing information 
    returns by persons making certain payments, see Sec. 1.6041-2(a)(3) and 
    Sec. 1.6041-6.
        (8) For provisions relating to the time for filing information 
    returns regarding payments of dividends, see Sec. 1.6042-2(c).
    * * * * *
        (11) For provisions relating to the time for filing information 
    returns with respect to payments of patronage dividends, see 
    Sec. 1.6044-2(d).
    * * * * *
        (13) For provisions relating to the time for filing information 
    returns regarding certain payments of interest, see Sec. 1.6049-4(g).
    * * * * *
        (15) For provisions relating to the time for filing the annual 
    information
    
    [[Page 53493]]
    
    return on Form 1042-S of the tax withheld under chapter 3 of the Code 
    (relating to withholding of tax nonresident aliens and foreign 
    corporations and tax-free covenant bonds), see Sec. 1.1461-1(c).
    * * * * *
        Par. 50. In Sec. 1.6091-1, paragraph (b)(15) is revised to read as 
    follows:
    
    
    Sec. 1.6091-1  Place for filing returns or other documents.
    
    * * * * *
        (b) * * *
        (15) For the place for filing information returns on Forms 1042-S 
    with respect to certain amounts paid to foreign persons, see 
    instructions to the form.
    * * * * *
    
    PART 31--EMPLOYMENT TAXES AND COLLECTION OF INCOME TAX AT SOURCE
    
        Par. 51. The authority for part 31 is amended by adding an entry in 
    numerical order to read in part as follows:
    
        Authority: 26 U.S.C. 7805 * * *
        Section 31.3401(a)(6)-1 also issued under 26 U.S.C. 1441(c)(4) and 
    26 U.S.C. 3401(a)(6). * * *
    
        Par. 52. Section 31.3401(a)(6)-1 is amended by:
        1. Revising the section heading.
        2. Revising the paragraph heading and first sentence of paragraph 
    (e).
        3. Adding paragraph (f).
        4. Removing the authority citation at the end of the section.
        The addition and revisions read as follows:
    
    
    Sec. 31.3401(a)(6)-1  Remuneration for services of nonresident alien 
    individuals.
    
    * * * * *
        (e) Exemption from income tax for remuneration paid for services 
    performed before January 1, 1999. Remuneration paid for services 
    performed within the United States by a nonresident alien individual 
    before January 1, 1999, is excepted from wages and hence is not subject 
    to withholding if such remuneration is, or will be, exempt from income 
    tax imposed by chapter 1 of the Internal Revenue Code by reason of a 
    provision of the Internal Revenue Code or an income tax convention to 
    which the United States is a party. * * *
        (f) Exemption from income tax for remuneration paid for services 
    performed after December 31, 1998. Remuneration paid for services 
    performed within the United States by a nonresident alien individual 
    after December 31, 1998, is excepted from wages and hence is not 
    subject to withholding if such remuneration is, or will be, exempt from 
    the income tax imposed by chapter 1 of the Internal Revenue Code by 
    reason of a provision of the Internal Revenue Code or an income tax 
    convention to which the United States is a party. An employer may rely 
    on a claim that the employee is entitled to an exemption from tax if it 
    complies with the requirements of Sec. 1.1441-1(e)(1)(ii) of this 
    chapter (for a claim based on a provision of the Internal Revenue Code) 
    or Sec. 1.1441-4(b)(2) of this chapter (for a claim based on an income 
    tax convention).
    
    
    Sec. 31.3406-0  [Amended]
    
        Par. 53. Section 31.3406-0 is amended by removing the entries in 
    the table for Sec. 31.3406(h)-2, paragraphs (e)(1) and (e)(2).
        Par. 54. Section 31.3406(d)-3 is amended by:
        1. Adding two sentences at the end of paragraph (a).
        2. Removing the words ``30-day'' in the first sentence, revising 
    the word ``these'' to ``the 30-day'', and adding the word ``may'' 
    immediately before the words ``apply only if'' in the second sentence, 
    and revising the word ``those'' to ``the'' in the third sentence in 
    paragraph (b).
        3. Revising paragraph (c).
        The addition and revision read as follows:
    
    
    Sec. 31.3406(d)-3  Special 30-day rules for certain reportable 
    payments.
    
        (a) * * * For payments made after December 31, 1998, see 
    Sec. 1.6049-5(d)(2)(ii) of this chapter for the application of a 90-day 
    grace period in lieu of the 30-day grace period described in this 
    paragraph (a) if, at the beginning of the 90-day grace period, certain 
    conditions are satisfied. If the grace period provisions of 
    Sec. 1.6049-5(d)(2)(ii) or Sec. 1.1441-1(b)(3)(iv) of this chapter are 
    applied with respect to a new account, the grace period provisions of 
    this paragraph (a) shall not apply to that account.
    * * * * *
        (c) Application to foreign payees. The rules of paragraphs (a) and 
    (b) of this section also apply to a payee from whom the payor is 
    required to obtain a Form W-8 (or an acceptable substitute) or other 
    evidence of foreign status (pursuant to relevant regulations under an 
    applicable Internal Revenue Code section without regard to the 
    requirement to furnish a taxpayer identifying number, and the 
    certifications described in Secs. 31.3406(d)-1(b)(3) and 31.3406(d)-2), 
    provided the payee represents orally or otherwise, before or at the 
    time of the acquisition or sale of the instrument or the establishment 
    of the account, that the payee is not a United States citizen or 
    resident. The 30-day rules described in paragraph (a) or (b) of this 
    section may apply only if the payee does not qualify for, or the payor 
    does not apply, the 90-day grace period described in Sec. 1.6049-
    5(d)(2)(ii) or Sec. 1.1441-1(b)(3)(iv) of this chapter.
        Par. 55. In Sec. 31.3406(g)-1, paragraph (e) is added to read as 
    follows:
    
    
    Sec. 31.3406(g)-1  Exception for payments to certain payees and certain 
    other payments.
    
