Revisions to Regulations Relating to Withholding of Tax on
Certain U.S. Source Income Paid to Foreign Persons &
Revisions of Information Reporting Regulations.

DEPARTMENT OF THE TREASURY 
Internal Revenue Service 26 CFR Parts 1
and 31 [TD 8881] RIN 1545- AX53; RIN 1545-AV27; RIN 1545-AV41

TITLE: Revisions to Regulations Relating to Withholding of Tax on
Certain U.S. Source Income Paid to Foreign Persons and Revisions of
Information Reporting Regulations.

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document contains amendments to 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 and
related requirements governing collection, deposit, refunds, and
credits of withheld amounts under sections 1461 through 1463.
Additionally, this document contains amendments under sections 6041,
6041A, 6042, 6045, 6049, and 3406. This regulation affects persons
making payments of U.S. source income to foreign persons.

DATES: These regulations are effective January 1, 2001.

FOR FURTHER INFORMATION CONTACT: Carl Cooper, Laurie Hatten-Boyd, or
Kate Hwa (202) 622-3840 (not a toll free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collections of information 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, withholding), and to facilitate tax
compliance (to verify entitlement to an exemption or a reduced
rate). The likely respondents are individuals, businesses, and other
for-profit organizations.

Comments on the collections of information should be sent 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, with copies to the Internal Revenue
Service , Attn: IRS Reports Clearance Officer, OP:FS:FP, Washington,
DC 20224.

The estimated average annual burden per respondent and/or
recordkeeper are reflected in the burdens of Forms W-8, 1042, 1042-
S, 1099, and the income tax return of a foreign person filed for
purposes of claiming a refund.

An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless the collection of
information displays a valid control number assigned by the Office
of Management and Budget.

Books or records relating to a collection of information must be
retained as long as their contents may become material in the
administration of any internal revenue law. Generally, tax returns
and tax return information are confidential, as required by 26
U.S.C. 6103.

Background

In Treasury Decision (TD) 8734 (62 FR 53387), the Treasury
Department and the IRS issued comprehensive regulations (final
regulations) under chapter 3 (sections 1441- 1464) and subpart G of
Subchapter A of chapter 61 (sections 6041-6050S) of the Internal
Revenue Code. Those final regulations were amended by TD 8804 (63 FR
72183 [1999- 12 I.R.B. 5]) which delayed the effective date of the
final regulations to payments made after December 31, 1999. The
effective date of the regulations was again extended by TD 8856 (64
FR 73408) to payments made after December 31, 2000.

Need for Changes

Since the publication of TD 8734, the IRS and Treasury of have
received numerous comments relating to technical errors in the
regulations and ways to ease compliance while keeping the objectives
of the regulations in place. In Notice 99-8 (1999-5 I.R.B. 26), the
IRS and Treasury announced amendments that would be made to the
regulations. This TD implements Notice 99-8 and contains additional
changes made in response to comments as well as the IRS and
Treasury's further analysis of the regulations.

Explanation of Revisions

A. Changes to §1.1441-1

1. Payments to a U.S. Branch of Certain Foreign Banks or Foreign
Insurance Companies. Generally, a payment to a U.S. branch of a
foreign person is a payment to a foreign person. Under
§1.1441-1(b)(2)(iv), however, a U.S. branch of certain foreign
banks or insurance companies and a withholding agent may agree to
treat the U.S. branch as a U.S. person for purposes of chapter 3 of
the Internal Revenue Code. The regulation as initially drafted
required a withholding agent to treat such a U.S. branch as a U.S.
person for all purposes under chapter 3 of the Internal Revenue
Code. The regulation itself, however, does not treat a U.S. branch
as a U.S. person for all purposes under chapter 3 of the Internal
Revenue Code. For example, a U.S. branch of a foreign bank or
insurance company provides a withholding certificate on a Form W-8,
which is used only by foreign persons. Further, under
§1.1461-1(c), payments to such a branch are reportable as
payments to a foreign person on Form 1042-S. Therefore,
§1.1441-1(b)(2)(iv) has been amended to state that,
notwithstanding the agreement between the withholding agent and a
U.S. branch to the treat the U.S. branch as a U.S. person, the
branch is not treated as a U.S. person for purposes of providing
documentation or for reporting payments to the branch.

2. Rules for Reliably Associating a Payment With a Withholding
Certificate or Other Appropriate Documentation

Section 1.1441-1(b)(2)(vii) contains rules to determine whether a
payment can be reliably associated with valid documentation. A
payment that cannot be reliably associated with valid documentation
is subject to the presumption rules in §§1.1441-1(b)(3),
1.1441- 4(a)(2)(ii) and (3)(i), 1.1441-5(d) and (e)(6), 1.1441-9(b)
(3), and 1.6049-5(d). Paragraph (b)(2)(vii) did not adequately
address when a payment made to a nonqualified intermediary, a flow-
through entity, or a U.S. branch of certain foreign banks and
insurance companies (other than a branch that acts as a U.S. person)
would be treated as reliably associated with documentation. These
entities provide a withholding certificate for themselves and
withholding certificates, documentary evidence, or other information
for the persons on whose behalf they act. Therefore, the payment
must be reliably associated not only with a withholding certificate
from the intermediary, flow-through entity, or U.S. branch, but also
with documentation from, or information relating to, the payee on
whose behalf the entity acts.

Paragraph (b)(2)(vii) has been amended to provide more detailed
reliable association rules. For a payment made to a nonqualified
intermediary, a flow-through.5 entity, or a U.S. branch, new
paragraph (b)(2)(vii)(B) provides that a withholding agent can
reliably associate the payment with valid documentation if, prior to
the payment, it has received a valid nonqualified intermediary
withholding certificate on Form W-8IMY; it can determine the portion
of the payment that relates to valid documentation associated with
the Form W-8IMY from a payee (i.e., a person other than a
nonqualified intermediary, flow- through entity, or U.S. branch);
and the nonqualified intermediary, flow-through entity, or U.S.
branch has provided sufficient information for the withholding agent
to report the payment on Form 1042-S or Form 1099, if reporting is
required.

Paragraph (b)(2)(vii)(C) provides rules for a withholding agent that
makes a payment to a qualified intermediary that does not assume
primary withholding responsibility under chapter 3 of the Internal
Revenue Code or primary Form 1099 reporting and backup withholding
responsibility under chapter 61 and section 3406 of the Internal
Revenue Code. The payment can be reliably associated with valid
documentation if, prior to the payment, the withholding agent
receives a valid qualified intermediary withholding certificate on
Form W-8IMY and a withholding statement that allocates the payment
among withholding rate pools, including withholding rate pools for
each U.S. non- exempt recipient for which the qualified intermediary
has provided a valid Form W-9 (or other information if a Form W-9
has not been provided).

For a payment made to a qualified intermediary that assumes primary
withholding responsibility under chapter 3 of the Internal Revenue
Code with respect to the payment, but does not assume primary Form
1099 reporting and backup withholding responsibility under chapter
61 and section 3406 of the Internal Revenue Code, paragraph (b)(2)
(vii)(D) provides that a withholding agent can reliably associate
the payment with valid.6 documentation if, prior to the payment, it
receives a valid Form W-8IMY and the withholding statement
associated with the Form W-8IMY allocates the payment between a
single withholding rate pool for which the qualified intermediary
assumes primary withholding responsibility and separate withholding
rate pools for each U.S. non-exempt recipient.

Paragraph (b)(2)(vii)(E) provides rules for a withholding agent that
makes a payment to a qualified intermediary that assumes primary
Form 1099 reporting and backup withholding responsibility under
chapter 61 and section 3406 of the Internal Revenue Code, but does
not assume primary withholding responsibility under chapter 3 of the
Internal Revenue Code. The payment can be reliably associated with
valid documentation if, prior to the payment, the withholding agent
can associate the payment with a valid Form W-8IMY and the
withholding statement associated with the Form W-8IMY allocates the
payment among the withholding rate pool or pools for which
withholding responsibility is not assumed and the portion of payment
for which the qualified intermediary assumes Form 1099 reporting and
backup withholding responsibility.

Finally, for a payment made to a qualified intermediary that assumes
both primary withholding responsibility under chapter 3 of the
Internal Revenue Code and primary Form 1099 reporting and backup
withholding responsibility under chapter 61 and section 3406 of the
Internal Revenue Code, paragraph (b)(2)(vii)(F) provides that a
withholding agent can reliably associate the payment with valid
documentation if, prior to the payment, it can associate the payment
with a valid Form W-8IMY. In this case, no withholding rate pool
allocation information is required. This same rule applies for
payments made to a withholding foreign partnership..7

3. Presumptions of Classification as Individual, Corporation,
Partnership, etc. As initially drafted, §1.1441-1(b)(3)(ii)
provided a withholding agent with presumption rules to determine a
payee's classification (e.g., individual, corporation, partnership)
if it could not reliably associate a payment with valid
documentation.

Paragraph (b)(3)(ii) did not, however, provide a presumption rule if
a withholding agent could reliably associate a payment with
documentary evidence (i.e., documentation other than a withholding
certificate) from which it could not determine the payee's
classification. For example, documentary evidence may indicate that
a payee (other than an entity that is treated as a per se
corporation under §301.7701-2(b)(8)(i)) is a type of entity
that can be organized so that all of its members have limited
liability, in which case it would be treated as an association, or
so that one or more of its members have unlimited liability, in
which case it would be treated as a partnership. The determination
of classification can be critical because if the entity is a flow-
through entity, it is not the beneficial owner of the payment and
its documentary evidence cannot be relied upon to grant a reduced
rate of withholding. Section 1.1441-1(b)(3)(ii)(C) has been added to
permit a withholding agent to treat an entity that has provided
documentary evidence as a corporation if the classification of the
entity cannot be determined from documentary evidence or by
reference to the exempt recipient rules under §1.6049-4(c)(1)
(ii). This presumption rule will reduce burdens on withholding
agents that are permitted to use documentary evidence, such as
foreign intermediaries and flow-through entities, which would
otherwise have to request from payees additional information
regarding U.S. tax classification. The presumption rule is not,
however, intended to allow foreign entities to avoid making the
correct determination of their classification and to provide the
correct documentation.

Thus, a foreign entity must make a determination about its
classification and if it determines that it is an intermediary,
partnership, foreign simple trust, or foreign grantor trust under
U.S. tax law principles, it must provide an intermediary or flow-
through withholding certificate on Form W-8IMY together with the
appropriate information relating to its customers, partners,
beneficiaries, owners, or other payees. Further, a withholding agent
cannot treat an entity as a corporation if it knows, or should know,
that the entity is a flow-through entity or intermediary. For
example, if a particular type of collective investment vehicle
provides documentary evidence that does not establish that it is a
corporation, partnership, or trust, but the withholding agent knows,
or has reason to know, that the investment vehicle is classified as
a partnership for U.S. tax purposes, it must request a partnership
withholding certificate from the entity.

An entity that is presumed to be a foreign corporation under new
paragraph (b)(2)(ii)(C) cannot be treated as the beneficial owner
entitled to a reduced rate of withholding to the extent the
documentary evidence indicates that it is a bank, broker, custodian,
intermediary, or other agent unless the entity provides a statement
that it is the beneficial owner of the income. For example,
documentary evidence that indicates that the payee is a bank does
not permit a withholding agent to apply the portfolio interest
exception to payments of interest made to the bank. In addition,
even though a foreign entity is treated as a beneficial owner for
purposes of the exceptions to withholding under the Internal Revenue
Code and regulations, it is not necessarily entitled to claim treaty
benefits. Whether treaty benefits may be claimed by an entity depend
on whether it meets the requirements under the income tax treaty and
section 894.

4. Changes to presumption rules.9

Several simplifying and clarifying changes have been made to the
presumption rules in §1.1441-1(b)(3). First, the presumption
rule applicable to pensions and annuities contained in
§1.1441-1(b)(3)(iii)(C) has been expanded to apply to
individual retirement accounts and individual retirement annuities.
Second, §1.1441-1(b)(3)(iii)(D), which contains presumption
rules applicable to offshore accounts, was revised to state the
applicable rule more clearly. In addition, the restriction on
applying the presumption rule of paragraph (b)(3)(iii)(D) to amounts
that are not subject to withholding has been moved from that
paragraph to §1.6049-5(d)(2). This change eliminates a conflict
with §1.6049- 5(d)(2), as previously drafted, which applied the
paragraph (b)(3)(iii)(D) rule to amounts not subject to withholding.

Section 1.1441-1(b)(3)(iv) contains a grace period presumption rule
that permits a withholding agent to treat a payee as a foreign
person in certain situations where the withholding agent would
presume the payee to be a U.S. person. Although the grace period
rule generally does not permit a withholding agent to apply any
exceptions to withholding, it does permit a withholding agent to
apply a reduced rate of withholding for 90 days to a payee that
provides a withholding certificate that would have been valid except
that it was transmitted by facsimile. One commentator noted that
because the facsimile rule applied only to payees that a withholding
agent could, "in its discretion" treat as a foreign person, the rule
was limited to those situations where the presumption rules would
have treated the payee as a U.S. person and the withholding agent
was exercising its discretion to treat the payee as foreign.
Therefore, the commentator argued, the rule arguably could not be
applied to payees that were required to be treated as foreign
persons under the presumption rules, e.g., an exempt recipient with
indicia of foreign status. The regulation has been modified by
removing the phrase "in its discretion" thereby permitting the
facsimile rule to apply to payees that are treated as foreign payees
under the presumption rules.

Paragraph (b)(3)(v), as promulgated in TD 8734, provided several
presumption rules that applied if a withholding agent did not
receive from a nonqualified intermediary the withholding
certificates or documentary evidence of the persons on whose behalf
the nonqualified intermediary acted or did not receive information
allocating the payment to each person. Under paragraph (b)(3)(v)(C),
if the withholding agent could associate a payment with a group of
beneficial owners or payees, it could treat the payment as being
made in its entirety to the person in the group that was subject to
the highest withholding rate or, if the rates were equal, to the
payee in the group with the highest U.S. tax liability.

If a nonqualified intermediary grouped persons subject to similar
withholding and tax rates together and allocated the payment to the
group, the nonqualified intermediary could achieve a reduced rate of
withholding for its customers without reliably associating the
payment to each of the customers that would be entitled to the
payment. Treasury and the IRS stated in Notice 99-8 that affording a
reduced rate of withholding under these circumstances was
inappropriate. Further, it was inappropriate to report the entire
payment as if it were made to a single documented payee who was not
entitled to receive the entire amount of income.

Paragraph (b)(3)(v) has been revised so that whenever a payment to a
nonqualified intermediary cannot be reliably associated with valid
documentation from a specific payee, the payment is treated as made
to an undocumented foreign payee and is subject to 30 percent
withholding. Under §1.1461-1(c), such payments are reported to
an unknown owner on Form 1042-S. Thus, a payment can no longer be
subject to a reduced rate of withholding because it can be allocated
to a group of documented payees all of whom are subject to the same
reduced rate of withholding. Similar changes have been made to the
presumption rules that applied to foreign partnerships under former
§1.1441-5(d)(3)(ii).

Paragraph (b)(3)(vi), as originally drafted, was in error. It stated
that the presumption rules that applied to foreign intermediaries
also applied to U.S. branches of foreign banks and insurance
companies that assumed withholding responsibility. The rule should
have provided that the intermediary presumption rules also apply to
U.S. branches of foreign banks and insurance companies that do not
agree to be treated as U.S. persons. Those branches are generally
treated in the same manner as nonqualified intermediaries under
chapter 3 of the Internal Revenue Code. Therefore, paragraph (b)(3)
(vi) has been revised to apply only to those branches that are not
treated as U.S. persons. Finally, paragraph (b)(3)(vii), which
applies to payments to joint payees, has been amended to clarify the
treatment of payments made to joint accounts.

5. Rules for Withholding and Reporting of Payments by a Foreign
Intermediary and Certain U.S. Branches

Section 1.1441-1(b)(6) sets forth the withholding obligations of a
foreign intermediary and certain U.S. branches. The regulation, as
originally drafted, stated that a qualified intermediary, a
nonqualified intermediary, or a U.S. branch of a foreign bank or
insurance company was deemed to have satisfied any obligation it had
to withhold and report an amount it paid if it did not know that the
correct amount had not been withheld. The rule did not, however,
require a foreign intermediary or U.S. branch to report a payment if
it knew that the withholding agent from whom it received the payment
had not reported the payment to the persons on whose behalf the
foreign intermediary or U.S. branch acted as long as the correct
amount was withheld. For example, if a U.S.

withholding agent withheld 30 percent from a payment of an amount
subject to withholding made to a nonqualified intermediary because
the nonqualified intermediary failed to provide documentation or
allocation information relating to the persons for whom it acted,
the rule relieved the nonqualified intermediary from any obligation
to report the payment to those persons. Foreign intermediaries and
U.S. branches, however, are withholding agents under
§1.1441-7(a) and, as stated in Notice 99-8, it is inappropriate
to relieve them of any reporting responsibility unless they have
provided another withholding agent with all of the information that
the withholding agent needs to report amounts paid to the
appropriate recipients of the income. In addition, paragraph (b)(6)
should not have included qualified intermediaries, because a
qualified intermediary has reporting responsibilities whether or not
another withholding agent properly reported the payment made to the
qualified intermediary.

The regulation has been revised to provide that a nonqualified
intermediary or U.S. branch (other than a U.S. branch treated as a
U.S. person) is not required to withhold and report if the
nonqualified intermediary or U.S. branch (i) has provided a valid
nonqualified intermediary or U.S. branch withholding certificate,
(ii) has provided all of the information required to be included in
a withholding statement associated with its withholding certificate
so that another withholding agent can do the required reporting on
Form 1042-S or Form 1099, and (iii) does not know, and has no reason
to know, that the other withholding agent did not withhold the
correct amount or did not report the payment correctly. A qualified
intermediary's obligations to withhold and report are determined in
accordance with its qualified intermediary agreement.

6. Definitions

Section 1.1441-1(c) contains the definitions of terms used in the
regulations under chapter 3 of the Internal Revenue Code. The
section has been significantly expanded and certain definitions have
been consolidated in this section. New definitions, or cross-
references to definitions, have been provided for the terms
beneficial owner, payee, intermediary, nonqualified intermediary,
qualified intermediary, withholding certificate, documentary
evidence, documentation, payor, exempt recipient, non-exempt
recipient, reportable amounts, flow-through entity, foreign simple
trust, foreign complex trust, foreign grantor trust, partnership,
nonwithholding foreign partnership, and withholding foreign
partnership.

Paragraph (c)(6)(i) has been changed to state specifically that the
definition of beneficial owner does not apply in cases where a
reduced rate of withholding is being claimed under an income tax
treaty. This change has been made to clarify that a person who is a
beneficial owner of an item of income for purposes of these
regulations would not necessarily beneficially own the item of
income for purposes of an income tax treaty. Paragraph (c)(6), as
originally drafted, did not include rules to determine the
beneficial owner of a payment made to a foreign trust or estate. In
general, the regulations retained the rules for foreign trusts and
estates that existed prior to the publication of TD 8734. The
paragraph has been revised to provide specific rules for payments to
foreign trusts and estates. Generally, the beneficial owners of a
payment to a foreign simple trust are the beneficiaries of the
trust. The beneficial owners of a payment made to a foreign.14
grantor trust are the owners of the trust. Foreign complex trusts
and foreign estates are considered to be the beneficial owners of
income paid to such entities.

Paragraph (c)(12) has been added to clarify the term payee. It
provides cross-references to those sections under which the payee of
income is determined, and emphasizes that foreign intermediaries and
flow-through entities are generally not considered the payees of
income. A qualified intermediary is, however, a payee to the extent
it assumes primary withholding responsibility with respect to a
payment, and a flow- through entity is a payee if it is receiving
income that is, or is treated as, effectively connected with the
conduct of a U.S. trade or business.

The definition of a flow-through entity has been moved from
§1.1441-1(e)(3)(i) to paragraph (c)(23). The definition has
also been expanded and clarified. The term flow-through entity
refers to any entity which has an obligation to transmit
documentation to another withholding agent. Therefore, an entity may
be a flow-through entity whether or not the income paid to the
entity is includible in the gross income of the entity's owners. A
flow-through entity includes a nonwithholding foreign partnership, a
foreign simple trust, a foreign grantor trust, or an entity that is
fiscally transparent under section 894 to the extent it provides
documentation on behalf of its interest holders. A withholding
foreign partnership and a withholding foreign trust are not flow-
through entities. The term flow-through entity has replaced the term
partnership in numerous places throughout the regulation.

7. Withholding Certificates

a. Forms W-9.15

Section 1.1441-1(d) contains rules for a payee to establish its
status as a U.S. payee. Under paragraph (d), a payee that provides a
Form W-9 may be treated as a U.S. payee that is not subject to
withholding under section 1441. Commentators have noted that under
current law, there is no prohibition against a foreign person
providing a Form W-9 to establish status as an exempt recipient.
They therefore suggest that the regulations should be clarified to
specifically state that providing a Form W-9 serves as a
representation of U.S. status and should only be furnished by a U.S.
person. In response to these comments, paragraph (d)(2) has been
amended to state that furnishing a Form W-9 serves as a statement
that the person providing the form is a U.S. person. Therefore, a
foreign person, including a U.S. branch of a foreign person, should
not provide a Form W-9 to a withholding agent. The instructions to
Form W-9 will also be modified to make clear that providing a Form
W-9 is a declaration of U.S. status.

Paragraph (d)(3) is revised to eliminate the requirement for a
permanent residence address. Permanent residence address is a term
defined in §1.1441-1(e)(2)(ii) and is generally the address of
a foreign person in the country in which the person is a resident
for tax purposes. The term is inapplicable, and potentially
misleading, as applied to the address a U.S. person should provide
on Form W-9.

Paragraph (d)(4), as originally drafted, provided rules to determine
whether a payment was made to a U.S. beneficial owner. Generally,
the regulation provided that if a customer of a foreign intermediary
provided a Form W-9, the withholding agent could treat such person
as a U.S. beneficial owner. A customer of a foreign intermediary
could also be treated as a U.S. beneficial owner if it provided a
U.S. branch withholding certificate that evidenced its agreement to
be treated as a U.S. person. A Form W-9 and a U.S. branch
withholding certificate, however, do not establish beneficial
ownership. Further, it is not necessary under the regulations to
determine whether a U.S. payee is a beneficial owner because a
payment to a U.S. payee is not subject to withholding under chapter
3 of the Internal Revenue Code whether or not the payee is the
beneficial owner of the income. Thus, the paragraph has been
modified to provide that the withholding agent may treat the payee
of a payment made to a foreign intermediary or a flow-through entity
as a U.S. payee if the payee provides a Form W-9 or a U.S. branch
withholding certificate that evidences the branch's agreement to be
treated as a U.S. person. b. Intermediary and flow-through
withholding certificates Section 1.1441-1(e)(3)(i) provides
definitions for the terms intermediary withholding certificate,
flow-through withholding certificate, and U.S. branch withholding
certificate. That section originally defined a flow-through
withholding certificate as a Form W-8 furnished by a partnership
(other than a withholding foreign partnership) or a trust or estate.
The paragraph has been revised to conform to the definition of flow-
through entity contained in §1.1441-1(c)(23) and the new rules
contained in §1.1441-5(e) regarding foreign trusts and foreign
estates, discussed in section E of this Explanation of Provisions.
Under paragraph (e)(3)(i), as revised, a flow-through withholding
certificate is defined as a withholding certificate on Form W-8
furnished by a nonwithholding foreign partnership, a foreign simple
trust, a foreign grantor trust, or a foreign entity presenting
claims on behalf of its interest holders for a reduced rate of
withholding under an income tax treaty. Foreign complex trusts and
foreign estates generally provide beneficial owner withholding
certificates.

Section 1.1441-1(e)(3)(ii) provides the requirements for a valid
withholding certificate provided by a qualified intermediary. The
paragraph has been modified to reflect the procedures applicable to
qualified intermediaries as set forth in Rev. Proc. 2000-12 (2004-4
I.R.B. 1).

Section §1.1441-1(e)(3)(iii) provides rules relating to a
nonqualified intermediary withholding certificate. Paragraph (e)(3)
(iii) generally provided that payee documentation provided with a
nonqualified intermediary withholding certificate needed to be
attached to the certificate. Similar requirements existed for flow-
through withholding certificates and U.S. branch withholding
certificates. The regulations have been revised to require that
payee documentation be associated with, rather than attached to, a
nonqualified intermediary, flow-through, or U.S. branch certificate
to obviate the need for a new withholding certificate each time
payee documentation is provided to a withholding agent. The
regulations do not set forth specific requirements for associating
documentation. Any reasonable method may be used to associate
documentation with its intermediary withholding certificate.

Paragraph (e)(3)(iii), as originally drafted, required a
certification that the withholding certificates or other appropriate
documentation attached to a nonqualified intermediary withholding
certificate represented all of the persons to whom the intermediary
withholding certificate related or that the amounts of income
allocable to persons for whom no documentation was provided was
separately stated. A similar requirement applied to nonwithholding
foreign partnership withholding certificates in §1.1441-5(c)(3)
(iii)(D). The requirement for this certification has been
eliminated. The persons on whose behalf a nonqualified intermediary
acts will frequently change as persons open and close accounts with
the intermediary. Thus, any such certification may be true at the
time made, but false at a later point, necessitating a new
withholding certificate. The elimination of the certification is not
an elimination, however, of the requirement to provide payee
withholding certificates to a withholding agent prior to a payment.
The certification requirement has also been eliminated for
nonwithholding foreign partnerships.

Section 1.1441-1(e)(3)(iii) permits a nonqualified intermediary to
provide payee documentation either in the form of withholding
certificates or in the form of documentary evidence. The withholding
agent is required to derive information from the withholding
certificates or other documentary evidence and report payments to
each specific payee on whose behalf the nonqualified intermediary
acts. However, the regulations were silent on how a withholding
agent was to determine the status (U.S. or foreign) or
classification (e.g., corporate, partnership, trust, or estate) and
other information required to report payments on Form 1042-S from
documentary evidence, particularly when that documentary evidence
was in a foreign language. Further, although the regulations require
a nonqualified intermediary to allocate payments to each payee on
whose behalf it acts so that a withholding agent can report payments
to each payee on Form 1042-S or Form 1099, the regulations provided
no detail on how the allocation information was to be provided.

The regulations have been revised to take these considerations into
account. Under §1.1441-1(e)(3)(iv) as revised, a nonqualified
intermediary must associate with its nonqualified intermediary
withholding certificate a withholding statement which sets forth the
information a withholding agent needs to allocate a payment to each
payee on whose.19 behalf the nonqualified intermediary acts and to
report the payment. Specifically, the withholding statement must
contain for each payee the payee's name, address, country of
residence, TIN (if any), the payee's recipient type for Form 1042-S
reporting, the applicable rate of withholding, the type of
withholding exception applied (if any), and the name of any other
intermediary or flow-through entity from whom the payee directly
receives the income. Additional information is required if a reduced
rate of withholding under an income tax treaty is claimed. The
withholding statement may be provided in any manner that the
withholding agent and nonqualified intermediary agree, including
electronically. It must be updated as frequently as necessary to
remain accurate prior to each payment. The regulation does not
require a nonqualified intermediary to provide information for a
payee unless the payee is a U.S. non-exempt recipient. Information
regarding U.S. non-exempt recipients must be provided irrespective
of any local laws that prohibit disclosure of an account holder or
account information. Therefore, a nonqualified intermediary should
obtain waivers from non-disclosure provisions from U.S. non-exempt
recipients. To the extent payee information is not provided, whether
for a U.S. non-exempt recipient or any other payee, the regulation
has been clarified to state explicitly that a withholding agent must
withhold under the presumption rules. Further, the nonqualified
intermediary remains liable for any tax not withheld by a
withholding agent and, unless the nonqualified intermediary itself
files information returns, will also be held liable for penalties
imposed for failure to file information returns under sections 6721
and 6722. Many commentators have argued that it is not practical to
provide information allocating a payment to each payee prior to each
payment because the customers of nonqualified intermediaries are
constantly acquiring and disposing of investments. Several
commentators made suggestions on how the regulations might ease
compliance burdens. One commentator suggested that no allocation
information should be required except in the case of income subject
to reduced rates of withholding under an income tax treaty and
payments made to U.S. non-exempt recipients. This suggestion was
rejected. The IRS has provided a mechanism for aggregate reporting
of payments in the model qualified intermediary agreement in Rev.
Proc. 2000-12. It is inappropriate to extend such treatment to
nonqualified intermediaries without the safeguards contained in a
qualified intermediary agreement. Other commentators suggested that
a withholding agent should withhold the difference between 30
percent of a payment and the claimed reduced rate of withholding in
escrow and release the amounts when allocation information is
provided. This suggestion was also not accepted. Such a system would
leave the escrow funds out of the control of both the IRS and the
beneficial owners of the payments. Further, because the nonqualified
intermediary would have to provide frequent allocations as soon as
possible after the time of payment to have the escrow funds
released, it appeared to provide little relief from the pressures
inherent in providing allocation information prior to a payment.
Other commentators argued that a reduced rate of withholding should
be provided at the time of payment with allocation information to
follow after the close of the year with various disincentives
provided for failure to furnish the allocation information. The
regulations generally adopt this approach.

Paragraph (e)(3)(iv)(D) provides alternative procedures that permit
a nonqualified intermediary to provide information allocating
reportable amounts to payees (including U.S. exempt recipients) by
January 31 of the year following the calendar year of payment. The
alternative procedures do not apply to payments made to U.S. non-
exempt recipients. Therefore, allocation information for those
persons must be provided prior to a payment. Under the alternative
procedures, only allocation information may be provided after a
payment is made: all other information that is required to be
included in a withholding statement and appropriate payee
documentation must be provided prior to a payment. The nonqualified
intermediary may have reduced rates of withholding apply by
identifying pools of income subject to a particular withholding rate
(withholding rate pools) and identifying the payees with the
appropriate withholding rate pools.

Various penalties apply if a nonqualified intermediary fails to
provide information to allocate payments in a withholding rate pool
to a withholding agent by January 31. First, the withholding agent
must commence withholding on all payments in accordance with the
presumption rules. Therefore, 30 percent withholding applies to
amounts subject to withholding and 31 percent backup withholding
applies to payments of deposit interest and original issue discount
on original issue discount obligations of 183 days or less. Under a
cure provision, the withheld amounts may be returned, and the
alternative procedures may continue to be used, if the nonqualified
intermediary provides allocation information by February 14. If the
nonqualified intermediary fails to provide allocation information by
that date, withholding continues for the taxable year, and all
subsequent taxable years, unless the withholding agent provides
allocation information prior to a payment. Further, because no
allocation information has been provided, the payments are
considered never to have been reliably associated with valid
documentation and the foreign beneficial owners and other payees on
whose behalf the nonqualified intermediary is acting are not
entitled to a reduced rate of withholding. Therefore, the
nonqualified intermediary shall remain liable under section 1461 for
the difference between the amount, if any, withheld by the
withholding agent and the amount that should have been withheld
under the presumption rules. Any tax due because of an allocation
failure will be assessed against the nonqualified intermediary and,
if necessary, collected from the assets that the nonqualified
intermediary has with the withholding agent. Interest and penalties
may also be assessed against the nonqualified intermediary. In
particular, paragraph (e)(3)(iv)(7) states that a failure to provide
allocation information will be presumed to be an intentional failure
to file information returns and payee statements under sections 6721
and 6722. The IRS will not, however, hold the withholding agent
liable for any tax, interest, or penalties, that are due solely to
the failure of the nonqualified intermediary to provide allocation
information.

The withholding statement rules and alternative allocation
procedures have also been made applicable to U.S. branches of
certain foreign banks and insurance companies and flow-through
entities. This change, together with certain other changes discussed
in this Explanation of Provisions, generally results in nonqualified
intermediaries, U.S. branches, and flow-through entities being
treated similarly. Paragraph (e)(3)(iv)(E) has been added to permit
the IRS to provide a withholding agent with a notice prohibiting the
withholding agent from applying the alternative procedures of
paragraph (e)(3)(iv)(D) to an identified nonqualified intermediary
(or to a flow-through entity or a U.S. branch of a foreign bank or
foreign insurance company) thereby requiring allocation information
prior to a payment to have a reduced rate of withholding apply. In
addition, the IRS may, in appropriate circumstances issue a notice
to a withholding agent prohibiting the withholding agent from
applying a reduced rate of withholding under any circumstances, even
if allocation information is provided prior to a payment. The IRS
contemplates issuing these notices in situations where a
nonqualified intermediary, flow-through entity, or U.S. branch fails
to pay a tax due or is not applying the rules of the regulations in
good faith.

c. Reportable amounts

Foreign intermediaries, flow-through entities, and U.S. branches of
foreign banks and insurance companies (other than U.S. branches
treated as U.S. persons) are required to provide information with
respect to reportable amounts, as defined in §1.1441- 1(e)(3)
(vi). Prior to its revision, paragraph (e)(3)(vi) included in the
definition of reportable amounts original issue discount or interest
(OID) paid on short-term instruments. This definition appeared to
include interest and OID regardless of whether those amounts were
paid on the redemption of an obligation or from the sale or exchange
of an obligation in a transaction other than a redemption. Under the
presumption rules, if a withholding agent makes a payment to a
foreign intermediary of interest and OID on a short-term obligation
and it lacks documentation for such amounts, it must presume that
the payee is a U.S. non-exempt recipient and report the income on
Form 1099 and backup withhold on the payment. See §1.6049-5(d)
(3)(iii). These rules proved to be impractical for sales of short-
term obligations outside the United States. Foreign intermediaries
have contended that they do not have the appropriate systems to
report gains from sales transactions on Forms 1099 or to provide the
proper allocation information to U.S. payors. Moreover, treating the
sale or exchange of short-term OID instruments as reportable
interest on Form 1099 was inconsistent with rules that treat amounts
paid on the sale or exchange, other than redemptions, of such
obligations as gross proceeds. See §§1.6045-1(d)(3) and
31.3406(b)(2)-2. Because it is more appropriate to treat sales,
other than redemptions, of short-term OID instruments as gross
proceeds rather than payments of interest or original issue
discount, the regulation has been amended to provide that reportable
amounts do not include amounts representing interest or OID on the
sale or exchange, other than a redemption, of a short-term OID
instrument. Therefore, a foreign intermediary, flow-through entity,
or U.S. branch is not required to provide information regarding
these transactions to a withholding agent as part of its withholding
statement.

d. Period of validity

Section 1.1441-1(e)(4)(ii)(A) states that documentary evidence
(i.e., documentation other than a withholding certificate) remains
valid until "the earlier of the last day of the third calendar year
following the year in which the documentary evidence is created . .
. ." Commentators have stated that it is not clear if a document is
"created" when it comes into being or when it is provided to a
withholding agent. They also stated that basing the validity period
on the date a document came into being would be more difficult to
administer because they would have to calculate the expiration date
in every case rather than assuming that it was valid for three years
after it had been received by the withholding agent. In response to
these comments, the rule has been amended to permit the validity
period to be measured from the date documentation is provided to the
withholding agent.

Section 1.1441-1(e)(4)(ii)(B) sets forth the circumstances in which
a Form W-8 has an indefinite validity period. Paragraph (e)(4)(ii)
(B)(1), as originally drafted, provided that a Form W-8 that
contained a TIN was valid indefinitely "if the income for which such
certificate is furnished is required to be reported" on Form 1042-S.
Commentators noted that a strict reading of this language could
preclude the indefinite validity of a Form W-8 with respect to
income that was not subject to reporting, even though other income
paid to the same beneficial owner by the withholding agent was
subject to reporting. The regulation has been amended to provide
that if there is annual reporting of at least one item of income
paid by a withholding agent to a beneficial owner, the Form W-8
remains valid even for payments that are not subject to reporting.
However, if a withholding agent has a Form W-8 with a TIN but does
not make any payments of an amount subject to withholding, for
example the withholding agent pays only deposit interest, the form
remains valid only for 3 calendar years after the year of receipt.
In addition, paragraph (e)(4)(ii)(B)(8) has been added to provide an
indefinite validity period for a withholding certificate provided by
a foreign simple trust or foreign grantor trust for the purposes of
transmitting withholding certificates or documentary evidence. e.
Electronic transmission of information

These regulations finalize the regulations proposed in REG-107872-97
(62 FR 53504) relating to the electronic submission of Forms W-8 and
make them applicable beginning January 1, 2000. Like the proposed
regulations, the final regulations apply only to situations where
there is a direct relationship between the withholding agent or
payor and the beneficial owner or payee. The final regulations
reserve on applicable standards for transmitting forms through tiers
of intermediaries. Comments were solicited on this matter in the
preamble to the proposed regulations but none were received. The IRS
and Treasury recognize the benefits of allowing the electronic
transmission of Forms W-8 through one or more intermediaries and
continue to solicit comments regarding requirements to ensure the
integrity, accuracy, and reliability of electronically transmitted
forms through tiers of intermediaries.

f. Requirement of taxpayer identifying number.26

Section 1.1441-1(e)(4)(vii) provides guidance for when a TIN is
required on a Form W-8. Paragraph (e)(4)(vii), as originally
drafted, required TINs on withholding certificates from all trusts
or estates or the fiduciaries thereof. A number of commentators
stated that the TIN requirement was burdensome and unreasonable when
applied to pension trusts and large investment trusts. In addition,
commentators noted that nonwithholding foreign partnerships, which
are treated similarly to foreign simple trusts and foreign grantor
trusts, are not required to have a TIN. In response to these
comments, the regulations have been amended by eliminating the TIN
requirement for foreign trusts other than foreign grantor trusts
with 5 or fewer owners.

Paragraph (e)(4)(vii) has also been modified to state that a TIN is
required on a withholding certificate from a beneficial owner that
is claiming an exemption based on its claim of tax exempt status
under section 501(c) or private foundation status. This does not
represent a change in the requirements for a withholding certificate
from such a beneficial owner. The regulation, as originally drafted,
however, contained the requirement only in §1.1441-9. The
requirement of a TIN has been repeated in this paragraph for
convenience. Finally, commentators noted that there was a conflict
between paragraph (e)(4)(vii), which did not require a TIN on a
withholding certificate from a nonwithholding foreign partnership,
and §1.1441-5(c)(3)(iii)(A), which stated that a TIN was
required. It was never intended that a nonwithholding foreign
partnership withholding certificate used to transmit documentation
and information relating to its partners have a TIN. Section
1.1441-5(c)(3)(iii)(A) has been modified accordingly. TINs are
required, however, if the withholding foreign partnership is
providing a withholding certificate on which it claims an exemption
from withholding because the income is effectively connected with
the conduct of a trade or business or when it is entitled to claim
treaty benefits under section 894 on income for which a TIN is
required under §1.1441-6(b)(1).

g. Requirement to furnish certificates for each account

Generally, each withholding agent that makes a payment to a
beneficial owner must obtain a separate withholding certificate. In
addition, a withholding agent that is a financial institution must
obtain withholding certificates or other appropriate documentation
on an account-by-account basis from its customers. Under paragraph
(e)(4)(ix)(A)(3) of the regulations, a withholding agent may rely on
a withholding certificate held at another branch of the same
withholding agent or of a person related to the withholding agent if
there is a system in place that permits a withholding agent to
access data regarding the withholding certificate and to transmit
data that affects the validity of the documentation into the system.
A commentator noted that the regulations do not contain provisions,
however, to let unrelated withholding agents utilize such a system
that they maintain in common or that is maintained by another
person. New paragraph (e)(4)(ix)(A)(4) has been added to permit
unrelated withholding agents to rely on such a system.

h. Special rules for brokers

Section 1.1441-1(e)(4)(ix)(C) provided that a withholding agent may
rely on the certification of a broker acting as the agent of a
beneficial owner if the broker held a valid beneficial owner
withholding certificate or other documentation for that beneficial
owner. As originally drafted, the intention of this provision was
unclear. It also appeared to be overly broad because it would have
permitted a foreign broker to retain beneficial owner documentation
and not transmit the documentation to a U.S. withholding agent.
Paragraph (e)(4)(ix)(C) has been redrafted to clarify, and
appropriately limit, its application. As redrafted, it applies only
to a U.S. broker. It permits such a broker that is acting as an
introducing or corresponding broker to provide a clearing broker
with a certification that it holds a valid withholding certificate
or other appropriate documentation. Without this rule, an
introducing or corresponding broker would have to obtain multiple
Forms W-8 and provide them to each clearing broker with whom the
introducing or corresponding broker executes transactions. In
addition, paragraph (e)(4)(ix)(C) has been amended to apply only to
readily tradeable instruments, as provided in §31.3406(h)-3(d),
on which it is modeled. An example has been added to illustrate the
paragraph.

8. Qualified Intermediary Withholding Certificates

Section 1.1441-1(e)(5) provides rules regarding qualified
intermediaries. The rules have been redrafted to more closely
conform with the model qualified intermediary agreement published as
part of Rev. Proc. 2000-12. The regulation, as originally drafted,
contained a requirement that a qualified intermediary disclose U.S.
non-exempt recipients "irrespective of local secrecy laws." The
model qualified intermediary agreement has specific provisions
contained in section 6.04 of the agreement, as well as other
sections, that govern the treatment of U.S. persons whenever foreign
law, whether or not a "secrecy" provision, may preclude disclosure
of a U.S. non-exempt recipient. Very generally, those provisions
require a qualified intermediary to disinvest a U.S. non-exempt
recipient who does not waive its local law non-disclosure privileges
and to collect backup withholding on income and sales proceeds paid
to such person. Therefore, the language stating that disclosure is
required "irrespective of local secrecy laws" has been deleted to
avoid creating an inconsistency between the model qualified
intermediary agreement and the regulation.

The provisions in paragraph (e)(5) regarding the terms of the
withholding agreement a qualified intermediary must enter with the
IRS have also been changed to more generally conform with the
qualified intermediary agreement as set forth in Rev. Proc. 2000-12.
The regulation clarifies the consequences of a qualified
intermediary's assumption of primary withholding responsibility.
Section 1.1441-1(e)(5)(iv), as originally drafted, stated that a
withholding agent making a payment to a qualified intermediary was
required to presume full withholding responsibility for that payment
unless the qualified intermediary assumed primary withholding
responsibility. The regulation was potentially misleading because it
could have been interpreted to mean that if a qualified intermediary
did not assume primary withholding responsibility, only the U.S.
withholding agent was responsible for withholding. Rev. Proc.
2000-12 makes clear, however, that qualified intermediaries are
required to withhold in certain circumstances even though they have
not assumed primary withholding responsibility. The rule that was
initially in paragraph (e)(5)(iv) was intended to relieve a
withholding agent making a payment to a qualified intermediary that
assumed primary withholding responsibility from the obligation to
withhold, not to relieve the qualified intermediary of any
withholding requirement. The paragraph has been amended to reflect
this intent.

Paragraph (e)(5)(iv) also stated that a qualified intermediary
generally would not be permitted to assume withholding and reporting
responsibility under section 3406 and chapter 61 of the Internal
Revenue Code on a payment made to a U.S. person unless the qualified
intermediary was a foreign branch of a U.S. person or a foreign
person that had a branch in the United States capable of performing
such reporting and withholding. In developing the model qualified
intermediary agreement, it became apparent that it was desirable to
permit certain qualified intermediaries that did not meet those
criteria to assume reporting and withholding responsibility under
chapter 61 of the Internal Revenue Code and section 3406. For
example, where payments are made through clearing organizations, it
may be impractical to require a qualified intermediary to provide
information regarding U.S. non-exempt recipients to a U.S.
withholding agent. The language that generally limited the ability
to assume reporting and withholding responsibility under chapter 61
of the Internal Revenue Code and section 3406 has been eliminated.
Whether a qualified intermediary may assume such responsibility is
left to the terms of the qualified intermediary agreement. See
section 3 of the model qualified intermediary agreement in Rev.
Proc. 2000-12.