    * * * * *
        (e) Certain reportable payments made outside the United States by 
    foreign persons, foreign offices of United States banks and brokers, 
    and others. For reportable payments made after December 31, 1998, a 
    payor is not required to backup withhold under section 3406 on a 
    reportable payment that qualifies for the documentary evidence rule 
    described in Sec. 1.6049-5(c)(1) or (4) of this chapter, whether or not 
    documentary evidence is actually provided to the payor, unless the 
    payor has actual knowledge that the payee is a United States person. 
    Further, no backup withholding is required for payments upon which a 
    30-percent amount was withheld by another payor in accordance with the 
    withholding provisions under chapter 3 of the Internal Revenue Code and 
    the regulations under that chapter. For rules applicable to notional 
    principal contracts, see Sec. 1.6041-1(d)(5) of this chapter.
        Par. 56. Section 31.3406(h)-2 is amended by:
        1. Revising paragraph (a)(3)(i).
        2. Revising the penultimate sentence in paragraph (d)
        3. Removing the heading of paragraph (e)(1).
        4. Removing the paragraph designation (e)(1).
        5. Removing paragraph (e)(2).
        The revisions read as follows:
    
    
    Sec. 31.3406(h)-2  Special rules.
    
        (a) * * *
        (3) Joint foreign payees--(i) In general. If the relevant payee 
    listed on a jointly owned account or instrument provides a Form W-8 or 
    documentary evidence described in Sec. 1.1441-1(e)(1)(ii) regarding its 
    foreign status, withholding under section 3406 applies unless every 
    joint payee provides the statement regarding foreign status (under the 
    provisions of chapters 3 or 61 of the Internal Revenue Code and the 
    regulations under those provisions) or any one of the joint owners who 
    has not
    
    [[Page 53494]]
    
    established foreign status provides a taxpayer identification number to 
    the payor in the manner required in Secs. 31.3406(d)-1 through 
    31.3406(d)-5. See Sec. 1.6049-5(d)(2)(iii) of this chapter for 
    corresponding joint payees provisions.
    * * * * *
        (d) * * * If its payee is not subject to withholding under section 
    3406, the payor must pay or credit the full amount of the payment to 
    the payee, unless, with respect to payments made after December 31, 
    1998, the payor chooses to apply prior withholding under section 3406 
    to an amount required to be withheld under another section of the 
    Internal Revenue Code (such as under section 1441) to the extent 
    permitted under procedures prescribed by the Internal Revenue Service 
    (see Sec. 601.601(d)(2) of this chapter). * * *
    * * * * *
        Par. 57. Section 31.6413(a)-3 is amended as follows:
        1. Paragraph (a)(1)(ii) is amended by removing the language ``or'' 
    at the end of the paragraph.
        2. In paragraph (a)(1)(iii), the parenthetical ``(including the 
    certification relating to foreign status described in Sec. 1.6049-
    5(b)(2)(iv) of this chapter or Sec. 1.6045-1(g)(1) of this chapter)'' 
    is removed and ``(including the documentation described in Sec. 1.1441-
    1(e)(1)(ii), 1.6045-1(g)(3), or 1.6049-5(c) of this chapter)'' is added 
    in its place.
        3. Paragraph (a)(1)(iii) is further amended by removing the period 
    at the end of the paragraph and adding ``; or'' in its place.
        4. Paragraph (a)(1)(iv) is added.
        5. Paragraphs (a)(2) and (b)(2) are revised.
        The addition and revisions read as follows:
    
    
    Sec. 31.6413(a)-3  Repayment by payor of tax erroneously collected from 
    payee.
    