Section 1.1441-1(e)(5)(v), as originally drafted, required a
qualified intermediary to associate a payment with one of three
categories of assets: (i) assets associated with documented foreign
persons, (ii) assets associated with documented U.S. payees, and
(iii) assets associated with undocumented payees. These three asset
categories were subdivided into classes of assets based on
withholding rates and reporting requirements. The asset categories
did not provide the needed flexibility sought by qualified
intermediaries. For example, information regarding U.S. exempt
recipient payees, who are not subject to withholding under section
1441, could not be combined with information regarding foreign
beneficial owner payees subject to a zero rate of withholding. The
model qualified intermediary agreement, as published in Rev. Proc.
2000-12, substituted the withholding rate pool concept for asset
classes and this concept has been reflected in the revised
regulation. A withholding rate pool is a payment of a single type of
income, determined in accordance with the categories of income
reported on Form 1042-S or Form 1099, as applicable, that is subject
to a single rate of withholding.

Finally, the regulations permit, in accordance with Rev. Proc.
2000-12, a qualified intermediary and a U.S. withholding agent to
use a single withholding rate pool for U.S. non-exempt recipients
for whom no backup withholding is required and a single withholding
rate pool for U.S. non-exempt recipients that are subject to backup
withholding provided that the qualified intermediary agreement
permits such an arrangement and sufficient information is provided
to the withholding agent no later than January 15 following the year
of payment that allocates the reportable payments to each U.S. non-
exempt recipient account holder. Failure to provide the allocation
information timely may result in penalties imposed on the qualified
intermediary and the termination of its qualified intermediary
agreement. Unlike qualified intermediaries, nonqualified
intermediaries and flow-through entities are not permitted to pool
payments to U.S. non-exempt recipients. Therefore, information
sufficient to allocate the payment to each U.S. non-exempt recipient
must be provided before a payment is made or the withholding agent
must treat the payment as made to a U.S. payee that has failed to
provide a TIN and impose backup withholding.

B. Changes to §1.1441-2

1. Amounts Subject to Withholding

Section 1.1441-2(a) has been amended to exclude from the definition
of amount subject to withholding interest paid as part of the
purchase price of an obligation sold between interest payment dates
(accrued interest) and an amount representing original issue
discount (OID) paid as part of the purchase price of an obligation
sold in a transaction other than the redemption of such obligation.
The exclusions do not apply, however, if the sale of an obligation
is part of a plan the principal purpose of which is to avoid tax and
the withholding agent has actual knowledge or reason to know of such
plan.

The exclusion of accrued interest and amounts representing OID paid
as part of the purchase price of an obligation sold in a transaction
other than a redemption were made in response to comments received
on §1.1441-2(b)(3) of the final regulations and proposed
regulation §1.1441-3(b) (REG-114000, 62 FR 53503). Section
1.1441-2(b)(3), as originally drafted, required withholding on OID
to the extent the withholding agent had actual knowledge of the
amount of the payment that was taxable to the beneficial owner.

A withholding agent was treated as having actual knowledge if it had
a direct account relationship with the holder of the obligation.
Proposed regulation §1.1441-3(b) would have eliminated the rule
that no withholding was required on accrued interest and replaced it
with a rule that conformed with the rule applicable to OID on the
theory that, from a withholding perspective, the two payments were
equivalent. The withholding rules applicable to OID and accrued
interest would have required withholding whenever a payment of
interest or OID was not subject to an exception, such as the
portfolio interest exception, or a payment of OID or accrued
interest was presumed made to a foreign person and the withholding
agent could not reliably associate the payment with beneficial owner
documentation. Such payments were subject to reporting on Form 1042-
S whether or not withholding was imposed..33

In Notice 99-8, Treasury and the IRS announced that they would make
modifications to the OID and accrued interest rules. The
modifications were intended to address criticisms by commentators
that the OID and accrued interest rules were unworkable.
Commentators argued that debt obligations are often sold in
delivery-versus- payment transactions which settle quickly and often
involve multiple intermediaries. The requirement to withhold in
absence of a beneficial owner withholding certificate would
necessarily inhibit the speed with which sales transactions are
normally conducted. In addition, they argued that a withholding
agent does not necessarily know the amount of OID or accrued
interest merely because it has a direct account relationship with
the account holder. In addition, custodians stated that sales were
often accounted for in systems different from those used to report
interest and OID and therefore the reporting requirement of the
regulations would require significant systems modifications. They
argued that these modifications were not justified because nearly
all accrued interest and OID would be from instruments that could
qualify for the portfolio interest exception. Notice 99-8 proposed
rules that were intended to require only the withholding agent that
had a direct account relationship with a beneficial owner to obtain
a Form W-8. Thus, the notice proposed a rule that would require a
withholding agent to obtain a withholding certificate only if it
received the proceeds from a sale against delivery of the debt
obligation or, in the case of a retirement, the withholding agent
was the person responsible for paying the owner or crediting its
account. The notice would have prevented intermediaries other than
the intermediary with the direct account relationship with the
beneficial owner from having to obtain a Form W-8 by stating that
any withholding agent that effected a transaction for a broker was
generally not required to obtain a Form W-8. A broker was.34 defined
by reference to §1.6045-1(a) and generally included a person
that makes sales of securities for customers in the ordinary course
of that person's trade or business. In addition, the notice proposed
to eliminate the rule that presumed knowledge of the amount of OID
or interest accrued between interest payment dates merely because
there was a direct account relationship with the beneficial owner of
an obligation.

Commentators criticized the Notice 99-8 proposal. They argued that
the multiple broker exception did not always accomplish its intended
purpose because certain participants in a transaction for whom a
Form W-8 should not be required could not meet the definition of a
broker, particularly since that definition does not include non-U.S.
payors that effect sales of obligations at an office outside the
United States and certain other persons, such as investment
advisors, who might participate in the transaction but did not stand
ready to effect sales of securities for others. In addition, the
Notice did not solve the problem faced by custodians.

In light of these criticisms, Treasury and the IRS have decided to
eliminate the requirement for withholding, and reporting, on accrued
interest and an amount representing OID paid on the sale of an OID
obligation, other than in a redemption. This change has been
effected by eliminating those items from the definition of amounts
subject to withholding. Withholding is required, however, if the
withholding agent knows or has reason to know that a sale is part of
a plan to avoid tax. For example, if a holder of a debt obligation
that pays interest that does not qualify for the portfolio interest
exception sells the instrument immediately prior to an interest
payment date and reacquires the same type of security after the
interest payment date and the withholding agent knows, or has reason
to know, of this pattern of sales, withholding and reporting of
accrued interest is required..35 Paragraph (a) has also been amended
to state that insurance premiums paid on a contract subject to the
section 4371 excise tax are not amounts subject to withholding. As
previously drafted, these amounts were excluded from the definition
of fixed or determinable annual or periodical (FDAP) income under
§1.1441-1(b)(2)(ii) and therefore were not included in amounts
subject to withholding. Excluding insurance premiums from FDAP is
inappropriate, however. Insurance premiums fall within the
definition of FDAP provided in paragraph (b)(1). Therefore, the
better means for exempting premiums subject to the section 4371
excise tax from withholding is to exclude them from the definition
of amounts subject to withholding.

2. Fixed or Determinable Annual or Periodical Income Section
1.1441-2(b)(1)(i) provides the definition of fixed or determinable
annual or periodical (FDAP) income. Such income, if from sources
within the United States, is generally an amount subject to
withholding and therefore also subject to reporting on Form 1042-S
if paid to a foreign payee. Paragraph (b)(1)(i) states that amounts
that are excluded from gross income under any provision of law
"without regard to the identity of the holder" are not FDAP income.
This provision was, in part, intended to exclude from FDAP qualified
scholarship income under section 117. The language, however, failed
to accomplish its intended purpose because the section 117 exclusion
is dependent on the identity of the person receiving the income--the
recipient must be a candidate for a degree at a certain type of
educational organization. The paragraph has been revised to state
that amounts that are excluded from gross income without regard to
the U.S. or foreign status of the owner of the income is not FDAP.
In addition, the paragraph has been changed to clarify that amounts
excluded from gross income under sections 892 (income of foreign.36
governments) and 115 (income of a U.S. possession) are not excluded
from the definition of FDAP since the foreign status of the owner of
the income is determinative of whether the exclusions provided by
those sections apply. Amounts subject to the section 892 and section
115 exclusions are, therefore, included in the scope of amounts
subject to withholding and therefore are reportable on Form 1042-S
under section 1461 even though not taxable under section 871 or 881.
3. Original Issue Discount

Section 1.1441-2(b)(3) provides rules governing the treatment of
original issue discount. Paragraph (b)(3)(i) describes the amount of
OID subject to taxation in the hands of the owner of an OID
obligation. Minor changes have been made to this paragraph to
clarify the amount of OID that is taxable to the beneficial owner of
the obligation. Paragraph (b)(3)(ii) describes the amount of OID
subject to withholding. To conform paragraph (b)(3)(ii) to the
changes discussed in section B. 1 of this Explanation of Provisions,
the paragraph has been revised to require a withholding agent to
withhold on OID only upon the redemption of the original issue
discount obligation or in any case where the withholding agent knows
that a sale, other than a redemption, is being made with the
principal purpose of avoiding tax on the obligation. A withholding
agent is required to withhold on the actual amount of OID includible
in the gross income of the owner of an obligation if it has actual
knowledge of such amount, or, if actual knowledge is lacking, on the
entire amount of OID determined under Publication 1212, "List of
Original Issue Discount Instruments" as if the obligation had been
held since issuance. Paragraph (b)(3)(iii) contained a rule that
required a withholding agent to withhold on interest and OID paid on
an OID obligation even though it did not know the amount of.37 OID
subject to taxation if the withholding agent could not reliably
associate the payment with valid documentation. The rule was
designed to eliminate an exception to withholding that applied if a
withholding agent did not have actual knowledge of the amount of OID
that accrued to the holder of the obligation up to the date of sale.
If the exception were not eliminated, it was feared that the
documentation requirement for portfolio interest could be avoided by
selling OID obligations through intermediaries that had no knowledge
of the accrued amount of OID. The rule is no longer necessary. Under
new §1.1441-2(a)(6), withholding is required if a withholding
agent knows, or has reason to know, that an OID obligation is sold
with the principal purpose of avoiding tax. Therefore, the rule as
originally contained in paragraph (b)(3)(iii) has been removed. New
paragraph (b)(3)(iii) contains the transition rule formerly found in
paragraph (b)(3)(iv). The rule has been modified, however. As
previously drafted, the rule appeared to eliminate any withholding
responsibility by the issuer of an OID obligation or its agent, as
formerly contained in Rev. Rul. 68-333 (1968-1 CB 390). As revised,
issuers and their agents are subject to any applicable withholding
requirements on obligations issued before or after December 31,
2000. The rule now states, however, that withholding on OID
obligations is only required by persons other than issuers or their
agents with respect to obligations issued after December 31, 2000.

C. Changes to §1.1441-3

1. Accrued Interest

Section 1.1441-3 provides rules to determine the amount subject to
withholding. In accordance with the change made in §1.1441-2(a)
(5), which eliminates interest accrued between sales dates from
amounts subject to withholding, §1.1441-3(b)(2) has been.38
modified to eliminate the requirement that a withholding agent that
pays accrued interest must report that interest on Form 1042-S.

2. Coordination With REIT Withholding

As originally drafted, §1.1441-3(c)(4)(i)(C) required
withholding under section 1441 on the portion of a Real Estate
Investment Trust (REIT) distribution that is not designated as a
capital gain dividend or return of basis. Therefore,
§1.1441-3(c)(4)(i)(C) inadvertently required withholding under
section 1441 on a distribution in excess of basis, which under
section 301(c)(3) is capital gain from the sale or exchange of stock
and, therefore, not subject to withholding under section 1441. To
correct this error, paragraph (c)(4)(i)(C) has been amended to
provide that withholding under section 1441 is not required on a
distribution in excess of basis. A distribution in excess of basis
is, however, subject to withholding under section 1445 unless the
interest in the REIT is not a U.S. real property interest (e.g., an
interest in a domestically controlled REIT under section 897(h)(2)).

D. Changes to §1441-4

1. Notional Principal Contracts

Section 1.1441-4(a)(3)(i) treats a payment of income on a notional
principal contract made to a foreign person as income effectively
connected with a trade or business within the United States unless
the withholding agent can reliably associate a payment with a
withholding certificate that certifies that the payment is not
effectively connected. This rule is overly broad because it presumes
that any notional principal contract payment made to a foreign
person is effectively connected even if the foreign person has no
nexus to the United States. As a result, §1.1441-4(a)(3)(i) has
been amended to limit the presumption that notional principal
contract income is effectively connected to a U.S. trade or
business.39 to those situations in which the income is either paid
to a U.S. qualified business unit of a foreign person or the
withholding agent otherwise knows, or has reason to know, that the
income is effectively connected with the conduct of a U.S. trade or
business. It is not expected that a withholding agent would be
considered to have reason to know that a notional principal contract
payment is effectively connected with the conduct of a trade or
business within the United States solely because the foreign person
receiving the payment has a qualified business unit in the United
States to which a portion of the payment may be allocated pursuant
to proposed regulation §1.863-3(h) (the global dealing
regulations). Section 1.1441-4(a)(3)(ii), as originally drafted,
stated that a payment to a financial institution was not treated as
effectively connected with the conduct of a trade or business within
the United States if the financial institution provided a
representation in a master agreement that governs transactions in
notional principal contracts between the parties (for example, an
International Swaps and Derivatives Association (ISDA) Agreement) or
in the confirmation on the particular notional principal contract
transaction that the counter party was a U.S. person or a non-U.S.
branch of a foreign person.

Commentators requested that the master agreement and confirmation
exceptions be expanded to apply to persons other than financial
institutions. Section 1.1441- 4(a)(3)(ii) has been amended (in the
table or corrections at the end of the regulation) to allow any
payee, not just a financial institution, to provide in a master
agreement or confirmation statement a representation that the payee
is a U.S. person or a non-U.S. branch of a foreign person.

2. Withholding on Payments From Individual Retirement Accounts.40

Section 1.1441-4(b)(1)(ii), as originally drafted, provided that
section 1441 applied to distributions from any trust described in
section 401(a) made to a nonresident alien individual and to certain
other retirement distributions. The result of this rule is that
section 1441, rather than section 3405, applies to retirement
distributions. This rule considerably eases the burdens that would
otherwise apply to retirement distributions. Commentators noted that
the regulations did not provide the same rule for distributions from
individual retirement accounts and annuities described in section
408. The regulation has been amended so that those distributions
will be subject to section 1441 as well.

E. Changes to §1441-5

Section 1.1441-5 of the regulations concerns payments made to
partnerships, trusts, and estates. As originally drafted, the
regulations contained extensive rules for payments made to U.S. and
foreign partnerships, but applied the rules of the regulations prior
to the publication of TD 8734 to trusts and estates. The trust and
estate rules, however, were inconsistent with the rules contained in
TD 8734 and were also incomplete. For example, §1.1441-1(c)(6)
(ii)(B) required a withholding agent to determine the beneficial
owner of income paid to a trust or estate under §1.1441-3(f)
and (g) of the regulations in effect prior to January 1, 2001. That
section, however, did not determine the beneficial owner of income
paid to a trust. In addition, §1.1441-1(e)(3)(i) stated that a
trust or estate was to use a flow-through withholding certificate
furnished under §1.1441- 5(e), but that section was reserved in
the regulation. The regulation has been revised to provide complete
trust and estate rules. Except as noted below, the partnership rules
remain generally unchanged; however, several changes were made to
clarify those rules..41

1. Rules Applicable to U.S. Partnerships, Trusts, and Estates

Section 1.1441-5(b), as originally drafted, provided rules regarding
payments to U.S. partnerships. The rules of paragraph (b) have been
expanded to cover payments to U.S. trusts and U.S. estates as well.
Under revised paragraph (b)(1), a payment to a U.S. partnership,
U.S. trust, or U.S. estate is treated as a payment to a U.S. person
and, therefore, not subject to withholding under chapter 3 of the
Internal Revenue Code. United States partnerships, U.S. trusts, and
U.S. estates are required, however, to withhold on payments they
make to foreign partners, foreign beneficiaries, or, in the case of
grantor trusts, foreign owners. Fiduciaries of U.S. trusts and U.S.
estates should take particular note that it is the trust or the
estate that is the withholding agent, and Forms 1042 and Forms 1042-
S must be filed using the name and TIN of the U.S. trust or U.S.
estate, not the name and TIN of the fiduciary.

Under paragraph (b)(2), a U.S. partnership is a withholding agent
for a foreign partner's distributable share of partnership income
that consists of amounts subject to withholding. A U.S. simple trust
is a withholding agent for the distributable net income (DNI)
includible in the gross income of a foreign beneficiary to the
extent the DNI consists of an amount subject to withholding.
Similarly, a U.S. complex trust is a withholding agent on DNI
includible in the gross income of a foreign beneficiary to the
extent the DNI consists of an amount subject to withholding that is,
or is required to be, distributed currently. U.S. simple trusts and
complex trusts are permitted to make reasonable estimates of the
portion of a distribution that constitute DNI consisting of amounts
subject to withholding. A U.S. grantor trust must withhold on any
income includible in the taxable.42 income of a foreign person that
is treated as an owner to the extent the amount includible consists
of an amount subject to withholding.

In the case of a partnership, if amounts subject to withholding are
not actually distributed, the U.S. partnership must withhold at the
earlier of the time the statement required under section 6031(b)
(Form K-1) is mailed or otherwise provided to the partner or the due
date for furnishing the statement. In addition, if an amount of
income is required to be, but is not actually distributed to the
foreign beneficiary of a U.S. simple or complex trust, the U.S.
trust must withhold at the time the income is required to be
reported on Form 1042-S. A U.S. grantor trust is required to
withhold at the time the trust receives the payment or the payment
is credited to the trust's account.

2. Payments Made to Foreign Partnerships

Section 1.1441-5(c) provides rules for payments made to foreign
partnerships. Generally, the payees of a payment made to a
nonwithholding foreign partnership are the partners of the
partnership. Paragraph (c)(1)(ii), however, contains rules on when
the partnership itself will be regarded as the payee of a payment.
That paragraph, as originally drafted, permitted a partnership to be
treated as the payee of income if the partnership provided a
withholding certificate stating that the payment was effectively
connected with the conduct of the partnership's U.S. trade or
business. A commentator noted that the paragraph did not treat the
partnership as the payee, however, to the extent the income was
treated as being effectively connected under the presumption rules
in the absence of a withholding certificate.

The paragraph has been revised to treat the partnership as the payee
if the income is presumed to be effectively connected in the absence
of documentation. For example,.43 if a nonwithholding foreign
partnership is receiving income on a notional principal contract and
the income is treated as effectively connected income under the
presumption rule of §1.1441-4(b)(3)(i), the nonwithholding
foreign partnership, and not the partners, is treated as the payee.
In addition, the example in paragraph (c)(1)(iv) has been replaced
with several less complex examples that better illustrate the
operation of the rules of paragraph (c)(1).

Section 1.1441-5(c)(2) contains rules relating to withholding
foreign partnerships. Section 1.1441-5(c)(2)(ii)(A), together with
§1.1461-1(c)(2)(ii)(A), required a withholding foreign
partnership to file a Form 1065 and Forms K-1 and exempted the
partnership from having to file Form 1042 and Forms 1042-S. The rule
was incorrect. A withholding foreign partnership is generally
required to withhold on payments and therefore must file a Form
1042, which is an income tax return, and not merely report the
amounts on Form 1065. Also, because the IRS matches amounts reported
on Forms 1042-S with amounts reported on Form 1042, it was incorrect
to substitute Forms K-1 for Forms 1042-S. Therefore, the regulation
has been amended to require a withholding foreign partnership to
file a tax return on Form 1042 and file information returns on Form
1042-S for amounts subject to withholding paid to, or included in
the distributive share of, its foreign partners. A withholding
foreign partnership may also be required to file a return on Form
1065 and make the statements on Form K-1 under section 6031 for its
partners. However, the IRS may agree in the withholding agreement to
modify information reporting requirements to avoid double reporting.
A rule that was formerly contained in §1.1441-7(a), which
permitted a withholding foreign partnership to arrange with a
withholding agent to have the.44 withholding agent impose
withholding on a payment has been removed because a withholding
foreign partnership is required to assume withholding
responsibility. Section 1.1441-5(c)(3) provides rules relating to
nonwithholding foreign partnerships. Paragraph (c)(3)(iv) has been
revised to require a nonwithholding foreign partnership to provide a
withholding statement in the same manner as a nonqualified
intermediary. In addition, paragraph (c)(3)(v) has been revised to
conform with revised §1.1441-1(b)(6), discussed in section A. 5
of this Explanation of Provisions. Thus, the regulation has been
changed to make clear that a nonwithholding foreign partnership has
an obligation to report payments even though another withholding
agent has withheld the appropriate amount if the nonwithholding
partnership has failed to provide adequate information for a
withholding agent to report the payments appropriately on Form 1042-
S and Form 1099 or the nonwithholding foreign partnership knows, or
has reason to know, that the payments were not correctly reported.
Paragraph (d) of §1.1441-5 provides presumption rules that
apply to determine the status of a partnership and its partners if a
payment cannot be reliably associated with valid documentation. The
rule in paragraph (d)(3)(ii), which permitted a reduced rate of
withholding to be applied to a payment to a nonwithholding foreign
partnership if the payment could be associated with a group of
documented payees all of whom were subject to the same withholding
rate has been removed for the reasons stated in connection with the
changes made to §1.1441-1(b)(3)(v)(C). See section A. 4, of
this Explanation of Provisions. Under the revised rule, any payment
of an amount subject to withholding paid to a foreign partnership
that has not been allocated to a specific payee is presumed made to
an undocumented foreign payee and subject to 30 percent
withholding..45

3. Payments to Foreign Trusts and Estates

Treasury Decision 8734 did not include new provisions regarding
withholding on payments by and to foreign trusts and foreign
estates. The IRS provided interim guidance in the instructions to
Forms W-8BEN and W-8IMY so that withholding agents could replace
documentation that was expiring under the withholding regulations
with documentation that would meet the requirements of TD 8734. In
addition, Notice 99-8 announced that Treasury and the IRS intended
to issue regulations that would clarify the withholding obligations
of income paid to trusts and estates. Under the instructions and the
notice, a payment to a foreign fiduciary was treated as a payment to
a foreign intermediary and, therefore, the foreign fiduciary was
required to furnish an intermediary withholding certificate on Form
W-8IMY. If the trust was a trust described in section 651(a) or a
trust, all or a portion of which was treated as owned by the grantor
or other persons under sections 671 through 679, the fiduciary was
required to attach Forms W-8BEN, Forms W- 8EXP, or Forms W-9, from
the beneficiaries or owners of the trust. In all other cases, the
foreign trustee or executor was required to attach a Form W-8BEN,
Form W-8EXP, or if required, Form W-9, completed on behalf of the
trust or estate.

Several commentators objected to the requirement that a foreign
fiduciary of a complex trust or a foreign estate provide an
intermediary withholding certificate. They requested that a
withholding certificate be required only from the trust or estate
itself. Requiring documentation from a fiduciary also was not
consistent with the rules under chapter 61, which generally require
a Form W-9 from a trust or estate and ignore the status of the
fiduciary. Finally, Notice 99-8 did not provide any presumption
rules for payments to foreign trusts and foreign estates..46

The regulations now contain a comprehensive set of rules for
payments made to foreign trusts and foreign estates in
§1.1441-5(e). A foreign complex trust (as defined in paragraph
(c)(25)) and a foreign estate are generally considered beneficial
owners of income under §1.1441-1(c)(6). Therefore, under
§1.1441-5(e)(2), a foreign complex trust or a foreign estate
may provide a beneficial owner withholding certificate or other
beneficial owner documentation for payments for which a reduced rate
of withholding is not claimed under a treaty. Whether such a trust
or estate can provide a beneficial owner withholding certificate to
claim a reduced rate of withholding under an income tax treaty will
depend on whether the trust or estate can claim to be a resident of
a treaty country, whether it derives the income under section 894,
and the regulations thereunder, and whether treaty benefits are
denied under a limitation on benefits provision.

Foreign simple trusts and foreign grantor trusts are not payees or
beneficial owners under §1.1441-5(e)(3), unless the payment is
an amount that is treated as effectively connected with the conduct
of a U.S. trade or business. The payees of payments to a foreign
simple trust or a foreign grantor trust are generally the
beneficiaries or owners of the trust. This is similar to the
treatment accorded to payments to foreign partnerships, where the
partners, rather than the partnership, are generally considered the
payees of income paid to the partnership. Therefore, the
documentation rules applicable to foreign simple trusts and foreign
grantor trusts generally accord with those applicable to foreign
partnerships. The trust itself provides a flow-through withholding
certificate with which it associates the withholding certificates
or, if permitted, documentary evidence of its beneficiaries or
owners. The foreign simple trust or foreign grantor trust must also
associate with its flow-through withholding certificate a
withholding statement identical to.47 that provided by foreign
partnerships and nonqualified intermediaries. The IRS may permit a
foreign trust to function as a withholding foreign trust. A
withholding foreign trust would generally be subject to the same
provisions as a withholding foreign partnership. Section 1.1441-1(e)
(6) provides presumption rules for payments of amounts subject to
withholding to foreign trusts and estates. Whether a payee is a
trust or estate is determined under the general presumption rules of
§1.1441-1(b)(3)(ii). A trust or estate is presumed to be U.S.
unless there are indicia of foreign status. If a payee is presumed
to be a foreign trust, but its status as a complex, simple, or
grantor trust is unknown, it will be treated as a complex trust. If
the trust is known to be a foreign simple or grantor trust, its
beneficiaries or owners will generally be presumed to be foreign
with respect to payments of amounts subject to withholding.

F. Changes to §1441-6

Section 1.1441-6 contains the provisions for claiming a reduced rate
of withholding under an income tax treaty. Section 1.1441-6(b) has
been revised to clarify the requirements for claiming treaty
benefits. Specifically, the provisions of paragraph (b)(2), as
originally drafted, which related to use of documentary evidence,
have been moved to newly revised paragraphs (c)(1) and (2) so that
all the documentary evidence rules appear in the same paragraph.
Paragraph (b)(2) now contains the provisions relating to treaty
claims made by interest holders of fiscally transparent entities.
Clarifying changes to those rules, which appeared in former
paragraph (b)(4), have also been made. Section 1.1441-6(c)(1) and
(2), as originally drafted, required a foreign person to establish
residency by obtaining a certified taxpayer identification number
(certified TIN) from the IRS. Those provisions required a person
claiming a reduced rate of withholding.48 to submit either a
certificate of residency or certain other prescribed documentation,
plus affidavits regarding compliance with the limitation on benefits
provisions of a treaty and with the regulations under section 894.
In Notice 99-8, the IRS announced that it would not implement the
procedures for obtaining certified TINs until January 1, 2002. The
certified TIN procedures have been removed. New paragraph (b)(3),
however, provides authority for the IRS to issue guidance on
requirements that a treaty claimant must follow to establish
residency and compliance with other requirements imposed by treaties
and the Internal Revenue Code, such as limitation on benefits
provisions and the requirement that the claimant derive the income
under section 894. Treasury and the IRS fully intend to implement
such procedures. However, Treasury and the IRS determined that it
was appropriate to delay implementation of the requirement while
withholding agents and beneficial owners implement other
requirements under the regulation. In addition, the IRS will examine
ways to more effectively implement the certified TIN requirement.
Paragraphs (c)(3) and (4) prescribe the types of documentation that
can be used to claim treaty benefits for income from marketable
instruments paid outside the United States to offshore accounts.
Former paragraph (b)(2) stated that documentary evidence could be
used, in certain cases, to claim treaty benefits if the documentary
evidence was accompanied by the certifications required in paragraph
(c)(5). Paragraph (c)(5) contained a requirement that a beneficial
owner applying for a certified TIN provide the IRS with
certifications, made in an affidavit signed under penalties of
perjury, that the beneficial owner was in compliance with any
applicable limitation on benefits provisions contained in a treaty
and that the beneficial owner derives the income for which treaty
benefits will be claimed. It was unclear from the regulations, as
drafted, whether the certifications that.49 were provided to
withholding agents were required to be made in affidavits signed
under penalties of perjury or whether the affidavit requirement only
applied to obtaining certified TINs. Although Treasury and the IRS
believe it is important that statements regarding compliance with
limitation on benefits provisions and section 894 be given in
conjunction with documentary evidence provided to a withholding
agent, a penalties of perjury requirement would impose a burden that
undermines the use of documentary evidence. One reason for
permitting use of documentary evidence is to eliminate, as much as
possible, the need for a penalties of perjury statement. Thus, the
affidavit and penalties of perjury requirements have been eliminated
with respect to documentary evidence provided to a withholding
agent. The IRS may, however, require an affidavit in connection with
the certified TIN procedures that it will establish. The affidavit
requirement in paragraph (c)(4), stating that the information on
documentary evidence is true and complete, has also been eliminated.

G. Changes to §1.1441-7

Section 1.1441-7 defines the term withholding agent and provides
various rules relating to the obligations of withholding agents,
including certain due diligence requirements regarding the
documentation they receive from payees.

1. Withholding Agent Defined

§1.1441-7(a) provides the definition of a withholding agent as
well as a withholding agent's obligation to withhold the appropriate
amount of taxes and file returns. The section has been revised by
removing language stating that a withholding foreign partnership
does not have to file Forms 1042-S for payments made to foreign
partners because it is required.50 to provide Forms K-1. The reason
for this change is discussed in section E. 2 of this Explanation of
Provisions.

Some U.S. withholding agents commented that foreign persons,
including U.S. branches of foreign persons, were taking the position
that they were not withholding agents for purposes of chapter 3 of
the Internal Revenue Code. Any person, whether U.S. or foreign, that
pays, or has control, receipt, custody, or disposal of an amount
subject to withholding is a withholding agent. In addition, with
respect to a single item of income, each person that handles the
payment is a withholding agent. Thus, there may be more than one
withholding agent with respect to a payment of an amount subject to
withholding. Examples have been added in new paragraph (a)(2) to
illustrate these principles. In particular, examples were added to
emphasize that foreign persons that pay, or have control, receipt,
or custody, of amounts subject to withholding are withholding
agents, including U.S. branches of foreign persons.

2. Reason to Know

Section 1.1441-7(b)(2)(ii), as originally drafted, provided the
exclusive rules for determining when a withholding agent that is a
financial institution making a payment of income from marketable
securities has reason to know that documentation provided to the
withholding agent is unreliable. Commentators noted that the
language of paragraph (b)(2)(ii) was inconsistent about whether the
rules applied only to withholding certificates (i.e., Forms W-8) or
also to documentary evidence. In addition, many commentators noted
that the rules could not be reasonably applied to documentary
evidence received through tiers of intermediaries, because that
documentation would often be in a foreign language. They further
argued that the rules relating to P.O. box addresses were
unreasonable.51 because in some countries P.O. box addresses are
standard. Finally, commentators noted that the means for curing
otherwise unreliable documentation were, in some instances, too
restrictive.

Section 1.1441-7 (b)(3) through (10) have been added to address the
comments. Some of the changes made to paragraph (b) reflect rules in
the model qualified intermediary agreement contained in Rev. Proc.
2000-12. Paragraphs (b)(4) through (b)(9) relate to the obligations
of a withholding agent for account holders that have a direct
account relationship with the withholding agent. The rules are
limited to direct account relationships because they often rely on
account information that will exist only if such a relationship
exists. However, under the rules of paragraph (b)(10), which relate
to documentation from persons that are not direct account holders,
the rules in paragraph (b)(4) through (9) apply to the extent that
they rely on information contained on the face of a withholding
certificate, documentary evidence, or a withholding statement.
Paragraph (b)(4) contains general rules regarding the reliability of
a withholding certificate provided on Form W-8. Paragraph (b)(5)
contains rules for when a Form W-8 will be regarded as unreliable to
establish a beneficial owner's foreign status and applicable cure
provisions. Paragraph (b)(6) contains rules for when a Form W-8 will
be regarded as unreliable to establish a beneficial owner's claim of
treaty benefits and applicable cure provisions. Paragraph (b)(7)
provides general rules relating to documentary evidence. Paragraphs
(b)(8) and (b)(9) contain rules regarding documentary evidence that
is unreliable to establish a beneficial owner's status as a foreign
person or a resident of a treaty country, respectively..52

Paragraph (b)(10) provides rules regarding due diligence standards
for documentation from payees received through nonqualified
intermediaries, flow-through entities, and certain U.S. branches of
foreign banks and insurance companies. Under paragraph (b)(10), a
withholding agent is required to review the information contained in
a withholding statement provided by those entities and may not rely
on the information contained in the withholding statement to the
extent it does not support the claims made for the payee. A
withholding agent must also review each withholding certificate to
verify that they support the claims made and are consistent with the
information on the withholding statement. Under a transition rule,
this review process does not apply to withholding certificates
received before December 31, 2001, if the payment is made prior to
that date. If a withholding certificate received before December 31,
2001, is relevant to a payment made after that date, it must be
reviewed for accuracy and matched to the information contained in
the withholding statement. Finally, a withholding agent must review
documentary evidence to determine that there is no obvious
indication that the payee is a U.S. non-exempt recipient or no
obvious indication that the documentary evidence does not establish
the identity of the person who provided the documentation.

H. Changes to §1.1441-9

Section 1.1441-9 provides the rules for payments made to foreign
tax-exempt entities and foreign governments. Paragraph (b)(2) of
that section provided that if a tax-exempt organization did not have
a determination from the IRS, it could establish its exempt status
by attaching to its withholding certificate an opinion of counsel
concluding that the organization is described in section 501(c) of
the Internal Revenue Code. In addition, if the opinion concluded
that the organization was described in section 501(c)(3).53 and was
not a private foundation, an affidavit regarding the operations and
support of the organization was required to be attached to the
organization's withholding certificate as well. The opinion of
counsel and affidavit was required to be renewed whenever the
certificate to which it was attached was required to be renewed.

Commentators stated that the requirement that the opinion of tax-
exempt status be provided by an attorney was too narrow and that an
opinion from any federally authorized tax practitioner, as defined
in section 7525(a)(3), should be permitted. In addition, the
requirement that the opinion of counsel and the affidavit be renewed
whenever the certificate was required to be renewed was confusing
because a withholding certificate from a tax-exempt entity requires
a TIN and, provided the income paid is subject to reporting, is
valid indefinitely absent a change in circumstances. Treasury and
IRS are currently considering whether an opinion issued by a person
other than an attorney authorized to practice before the IRS should
suffice. Although the Treasury and IRS have not yet concluded that a
person other than an attorney should be permitted to provide the
opinion, the regulation has been amended to permit that possibility
in future guidance. In addition, the requirement to renew the
opinion and affidavit has been clarified by stating that it must be
renewed if there is a change in facts or circumstances relevant to
the organization's status under section 501(c)(3).

I. Changes to §1.1461-1

Section 1.1461-1 contains requirements regarding the payment and
deposit of tax withheld under chapter 3 of the Internal Revenue Code
and the filing of a tax return (Form 1042) and information returns
(Forms 1042-S) by withholding agents. Generally, the paragraph has
been amended to make a withholding agent's obligations clearer..54
Paragraphs (b)(2) and (c)(4), as originally drafted, stated that a
withholding agent was not required to file a tax return or
information return if another withholding agent had done so.
Numerous exceptions to the rule were provided. These paragraphs were
misleading because they implied that the general rule was that a tax
return and information returns were not required if there was
another withholding agent in the chain of payment required to file a
tax return and information returns. The exceptions to the rule,
however, required every withholding agent that made payments of an
amount subject to withholding to a foreign person to file a tax
return and information returns in every situation, except that a
nonqualified intermediary or flow-through entity was not required to
file a tax return and information returns for payments that it made
provided that it furnished to a withholding agent sufficient
information for the withholding agent to correctly withhold and
report the payment. Section 1.1461-1(b) and (c) have been clarified
to state that a withholding agent that makes a payment of an amount
subject to reporting to a recipient must file a Form 1042-S and
provide a copy to the recipient. The terms recipient and amount
subject to reporting are defined in paragraphs (c)(1)(ii) and (c)
(2), respectively. A recipient includes a beneficial owner
(including a foreign complex trust and estate), a qualified
intermediary, a withholding foreign partnership, a withholding
foreign trust, an authorized foreign agent, a U.S. branch treated as
a U.S. person, a nonwithholding foreign partnership or foreign
simple trust receiving income effectively connected with a U.S.
trade or business, any payee presumed to be a foreign person, and
any other person for whom a Form 1042-S is required by the
instructions to the form. A nonqualified intermediary, a disregarded
entity, a flow-through entity, and a U.S. branch that is not treated
as a U.S. person are not recipients. Amounts paid to such entities
are reported as paid to the persons on whose.55 behalf the entity
acts or to the interest holders in the entity. The term amount
subject to reporting generally means amount subject to withholding
as defined under §1.1441-2(a). The regulation has also been
clarified by providing a more extensive, but not exhaustive, list of
those amounts subject to reporting and those amounts for which there
is an exception to reporting. See new §1.1461-1(c)(2).
Paragraph (c)(2)(i)(C), as originally drafted, stated that the
amount of effectively connected income that was required to be
reported with respect to a notional principal contract was the net
income described in §1.446-3(d). Commentators objected to this
requirement because their systems are programmed to report cash
payments, not accrued amounts. New paragraph (c)(2)(i)(J) now
provides that the amount required to be reported is limited to the
amount of cash paid from the notional principal contract.

Finally, the section has been clarified by separately stating the
reporting requirements of U.S. withholding agents, qualified
intermediaries, nonqualified intermediaries, and flow-through
entities. Withholding agents should note, in particular, that
information regarding nonqualified intermediaries, flow-through
entities, and U.S. branches (other than U.S. branches treated as
U.S. persons) in which a recipient is an account holder or an
interest holder must be included on Form 1042-S. Such information is
important to the IRS's efforts to monitor compliance by such
entities and branches with the requirements of the regulations.

J. Changes to the regulations under section 6041

Section 1.6041-1(d) has been revised to require that the amount of a
notional principal contract payment reported on Form 1099 is the
amount of cash paid on the.56 contract for the calendar year. This
change conforms the Form 1099 reporting rule to that under
§1.1461-1(c)(2)(i)(J).

Section 1.6041-4(a)(3) states that a nonqualified intermediary, a
qualified intermediary, or certain U.S. branches of foreign banks
and insurance companies that receive payments reportable under
section 6041 (e.g., rents, notional principal contract income, and
other fixed or determinable income) are not required to report the
payments on Form 1099 when they, in turn, make the payment to their
account holders unless they know the payments are required to be
reported and were not so reported. Similar exceptions apply to
dividends, gross proceeds from sales of securities, and interest
under §§1.6042-3(b)(1)(vi), 1.6045-1(g)(v), and
1.6049-5(b)(14), respectively. These provisions have been modified
to state that the exception does not apply to a U.S. branch of a
foreign bank or insurance company that agrees with a withholding
agent to be treated as a U.S. person. The exception is inappropriate
in this case because such branches do not provide payee
documentation on Form W-9 (or the name, address, TIN, and
information allocating the payment to the payee) to a withholding
agent. The exception is also inappropriate if a qualified
intermediary assumes Form 1099 reporting responsibility. Therefore,
the exception has been changed to exclude qualified intermediaries
that assume Form 1099 reporting. Finally, the exceptions have been
amended to state that a nonqualified intermediary, qualified
intermediary, or U.S. branch is deemed to know the required
reporting was not done in any case where the intermediary or branch
has failed to provide documentation or other information so that
another payor can do the reporting.

K. Changes to §1.6041A-1.57

Section 1.6041A-1(d)(3)(i)(C) has been added to provide an exception
from reporting remuneration for services as a direct seller paid
outside the United States. Prior to this change, remuneration for
services was subject to reporting in absence of documentation
establishing the direct seller's status as a foreign person because
the presumption rules of §§1.6049-5(d)(2) and 1.1441-1(b)
(3)(iii) treated a direct seller as a U.S. non-exempt recipient.
Commentators stated that the presumption was inaccurate because most
direct sellers abroad are foreign persons. They also argued that
obtaining documentation from direct sellers to rebut the presumption
was overly burdensome.

L. Changes to §1.6045-1

Section 1.6045-1(g) provides an exception from Form 1099 reporting
for a broker if a customer is considered an exempt foreign person
under that section. Under §1.6045- 1(g)(1)(i), a broker may
treat a customer as an exempt foreign person if the broker receives
a withholding certificate or documentary evidence that establishes
the person's status as a foreign person. As originally drafted, the
last sentence of §1.6045-1(g)(1)(i) stated that if a
withholding certificate was provided, a withholding agent could rely
on the certificate to exempt the customer from reporting only if the
certificate included a statement that the beneficial owner had not
been, and at the time the certificate was furnished reasonably
expected not to be, present in the United States for a period
aggregating 183 days or more during each calendar year. The
regulation did not state whether the a statement was required if
documentary evidence was provided.

Two clarifying changes have been made to §1.6045-1(g)(1)(i).
First, the regulation has been modified to require the statement
relating to presence in the United States only from individuals.
Second, the regulation states that the statement is not required
if.58 documentary evidence is provided. The statement is required on
a withholding certificate and not on documentary evidence because a
withholding certificate is the documentation required for an account
maintained in the United States. Documentary evidence can only be
used for amounts paid outside the United States to an offshore
account and, therefore, the likelihood that the person may be
present in the United States for the relevant period is greatly
reduced.

Clarifying changes have also been made to §1.6045-1(g)(3)(iv).
The first sentence of that section stated that a broker could treat
an intermediary, as defined in §1.1441- 1(c)(13), as an exempt
recipient except when the broker had actual knowledge or reason to
know the intermediary was acting on behalf of a U.S. person. The
exception should only apply if the intermediary is acting on behalf
of a U.S. person who is subject to reporting on Form 1099, that is,
a U.S. non-exempt recipient. The regulation has been amended to make
this clear. An erroneous cite to nonwithholding foreign partnerships
has also been eliminated.

In paragraph (g)(4) of §1.6045-1, Example 7 has been amended to
reflect the change to the regulations that now generally treats
accrued interest as an amount that is not subject to withholding.
Under that example, a foreign bank that is a U.S. payor effects a
sale of an interest bearing obligation at an office outside the
United States on behalf of an undocumented account holder. Under the
regulation, as originally drafted, the gross proceeds from the sale,
net of accrued interest, were reported on Form 1099 as paid to a
payee that was presumed to be a U.S. person. However, because the
accrued interest was considered an amount subject to withholding, it
was reportable on Form 1042-S. Under the regulation, as revised,
accrued interest is treated as an amount that is not.59 subject to
withholding. Therefore, both the gross proceeds, net of accrued
interest, and the accrued interest are now presumed paid to a U.S.
payee and reported on Form 1099 under the presumption rule
§1.6049-5(d)(2). Two additional examples have been added to
paragraph (g)(4) to illustrate the operation of the presumption
rules on a sale of a short-term original issue discount instrument.
These examples were added to make clear that a sale of an OID
obligation outside the United States is a gross proceeds transaction
and, therefore, under the presumption rule of §1.6049-5(d)(2),
presumed made to a U.S. person. Whether the gross proceeds are
reportable depends on whether the exception of §1.6045-1(a) for
sales outside the United States by a non-U.S. payor applies.

M. Changes to §1.6049-5

Under §1.6049-5(c)(1), a withholding agent or payor may
generally rely on documentary evidence from a foreign payee instead
of a beneficial owner withholding certificate on Form W-8 if an
amount is paid outside the United States to an offshore account. An
offshore account is 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 and outside of a U.S. possession.
Under §1.6049-5(e), an amount is considered paid outside the
United States if the payor completes the acts necessary to effect
payment outside the United States.

The regulations do not specifically address whether partners of a
nonwithholding foreign partnership, foreign beneficiaries of a
foreign simple trust, or foreign owners of a foreign grantor trust
can use documentary evidence to establish their status as foreign
payees. Paragraph (c)(1) has been amended to permit the use of
documentary evidence by foreign partners, beneficiaries, and owners
in these situations. Documentary evidence.60 can also be used for
purposes of chapter 3 of the Internal Revenue Code by virtue of the
incorporation of §1.6049-5(c)(1) in §1.1441-1(e)(1)(ii)(A)
(2). The use of documentary evidence is appropriate because the
regulations generally treat payments to foreign nonwithholding
foreign partnerships, foreign simple trusts, and foreign grantor
trusts similar to payments made to nonqualified intermediaries, and
the latter are permitted to provide documentary evidence on behalf
of their account holders.