        (a) * * * (1) * * *
        (iv) The amount is withheld because a payor imposed backup 
    withholding on a payment made to a person because the payee failed to 
    furnish the documentation described in Sec. 1.1441-1(e)(1)(ii) of this 
    chapter and the payee subsequently furnishes, completes, or corrects 
    the documentation. The documentation must be furnished, completed, or 
    corrected prior to the end of the calendar year in which the payment is 
    made and prior to the time the payor furnishes a Form 1099 to the payee 
    with respect to the payment for which the withholding erroneously 
    occurred.
        (2) For purposes of paragraph (a)(1) of this section (other than 
    erroneous withholding occurring under the circumstances described in 
    paragraph (a)(1)(iv) of this section), if a payor or broker withholds 
    because the payor or broker has not received a taxpayer identifying 
    number or required certification and the payee subsequently provides a 
    taxpayer identifying number or a required certification to the payor, 
    the payor or broker may not refund the amount to the payee.
        (b) * * *
        (2) Adjustment after the deposit of the tax--(i) In general. Except 
    as provided in paragraph (b)(2)(ii) of this section, if the amount 
    erroneously withheld has been deposited prior to the time that the 
    refund is made to the payee, the payor or broker may adjust any 
    subsequent deposit of the tax collected under chapter 24 of the 
    Internal Revenue Code that the payor or broker is required to make in 
    the amount of the tax that has been refunded to the payee.
        (ii) Erroneous withholding from a payee that is a foreign person. 
    Where a payor withholds in error from a payee that is a nonresident 
    alien or foreign person, as described in paragraph (a)(1)(iv) of this 
    section, the payor may refund some or all of the amount subject to 
    backup withholding under section 3406. A refund may be paid in 
    accordance with the requirements of this paragraph (b)(2)(ii) where the 
    documentation is furnished, completed, or corrected prior to the end of 
    the calendar year in which the payment is made and prior to the time 
    the payor furnishes a Form 1099 to the payee with respect to the 
    payment for which the withholding erroneously occurred. The amount of 
    the refund will be the amount erroneously withheld less the amount of 
    tax required to be withheld, if any, under chapter 3 of the Internal 
    Revenue Code and the regulations under that chapter. With respect to 
    the amount of the payment to the foreign person and the amount of tax 
    required to be withheld under chapter 3 of the Internal Revenue Code 
    (and the regulations thereunder), returns must be made in accordance 
    with the requirements of Sec. 1.1461-1 (b) and (c) of this chapter.
        Par. 58. Effective October 14, 1997, Sec. 31.9999-0 is added to 
    read as follows:
    
    
    Sec. 31.9999-0  Effective dates.
    
        In general, the provisions of Secs. 35a.9999-1, 35a.9999-2, 
    35a.9999-3, 35a.9999-3A, 35a.9999-4, and 35a.9999-5 of this chapter 
    apply before January 1, 1997. The provisions of those sections remain 
    applicable after December 31, 1996, and before January 1, 1999, 
    however, for purposes of Sec. 301.6724-1 of this chapter, relating to 
    due diligence safe harbor, and for international transactions, 
    including transactions involving a foreign payee, a foreign payor, a 
    foreign office of a U.S. bank or broker, or a payment from sources 
    without the United States. See Secs. 31.3406-0 through 31.3406(i)-1 of 
    this chapter for rules that apply to other transactions after December 
    31, 1996.
    
    
    Sec. 31.9999-0  [Removed]
    
        Par. 59. Effective January 1, 1999, Sec. 31.9999-0 is removed.
    
    PART 35a--TEMPORARY EMPLOYMENT TAX REGULATIONS UNDER THE INTEREST 
    AND DIVIDEND TAX COMPLIANCE ACT OF 1983
    
        Par. 60. The authority for part 35a is amended by removing the 
    entries for Sec. 
    
    
    Sec. 35a.9999-1, 35a.9999-2, 35a.9999-3, 35a.9999-3A, 35a.9999-4T,  and 
    35a.9999-5 to read in part as follows:
    
        Authority: 26 U.S.C. 7805 * * *
    
    
    Sec. 35a.9999-0T  [Removed]
    
        Par. 60a. Effective October 14, 1997 Sec. 35a.9999-0T is removed.
        Par. 61. Effective October 14, 1997 Sec. 35a.9999-0 is added to 
    read as follows:
    
    
    Sec. 35a.9999-0  Effective date.
    
        See Sec. 31.9999-0 of this chapter for applicability dates for 
    Secs. 35a.9999-1 through 35a.9999-5.
        Par. 62. Effective January 1, 1999, Secs. 35a.9999-0, 35a.9999-1, 
    35a.9999-2, 35a.9999-3, 35a.9999-3A, 35a.9999-4T and 35a.9999-5 are 
    removed.
    
    PART 301--PROCEDURE AND ADMINISTRATION
    
        Par. 63. The authority citation for part 301 is amended by adding 
    an entry in numerical order to read in part as follows:
    
        Authority: 26 U.S.C. 7805. * * *
        Section 301.6402-3 also issued under 95 Stat. 357 amending 88 Stat. 
    2351. * * *
    
        Par. 64. Section 301.6109-1 is amended as follows:
        1. Paragraphs (b)(2)(iv) and (b)(2)(v) are revised.
        2. Paragraph (b)(2)(vi) is added.
        3. Paragraph (c) is revised.
        The revisions and addition read as follows:
    
    
    Sec. 301.6109-1  Identifying numbers.
    