Section 1.6049-5(c)(4) provides rules that apply to U.S. payors that
make payments outside the United States of amounts not subject to
withholding (e.g., foreign source income and gross proceeds from the
sale of securities) other than deposit interest and interest or OID
on short-term OID instruments. Non-U.S. payors are generally exempt
from reporting these payments. There were several issues under
paragraph (c)(4) as originally drafted. First, the paragraph was
internally inconsistent. Paragraph (c)(4)(i) stated that a bank or
other financial institution could establish a payee's status as a
foreign person by relying on a written declaration made on an
account opening statement that the payee was not a U.S. person in
two circumstances: (i) if it was not customary in a country to
obtain documentary evidence to establish a person's identity, or
(ii) if it was customary to obtain documentary evidence but it was
not customary to renew it. Paragraph (c)(4)(iv), however, stated
that a bank or financial institution could not rely on a declaration
if it was customary to obtain documentary evidence but not customary
to renew it. Second, paragraph (c)(4)(i) did not permit a bank or
financial institution to rely on documentary evidence to establish a
person's foreign status if there was indicia of U.S. status,
including employment by a U.S.-based multinational organization. A
commentator noted that prohibiting use of documentary evidence
merely because an account holder worked for a.61 U.S.-based
multinational organization was overly broad because such
organizations commonly employ local employees and a withholding
agent may not know whether a particular multinational is U.S. based.
Finally, paragraph (c)(4)(iii) required a bank or financial
institution that relied upon a declaration of foreign status or non-
renewable documentary evidence to send a negative confirmation
statement each year to the account holder stating that the account
holder was being treated as a foreign payee and that the account
holder was obligated to notify the bank or financial institution if
it became a U.S. citizen or U.S. resident. A commentator argued that
the expense of such a requirement was not justified. The commentator
argued that if an account holder legitimately establishes foreign
status, it is unlikely that the account holder will become a U.S.
citizen or resident and that if it does, there are factors, such as
a change of address, that will indicate a change in the person's
status.

Paragraph (c)(4) has been amended to remove the inconsistency and to
take the commentators' comments into account. Under paragraph (c)(4)
(ii), as revised, a declaration of foreign status may be used only
if it is not customary to obtain documentary evidence. The
declaration may be relied upon only if there is no address or other
indicia of U.S. status. If it is customary in the country where a
bank or financial institution maintains a branch or office to
obtain, but not renew, documentary evidence, then the bank or
financial institution may rely on the documentary evidence without
the need to renew it provided that it may rely on the documentation
to establish foreign status under the due diligence rules of
§1.1441-7(b)(7) and (8). The restriction on using such
documentation in the case of a U.S. based multinational employee has
been removed. If, however, the bank or financial institution may
rely on the documentary evidence as establishing foreign.62 status
even though there are indicia of U.S. status, it can rely on the
documentary evidence only for a period of three full calendar years
after the calendar year in which it is received. Finally, neither
the documentation rule of paragraph (c)(4)(i) nor the declaration
rule of paragraph (c)(4)(ii) requires a payor to send a negative
confirmation. Section 1.6049-5(d) contains presumption rules that
generally apply for chapter 61 reporting if a payor lacks required
documentation from a payee. Paragraph (d)(2) governs payments other
than payments to intermediaries or flow-through entities. Paragraph
(d)(2)(i) has been clarified to state that the presumption rules of
§1.1441-1(b)(3)(iii)(D) (payments to offshore accounts) do not
apply to amounts that are not subject to withholding. As originally
drafted, paragraph (d)(2)(i) stated that the rules of §1.1441-
1(b)(3)(iii) applied to all payments, irrespective of whether they
were subject to withholding. Section 1.1441-1(b)(3)(iii)(D),
however, stated that it did not apply to amounts that were not
subject to withholding. Revised paragraph (d)(2)(i) eliminates the
inconsistency. Therefore, payments of deposit interest, and interest
or OID arising from the redemption of an obligation described in
section 871(g)(1)(B)(i) paid to an offshore account are presumed
paid to a U.S. payee. In addition, gross proceeds, which are not
amounts subject to withholding, are also treated as paid to U.S.
persons under §1.6045- 1(g)(1)(i). Under the exceptions of
§§1.6045-1(a)(1) and 1.6045-1(g)(3), however, gross
proceeds from the sale of a security by a non-U.S. payor effected
outside the United States are not subject to reporting.

The grace period rule in §1.6049-5(d)(2)(ii), as originally
drafted, did not cover the same payments as were covered under the
grace period rule of §1.1441-1(b)(3)(iv) even though the latter
regulation cross-references §1.6049-5(d)(2)(ii). For example,
the rule.63 under the 1441 regulations, but not the rule under
section 6049, covered dividends from any redeemable security issued
by an investment company and amounts paid with respect to loans of
securities. Paragraph 5(d)(2)(ii) has been amended to cover the same
payments as are covered by the grace period rule of
§1.1441-1(b)(3)(iv). In addition, paragraph (d)(2)(ii) prior to
amendment stated that the grace period expired on the earlier of the
of the 90th day after the grace period began, the date on which
documentation is provided, or the last day of the calendar year.
Commentators stated that terminating the grace period at the end of
a calendar year complicated systems programming because there was a
shrinking grace period for payments made within 90 days of the end
of the year. The requirement to terminate the grace period as of the
close of a calendar year has been eliminated because it is not
necessary.

Paragraph (d)(3) provides presumption rules for payments made to
foreign intermediaries. With exceptions for deposit interest and
interest and OID on short-term obligations, payments to foreign
intermediaries are presumed made to foreign payees. Paragraph (d)(4)
provided different presumptions for payments to partnerships. Under
that paragraph, payments made to foreign partnerships were generally
presumed made to U.S. payees, even if the partnership established
its status as a foreign partnership. Commentators argued that the
disparate treatment between intermediaries and partnerships was not
justified because they are treated similarly for other purposes
under the regulations. The differences also complicated payors'
information systems. In response to these comments, the presumption
rules of paragraph (d)(3) have been revised to apply to payments
made to all flow-through entities (nonwithholding foreign
partnerships, foreign simple trusts, and foreign grantor trusts)..64

Paragraph (d)(3)(ii) provides rules for payments of amounts that are
not subject to withholding (e.g., foreign source income and gross
proceeds from the sales of securities) other than deposit interest
and interest and OID on short-term obligations paid to foreign
intermediaries and flow-through entities. The paragraph required a
payor to presume that a payment was made to an exempt recipient
unless the payor had actual knowledge that any person for whom the
intermediary was collecting the payment was a U.S. non-exempt
recipient. In that case, the payment was treated as made to the U.S.
non-exempt recipient. The last sentence of the paragraph, however,
also appeared to require a payor to presume that a payment was made
to a U.S. non-exempt recipient if it appeared that the payment might
be collected on behalf of a U.S. non-exempt payee, because, for
example, an intermediary provided Forms W-9 for some payees but did
not allocate a payment to any particular payee. The application of
the last sentence of the paragraph, however, was uncertain.

Paragraph (d)(3)(ii) has been revised to generally reflect the
principle that a payment of an amount that is not subject to
withholding (other than short-term OID and deposit interest) made to
an intermediary should not be subject to Form 1099 reporting by a
payor if the payment would not be subject to Form 1099 reporting if
made to a U.S. non- exempt recipient by an intermediary that is not
a U.S. payor. Thus, the general rule is that a payment covered by
the paragraph (i.e., foreign source income or gross proceeds) is
presumed paid to an exempt recipient unless the payor has actual
knowledge that the amount is attributable to a U.S. non-exempt
recipient.

As originally drafted, §1.6049-5(d)(3)(iii) provided special
presumption rules for payments of deposit interest and interest or
OID from short-term original issue discount.65 obligations to
foreign intermediaries. It was not clear whether the presumption
rule of the paragraph applied to the portion of the sale proceeds
representing OID from the sale or exchange of short-term OID
instrument in a transaction other than a redemption. Under paragraph
(d)(3)(iii) as revised, a payment of deposit interest or interest or
OID on the redemption of a short-term original issue discount
obligation paid to an intermediary or flow-through entity is
presumed paid to a U.S. payee. The paragraph does not apply to sales
or exchanges (other than redemption) of short-term OID instruments.
Such sales or exchanges are treated as gross proceeds transactions,
in conformance with the rules in §§1.6045-1(c) and (d)(3)
and 31.3406(b)(2)-2, and are subject to the general presumption rule
for payments made to foreign intermediaries under §1.6049-5(d)
(3)(ii). Therefore, gross proceeds from the sale or exchange (other
than a redemption) of a short-term OID instrument will generally be
presumed paid as made to an exempt recipient. Intermediaries that
are U.S. payors, however, may themselves be required to report such
gross proceeds under §1.6045-1(c) and (1)(g)(i) and the
presumption rule of §1.6049- 5(d)(2), which applies to payments
made to persons other than an intermediary because under that
section gross proceeds are generally considered paid to U.S. payees
under that section.

Paragraph (d)(3)(iii)(B) contained a presumption rule for payments
made to exempt recipients that had not provided documentation that
they were acting as intermediaries. The scope and application of
this rule were unclear. Paragraph (d)(3)(iii)(B) has been completely
revised and now states that a payment made to an exempt recipient
that the payor knows, or has reason to know, is acting as an
intermediary is subject to the presumptions that apply to
intermediaries..66 N. Withholding Certificate Transitional Issues
The changes made by this regulation will require revisions to
instructions to the withholding certificates issued on Form W-8 and
certain minor changes to the forms themselves. Until Forms W-8, and
the instructions, are revised withholding agents may rely on Forms
W-8BEN, W-8ECI, W-8EXP, and W-8IMY as currently in effect but should
take into account, particularly with respect to Form W-8IMY used by
intermediaries and flow-through entities, that the instructions to
the form do not reflect the withholding statement requirements
contained in this regulation. In particular, withholding agents and
providers of Form W-8IMY should furnish a withholding statement in
connection with the form that conforms to §1.1441-1(e)(3)(iv).

Special Analyses

It has been determined that this Treasury decision is not a
significant regulatory action as defined in Executive Order 12866.
Therefore, a regulatory assessment is not required. It has also been
determined that section 553(b) of the Administrative Procedure Act
(5 U.S.C. chapter 5) does not apply to these regulations. Finally,
it has been determined that the Regulatory Flexibility Act (5 U.S.C.
chapter 6) does not apply to these regulations because the
regulations do not impose a collection of information on small
entities. Pursuant to 7805(f) of the Internal Revenue Code, the
notice of proposed rulemaking preceding these regulations (61 FR
17614) was submitted to the Small Business Administration for
comment on its impact on small business.

Drafting Information

The principal authors of these regulations are Carl Cooper, Laurie
Hatten-Boyd, and Kate Hwa of the Office of Associate Chief Counsel
(International)..67 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. Adoption of Amendments
to Regulations Accordingly, 26 CFR parts 1 and 31 are amended as
follows:

PART 1--INCOME TAXES

Paragraph 1. The authority citation for part 1 continues to read in
part as follows: Authority: 26 U.S.C. 7805 * * * Par. 2. Effective
January 1, 2001, §1.1441-0 is amended by:

1. Revising the entry for §1.1441-1(b)(2)(vii).

2. Adding entries for §1.1441-1(b)(2)(vii)(A) through (F).

2a. Revising the entry for §1.1441-1(b)(3)(ii).

3. Adding entries for §1.1441-1(b)(3)(ii)(A) through (C).

4. Revising the entry for §1.1441-1(b)(3)(iv).

5. Revising entry for §1.1441-1(b)(3)(v)(B).

6. Revising the entry for §1.1441-1(b)(3)(vi).

7. Adding entries for §1.1441-1(b)(3)(vii)(A) and (B).

8. Adding entries for §1.1441-1(b)(6)(i) and (ii).

9. Revising the entries for §1.1441-1(c)(6)(ii), (c)(6)(ii)(B),
(c)(6)(ii)(C), and adding a new entry for §1.1441-1(c)(6)(ii)
(D).

10. Adding entries for §1.1441-1(c)(12) through (29).

11. Revising the entry for §1.1441-1(d)(4).

12. Revising the entry for §1.1441-1(e)(3)(iii), (e)(3)(iv),
and (e)(3)(iv)(A) through (C).

13. Adding entries for §1.1441-1(e)(3)(iv)(D) and (E).

14. Adding entries for §1.1441-1(e)(4)(iv)(A), (B), and (C).

15. Revising the entries for §1.1441-1(e)(5)(v) and (e)(5)(v)
(B) and (C).

16. Revising the entries for §1.1441-2(b)(3)(i) and (ii).

17. Removing the entries for §1.1441-2(b)(3)(iii) and (iv).

18. Revising the entry for §1.1441-5(a).

19. Revising the entries for §1.1441-5(b), (b)(1), (b)(2), and
(b)(2)(i), adding entries for §1.1441-5(b)(2)(i)(A) and (b)(2)
(i)(B), and revising entries for §1.1441- 5(b)(2)(ii), (b)(2)
(iii), (b)(2)(iv), and (b)(2)(v).

20. Revising the entry for §1.1441-5(c)(1)(iv).

21. Removing the entries for §1.1441-5(c)(2)(ii)(A) and (B).

21. Revising the entry for §1.1441-5(c)(3).

22. Revising the entries for §1.1441-5(c)(3)(iii).

23. Revising the entries for §1.1441-5(c)(3)(iv) and (v).

24. Revising the entry for §1.1441-5(d).

25. Removing the entries for §1.1441-5(d)(3)(i) through (d)(3)
(iv).

26. Revising the entry for §1.1441-5(d)(4).

27. Revising the entry for §1.1441-5(e)..69

28. Adding entries for §1.1441-5(e)(1), (e)(2), (e)(3), (e)(3)
(i), (e)(3)(ii), (e)(4), (e)(5), (e)(5)(i), (e)(5)(ii), (e)(5)(iii),
(e)(5)(iv), (e)(5)(v), (e)(6), (e)(6)(i), (e)(6)(ii) and (e)(6)
(iii).

29. Revising the entries for §1.1441-6(b)(2), (b)(2)(i) and (b)
(2)(ii).

30. Adding entries for §1.1441-6(b)(2)(iii) and (b)(2)(iv).

31. Revising the entry for §1.1441-6(b)(3).

32. Revising the entry for §1.1441-6(b)(4).

33. Removing the entries for §1.1441-6(b)(4)(i), (b)(4)(ii),
(b)(4)(ii)(A), (b)(4)(ii)(B), (b)(4)(iii), and (b)(4)(iv).

34. Removing the entry for §1.1441-6(b)(5).

35. Revising the entry for §1.1441-6(c).

36. Revising the entry for §1.1441-6(c)(2).

37. Removing the entries for §1.1441-6(c)(2)(i), (c)(2)(ii),
and (c)(2)(iii).

38. Revising the entries for §1.1441-6(c)(5), (c)(5)(i) and (c)
(5)(ii).

39. Revising the entry for §1.1441-6(e).

40. Adding entries for §1.1441-7(a)(1) and (2).

41. Removing the entries for §1.1441-7(b)(2)(i) and (b)(2)(ii).

42. Revising the entry for §1.1441-7(b)(3).

43. Adding entries for §1.1441-7(b)(4), (b)(4)(i), (b)(4)(ii),
and (b)(5) through (b)(11).

The additions and revisions read as follows. §1.1441-0 Outline
of regulation provisions for section 1441.

* * * * *

§1.1441-1 Requirement for the deduction and withholding of tax
on payments to foreign persons..70

* * * * *

(b) * * *

(2) * * *

(vii) Rules for reliably associating a payment with a withholding
certificate or other appropriate documentation.

(a) Generally.

(b) Special rules applicable to a withholding certificate from a
nonqualified intermediary or flow-through entity.

(c) Special rules applicable to a withholding certificate provided
by a qualified intermediary that does not assume primary withholding
responsibility.

(d) Special rules applicable to a withholding certificate provided
by a qualified intermediary that assumes primary withholding
responsibility under chapter 3 of the Internal Revenue Code.

(e) Special rules applicable to a withholding certificate provided
by a qualified intermediary that assumes primary Form 1099 reporting
and backup withholding responsibility but not primary withholding
under chapter 3.

(f) Special rules applicable to a withholding certificate provided
by a qualified intermediary that assumes primary withholding
responsibility under chapter 3 and primary Form 1099 reporting and
backup withholding responsibility and a withholding certificate
provided by a withholding foreign partnership.

(3) * * *

(ii) Presumptions of classification as individual, corporation,
partnership, etc.

(a) In general.

(b) No documentation provided.

(c) Documentary evidence furnished for offshore account. * * * * *

(iv) Grace period.

(v) * * *

(B) Beneficial owner documentation or allocation information is
lacking or unreliable.

* * * * *

(vi) U.S. branches.

(vii) * * *

(A) In general.

(b) Special rule for offshore accounts.

* * * * *

(6) * * *

(i) In general.

(ii) Example.

* * * * *

(c) * * *

(6) * * *

(ii) Special rules.

* * * * *

(B) Foreign partnerships.

(c) Foreign simple trusts and foreign grantor trusts.

(d) Other foreign trusts and foreign estates..71

* * * * *

(12) Payee.

(13) Intermediary.

(14) Nonqualified intermediary.

(15) Qualified intermediary.

(16) Withholding certificate.

(17) Documentary evidence; other appropriate documentation.

(18) Documentation.

(19) Payor.

(20) Exempt recipient.

(21) Non-exempt recipient.

(22) Reportable amounts.

(23) Flow-through entity.

(24) Foreign simple trust.

(25) Foreign complex trust.

(26) Foreign grantor trust.

(27) Partnership.

(28) Nonwithholding foreign partnership.

(29) Withholding foreign partnership.

(d) * * *

(4) When a payment to an intermediary or flow-through entity may be
treated as made to a U.S. payee.

(e) * * *

(3) * * *

(iii) Intermediary withholding certificate from a nonqualified
intermediary.

(iv) Withholding statement provided by nonqualified Intermediary.

(a) In general.

(b) General requirements.

(c) Content of withholding statement.

(d) Alternative procedures.

(e) Notice procedures.

* * * * *

(4) * * *

(iv) * * *

(A) In general.

(b) Requirements.

(c) Special requirements for transmission of Forms W-8 by an
intermediary. [Reserved]

* * * * *

(5) * * *

(v) Withholding statement.

* * * * *

(B) Content of withholding statement.

(c) Withholding rate pools.

* * * * *

§1.1441-2 Amounts subject to withholding.

* * * * *.72

(b) * * *

(3) * * *

(i) Amount subject to tax.

(ii) Amounts subject to withholding.

* * * * *

§1.1441-5 Withholding on payments to partnerships trusts, and
estates.

(a) In general.

(b) Rules applicable to U.S. partnerships, trusts, and estates.

(1) Payments to U.S. partnerships, trusts, and estates.

(2) Withholding by U.S. payees.

(i) U.S. partnerships.

(a) In general.

(b) Effectively connected income of partners.

(ii) U.S. simple trusts.

(iii) U.S. complex trusts and U.S. estates.

(iv) U.S. grantor trusts

(v) Subsequent distribution

(c) * * *

(1) * * *

(iv) Examples.

* * * * *

(3) Nonwithholding foreign partnerships.

* * * * *

(iii) Withholding certificate from a nonwithholding foreign
partnership.

(iv) Withholding statement provided by nonwithholding foreign
partnership.

(v) Withholding and reporting by a foreign partnership.

(d) Presumption rules.

* * * * *

(4) Determination by a withholding foreign partnership of the status
of its partners.

(e) Foreign trusts and estates.

(1) In general.

(2) Payments to foreign complex trusts and estates.

(3) Payees of payments to foreign simple trusts and foreign grantor
trusts.

(i) Payments for which beneficiaries and owners are payees.

(ii) Payments for which trust is payee.

(4) Reliance on claim of foreign complex trust or foreign estate
status.

(5) Foreign simple trust and foreign grantor trust.

(i) Reliance on claim of foreign simple trust or foreign grantor
trust status.

(ii) Reliance on claim of reduced withholding by a foreign simple
trust or foreign grantor trust for its beneficiaries or owners.

(iii) Withholding certificate from foreign simple trust or foreign
grantor trust.

(iv) Withholding statement provided by a foreign simple trust or
foreign grantor trust.

(v) Withholding foreign trusts.

(6) Presumption rules

(i) In general.73

(ii) Determination of status as U.S. or foreign trust or estate in
the absence of documentation.

(iii) Determination of beneficiary or owner's status in the absence
of certain documentation.

* * * * *

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

* * * * *

(b) * * *

(2) Payment to fiscally transparent entity.

(i) In general.

(ii) Certification by qualified intermediary.

(iii) Dual treatment.

(iv) Examples.

(3) Certified TIN.

(4) Claim of benefits under an income tax treaty by a U.S. person.

(c) Exemption from requirement to furnish a taxpayer identifying
number and special documentary evidence rules for certain income.

* * * * *

(2) Income to which special rules apply.

* * * * *

(5) Statements regarding entitlement to treaty benefits.

(i) Statement regarding conditions under a limitation on benefits
provision.

(ii) Statement regarding whether the taxpayer derives the income.

* * * * *

(e) Competent authority.

* * * * *

§1.1441-7 General provisions relating to withholding agents.

(a) * * *

(1) In general.

(2) Examples.

(b) * * *

(3) Financial institutions--limits on reason to know.

(4) Rules applicable to withholding certificates.

(i) In general.

(ii) Examples.

(5) Withholding certificate--establishment of foreign status.

(6) Withholding certificate--claim of reduced rate of withholding
under treaty.

(7) Documentary evidence.

(8) Documentary evidence--establishment of foreign status.

(9) Documentary evidence--claim of reduced rate of withholding under
treaty.

(10) Limits on reason to know--indirect account holders.

(11) Additional guidance.