    * * * * *
        (b) * * *
        (2) * * *
        (iv) A foreign person that makes a return of tax (including income, 
    estate, and gift tax returns), an amended return, or a refund claim 
    under this title but
    
    [[Page 53495]]
    
    excluding information returns, statements, or documents;
        (v) A foreign person that makes an election under Sec. 301.7701-
    3(c); and
        (vi) A foreign person that furnishes a withholding certificate 
    described in Sec. 1.1441-1(e)(2) or (3) of this chapter or Sec. 1.1441-
    5(c)(2)(iv) or (3)(iii) of this chapter to the extent required under 
    Sec. 1.1441-1(e)(4)(vii) of this chapter.
        (c) Requirement to furnish another's number. Every person required 
    under this title to make a return, statement, or other document must 
    furnish such taxpayer identifying numbers of other U.S. persons and 
    foreign persons that are described in paragraph (b)(2)(i), (ii), (iii), 
    or (vi) of this section as required by the forms and the accompanying 
    instructions. The taxpayer identifying number of any person furnishing 
    a withholding certificate referred to in paragraph (b)(2)(vi) of this 
    section shall also be furnished if it is actually known to the person 
    making a return, statement, or other document described in this 
    paragraph (c). If the person making the return, statement, or other 
    document does not know the taxpayer identifying number of the other 
    person, and such other person is one that is described in paragraph 
    (b)(2)(i), (ii), (iii), or (vi) of this section, such person must 
    request the other person's number. The request should state that the 
    identifying number is required to be furnished under authority of law. 
    When the person making the return, statement, or other document does 
    not know the number of the other person, and has complied with the 
    request provision of this paragraph (c), such person must sign an 
    affidavit on the transmittal document forwarding such returns, 
    statements, or other documents to the Internal Revenue Service, so 
    stating. A person required to file a taxpayer identifying number shall 
    correct any errors in such filing when such person's attention has been 
    drawn to them.
    * * * * *
        Par. 65. Section 301.6114-1 is amended by:
        1. Revising paragraph (a)(1)(ii).
        2. Revising paragraph (b)(4)(ii) introductory text
        3. Removing the period at the end of paragraph (b)(4)(ii)(B)(7) and 
    adding ``; or'' in its place
        4. Adding paragraphs (b)(4)(ii)(C) and (b)(4)(ii)(D).
        5. Revising paragraph (c)(1)(i).
        6. Adding paragraph (c)(6).
        The revisions and addition read as follows:
    
    
    Sec. 301.6114-1  Treaty-based return positions.
    
        (a) * * * (1) * * *
        (ii) If a return of tax would not otherwise be required to be 
    filed, a return must nevertheless be filed for purposes of making the 
    disclosure required by this section. For this purpose, such return need 
    include only the taxpayer's name, address, taxpayer identifying number, 
    and be signed under penalties of perjury (as well as the subject 
    disclosure). Also, the taxpayer's taxable year shall be deemed to be 
    the calendar year (unless the taxpayer has previously established, or 
    timely chooses for this purpose to establish, a different taxable 
    year). In the case of a disclosable return position relating solely to 
    income subject to withholding (as defined in Sec. 1.1441-2(a) of this 
    chapter), however, the statement required to be filed in paragraph (d) 
    of this section must instead be filed at times and in accordance with 
    procedures published by the Internal Revenue Service.
    * * * * *
        (b) * * *
        (4) * * *
        (ii) A treaty exempts from tax, or reduces the rate of tax on, 
    fixed or determinable annual or periodical income subject to 
    withholding under section 1441 or 1442 that a foreign person receives 
    from a U.S. person, but only if described in paragraphs (b)(4)(ii)(A) 
    and (B) of this section, or in paragraph (b)(4)(ii)(C) or (D) of this 
    section as follows--
    * * * * *
        (C) For payments made after December 31, 1998, with respect to a 
    treaty that contains a limitation on benefits article, that--
        (1) The treaty exempts from tax, or reduces the rate of tax on 
    income subject to withholding (as defined in Sec. 1.1441-2(a) of this 
    chapter) that is received by a foreign person (other than a State, 
    including a political subdivision or local authority) that is the 
    beneficial owner of the income and the beneficial owner is related to 
    the person obligated to pay the income within the meaning of sections 
    267(b) and 707(b), and the income exceeds $500,000; and
        (2) A foreign person (other than an individual or a State, 
    including a political subdivision or local authority) meets the 
    requirements of the limitation on benefits article of the treaty; or
        (D) For payments made after December 31, 1998, with respect to a 
    treaty that imposes any other conditions for the entitlement of treaty 
    benefits, for example as a part of the interest, dividends, or royalty 
    article, that such conditions are met;
    * * * * *
        (c) * * *
        (1) * * *
        (i) Notwithstanding paragraph (b)(4) or (5) of this section, that a 
    treaty has reduced the rate of withholding tax otherwise applicable to 
    a particular type of fixed or determinable annual or periodical income 
    subject to withholding under section 1441 or 1442, such as dividends, 
    interest, rents, or royalties to the extent such income is beneficially 
    owned by an individual or a State (including a political subdivision or 
    local authority);
    * * * * *
        (6) This section does not apply to amounts required to be reported 
    under section 6038A on a Form 5472 (or successor form) to the extent 
    permitted under the form or accompanying instructions.
    * * * * *
        Par. 66. Section 301.6402-3 is amended by:
        1. Revising paragraph (e).
        2. Removing the authority citation at the end of the section.
        The revision reads as follows:
    
    
    Sec. 301.6402-3  Special rules applicable to income tax.
    
    * * * * *
        (e) In the case of a nonresident alien individual or foreign 
    corporation, the appropriate income tax return on which the claim for 
    refund or credit is made must contain the tax identification number of 
    the taxpayer required pursuant to section 6109 and the entire amount of 
    income of the taxpayer subject to tax, even if the tax liability for 
    that income was fully satisfied at source through withholding under 
    chapter 3 of the Internal Revenue Code (Code). Also, if the overpayment 
    of tax resulted from the withholding of tax at source under chapter 3 
    of the Code, a copy of the Form 1042-S required to be provided to the 
    beneficial owner pursuant to Sec. 1.1461-1(c)(1)(i) of this chapter 
    must be attached to the return. For purposes of claiming a refund, the 
    Form 1042-S must include the taxpayer identifying number of the 
    beneficial owner even if not otherwise required. No claim of refund or 
    credit under chapter 65 of the Code may be made by the taxpayer for any 
    amount that the payor has repaid to the taxpayer pursuant to 
    Sec. 1.1461-2(a)(2) of this chapter, that was subject to a set-off 
    pursuant to Sec. 1.1461-2(a)(3) of this chapter, or in accordance with 
    the provisions of an agreement that a qualified intermediary described 
    in Sec. 1.1441-1(e)(5)(ii) has in effect with the Internal Revenue 
    Service. Upon request, a taxpayer must also submit such documentation 
    as the Commissioner (or delegate), the District Director, or the 
    Assistant Commissioner (International),
    
    [[Page 53496]]
    
    may require establishing that the taxpayer is the beneficial owner of 
    the income for which a claim of refund or credit is being made.
        Par. 67. In Sec. 301.6721-0, the table is amended by adding entries 
    for Sec. 3012.6724-1, paragraphs (g)(1), (g)(2), and (g)(3) to read as 
    follows:
    
    
    Sec. 301.6721-0  Table of Contents.
    
    * * * * *
    
    
    Sec. 301.6724-1  Reasonable cause.
    
    * * * * *
        (g) * * *
        (1) In general.
        (2) Special rules relating to TINs.
        (3) Effective dates.
    * * * * *
        Par. 68. In Sec. 301.6724-1, paragraph (g) is revised to read as 
    follows:
    
    
    Sec. 301.6724-1  Reasonable cause.
    
    * * * * *
        (g) Due diligence safe harbor--(1) In general. A filer may 
    establish reasonable cause with respect to a failure relating to an 
    information reporting requirement as described in paragraph (j) of this 
    section if the filer exercises due diligence as provided under section 
    6724(c)(1) with respect to failures described in sections 6721 through 
    6723.
        (2) Special rules relating to TINs. The following questions and 
    answers provide guidance on the exercise of due diligence for an 
    exception to a penalty under sections 6721 through 6723 for a failure 
    to provide a correct TIN on any information return (as defined in 
    Sec. 301.6721-1(g)), payee statement (as defined in Sec. 301.6722-
    1(d)), document (as described in Sec. 301.6723-1(a)(4)), or the failure 
    merely to provide a TIN as described in Sec. 301.6723-1(a)(4)(ii).
    
    General Rule
    
        Q-1. Is a payor subject to a penalty for a failure to provide a 
    correct TIN on an information return with respect to a reportable 
    interest or dividend payment if the payee has certified, under 
    penalties of perjury, that the TIN furnished to the payor is the 
    payee's correct number, the payor provided that number on an 
    information return, and the number is later determined not to be the 
    payee's correct number?
        A-1. A payor is not subject to a penalty for failure to provide the 
    payee's correct TIN on an information return, if the payee has 
    certified, under penalties of perjury, that the TIN provided to the 
    payor was his correct number, and the payor included such number on the 
    information return before being notified by the Internal Revenue 
    Service (IRS) (or a broker) that the number is incorrect.
    
    Due Diligence Defined for Accounts Opened and Instruments Acquired 
    After December 31, 1983
    
        Q-2. In order for a payor of a reportable interest or dividend 
    payment (other than in a window transaction) to be considered to have 
    exercised due diligence in furnishing the correct TIN of a payee with 
    respect to an account opened or an instrument acquired after December 
    31, 1983, what actions must the payor take?
        A-2. (1) In general, the payor of an account or instrument that is 
    not a pre-1984 account nor a window transaction must use a TIN provided 
    by the payee under penalties of perjury on information returns filed 
    with the IRS to satisfy the due diligence requirement. Therefore, if a 
    payor permits a payee to open an account without obtaining the payee's 
    TIN under penalties of perjury and files an information return with the 
    IRS with a missing or an incorrect TIN, the payor will be liable for 
    the $50 penalty for the year with respect to which such information 
    return is filed. However, in its administrative discretion, the IRS 
    will not enforce the penalty with respect to a calendar year if the 
    certified TIN is obtained after the account is opened and before 
    December 31 of such year, provided that the payor exercises due 
    diligence in processing such number, i.e., the payor uses the same care 
    in processing the TIN provided by the payee that a reasonably prudent 
    payor would use in the course of the payor's business in handling 
    account information such as account numbers and balances.
        (2) Once notified by the IRS (or a broker) that a number is 
    incorrect, a payor is liable for the penalty for all prior years in 
    which an information return was filed with that particular incorrect 
    number if the payor has not exercised due diligence with respect to 
    such years. A pre-existing certified TIN does not constitute an 
    exercise of due diligence after the IRS or a broker notifies the payor 
    that the number is incorrect unless the payor undertakes the actions 
    described in Sec. 31.3406(d)-5(d)(2)(i) of this chapter with respect to 
    accounts receiving reportable payments described in section 3406(b)(1) 
    and reported on information returns described in sections 6724(d)(1)(A) 
    (i) through (iv).
        Q-3. Is a payor as described in A-2 liable for the penalty if the 
    payor obtained a certified TIN from a payee but inadvertently processed 
    the name or number incorrectly on the information return?
        A-3. Yes. The payor is liable for the penalty unless the payor 
    exercised that degree of care in processing the TIN and name and in 
    furnishing it on the information return that a reasonably prudent payor 
    would use in the course of the payor's business in handling account 
    information, such as account numbers and account balances.
    