* * * * *

Par. 3. Effective January 1, 2001, section 1.1441-1 is amended by:

1. Revising the first sentence of paragraph (b)(2)(i)..74

2. Revising paragraphs (b)(2)(iv)(A), (b)(2)(iv)(B)(3), and (b)(2)
(iv)(C).

3. Revising paragraphs (b)(2)(v)(A) and (b)(2)(v)(B).

4. Revising paragraph (b)(2)(vii).

5. Revising the first sentence of paragraph (b)(3)(i).

6. Revising paragraph (b)(3)(ii).

7. Revising paragraphs (b)(3)(iii)(C) and (b)(3)(iii)(D).

8. Revising paragraph (b)(3)(iv).

9. Revising paragraph (b)(3)(v).

10. Revising paragraphs (b)(3)(vi) and (b)(3)(vii).

11. Revising paragraph (b)(6).

12. Revising paragraph (c)(2).

13. Revising paragraph (c)(6).

14. Adding paragraphs (c)(12) through (c)(29).

15. Revising paragraphs (d)(2) through (d) (4).

16. Revising paragraphs (e)(1)(ii)(A)(1), (e)(1)(ii)(A)(3), and (e)
(1)(ii)(A)(4).

17. Revising paragraph (e)(3).

18. Revising paragraph (e)(4)(ii)(A).

19. Revising paragraphs (e)(4)(ii)(B)(1) through (e)(4)(ii)(B)(4)
and (e)(4)(ii)(B) (6), and adding paragraph (e)(4)(ii)(B)(8).

20. Revising paragraph (e)(4)(iv).

21. Revising paragraph (e)(4)(vii).

22. Adding paragraph (e)(4)(ix)(A)(4) and revising paragraph (e)(4)
(ix)(C).

23. Revising paragraph (e)(5)(i) and (e)(5)(iii) through (e)(5)
(v)..75

The additions and revisions read as follows:

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

* * * * *

(b) * * *

(2) Determination of payee and payee's status--

(i) In general. Except as otherwise provided in this paragraph (b)
(2) and §1.1441-5(c)(1) and (e)(3), 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).

* * * * *

(iv) Payments to a U.S. branch of certain foreign banks or foreign
insurance companies--(A) U.S. branch treated as a U.S. person in
certain cases. A payment to a U.S. branch of a foreign person is a
payment to a foreign person. However, a U.S. branch described in
this paragraph (b)(2)(iv)(A) and a withholding agent (including
another U.S. branch described in this paragraph (b)(2)(iv)(A)) may
agree to treat the branch as a U.S. person for purposes of
withholding on specified payments to the U.S. branch.
Notwithstanding the preceding sentence, a withholding agent making a
payment to a U.S. branch treated as a U.S. person under this
paragraph (b)(2)(iv)(A) shall not treat the branch as a U.S. person
for purposes of reporting the payment made to the branch. Therefore,
a payment to such U.S. branch shall be reported on Form 1042-S under
§1.1461-1(c). Further, a U.S. branch that is treated as a U.S.
person under this paragraph (b)(2)(iv)(A) shall not be treated as a
U.S. person for purposes of the withholding certificate it may
provide to a withholding agent. Therefore, the U.S. branch must
furnish a U.S. branch withholding certificate on Form W-8 as
provided in paragraph (e)(3)(v) of this section and not a Form W-9.
An agreement to treat a U.S. branch as a U. S. person must be
evidenced by a U.S. branch withholding certificate described in
paragraph (e)(3)(v) of this section furnished by the U.S. branch to
the withholding agent. A U.S. branch described in this paragraph (b)
(2)(iv)(A) is any U.S. branch of a foreign bank subject to
regulatory supervision by the Federal Reserve Board or a U.S. branch
of a foreign insurance company required to file an annual statement
on a form approved by the National Association of Insurance
Commissioners with the Insurance Department of a State, a Territory,
or the District of Columbia. The Internal Revenue Service (IRS) may
approve a list of U.S. branches that may qualify for treatment as a
U.S. person under this paragraph (b)(2)(iv)(A) (see §601.601(d)
(2) of this chapter). See §1.6049-5(c)(5)(vi) for the treatment
of U.S. branches as U.S. payors if they make a payment that is
subject to reporting under chapter 61 of the Internal Revenue Code.
Also see §1.6049-5(d)(1)(ii) for the treatment of U.S. branches
as foreign payees under chapter 61 of the Internal Revenue Code.

(b) * * *

(3) As a payment to a foreign person of income that is effectively
connected with the conduct of a trade or business in the United
States if the withholding agent cannot reliably associate the
payment with a withholding certificate from the U.S. branch or any
other certificate or other appropriate documentation from another
person. See §1.1441- 4(a)(2)(ii).

(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 separate person.77 solely for purposes of section
1441(a) and all other provisions of chapter 3 of the Internal
Revenue Code and the regulations thereunder (other than for purposes
of reporting the payment to the U.S. branch under §1.1461-1(c)
or for purposes of the documentation such a branch must furnish
under paragraph (e)(3)(v) of this section) 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 Internal Revenue Code and the regulations
thereunder and other applicable withholding provisions of the
Internal Revenue 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 qualified intermediary
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 and §1.1441-4(a)(2)(ii).

* * * * *

(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, the
payee of a payment to a person that the withholding agent may treat
as a foreign intermediary in accordance with the provisions of
paragraph (b)(3)(ii)(C) or (b)(3)(v)(A) of this section is the
person or persons for whom the intermediary collects the payment.
Thus, for example, the payee of a payment that the.78 withholding
agent can reliably associate with a withholding certificate from a
qualified intermediary (defined in paragraph (e)(5)(ii) of this
section) that does not assume primary withholding responsibility or
a payment to a nonqualified intermediary are the persons for whom
the qualified intermediary or nonqualified intermediary acts and not
to the intermediary itself. See paragraph (b)(3)(v) of this section
for presumptions that apply if the payment cannot be reliably
associated with valid documentation. For similar rules for payments
to flow-through entities, see §1.1441-5(c)(1) and (e)(3).

(b) Payments treated as made to foreign intermediary. The payee of a
payment to a person that the withholding agent may treat as a
qualified intermediary is the qualified intermediary to the extent
that the qualified intermediary assumes primary withholding
responsibility under paragraph (e)(5)(iv) of this section for the
payment. For example if a qualified intermediary assumes primary
withholding responsibility under chapter 3 of the Internal Revenue
Code but does not assume primary reporting or withholding
responsibility under chapter 61 or section 3406 of the Internal
Revenue Code and therefore provides Forms W-9 for U.S. non-exempt
recipients, the qualified intermediary is the payee except to the
extent the payment is reliably associated with a Form W-9 from a
U.S. non-exempt recipient.

* * * * *

(vii) Rules for reliably associating a payment with a withholding
certificate or other appropriate documentation--(A) Generally. The
presumption rules of paragraph (b)(3) of this section and
§§1.1441-5(d) and (e)(6) and 1.6049-5(d) apply to any
payment, or portion of a payment, that a withholding agent cannot
reliably associate with valid documentation. Generally, a
withholding agent can reliably associate a payment with valid
documentation.79 if, prior to the payment, it holds valid
documentation (either directly or through an agent), it can reliably
determine how much of the payment relates to the valid
documentation, and it has no actual knowledge or reason to know that
any of the information, certifications, or statements in, or
associated with, the documentation are incorrect. Special rules
apply for payments made to intermediaries, flow-through entities,
and certain U.S. branches. See paragraph (b)(2)(vii)(B) through (F)
of this section. The documentation referred to in this paragraph (b)
(2)(vii) is documentation described in paragraphs (c)(16) and (17)
of this section upon which a withholding agent may rely to treat the
payment as a payment made to a payee or beneficial owner, and to
ascertain the characteristics of the payee or beneficial owner that
are relevant to withholding or reporting under chapter 3 of the
Internal Revenue Code and the regulations thereunder. For purposes
of this paragraph (b)(2)(vii), documentation also includes the
agreement that the withholding agent has in effect with an
authorized foreign agent in accordance with §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 §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
Internal Revenue Code. The withholding agent must, however, treat
the payment as made to an undocumented person for purposes of
chapter 3 of the Internal Revenue Code. Therefore, the presumption
rules of paragraph (b)(3)(iii) of this section apply to determine
whether the person is presumed to be a U.S. person (in which case,
no withholding is required under.80 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)
of this section for special reliance rules in the case of a payment
to a foreign intermediary and §1.1441- 5(d) and (e)(6) for
special reliance rules in the case of a payment to a flow-through
entity.

(b) Special rules applicable to a withholding certificate from a
nonqualified intermediary or flow-through entity. (1) In the case of
a payment made to a nonqualified intermediary, a flow-through entity
(as defined in paragraph (c)(23) of this section), and a U.S. branch
described in paragraph (b)(2)(iv) of this section (other than a
branch that is treated as a U.S. person), a withholding agent can
reliably associate the payment with valid documentation only to the
extent that, prior to the payment, the withholding agent can
allocate the payment to a valid nonqualified intermediary, flow-
through, or U.S. branch withholding certificate; the withholding
agent can reliably determine how much of the payment relates to
valid documentation provided by a payee as determined under
paragraph (c)(12) of this section (i.e., a person that is not itself
an intermediary, flow-through entity, or U.S. branch); and the
withholding agent has sufficient information to report the payment
on Form 1042-S or Form 1099, if reporting is required. See paragraph
(e)(3)(iii) of this section for the requirements of a nonqualified
intermediary withholding certificate, paragraph (e)(3)(v) of this
section for the requirements of a U.S. branch certificate, and
§§1.1441-5(c)(3)(iii) and (e)(5)(iii) for the requirements
of a flow-through withholding certificate. Thus, a payment cannot be
reliably associated with valid documentation provided by a payee to
the extent such documentation is lacking or unreliable, or to the
extent that information required to allocate and report all or a
portion.81 of the payment to each payee is lacking or unreliable. If
a withholding certificate attached to an intermediary, U.S. branch,
or flow-through withholding certificate is another intermediary,
U.S. branch, or flow-through withholding certificate, the rules of
this paragraph (b)(2)(vii)(B) apply by treating the share of the
payment allocable to the other intermediary, U.S. branch, or flow-
through entity as if the payment were made directly to such other
entity. See paragraph (e)(3)(iv)(D) of this section for rules
permitting information allocating a payment to documentation to be
received after the payment is made.

(2) The rules of paragraph (b)(2)(vii)(B)(1) of this section are
illustrated by the following examples: Example 1. WH, a withholding
agent, makes a payment of U.S. source interest to NQI, an
intermediary that is a nonqualified intermediary. NQI provides a
valid intermediary withholding certificate under paragraph (e)(3)
(iii) of this section. NQI does not, however, provide valid
documentation from the persons on whose behalf it receives the
interest payment, and, therefore, the interest payment cannot be
reliably associated with valid documentation provided by a payee. WH
must apply the presumption rules of paragraph (b)(3)(v) of this
section to the payment.

Example 2. The facts are the same as in Example 1, except that NQI
does attach valid beneficial owner withholding certificates (as
defined in paragraph (e)(2)(i) of this section) from A, B, C, and D
establishing their status as foreign persons. NQI does not, however,
provide WH with any information allocating the payment among A, B,
C, and D and, therefore, WH cannot determine the portion of the
payment that relates to each beneficial owner withholding
certificate. The interest payment cannot be reliably associated with
valid documentation from a payee and WH must apply the presumption
rules of paragraph (b)(3)(v) of this section to the payment. See,
however, paragraph (e)(3)(iv)(D) of this section providing special
rules permitting allocation information to be received after a
payment is made.

Example 3. The facts are the same as in Example 2, except that NQI
does provide allocation information associated with its intermediary
withholding certificate indicating that 25 percent of the interest
payment is allocable to A and 25 percent to B. NQI does not provide
any allocation information regarding the remaining 50 percent of the
payment. WH may treat 25 percent of the payment as made to A and 25
percent as made to B. The remaining 50 percent of the payment cannot
be reliably associated with valid documentation from a payee,
however, since NQI did not provide information allocating.82 the
payment. Thus, the remaining 50 percent of the payment is subject to
the presumption rules of paragraph (b)(3)(v) of this section.

Example 4. WH makes a payment of U.S. source interest to NQI1, an
intermediary that is not a qualified intermediary. NQI1 provides WH
with a valid nonqualified intermediary withholding certificate as
well a valid beneficial owner withholding certificates from A and B
and a valid nonqualified intermediary withholding certificate from
NQI2. NQI2 has provided valid beneficial owner documentation from C
sufficient to establish C's status as a foreign person. Based on
information provided by NQI1, WH can allocate 20 percent of the
interest payment to A, and 20 percent to B. Based on information
that NQI2 provided NQI1 and that NQI1 provides to WH, WH can
allocate 60 percent of the payment to NQI 2, but can only allocate
one half of that payment (30 percent) to C. Therefore, WH cannot
reliably associate 30 percent of the payment made to NQI2 with valid
documentation and must apply the presumption rules of paragraph (b)
(3)(v) of this section to that portion of the payment.

(c) Special rules applicable to a withholding certificate provided
by a qualified intermediary that does not assume primary withholding
responsibility. (1) If a payment is made to a qualified intermediary
that does not assume primary withholding responsibility under
chapter 3 of the Internal Revenue Code or primary Form 1099
reporting and backup withholding responsibility under chapter 61 and
section 3406 of the Internal Revenue Code for the payment, a
withholding agent can reliably associate the payment with valid
documentation only to the extent that, prior to the payment, the
withholding agent has received a valid qualified intermediary
withholding certificate and the withholding agent can reliably
determine the portion of the payment that relates to a withholding
rate pool, as defined in paragraph (e)(5)(v)(C) of this section. In
the case of a withholding rate pool attributable to a U.S. non-
exempt recipient, a payment cannot be reliably associated with valid
documentation unless, prior to the payment, the qualified
intermediary has provided the U.S. person's Form W-9 (or, in the
absence of the form, the name, address, and TIN, if available, of
the U.S. person) and sufficient information for the withholding
agent to.83 report the payment on Form 1099. See paragraph (e)(5)(v)
(C)(2) of this section for special rules regarding allocation of
payments among U.S. non-exempt recipients.

(2) The rules of this paragraph (b)(2)(vii)(C) are illustrated by
the following examples: Example 1. WH, a withholding agent, makes a
payment of U.S. source dividends to QI. QI provides WH with a valid
qualified intermediary withholding certificate on which it indicates
that it does not assume primary withholding responsibility under
chapter 3 of the Internal Revenue Code or primary Form 1099
reporting and backup withholding responsibility under chapter 61 and
section 3406 of the Internal Revenue Code. QI does not provide any
information allocating the dividend to withholding rate pools. WH
cannot reliably associate the payment with valid payee documentation
and therefore must apply the presumption rules of paragraph (b)(3)
(v) of this section.

Example 2. WH makes a payment of U.S. source dividends to QI. QI has
5 customers: A, B, C, D, and E. QI has obtained documentation from A
and B establishing their entitlement to a 15 percent rate of tax on
U.S. source dividends under an income tax treaty. C is a U.S. person
that is an exempt recipient as defined in paragraph (c)(20) of this
section. D and E are U.S. non-exempt recipients who have provided
Forms W-9 to QI. A, B, C, D, and E are each entitled to 20 percent
of the dividend payment. QI provides WH with a valid qualified
intermediary withholding certificate as described in paragraph (e)
(2)(ii) of this section with which it associates the Forms W-9 from
D and E. QI associates the following allocation information with its
qualified intermediary withholding certificate: 40 percent of the
payment is allocable to the 15 percent withholding rate pool, and 20
percent is allocable to each of D and E. QI does not provide any
allocation information regarding the remaining 20 percent of the
payment. WH cannot reliably associate 20 percent of the payment with
valid documentation and, therefore, must apply the presumption rules
of paragraph (b)(3)(v) of this section to that portion of the
payment. The 20 percent of the payment allocable to the 15 percent
withholding rate pool, and the portion of the payments allocable to
D and E are payments that can be reliably associated with
documentation.

(d) Special rules applicable to a withholding certificates provided
by a qualified intermediary that assumes primary withholding
responsibility under chapter 3 of the Internal Revenue Code. (1) In
the case of a payment made to a qualified intermediary that assumes
primary withholding responsibility under chapter 3 of the Internal
Revenue Code with respect to that payment (but does not assume
primary Form 1099 reporting and backup withholding responsibility
under chapter 61 and section 3406 of the Internal.84 Revenue Code),
a withholding agent can reliably associate the payment with valid
documentation only to the extent that, prior to the payment, the
withholding agent has received a valid qualified intermediary
withholding certificate and the withholding agent can reliably
determine the portion of the payment that relates to the withholding
rate pool for which the qualified intermediary assumes primary
withholding responsibility under chapter 3 of the Internal Revenue
Code and the portion of the payment attributable to withholding rate
pools for each U.S. non-exempt recipient for whom the qualified
intermediary has provided a Form W-9 (or, in absence of the form,
the name, address, and TIN, if available, of the U.S. non-exempt
recipient). See paragraph (e)(5)(v)(C)(2) of this section for
alternative allocation procedures for payments made to U.S. persons
that are not exempt recipients.

(2) Examples. The following examples illustrate the rules of
paragraph (b)(2)(vii)(D)(1) of this section: Example 1. WH makes a
payment of U.S. source interest to QI, a qualified intermediary. QI
provides WH with a withholding certificate that indicates that QI
will assume primary withholding responsibility under chapter 3 of
the Internal Revenue Code with respect to the payment. In addition,
QI attaches a Form W-9 from A, a U.S. non-exempt recipient, as
defined in paragraph (c)(21) of this section, and provides the name,
address, and TIN of B, a U.S. person that is also a non-exempt
recipient but who has not provided a Form W-9. QI associates a
withholding statement with its qualified intermediary withholding
certificate indicating that 10 percent of the payment is
attributable to A, and 10 percent to B, and that QI will assume
primary withholding responsibility with respect to the remaining 80
percent of the payment. WH can reliably associate the entire payment
with valid documentation. Although under the presumption rule of
paragraph (b)(3)(v) of this section, an undocumented person
receiving U.S. source interest is generally presumed to be a foreign
person, WH has actual knowledge that B is a U.S. non- exempt
recipient and therefore must report the payment on Form 1099 and
backup withhold on the interest payment under section 3406.

Example 2. The facts are the same as in Example 1, except that no
Forms W-9 or other information have been provided for the 20 percent
of the payment that is allocable to A and B. Thus, QI has accepted
withholding responsibility for 80 percent of the payment, but has
provided no information for the remaining 20 percent. In this case,
20.85 percent of the payment cannot be reliably associated with
valid documentation, and WH must apply the presumption rule of
paragraph (b)(3)(v) of this section.

(e) Special rules applicable to a withholding certificate provided
by a qualified intermediary that assumes primary Form 1099 reporting
and backup withholding responsibility but not primary withholding
under chapter 3. (1). If a payment is made to a qualified
intermediary that assumes primary Form 1099 reporting and backup
withholding responsibility for the payment (but does not assume
primary withholding responsibility under chapter 3 of the Internal
Revenue Code), a withholding agent can reliably associate the
payment with valid documentation only to the extent that, prior to
the payment, the withholding agent has received a valid qualified
intermediary withholding certificate and the withholding agent can
reliably determine the portion of the payment that relates to a
withholding rate pool or pools provided as part of the qualified
intermediary's withholding statement and the portion of the payment
for which the qualified intermediary assumes primary Form 1099
reporting and backup withholding responsibility.

(2) The following example illustrates the rules of paragraph (b)(2)
((vii)(D)(1) of this section: Example. WH makes a payment of U.S.
source dividends to QI, a qualified intermediary. QI has provided WH
with a valid qualified intermediary withholding certificate. QI
states on its withholding statement accompanying the certificate
that it assumes primary Form 1099 reporting and backup withholding
responsibility but does not assume primary withholding
responsibility under chapter 3 of the Internal Revenue Code. QI
represents that 15 percent of the dividend is subject to a 30
percent rate of withholding, 75 percent of the dividend is subject
to a 15 percent rate of withholding, and that QI assumed primary
Form 1099 reporting and backup withholding for the remaining 10
percent of the payment. The entire payment can be reliably
associated with valid documentation.

(f) Special rules applicable to a withholding certificate provided
by a qualified intermediary that assumes primary withholding
responsibility under chapter 3 and primary.86 Form 1099 reporting
and backup withholding responsibility and a withholding certificate
provided by a withholding foreign partnership. If a payment is made
to a qualified intermediary that assumes both primary withholding
responsibility under chapter 3 of the Internal Revenue Code and
primary Form 1099 reporting and backup withholding responsibility
under chapter 61 and section 3406 of the Internal Revenue Code for
the payment, a withholding agent can reliably associate a payment
with valid documentation provided that it receives a valid qualified
intermediary withholding certificate as described in paragraph (e)
(3)(ii) of this section. In the case of a payment made to a
withholding foreign partnership, the withholding agent can reliably
associate the payment with valid documentation to the extent it can
associate the payment with a valid withholding certificate described
in §1.1441-5(c)(2)(iv).

(3) Presumptions regarding payee's status in the absence of
documentation--

(i) General rules. A withholding agent that cannot, prior to the
payment, reliably associate (within the meaning of paragraph (b)(2)
(vii) of this section) a payment of an amount subject to withholding
(as described in §1.1441-2(a)) with valid documentation may
rely on the presumptions of this paragraph (b)(3) 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). * * *

(ii) Presumptions of classification as individual, corporation,
partnership, etc. (A) In general. A withholding agent that cannot
reliably associate a payment with a valid withholding certificate or
that has received valid documentary evidence under
§§1.1441- 1(e)(1)(ii)(2) and 1.6049-5(c)(1) or (4) but
cannot determine a payee's classification from the documentary
evidence must apply the rules of this paragraph (b)(3)(ii) to
determine the.87 payee's classification as an individual, trust,
estate, corporation, or 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 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 §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
§1.1441-9(b)(2) be furnished to the withholding agent.

(b) No documentation provided. If the withholding agent cannot
reliably associate a payment with a valid withholding certificate or
valid documentary evidence, it must presume that the payee is an
individual, a trust, or an estate, if the payee appears to be such
person (e.g., based on the payee's name or other indications). In
the absence of reliable indications that the payee is an individual,
trust, or an estate, the withholding agent must presume that the
payee is a corporation or one of the persons enumerated under
§1.6049-4(c)(1)(ii)(B) through (Q) if it can be so treated
under §1.6049-4(c)(1)(ii)(A)(1) or any one of the paragraphs
under §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 §1.6049-4(c)(1)(ii)(A)(1) through (Q),
then the payee shall be presumed to be a partnership. If such a
partnership is presumed to be foreign, it is not the beneficial
owner of the income paid to it. See paragraph (c)(6) of this
section. If such a partnership.88 is presumed to be domestic, it is
a U.S. non-exempt recipient for purposes of chapter 61 of the
Internal Revenue Code.