    Special Rules
    
        Q-4. With respect to an instrument transferred without the 
    assistance of a broker, is a payor liable for the penalty for filing an 
    information return with a missing or an incorrect TIN if the payor 
    records on its books a transfer of a readily tradable instrument in a 
    transaction in which the payor was not a party?
        A-4. Generally, a payor as described in Q-4 will be considered to 
    have exercised due diligence with respect to a readily tradable 
    instrument that is not part of a pre-1984 account with the payor if the 
    payor records on its books a transfer in which the payor was not a 
    party. This exception applies until the calendar year in which the 
    payor receives a certified TIN from the payee.
        Q-5. Is the payor described in A-4 required to solicit the TIN of a 
    payee of an account with a missing TIN in order to be considered as 
    having exercised due diligence in a subsequent calendar year?
        A-5. There is no requirement on the payor to solicit the TIN in 
    order to be considered to have exercised due diligence in a subsequent 
    calendar year under the rule set forth in A-4.
        Q-6. Is a payor as described in Q-4 considered to have exercised 
    due diligence if the payee provides a TIN to the payor (whether or not 
    certified), the payor uses that number on the information return filed 
    for the payee, and the number is later determined to be incorrect?
        A-6. A payor as described in Q-4 who records on its books a 
    transfer in which it was not a party is considered to have exercised 
    due diligence under the rule set forth in A-4 where the transfer is 
    accompanied with a TIN provided that the payor uses the same care in 
    processing the TIN provided by a payee that a reasonably prudent payor 
    would use in the course of the payor's business in handling account 
    information, such as account numbers and account balances. Thus, a 
    payor will not be liable for the penalty if the payor uses the TIN 
    provided by the payee on information returns that it files, even if the 
    TIN provided by the payee is later determined to be incorrect. However, 
    a payor will not be considered as having exercised due diligence under 
    A-4 after the IRS or a broker notifies the payor that the
    
    [[Page 53497]]
    
    number is incorrect unless the payor undertakes the required additional 
    actions described in the second paragraph of A-2.
        Q-7. Is a payor liable for a penalty for filing an information 
    return with a missing or an incorrect TIN with respect to a post-1983 
    account or instrument if the payor could have met the due diligence 
    requirements but for the fact that the payor incurred an undue 
    hardship?
        A-7. A payor of a post-1983 account or instrument is not liable for 
    a penalty under section 6721(a) for filing an information return with a 
    missing or an incorrect TIN if the IRS determines that the payor could 
    have satisfied the due diligence requirements but for the fact that the 
    payor incurred an undue hardship. An undue hardship is an extraordinary 
    or unexpected event such as the destruction of records or place of 
    business of the payor by fire or other casualty (or the place of 
    business of the payor's agent who under a pre-existing written contract 
    had agreed to fulfill the payor's due diligence obligations with 
    respect to the account subject to the penalty and there was no means 
    for the obligations to be performed by another agent or the payor). 
    Undue hardship will also be found to exist if the payor could have met 
    the due diligence requirements only by incurring an extraordinary cost.
        Q-8. How does a payor obtain a determination from the IRS that the 
    payor has met the undue hardship exception to the penalty under section 
    6721(a) for the failure to include the correct TIN on an information 
    return for the year with respect to which the payor is subject to the 
    penalty?
        A-8. A determination of undue hardship may be established only by 
    submitting a written statement to the IRS signed under penalties of 
    perjury that sets forth all the facts and circumstances that make an 
    affirmative showing that the payor could have satisfied the due 
    diligence requirements but for the occurrence of an undue hardship. 
    Thus, the statement must describe the undue hardship and make an 
    affirmative showing that the payor either was in the process of 
    exercising or stood ready to exercise due diligence when the undue 
    hardship occurred. A payor may request an undue hardship determination 
    from the district director or the director of the Internal Revenue 
    Service Center where the payor is required to remit the penalty under 
    section 6721(a).
        Q-9. Is a pre-1984 account or instrument of a payor that is 
    exchanged for an account or instrument of another payor as a result of 
    a merger of the other payor or acquisition of the accounts or 
    instruments of such payor transformed into a post-1983 account or 
    instrument if the merger or acquisition occurs after December 31, 1983?
        A-9. No. A pre-1984 account or instrument that is exchanged for 
    another account or instrument pursuant to a statutory merger or the 
    acquisition of accounts or instruments is not transformed into a post-
    1983 account or instrument because the exchange occurs without the 
    participation of the payee.
        Q-10. May the acquiring taxpayer described in A-9 rely upon the 
    business records and past procedures of the merged payor or the payor 
    whose accounts or instruments were acquired in order to establish that 
    due diligence has been exercised on the acquired pre-1984 and post-1983 
    accounts or instruments?
        A-10. Yes. The acquiring payor may rely upon the business records 
    and past procedures of the merged payor or of the payor whose accounts 
    or instruments were acquired in order to establish due diligence to 
    avoid the penalty under section 6721(a) with respect to information 
    returns that have been or will be filed.
        Q-11. To what extent may a payor rely on the due diligence rules 
    set forth in Secs. 35a.9999-1, 35a.9999-2, and 35a.9999-3 of this 
    chapter in effect prior to January 1, 1999 (see Secs. 35a.9999-1, 
    35a.9999-2, and 35a.9999-3 as contained in 26 CFR part 35a, revised 
    April 1, 1997).
        A-11. A payor may rely on the due diligence rules set forth in 
    Secs. 35a.9999-1, 35a.9999-2, and 35a.9999-3 of this chapter in effect 
    prior to January 1, 1999 (see Secs. 35a.9999-1, 35a.9999-2, and 
    35a.9999-3 as contained in 26 CFR part 35a, revised April 1, 1997) 
    solely for the definitions of terms or phrases used in this paragraph 
    (g)(2).
        (3) Effective dates. This paragraph (g) is effective for 
    information returns (as defined in section 6724(d)(1)) required to be 
    filed, payee statements (as defined in section 6724(d)(2)) required to 
    be furnished, and specified information (as described in section 
    6724(d)(3)) required to be reported after December 31, 1998. See 
    Sec. 301.6724-1(g) in effect prior to January 1, 1999 (see Sec. 301. 
    6724-1(g) as contained in 26 CFR part 301, revised April 1, 1997) for 
    substantially similar rules applicable prior to January 1, 1999.
    * * * * *
    
    PART 502--[REMOVED]
    
        Par. 70. Part 502 is removed.
    
    PART 503--[REMOVED]
    
        Par. 71. Part 503 is removed.
    
    PART 509--SWITZERLAND
    
        Par. 72. The authority citation for ``Subpart--General Income Tax'' 
    is removed and a general authority citation for part 509 is added to 
    read as follows:
    
        Authority: 26 U.S.C. 62, 3791 and 7805.
    
        Par. 73. Part 509 is amended as follows:
    
    
    Secs. 509.1 through 509.10
    
    [Removed]
    
        1. Subpart--Withholding of Tax consisting of Secs. 509.1 through 
    509.10 is removed.
    
    
    Sec. 509.103  [Amended]
    
        2. In Sec. 509.103, paragraph (e) is removed and reserved.
    
    
    Sec. 509.117  [Amended]
    
        3. In Sec. 509.117, paragraph (a) is removed and reserved.
    
    
    Sec. 509.119  [Removed]
    
    
    Sec. 509.122  [Removed]
    
        4. Sections 509.119 and 509.122 are removed.
    
    PART 513--IRELAND
    
        Par. 74. The authority citation for part 513 is revised to read as 
    follows:
    
        Authority: 26 U.S.C. 62.
    
        Par. 75. Part 513 is amended as follows:
    
    
    Sec. 513.1  [Removed]
    
        1. Section 513.1 is removed.
        2. Sections 513.2, 513.3, 513.4 and 513.5 are revised to read as 
    follows:
    
    
    Sec. 513.2  Dividends.
    
        The fact that the payee of the dividend is not required to pay 
    Irish tax on such dividend because of the application of reliefs or 
    exemptions under Irish revenue laws does prevent the application of the 
    reduction in rate of United States tax with respect to such dividend. 
    If the dividend would have been subject to Irish tax had the payee 
    thereof derived an income large enough to require payment of tax then 
    liability to Irish tax exists for the purpose of the reduction in rate 
    of United State tax. As to what constitutes a permanent establishment, 
    see Article II(1)(i) of the convention.
    
    
    Sec. 513.3  Interest.
    
        The provisions of Sec. 513.2 relating to the degree of liability to 
    Irish tax in the case of dividends are equally applicable with respect 
    to the income falling within the scope of this section.
    
    [[Page 53498]]
    
    Sec. 513.4  Patent and copyright royalties and film rentals.
    
        The provisions of Sec. 513.2 relating to the degree of liability to 
    Irish tax in the case of dividends are equally applicable with respect 
    to the income falling within the scope of this section.
    
    
    Sec. 513.5  Natural resource royalties and real property rentals.
    
        The provisions of Sec. 513.2 relating to the degree of liability to 
    Irish tax in the case of dividends are equally applicable with respect 
    to the income falling within the scope of this section.
    
    PART 514--FRANCE
    
        Par. 76. The authority citation for part 514 is added to read as 
    set forth below and the authority citation preceding Sec. 514.1 is 
    removed.
    
        Authority: 26 U.S.C. 7805.
    
        Par. 77. Part 514 is amended as follows:
        1. The undesignated centerheading preceding Sec. 514.1 is removed.
    
    
    Secs. 514.20 and 514.21  [Removed]
    
        2. Sections 514.20 and 514.21 are removed.
    
    
    Sec. 514.22  [Amended]
    
        3. In Sec. 514.22, paragraph (c) is removed.
    
    
    Secs. 514.23 through 514.32  [Removed]
    
        4. Sections 514.23 through 514.32 are removed.
    
    
    Secs. 514.101 through 514.117  [Removed]
    
        5. Subpart--General Income Tax consisting of sections 514.101 
    through 514.117 is removed.
    
    PART 516--[REMOVED]
    
        Par. 78. Part 516 is removed.
    