(c) Documentary evidence furnished for offshore account. If the
withholding agent receives valid documentary evidence, as described
in §1.6049-5(c)(1) or (4), with respect to an offshore account
from an entity but the documentary evidence does not establish the
entity's classification as a corporation, trust, estate, or
partnership, the withholding agent may presume (in the absence of
actual knowledge otherwise) that the entity is the type of person
enumerated under §1.6049-4(c)(1)(ii)(B) through (Q) if it can
be so treated under any one of those paragraphs without the need to
furnish documentation. If the withholding agent cannot treat a payee
as a person described in §1.6049-4(c)(1)(ii)(B) through (Q),
then the payee shall be presumed to be a corporation unless the
withholding agent knows, or has reason to know, that the entity is
not classified as a corporation for U.S. tax purposes. If a payee
is, or is presumed to be, a corporation under this paragraph (b)(3)
(ii)(C) and a foreign person under paragraph (b)(3)(iii) of this
section, a withholding agent shall not treat the payee as the
beneficial owner of income if the withholding agent knows, or has
reason to know, that the payee is not the beneficial owner of the
income. For this purpose, a withholding agent shall have reason to
know that the payee is not a beneficial owner if the documentary
evidence indicates that the payee is a bank, broker, intermediary,
custodian, or other agent, or is treated under §1.6049-4(c)(1)
(ii)(B) through (Q) as such a person. A withholding agent may,
however, treat such a person as a beneficial owner if the foreign
person provides a statement, in writing and signed by a person with
authority to sign the statement, that is attached to the documentary
evidence stating it is the beneficial owner of the income..89

(iii) * * *

(C) Pensions, annuities, etc. A payment from a trust described in
section 401(a), an annuity plan described in section 403(a), a
payment with respect to any annuity, custodial account, or
retirement income account described in section 403(b), or a payment
from an individual retirement account or individual retirement
annuity described in section 408 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 and the treaty 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 to be 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 reduction in the 30-
percent rate, see §§1.1441-4(e) or 1.1441-6(b).

(d) Certain payments to offshore accounts. A payment is presumed
made to a foreign payee if the payment is made outside the United
States (as defined in §1.6049- 5(e)) to an offshore account (as
defined in §1.6049-5(c)(1)) and the withholding agent.90 does
not have actual knowledge that the payee is a U.S. person. See
§1.6049-5(d)(2) and (3) for exceptions to this rule.

(iv) Grace period. A withholding agent may choose to apply the
provisions of §1.6049-5(d)(2)(ii) regarding a 90-day grace
period for purposes of this paragraph (b)(3) (by applying the term
withholding agent instead of the term payor) to amounts described in
§1.1441-6(c)(2) and to amounts covered by a Form 8233 described
in §1.1441- 4(b)(2)(ii). Thus, for these amounts, a withholding
agent may choose to treat an account holder as a foreign person and
withhold under chapter 3 of the Internal Revenue 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 an 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
§1.1461-1(c)(4)(i)(A). 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. non- 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 §1.1461-2..91

(B) If, at the end of the grace period, the documentation is not
furnished in the manner required under this section, or if
documentation is furnished that does not support the claimed rate
reduction, and the account holder is presumed to be a foreign person
then adjustments must be made to correct any underwithholding on
amounts credited to the account during the grace period, based on
the adjustment procedures described in §1.1461-2.

(v) Special rules applicable to payments to foreign
intermediaries--(A) Reliance on claim of status as foreign
intermediary. The presumption rules of paragraph (b)(3)(v)(B) of
this section apply to a payment made to an intermediary (whether the
intermediary is a qualified or nonqualified intermediary) that has
provided a valid withholding certificate under paragraph (e)(3)(ii)
or (iii) of this section (or has provided documentary evidence
described in paragraph (b)(3)(ii)(C) of this section that indicates
it is a bank, broker, custodian, intermediary, or other agent) to
the extent the withholding agent cannot treat the payment as being
reliably associated with valid documentation under the rules of
paragraph (b)(2)(vii) of this section. 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. 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 a payee other than an intermediary whose
classification as an individual, corporation, partnership, 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 paragraph (b)(3)(v)(B) of this section are not relevant to a
withholding agent that can reliably associate.92 a payment with a
withholding certificate from a person representing to be a qualified
intermediary to the extent the qualified intermediary has assumed
primary withholding responsibility in accordance with paragraph (e)
(5)(iv) of this section.

(b) Beneficial owner documentation or allocation information is
lacking or unreliable. Any portion of a payment that the withholding
agent may treat as made to a foreign intermediary (whether a
nonqualified or a qualified intermediary) but that the withholding
agent cannot treat as reliably associated with valid documentation
under the rules of paragraph (b)(2)(vii) of this section is presumed
made to an unknown, undocumented foreign payee. As a result, a
withholding agent must deduct and withhold 30 percent from any
payment of an amount subject to withholding. If a withholding
certificate attached to an intermediary certificate is another
intermediary withholding certificate or a flow-through withholding
certificate, the rules of this paragraph (b)(3)(v)(B) (or
§1.1441-5(d)(3) or (e)(6)(iii)) apply by treating the share of
the payment allocable to the other intermediary or flow-through
entity as if it were made directly to the other intermediary or
flow-through entity. Any payment of an amount subject to withholding
that is presumed made to an undocumented foreign person must be
reported on Form 1042-S. See §1.1461-1(c). See
§1.6049-5(d) for payments that are not subject to withholding.

(vi) U.S. branches. The rules of paragraph (b)(3)(v)(B) of this
section shall apply to payments to a U.S. branch described in
paragraph (b)(2)(iv)(A) of this section that has provided a
withholding certificate as described in paragraph (e)(3)(v) of this
section on which it has not agreed to be treated as a U.S. person.

(vii) Joint payees--(A) In general. Except as provided in paragraph
(b)(3)(vii)(B) of this section, if a withholding agent makes a
payment to joint payees and cannot reliably.93 associate a payment
with valid documentation from all payees, the payment is presumed
made to an unidentified U.S. person. However, if one of the joint
payees provides a Form W-9 furnished in accordance with the
procedures described in §§31.3406(d)-1 through
31.3406(d)-5 of this chapter, the payment shall be treated as made
to that payee. See §31.3406(h)-2 of this chapter for rules to
determine the relevant payee if more than one Form W-9 is provided.
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 meets the conditions described in paragraph (b)(3)(iv) of
this section.

(b) Special rule for offshore accounts. If a withholding agent makes
a payment to joint payees and cannot reliably associate a payment
with valid documentation from all payees, the payment is presumed
made to an unknown foreign payee if the payment is made outside the
United States (as defined in §1.6049-5(e)) to an offshore
account (as defined in §1.6049-5(c)(1)).

* * * * *

(6) Rules of withholding for payments by a foreign intermediary or
certain U.S. branches--

(i) In general. 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 §1.1441-2(a)) shall be required to withhold (if
another withholding agent has not withheld the full amount required)
and report such payment under chapter 3 of the Internal Revenue Code
and the regulations thereunder except as otherwise provided in this
paragraph (b)(6). A nonqualified intermediary or U.S. branch
described in paragraph (b)(2)(iv) of this section (other than a
branch that is treated as a U.S. person) shall not be required to
withhold or report if it has provided a valid.94 nonqualified
intermediary withholding certificate or a U.S. branch withholding
certificate, it has provided all of the information required by
paragraph (e)(3)(iv) of this section (withholding statement), and it
does not know, and has no reason to know, that another withholding
agent failed to withhold the correct amount or failed to report the
payment correctly under §1.1461-1(c). A qualified
intermediary's obligations to withhold and report shall be
determined in accordance with its qualified intermediary withholding
agreement.

(ii) Examples.

The following examples illustrate the rules of paragraph (b)(6)(i)
of this section: Example 1. FB, a foreign bank, acts an intermediary
for five different persons, A, B, C, D, and E, each of whom owns
U.S. securities that generate U.S. source dividends. The dividends
are paid by USWA, a U.S. withholding agent. FB furnished USWA with a
nonqualified intermediary withholding certificate, described in
paragraph (e)(3)(iii) of this section, to which it attached the
withholding certificates of each of A, B, C, D, and E. The
withholding certificates from A and B claim a 15 percent reduced
rate of withholding under an income tax treaty. C, D, and E claim no
reduced rate of withholding. FB provides a withholding statement
that meets all of the requirements of paragraph (e)(3)(iv) of this
section, including information allocating 20 percent of each
dividend payment to each of A, B, C, D, and E. FB does not have
actual knowledge or reason to know that USWA did not withhold the
correct amounts or report the dividends on Forms 1042-S to each of
A, B, C, D, and E. FB is not required to withhold or to report the
dividends to A, B, C, D, and E.

Example 2. The facts are the same as in Example 1, except that FB
did not provide any information for USWA to determine how much of
the dividend payments were made to A, B, C, D, and E. Because USWA
could not reliably associate the dividend payments with
documentation under paragraph (b)(2)(vii) of this section, USWA
applied the presumption rules of paragraph (b)(3)(v) of this section
and withheld 30 percent from all dividend payments. In addition,
USWA filed a single Form 1042-S reporting the payment to an unknown
foreign payee. FB is deemed to know that USWA did not report the
payment to A, B, C, D, and E because it did not provide all of the
information required on a withholding statement under paragraph (e)
(3)(iv) of this section (i.e., allocation information). Although FB
is not required to withhold on the payment because the full 30
percent withholding was imposed by USWA, it is required to report
the payments on Forms 1042-S to A, B, C, D, and E. FB's intentional
failure to do so will subject it to intentional disregard penalties
under sections 6721 and 6722.

* * * * *

(c) * * *

(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. Solely for
purposes of the regulations under chapter 3 of the Internal Revenue
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. Such a branch continues to be
a U.S. payor for purposes of chapter 61 of the Internal Revenue
Code. See §1.6049-5(c)(4). 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).

* * * * *

(6) Beneficial owner--

(i) General rule. This paragraph (c)(6) defines the term beneficial
owner for payments of income other than a payment for which a
reduced rate of withholding is claimed under an income tax treaty.
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 Internal
Revenue 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.96 capacity as a nominee, agent, or 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 were income.

(ii) Special rules--

(A) General rule. The beneficial owners of income paid to an entity
described in this paragraph (c)(6)(ii) are those persons described
in paragraphs (c)(6)(ii)(B) through (D) of this section.

(b) Foreign partnerships. The beneficial owners of income paid to a
foreign partnership (whether a nonwithholding or a withholding
foreign partnership) are the partners in the partnership, unless
they themselves are not the beneficial owners of the income under
this paragraph (c)(6). 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
persons that are not beneficial owners under this paragraph (c)(6)).
See §1.1441-5(b) for applicable withholding procedures for
payments to a domestic partnership. See also §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.

(c) Foreign simple trusts and foreign grantor trusts. The beneficial
owners of income paid to a foreign simple trust, as described in
paragraph (c)(23) of this section, are the beneficiaries of the
trust, unless they themselves are not the beneficial owners of
the.97 income under this paragraph (c)(6). The beneficial owners of
income paid to a foreign grantor trust, as described in paragraph
(c)(26) of this section, are the persons treated as the owners of
the trust, unless they themselves are not the beneficial owners of
the income under this paragraph (c)(6).

(d) Other foreign trusts and foreign estates. The beneficial owner
of income paid to a foreign complex trust as defined in paragraph
(c)(25) of this section or to a foreign estate is the foreign
complex trust or estate itself.

* * * * *

(12) Payee. For purposes of chapter 3 of the Internal Revenue Code,
the term payee of a payment is determined under paragraph (b)(2) of
this section, §1.1441-5(c)(1) (relating to partnerships), and
§1.1441-5(e)(2) and (3) (relating to trusts and estates) and
includes foreign persons, U.S. exempt recipients, and U.S. non-
exempt recipients. A nonqualified intermediary and a qualified
intermediary (to the extent it does not assume primary withholding
responsibility) are not payees if they are acting as intermediaries
and not the beneficial owner of income. In addition, a flow-through
entity is not a payee unless the income is (or is deemed to be)
effectively connected with the conduct of a trade or business in the
United States. See §1.6049-5(d)(1) for rules to determine the
payee for purposes of chapter 61 of the Internal Revenue Code. See
§§1.1441-1(b)(3), 1.1441-5(d), and (e)(6) and 1.6049-5(d)
(3) for presumption rules that apply if a payee's identity cannot be
determined on the basis of valid documentation.

(13) Intermediary. 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.98 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.

(14) Nonqualified intermediary. A nonqualified intermediary means
any intermediary that is not a U.S. person and not a qualified
intermediary, as defined in paragraph (e)(5)(ii) of this section, or
a qualified intermediary that is not acting in its capacity as a
qualified intermediary with respect to a payment. For example, to
the extent an entity that is a qualified intermediary provides
another withholding agent with a foreign beneficial owner
withholding certificate as defined in paragraph (e)(2)(i) of this
section, the entity is not acting in its capacity as a qualified
intermediary. Notwithstanding the preceding sentence, a qualified
intermediary is acting as a qualified intermediary to the extent it
provides another withholding agent with Forms W-9, or other
information regarding U.S. non-exempt recipients pursuant to its
qualified intermediary agreement with the IRS.

(15) Qualified intermediary. The term qualified intermediary is
defined in paragraph (e)(5)(ii) of this section.

(16) Withholding certificate. The term withholding certificate means
a Form W-8 described in paragraph (e)(2)(i) of this section
(relating to foreign beneficial owners), paragraph (e)(3)(i) of this
section (relating to foreign intermediaries), §1.1441-5(c)(2)
(iv), (c)(3)(iii), and (e)(3)(iv) (relating to flow-through
entities), a Form 8233 described in §1.1441-4(b)(2), a Form W-9
as described in paragraph (d) of this section, a statement described
in §1.871-14(c)(2)(v) (relating to portfolio interest), or any
other certificates that under the Internal Revenue Code or
regulations certifies or establishes the status of a payee or
beneficial owner as a U.S. or a foreign person..99 (17) Documentary
evidence; other appropriate documentation. The terms documentary
evidence or other appropriate documentation refer to documents other
than a withholding certificate that may be provided for payments
made outside the United States to offshore accounts or any other
evidence that under the Internal Revenue Code or regulations
certifies or establishes the status of a payee or beneficial owner
as a U.S. or foreign person. See §§1.1441-6(b)(2), (c)(3)
and (4) (relating to treaty benefits), and 1.6049-5(c)(1) and (4)
(relating to chapter 61 reporting). Also see §1.1441-4(a)(3)
(ii) regarding documentary evidence for notional principal
contracts.

(18) Documentation. The term documentation refers to both
withholding certificates, as defined in paragraph (c)(16) of this
section, and documentary evidence or other appropriate
documentation, as defined in paragraph (c)(17) of this section.

(19) Payor. The term payor is defined in §31.3406(a)-2 of this
chapter and §1.6049- 4(a)(2) and generally includes a
withholding agent, as defined in §1.1441-7(a). The term also
includes any person that makes a payment to an intermediary, flow-
through entity, or U.S. branch that is not treated as a U.S. person
to the extent the intermediary, flow-through, or U.S. branch
provides a Form W-9 or other appropriate information relating to a
payee so that the payment can be reported under chapter 61 of the
Internal Revenue Code and, if required, subject to backup
withholding under section 3406. This latter rule does not preclude
the intermediary, flow-through entity, or U.S. branch from also
being a payor.

(20) Exempt recipient. The term exempt recipient means a person that
is exempt from reporting under chapter 61 of the Internal Revenue
Code and backup withholding under section 3406 and that is described
in §§1.6041-3(q), 1.6045-2(b)(2)(i), and 1.6049- 4(c)(1)
(ii), and §5f.6045-1(c)(3)(i)(B) of this chapter. Exempt
recipients are not exempt from withholding under chapter 3 of the
Internal Revenue Code unless they are U.S. persons or foreign
persons entitled to an exemption from withholding under chapter 3.

(21) Non-exempt recipient. A non-exempt recipient is any person that
is not an exempt recipient under paragraph (c)(20) of this section.

(22) Reportable amounts. Reportable amounts are defined in paragraph
(e)(3)(vi) of this section.

(23) Flow-through entity. A flow-through entity means any entity
that is described in this paragraph (c)(23) and that may provide
documentation on behalf of others to a withholding agent. The
entities described in this paragraph are a foreign partnership
(other than a withholding foreign partnership), a foreign simple
trust (other than a withholding foreign trust) that is described in
paragraph (c)(24) of this section, a foreign grantor trust (other
than a withholding foreign trust) that is described in paragraph (c)
(25) of this section, or, for any payments for which a reduced rate
of withholding under an income tax treaty is claimed, any entity to
the extent the entity is considered to be fiscally transparent under
section 894 with respect to the payment by an interest holder's
jurisdiction.

(24) Foreign simple trust. A foreign simple trust is a foreign trust
that is described in section 651(a).

(25) Foreign complex trust. A foreign complex trust is a foreign
trust other than a trust described in section 651(a) or sections 671
through 679.

(26) Foreign grantor trust. A foreign grantor trust is a foreign
trust but only to the extent all or a portion of the income of the
trust is treated as owned by the grantor or another person under
sections 671 through 679..101 (27) Partnership. The term partnership
means any entity treated as a partnership under §301.7701-2 or
-3 of this chapter.

(28) Nonwithholding foreign partnership. A nonwithholding foreign
partnership is a foreign partnership that is not a withholding
foreign partnership, as defined in §1.1441- 5(c)(2)(i).

(29) Withholding foreign partnership. A withholding foreign
partnership is defined in §1.1441-5(c)(2)(i).

(d) * * *

(2) Payments for which a Form W-9 is otherwise required. A
withholding agent may treat as a U.S. payee any person who is
required to furnish a Form W-9 and who furnishes it in accordance
with the procedures described in §§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
§31.3406(h)-3( e) of this chapter regarding reliance by a payor
on a Form W-9. Providing a Form W-9 or valid substitute form shall
serve as a statement that the person whose name is on the form is a
U.S. person. Therefore, a foreign person, including a U.S. branch
treated as a U.S. person under paragraph (b)(2)(iv) of this section,
shall not provide a Form W-9. A U.S. branch of a foreign person may
establish its status as a foreign person exempt from reporting under
chapter 61 and backup withholding under section 3406 by providing a
withholding certificate on Form W-8.

(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 (e.g., a person exempt from reporting under chapter 61
of the Internal Revenue Code), the withholding agent may treat.102
the payee as a U.S. payee if the payee provides the withholding
agent with a Form W-9 or a substitute form described in
§31.3406(h)-3(c)(2) of this chapter (relating to forms for
exempt recipients) that contains the payee's name, address, and TIN.
The form must be signed under penalties of perjury by the payee if
so required by the form or by §31.3406(h)-3 of this chapter.
Providing a Form W-9 or valid substitute form shall serve as a
statement that the person whose name is on the certificate is a U.S.
person. A Form W-9 or valid substitute form shall not be provided by
a foreign person, including any U.S. branch of a foreign person
whether or not the branch is treated as a U.S. person under
paragraph (b)(2)(iv) of this section. See paragraph (e)(3)(v) of
this section for withholding certificates provided by U.S. branches
described in paragraph (b)(2)(iv) of this section. The procedures
described in §31.3406(h)-2(a) of this chapter shall apply to
payments to joint payees. A withholding agent that receives a Form
W-9 to satisfy this paragraph (d)(3) must retain the form in
accordance with the provisions of §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
§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 a U.S. 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 Internal Revenue Code (e.g.,
§1.6049-4(c)(1)(ii) for payments of interest).

(4) When a payment to an intermediary or flow-through entity may be
treated as made to a U.S. payee. A withholding agent that makes a
payment to an intermediary (whether a qualified intermediary or
nonqualified intermediary), a flow-through entity, or a.103 U.S.
branch described in paragraph (b)(2)(iv) of this section may treat
the payment as made to a U.S. payee to the extent that, prior to the
payment, 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 or to the extent the withholding agent can reliably
associate the payment with a Form W-8 described in paragraph (e)(3)
(v) of this section that evidences an agreement to treat a U.S.
branch described in paragraph (b)(2)(iv) of this section as a U.S.
person. In addition, a withholding agent may treat the payment as
made to a U.S. payee only if it complies with the electronic
confirmation procedures described in paragraph (e)(4)(v) of this
section, if required, and 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 withholding agent may be
notified in accordance with section 3406(a)(1)(B) and the
regulations under that section. See applicable procedures under
section 3406(a)(1)(B) and the regulations under that section for
payors who have been notified with regard to such a Form W-9.
Withholding agents 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
§601.601(d)(2) of this chapter).

(e) * * *

(1) * * *

(ii) * * *

(A) * * *

(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, or U.S. branch withholding certificate;

* * * * *

(3) That the withholding agent can reliably associate the payment
with a valid qualified intermediary withholding certificate, as
described in paragraph (e)(3)(ii) of this section, and the qualified
intermediary has provided sufficient information for the withholding
agent to allocate the payment to a withholding rate pool other than
a withholding rate pool or pools established for U.S. non-exempt
recipients;

(4) That the withholding agent can reliably associate the payment
with a withholding certificate described in §1.1441-5(c)(3)
(iii) or (e)(5)(iii) from a flow-through entity claiming the income
is effectively connected income;

* * * * *

(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 (whether a qualified or nonqualified
intermediary) with respect to a payment and not the beneficial
owner. See paragraphs (e)(3)(ii) and (iii) of this section. A flow-
through withholding certificate is a Form W-8 used by a flow-through
entity as defined in paragraph (c)(23) of this section. See
§1.1441- 5(c)(3)(iii) (a nonwithholding foreign partnership),
§1.1441-5(e)(5)(iii) (a foreign simple trust or foreign grantor
trust) or §1.1441-6(b)(2) (foreign entity presenting claims on
behalf of its interest holders for a reduced rate of withholding
under an income tax treaty). A U.S..105 branch certificate is a Form
W-8 furnished under paragraph (e)(3)(v) of this section by a U.S.
branch described in paragraph (b)(2)(iv) of this section. See
paragraph (e)(4)(viii) of this section for applicable reliance
rules.