    PART 517--[REMOVED]
    
        Par. 79. Part 517 is removed.
    
    PART 520--[REMOVED]
    
        Par. 80. Part 520 is removed.
    
    PART 521--[AMENDED]
    
        Par. 81. The authority citation for part 521 is revised to read as 
    follows:
    
        Authority: 26 U.S.C. 62, 143, 144, 211, and 231.
    
        Par. 82. Part 521 is amended as follows:
    
    
    Secs. 521.1-521.8  [Removed]
    
        1. Subpart--Withholding of Tax consisting of Secs. 521.1 through 
    521.8 is removed.
    
    
    Sec. 521.103  [Amended]
    
        2. In Sec. 521.103, paragraph (d) is removed and reserved.
    
    PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT
    
        Par. 83. The authority for part 602 continues to read as follows:
    
        Authority: 26 U.S.C. 7805.
    
        Par. 84. In Sec. 602.101, paragraph (c) is amended by:
        1. Removing the following entries from the table:
    
    
    Sec. 602.101  OMB Control numbers.
    
    * * * * *
        (c) * * *
    
    ------------------------------------------------------------------------
                                                                 Current OMB
         CFR part or section where identified and described      control No.
    ------------------------------------------------------------------------
                                                                            
                      *        *        *        *        *                 
    1.1441-8T..................................................    1545-1053
                                                                            
                      *        *        *        *        *                 
    1.1461-3...................................................    1545-0054
                                                                   1545-0055
                                                                   1545-0096
                                                                   1545-0795
    1.1461-4...................................................    1545-0054
                                                                   1545-0055
                                                                   1545-0096
                                                                            
                      *        *        *        *        *                 
    35a.9999-3.................................................     545-0112
                                                                            
                      *        *        *        *        *                 
    Part 502...................................................    1545-0844
    Part 503...................................................    1545-0837
                                                                            
                      *        *        *        *        *                 
    Part 516...................................................    1545-0841
    Part 517...................................................    1545-0849
    Part 520...................................................    1545-0833
                                                                            
                      *        *        *        *        *                 
    ------------------------------------------------------------------------
    
        2. Adding entries in numerical order to the table to read as 
    follows:
    
    
    Sec. 602.101  OMB Control numbers.
    
    * * * * *
        (c) * * *
    
    ------------------------------------------------------------------------
                                                                 Current OMB
         CFR part or section where identified and described      control No.
    ------------------------------------------------------------------------
                                                                            
                      *        *        *        *        *                 
    1.1441-1...................................................    1545-1484
    1.1441-4...................................................    1545-1484
                                                                            
                      *        *        *        *        *                 
    11.1441-8..................................................    1545-1484
                                                                   1545-1053
    1.1441-9...................................................    1545-1484
                                                                            
                      *        *        *        *        *                 
    31.3401(a)(6)..............................................    1545-1484
    301.6114-1.................................................    1545-1484
                                                                            
                      *        *        *        *        *                 
    ------------------------------------------------------------------------
    
        3. Revising entries in the table to read as follows:
    
    
    Sec. 602.101  OMB Control numbers.
    
    * * * * *
        (c) * * *
    
    ------------------------------------------------------------------------
                                                                 Current OMB
         CFR part or section where identified and described      control No.
    ------------------------------------------------------------------------
                                                                            
                      *        *        *        *        *                 
    1.1441-5...................................................    1545-0096
                                                                   1545-0795
                                                                   1545-1484
    1.1441-6...................................................    1545-0055
                                                                   1545-0795
                                                                   1545-1484
                      *        *        *        *        *                 
    1.1461-1...................................................    1545-0054
                                                                   1545-0055
                                                                   1545-0795
                                                                   1545-1484
                      *        *        *        *        *                 
    301.6402-3.................................................    1545-0055
                                                                   1545-0073
                                                                   1545-0091
                                                                   1545-0132
                                                                   1545-1484
                      *        *        *        *        *                 
    ------------------------------------------------------------------------
    
    Michael P. Dolan,
    Acting Commissioner of Internal Revenue.
    
        Approved: August 28, 1997.
    Donald C. Lubick,
    Acting Assistant Secretary of the Treasury.
    [FR Doc. 97-25998 Filed 10-6-97; 8:45 am]
    BILLING CODE 4830-01-U
    
    
    

Document Information

Effective Date:
1/1/1999
Published:
10/14/1997
Department:
Internal Revenue Service
Entry Type:
Rule
Action:
Final and temporary regulations.
Document Number:
97-25998
Dates:
These regulations are effective January 1, 1999, except the addition of Sec. 31.9999-0, the removal of Sec. 35a.9999-0T and the addition of Sec. 35a.9999-0, which are effective October 14, 1997.
Pages:
53387-53498 (112 pages)
Docket Numbers:
TD 8734
PDF File:
97-25998.pdf
CFR: (223)
26 CFR 1.6031-1)
26 CFR 1.6042-3)
26 CFR 1.6049-4(a)(2)
26 CFR 1.6049-4(a)
26 CFR 1.6302-2(a)(1)
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