(ii) Intermediary withholding certificate from a qualified
intermediary. A qualified intermediary shall provide a qualified
intermediary withholding certificate for reportable amounts received
by the qualified intermediary. See paragraph (e)(3)(vi) of this
section for the definition of reportable amount. A qualified
intermediary withholding certificate is valid only if it is
furnished on a Form W-8, an acceptable substitute form, or such
other form as the IRS may prescribe, it is signed under penalties of
perjury by a person with authority to sign for the qualified
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), qualified intermediary employer
identification number (QI-EIN), and the country under the laws of
which the intermediary is created, incorporated, or governed. A
qualified intermediary that does not act in its capacity as a
qualified intermediary must not use its QI-EIN. Rather the
intermediary should provide a nonqualified intermediary withholding
certificate, if it is acting as an intermediary, and should use the
taxpayer identification number, if any, that it uses for all other
purposes;

(B) A certification that, with respect to accounts it identifies on
its withholding statement (as described in paragraph (e)(5)(v) of
this section), the qualified intermediary is not acting for its own
account but is acting as a qualified intermediary;

(C) A certification that the qualified intermediary has provided, or
will provide, a withholding statement as required by paragraph (e)
(5)(v) of this section; and.106

(D) Any other information, certifications, or statements 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) or paragraph (e)(3)(v) of this section. See
paragraph (e)(5)(v) of this section for the requirements of a
withholding statement associated with the qualified intermediary
withholding certificate.

(iii) Intermediary withholding certificate from a nonqualified
intermediary. A nonqualified intermediary shall provide a
nonqualified intermediary withholding certificate for reportable
amounts received by the nonqualified intermediary. See paragraph (e)
(3)(vi) of this section for the definition of reportable amount. A
nonqualified intermediary withholding certificate is valid only to
the extent it is furnished on a Form W-8, 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
nonqualified intermediary, it contains the information, statements,
and certifications described in this paragraph (e)(3)(iii) and
paragraph (e)(3)(iv) of this section, its validity has not expired,
and the withholding certificates and other appropriate documentation
for all persons to whom the certificate relates are associated with
the certificate. Withholding certificates and other appropriate
documentation consist of beneficial owner withholding certificates
described in paragraph (e)(2)(i) of this section, intermediary and
flow-through withholding certificates described in paragraph (e)(3)
(i) of this section, withholding foreign partnership certificates
described in §1.1441-5(c)(2)(iv), documentary evidence
described in §§1.1441-6(c)(3) or (4) and 1.6049-5(c)(1),
and any other documentation or certificates applicable under other
provisions of the Internal Revenue Code or regulations that certify
or establish the status of the payee or beneficial owner as a U.S.
or a foreign person. If a nonqualified.107 intermediary is acting on
behalf of another nonqualified intermediary or a flow-through
entity, then the nonqualified intermediary must associate with its
own withholding certificate the other nonqualified intermediary
withholding certificate or the flow-through withholding certificate
and separately identify all of the withholding certificates and
other appropriate documentation that are associated with the
withholding certificate of the other nonqualified intermediary or
flow-through entity. Nothing in this paragraph (e)(3)(iii) shall
require an intermediary to furnish original documentation. Copies of
certificates or documentary evidence may be transmitted to the U.S.
withholding agent, in which case the nonqualified 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 §1.871-14(c)(2)(v) furnished for
interest to qualify as portfolio interest for purposes of sections
871(h) and 881(c). The information and certifications required on a
Form W-8 described in this paragraph (e)(3)(iii) are as follows--

(A) The name and permanent resident address (as described in
paragraph (e)(2)(ii) of this section) of the nonqualified
intermediary, and the country under the laws of which the
nonqualified intermediary is created, incorporated, or governed;

(B) A certification that the nonqualified intermediary is not acting
for its own account;

(C) If the nonqualified intermediary withholding certificate is used
to transmit withholding certificates or other appropriate
documentation for more than one person on whose behalf the
nonqualified intermediary is acting, a withholding statement
associated.108 with the Form W-8 that provides all the information
required by paragraph (e)(3)(iv) of this section; and

(D) Any other information, certifications, or statements as may be
required by the form or accompanying instructions in addition to, or
in lieu of, the information, certifications, and statements
described in this paragraph (e)(3)(iii) or paragraph (e)(5)(iv) of
this section.

(iv) Withholding statement provided by nonqualified
intermediary--(A) In general. A nonqualified intermediary shall
provide a withholding statement required by this paragraph (e)(3)
(iv) to the extent the nonqualified intermediary is required to
furnish, or does furnish, documentation for payees on whose behalf
it receives reportable amounts (as defined in paragraph (e)(3)(vi)
of this section) or to the extent it otherwise provides the
documentation of such payees to a withholding agent. A nonqualified
intermediary is not required to disclose information regarding
persons for whom it collects reportable amounts unless it has actual
knowledge that any such person is a U.S. non-exempt recipient as
defined in paragraph (c)(21) of this section. Information regarding
U.S. non-exempt recipients required under this paragraph (e)(3)(iv)
must be provided irrespective of any requirement under foreign law
that prohibits the disclosure of the identity of an account holder
of a nonqualified intermediary or financial information relating to
such account holder. Although a nonqualified intermediary is not
required to provide documentation and other information required by
this paragraph (e)(3)(iv) for persons other than U.S. non-exempt
recipients, a withholding agent that does not receive documentation
and such information must apply the presumption rules of paragraph
(b) of this section, §§1.1441- 5(d) and (e)(6) and
1.6049-5(d) or the withholding agent shall be liable for tax,
interest, and penalties. A withholding agent must apply the
presumption rules even if it is not required.109 under chapter 61 of
the Internal Revenue Code to obtain documentation to treat a payee
as an exempt recipient and even though it has actual knowledge that
the payee is a U.S. person. For example, if a nonqualified
intermediary fails to provide a withholding agent with a Form W-9
for an account holder that is a U.S. exempt recipient, the
withholding agent must presume (even if it has actual knowledge that
the account holder is a U.S. exempt recipient), that the account
holder is an undocumented foreign person with respect to amounts
subject to withholding. See paragraph (b)(3)(v) of this section for
applicable presumptions. Therefore, the withholding agent must
withhold 30 percent from the payment even though if a Form W-9 had
been provided, no withholding or reporting on the payment
attributable to a U.S. exempt recipient would apply. Further, a
nonqualified intermediary that fails to provide the documentation
and the information under this paragraph (e)(3)(iv) for another
withholding agent to report the payments on Forms 1042-S and Forms
1099 is not relieved of its responsibility to file information
returns. See paragraph (b)(6) of this section. Therefore, unless the
nonqualified intermediary itself files such returns and provides
copies to the payees, it shall be liable for penalties under
sections 6721 (failure to file information returns), and 6722
(failure to furnish payee statements), including the penalties under
those sections for intentional failure to file information returns.
In addition, failure to provide either the documentation or the
information required by this paragraph (e)(3)(iv) results in a
payment not being reliably associated with valid documentation.
Therefore, the beneficial owners of the payment are not entitled to
reduced rates of withholding and if the full amount required to be
held under the presumption rules is not withheld by the withholding
agent, the nonqualified intermediary must withhold the difference
between the amount withheld by the withholding agent and the amount
required.110 to be withheld. Failure to withhold shall result in the
nonqualified intermediary being liable for tax under section 1461,
interest, and penalties, including penalties under section 6656
(failure to deposit) and section 6672 (failure to collect and pay
over tax).

(b) General requirements. A withholding statement must be provided
prior to the payment of a reportable amount and must contain the
information specified in paragraph (e)(3)(iv)(C) of this section.
The statement must be updated as often as required to keep the
information in the withholding statement correct prior to each
subsequent payment. The withholding statement forms an integral part
of the withholding certificate provided under paragraph (e)(3)(iii)
of this section, and the penalties of perjury statement provided on
the withholding certificate shall apply to the withholding
statement. The withholding statement may be provided in any manner
the nonqualified intermediary and the withholding agent mutually
agree, including electronically. If the withholding statement is
provided electronically, there must be sufficient safeguards to
ensure that the information received by the withholding agent is the
information sent by the nonqualified intermediary and all occasions
of user access that result in the submission or modification of the
withholding statement information must be recorded. In addition, an
electronic system must be capable of providing a hard copy of all
withholding statements provided by the nonqualified intermediary. A
withholding agent will be liable for tax, interest, and penalties in
accordance with paragraph (b)(7) of this section to the extent it
does not follow the presumption rules of paragraph (b)(3) of this
section or §§1.1441-5(d) and (e)(6), and 1.6049-5(d) for
any payment of a reportable amount, or portion thereof, for which it
does not have a valid withholding statement prior to making a
payment..111 (C) Content of withholding statement. The withholding
statement provided by a nonqualified intermediary must contain the
information required by this paragraph (e)(3)(iv)(C).

(1) The withholding statement must contain the name, address, TIN
(if any) and the type of documentation (documentary evidence, Form
W-9, or type of Form W-8) for every person from whom documentation
has been received by the nonqualified intermediary and provided to
the withholding agent and whether that person is a U.S. exempt
recipient, a U.S. non-exempt recipient, or a foreign person. See
paragraphs (c)(2), (20), and (21) of this section for the
definitions of foreign person, U.S. exempt recipient, and U.S. non-
exempt recipient. In the case of a foreign person, the statement
must indicate whether the foreign person is a beneficial owner or an
intermediary, flow-through entity, or U.S. branch described in
paragraph (b)(2)(iv) of this section and include the type of
recipient, based on recipient codes used for filing Forms 1042-S, if
the foreign person is a recipient as defined in §1.1461-1(c)(1)
(ii).

(2) The withholding statement must allocate each payment, by income
type, to every payee (including U.S. exempt recipients) for whom
documentation has been provided. Any payment that cannot be reliably
associated with valid documentation from a payee shall be treated as
made to an unknown payee in accordance with the presumption rules of
paragraph (b) of this section and §§1.1441-5(d) and (e)(6)
and 1.6049-5(d). For this purpose, a type of income is determined by
the types of income required to be reported on Forms 1042-S or 1099,
as appropriate. Notwithstanding the preceding sentence, deposit
interest (including original issue discount) described in section
871(i)(2)(A) or 881(d) and interest or original issue discount on
short-term obligations as described in section.112 871(g)(1)(B) or
881(e) is only required to be allocated to the extent it is required
to be reported on Form 1099 or Form 1042-S. See §1.6049-8
(regarding reporting of bank deposit interest to certain foreign
persons). If a payee receives income through another nonqualified
intermediary, flow-through entity, or U.S. branch described in
paragraph (e)(2)(iv) of this section (other than a U.S. branch
treated as a U.S. person), the withholding statement must also
state, with respect to the payee, the name, address, and TIN, if
known, of the other nonqualified intermediary or U.S. branch from
which the payee directly receives the payment or the flow-through
entity in which the payee has a direct ownership interest. If
another nonqualified intermediary, flow-through entity, or U.S.
branch fails to allocate a payment, the name of the nonqualified
intermediary, flow-through entity, or U.S. branch that failed to
allocate the payment shall be provided with respect to such payment.

(3) If a payee is identified as a foreign person, the nonqualified
intermediary must specify the rate of withholding to which the payee
is subject, the payee's country of residence and, if a reduced rate
of withholding is claimed, the basis for that reduced rate (e.g.,
treaty benefit, portfolio interest, exempt under section 501(c)(3),
892, or 895). The allocation statement must also include the
taxpayer identification numbers of those foreign persons for whom
such a number is required under paragraph (e)(4)(vii) of this
section or §1.1441-6(b)(1) (regarding claims for treaty
benefits). In the case of a claim of treaty benefits, the
nonqualified intermediary's withholding statement must also state
whether the limitation on benefits and section 894 statements
required by §1.1441-6(c)(5) have been provided, if required, in
the beneficial owner's Form W-8 or associated with such owner's
documentary evidence..113 (4) The withholding statement must also
contain any other information the withholding agent reasonably
requests in order to fulfill its obligations under chapter 3,
chapter 61 of the Internal Revenue Code, and section 3406.

(d) Alternative procedures--

(1) In general. Under the alternative procedures of this paragraph
(e)(3)(iv)(D), a nonqualified intermediary may provide information
allocating a payment of a reportable amount to each payee (including
U.S. exempt recipients) otherwise required under paragraph (e)(3)
(iv)(B)(2) of this section after a payment is made. To use the
alternative procedure of this paragraph (e)(3)(iv)(D), the
nonqualified intermediary must inform the withholding agent on a
statement associated with its nonqualified intermediary withholding
certificate that it is using the procedure under this paragraph (e)
(3)(iv)(D) and the withholding agent must agree to the procedure. If
the requirements of the alternative procedure are met, a withholding
agent, including the nonqualified intermediary using the procedures,
can treat the payment as reliably associated with documentation and,
therefore, the presumption rules of paragraph (b)(3) of this section
and §§1.1441-5(d) and (e)(6) and 1.6049-5(d) do not apply
even though information allocating the payment to each payee has not
been received prior to the payment. See paragraph (e)(3)(iv)(D)(7)
of this section, however, for a nonqualified intermediary's
liability for tax and penalties if the requirements of this
paragraph (e)(3)(iv)(D) are not met. These alternative procedures
shall not be used for payments that are allocable to U.S. non-exempt
recipients. Therefore, a nonqualified intermediary is required to
provide a withholding agent with information allocating payments of
reportable amounts to U.S. non-exempt recipients prior to the
payment being made by the withholding agent..114 (2) Withholding
rate pools. In place of the information required in paragraph (e)(3)
(iv)(C)(2) of this section allocating payments to each payee, the
nonqualified intermediary must provide a withholding agent with
withholding rate pool information prior to the payment of a
reportable amount. The withholding statement must contain all other
information required by paragraph (e)(3)(iv)(C) of this section.
Further, each payee listed in the withholding statement must be
assigned to an identified withholding rate pool. To the extent a
nonqualified intermediary is required to, or does provide,
documentation, the alternative procedures do not relieve the
nonqualified intermediary from the requirement to provide
documentation prior to the payment being made. Therefore,
withholding certificates or other appropriate documentation and all
information required by paragraph (e)(3)(iv)(C) of this section
(other than allocation information) must be provided to a
withholding agent before any new payee receives a reportable amount.
In addition, the withholding statement must be updated by assigning
a new payee to a withholding rate pool prior to the payment of a
reportable amount. A withholding rate pool is a payment of a single
type of income, determined in accordance with the categories of
income used to file Form 1042-S, that is subject to a single rate of
withholding. A withholding rate pool may be established by any
reasonable method to which the nonqualified intermediary and a
withholding agent agree (e.g., by establishing a separate account
for a single withholding rate pool, or by dividing a payment made to
a single account into portions allocable to each withholding rate
pool). The nonqualified intermediary shall determine withholding
rate pools based on valid documentation or, to the extent a payment
cannot be reliably associated with valid documentation, the
presumption rules of paragraph (b)(3) of this section and
§§1.1441-5(d) and (e)(6) and 1.6049-5(d)..115 (3)
Allocation information. The nonqualified intermediary must provide
the withholding agent with sufficient information to allocate the
income in each withholding rate pool to each payee (including U.S.
exempt recipients) within the pool no later than January 31 of the
year following the year of payment. Any payments that are not
allocated to payees for whom documentation has been provided shall
be allocated to an undocumented payee in accordance with the
presumption rules of paragraph (b)(3) of this section and
§§1.1441-5(d) and (e)(6) and 1.6049-5(d). Notwithstanding
the preceding sentence, deposit interest (including original issue
discount) described in section 871(i)(2)(A) or 881(d) and interest
or original issue discount on short-term obligations as described in
section 871(g)(1)(B) or 881(e) is not required to be allocated to a
U.S. exempt recipient or a foreign payee, except as required under
§1.6049-8 (regarding reporting of deposit interest paid to
certain foreign persons).

(4) Failure to provide allocation information. If a nonqualified
intermediary fails to provide allocation information, if required,
by January 31 for any withholding rate pool, a withholding agent
shall not apply the alternative procedures of this paragraph (e)(3)
(iv)(D) to any payments of reportable amounts paid after January 31
in the taxable year following the calendar year for which allocation
information was not given and any subsequent taxable year. Further,
the alternative procedures shall be unavailable for any other
withholding rate pool even though allocation information was given
for that other pool. Therefore, the withholding agent must withhold
on a payment of a reportable amount in accordance with the
presumption rules of paragraph (b)(3) of this section, and
§§1.1441- 5(d) and (e)(6) and 1.6049-5(d), unless the
nonqualified intermediary provides all of the information, including
information sufficient to allocate the payment to each specific
payee,.116 required by paragraph (e)(3)(iv)(A) through (C) of this
section prior to the payment. A nonqualified intermediary must
allocate at least 90 percent of the income required to be allocated
for each withholding rate pool or the nonqualified intermediary will
be treated as having failed to provide allocation information for
purposes of this paragraph (e)(3)(iv)(D). See paragraph (e)(3)(iv)
(D)(7) of this section for liability for tax and penalties if a
nonqualified intermediary fails to provide allocation information in
whole or in part.

(5) Cure provision. A nonqualified intermediary may cure any failure
to provide allocation information by providing the required
allocation information to the withholding agent no later than
February 14 following the calendar year of payment. If the
withholding agent receives the allocation information by that date,
it may apply the adjustment procedures of §1.1461-2 to any
excess withholding for payments made on or after February 1 and on
or before February 14. Any nonqualified intermediary that fails to
cure by February 14, may request the ability to use the alternative
procedures of this paragraph (e)(3)(iv)(D) by submitting a request,
in writing, to the Assistant Commissioner (International). The
request must state the reason that the nonqualified intermediary did
not comply with the alternative procedures of this paragraph (e)(3)
(iv)(D) and steps that the nonqualified intermediary has taken, or
will take, to ensure that no failures occur in the future. If the
Assistant Commissioner (International) determines that the
alternative procedures of this paragraph (e)(3)(iv)(D) may apply, a
determination to that effect will be issued by the IRS to the
nonqualified intermediary.

(6) Form 1042-S reporting in case of allocation failure. If a
nonqualified intermediary fails to provide allocation information by
February 14 following the year of payment for a withholding rate
pool, the withholding agent must file Forms 1042-S for payments made
to.117 each payee in that pool (other than U.S. exempt recipients)
in the prior calendar year by pro rating the payment to each payee
(including U.S. exempt recipients) listed in the withholding
statement for that withholding rate pool. If the nonqualified
intermediary fails to allocate10 percent or less of an amount
required to be allocated for a withholding rate pool, a withholding
agent shall report the unallocated amount as paid to a single
unknown payee in accordance with the presumption rules of paragraph
(b) of this section and §§1.1441-5(d) and (e)(6) and
1.6049-5(d). The portion of the payment that can be allocated to
specific recipients, as defined in §1.1461-1(c)(1)(ii), shall
be reported to each recipient in accordance with the rules of
§1.1461-1(c).

(7) Liability for tax, interest, and penalties. If a nonqualified
intermediary fails to provide allocation information by February 14
following the year of payment for all or a portion of the payments
made to any withholding rate pool, the withholding agent from whom
the nonqualified intermediary received payments of reportable
amounts shall not be liable for any tax, interest, or penalties, due
solely to the errors or omissions of the nonqualified intermediary.
See §1.1441-7(b)(2) through (10) for the due diligence
requirements of a withholding agent. Because failure by the
nonqualified intermediary to provide allocation information results
in a payment not being reliably associated with valid documentation,
the beneficial owners for whom the nonqualified intermediary acts
are not entitled to a reduced rate of withholding. Therefore, the
nonqualified intermediary, as a withholding agent, shall be liable
for any tax not withheld by the withholding agent in accordance with
the presumption rules, interest on the under withheld tax if the
nonqualified intermediary fails to pay the tax timely, and any
applicable penalties, including the penalties under sections 6656
(failure to deposit), 6721 (failure to file information returns) and
6722.118 (failure to file payee statements). Failure to provide
allocation information for more than 10 percent of the payments made
to a particular withholding rate pool will be presumed to be an
intentional failure within the meaning of sections 6721(e) and
6722(c). The nonqualified intermediary may rebut the presumption.

(8) Applicability to flow-through entities and certain U.S.
branches. See paragraph (e)(3)(v) of this section and
§1.1441-5(c)(3)(iv) and (e)(5)(iv) for the applicability of
this paragraph (e)(3)(iv) to U.S. branches described in paragraph
(b)(2)(iv) of this section (other than U.S. branches treated as U.S.
persons) and flow-through entities.

(e) Notice procedures. The IRS may notify a withholding agent that
the alternative procedures of paragraph (e)(3)(iv)(D) of this
section are not applicable to a specified nonqualified intermediary,
a U.S. branch described in paragraph (b)(2)(iv) of this section, or
a flow-through entity. If a withholding agent receives such a
notice, it must commence withholding in accordance with the
presumption rules of paragraph (b)(3) of this section and
§§1.1441-5(d) and (e)(6) and 1.6049-5(d) unless the
nonqualified intermediary, U.S. branch, or flow-through entity
complies with the procedures in paragraphs (e)(3)(iv)(A) through (C)
of this section. In addition, the IRS may notify a withholding
agent, in appropriate circumstances, that it must apply the
presumption rules of paragraph (b)(3) of this section and
§§1.1441-5(d) and (e)(6) and 1.6049-5(d) to payments made
to a nonqualified intermediary, a U.S. branch, or a flow-through
entity even if the nonqualified intermediary, U.S. branch or flow-
through entity provides allocation information prior to the payment.
A withholding agent that receives a notice under this paragraph (e)
(3)(iv)(E) must commence withholding in accordance with the
presumption rules within 30 days of the date of the notice. The IRS
may withdraw its prohibition against using the alternative
procedures.119 of paragraph (e)(3)(iv)(D) of this section, or its
requirement to follow the presumption rules, if the nonqualified
intermediary, U.S. branch, or flow-through entity can demonstrate to
the satisfaction of the Assistant Commissioner (International) or
his delegate that it is capable of complying with the rules under
chapter 3 of the Internal Revenue Code and any other conditions
required by the Assistant Commissioner (International).

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