Final Regs Address Foreign Withholding Rules

(Parker Tax Publishing January 2020)

The IRS issued final regulations that provide guidance on certain due diligence and reporting rules applicable to persons making certain U.S. source payments to foreign persons, and guidance on certain aspects of reporting by foreign financial institutions on U.S. accounts. The final regulations affect persons making U.S.-related payments to certain foreign persons and foreign financial institutions reporting certain U.S. accounts. T.D. 9890.

Background

In 2018, the IRS issued proposed regulations (REG-132881-17) under chapter 3 (i.e., withholding of tax on nonresident aliens and foreign corporations) and chapter 4 (i.e., taxes to enforce reporting on certain foreign accounts) to reduce the burden under those regulations (the 2018 proposed regulations). The 2018 proposed regulations were in response to Executive Orders 13777 and 13789, which instructed the Treasury Secretary to reduce regulatory burdens on taxpayers. In Prop. Reg. Sec. 1.1441-1(e)(4)(ii)(A)(2) and Prop. Reg. Sec. 1.1441-6(c)(5)(i), the IRS proposed modifications to certain provisions that are also in chapter 3 temporary regulations and the chapter 4 temporary regulations issued in 2017. Some of the proposed modifications relate to the requirement that a withholding certificate or treaty statement, provided with documentary evidence by a treaty claimant that is an entity, identify the applicable limitation on benefits provision that the entity meets in order to be eligible for treaty benefits. Other proposed modifications in Prop. Reg. Sec. 1.1441-1(c)(38) and Prop. Reg. Sec. 1.1471-1(b)(62) and (99), relate to the documentation that a withholding agent may rely on to treat an address provided by an account holder that is subject to a hold mail instruction as a permanent residence address for purposes of an account holder's claim of foreign status or benefits under an income tax treaty.

In early January, the IRS issued T.D. 9890. T.D. 9890 contains final regulations that incorporate the modifications included in the 2018 proposed regulations with respect to those requirements. According to the IRS, the remaining provisions of the 2018 proposed regulations will be finalized in separate guidance at a future date. The following are some of the provisions included in the final regulations.

Requirement for a Withholding Agent to Obtain a Foreign Taxpayer Identification Number and Date of Birth

The final regulations clarify the application of the exception to the requirement that a withholding certificate include a foreign taxpayer identification number (TIN) for an account holder that is a government, international organization, foreign central bank, or resident of a U.S. territory by adding an example specifying that an account holder may claim foreign government status either under Code Sec. 892 or otherwise when the withholding agent may rely upon a claim of exemption either under Reg. Sec. 1.1441-8 (generally on a Form W-8-EXP, Certificate of Foreign Government or Other Foreign Organization for United States Tax Withholding and Reporting) or under Reg. Sec. 1.1441-7 (generally on a Form W-8BEN-E, Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting (Entities)).

The final regulations also clarify the standard of knowledge applicable to a date of birth by providing that a withholding agent may rely on a date of birth provided on a withholding certificate unless it knows or has reason to know that the date of birth is incorrect. This is the same standard of knowledge applicable to foreign TINs. Finally, the final regulations incorporate the allowance in the instructions for Form W-8 that a reasonable explanation may be provided on a separate attached statement associated with the withholding certificate.

Nonqualified Intermediary Withholding Statements

With respect to intermediary withholding statements, the IRS said that it is important that a nonqualified intermediary provide on its withholding statement the recipient category code for each payee. One practitioner noted that nonqualified intermediaries generally do not have familiarity with determining the appropriate chapter 4 recipient code for Form 1042-S reporting purposes because nonqualified intermediaries generally do not file Form 1042-S and the chapter 4 recipient categories listed on Form 1042-S differ from the chapter 4 status categories listed on a Form W-8 that may be provided by a payee. Because a withholding agent making a payment to the nonqualified intermediary is required to file Form 1042-S, the practitioner suggested that the withholding agent is better able to determine the appropriate chapter 4 recipient code than a nonqualified intermediary. Thus, the practitioner recommended that the requirement for chapter 4 recipient codes be eliminated for certain withholding statements or that the IRS provide information on the relationship between chapter 4 recipient status on Forms W-8 and Form 1042-S.

In response, the IRS said that it is important to continue to obtain chapter 4 recipient codes but agreed with the comment that withholding agents may be better able to determine the appropriate chapter 4 recipient code than a nonqualified intermediary. As a result, the final regulations provide that a nonqualified intermediary may provide a withholding statement that does not include a chapter 4 recipient code for one or more payees if the withholding agent is able to determine the appropriate recipient code based on other information included on, or associated with, the withholding statement or that is otherwise contained in the withholding agent's records with respect to the payee. These provisions also apply to nonqualified intermediary withholding statements associated with withholdable payments under chapter 4.

Electronic Signatures for Purposes of Chapters 3 and 4

Temporary regulations issued in 2017 permit a withholding agent to accept an electronically signed withholding certificate if the withholding certificate reasonably demonstrates to the withholding agent that it has been electronically signed by the recipient identified on the form or a person authorized by the recipient to sign the form. The regulation includes an example that illustrates when a withholding agent may treat a withholding certificate as validly signed based on a review of a withholding certificate that reasonably demonstrates that it has been electronically signed (as opposed to appearing to have a typed name as a signature). This provision applies in addition to the allowance provided under Reg. Sec. 1.1441-1(e)(4)(iv) for a withholding agent to establish its own system for a beneficial owner or payee to electronically furnish to the withholding agent (and sign electronically) a Form W-8.

One practitioner requested that the example be removed because it could be interpreted as providing a minimum standard for accepting an electronically signed withholding certificate and may become inconsistent with future changes in technology for providing electronic signatures. Other practitioners also requested that the final regulations allow reliance on an electronically signed Form W-9 (Request for Taxpayer Identification Number and Certification), and one practitioner requested that a withholding agent be permitted to rely on a withholding certificate collected through an electronic system maintained by a nonqualified intermediary or flow-through entity if the nonqualified intermediary or flow-through entity provides a written statement confirming that the electronic system meets the requirements of Reg. Sec. 1.1441-1(e)(4)(iv), as described in Notice 2016-8.

The example is retained in the final regulations. However, to provide additional flexibility, the final regulations permit a withholding agent to consider, in addition to the withholding certificate itself, other documentation or information the withholding agent has that supports that a withholding certificate was electronically signed, provided that the withholding agent does not have actual knowledge that the documentation or information is incorrect. The final regulations do not add a specific allowance for Form W-9 because, the IRS said, rules regarding reliance on an electronically signed Form W-9 are provided in separate guidance, such as the Requestor Instructions to Form W-9. Additionally, in light of the general rule in Reg. Sec. 1.1441-1(e)(4) that provides that the rules in such paragraph are applicable to Form W-8, Form 8233, and certain documentary evidence, the specific exclusion in Reg. Sec. 1.1441-1T(e)(4)(i)(B) for Form W-9 is unnecessary and therefore not included in the final regulations.

For a discussion of the requirements for withholding on payments to nonresident aliens and foreign entities, see Parker Tax ¶202,100.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

Parker Tax Pro Library - An Affordable Professional Tax Research Solution. www.parkertaxpublishing.com

We hope you find our professional tax research articles comprehensive and informative. Parker Tax Pro Library gives you unlimited online access all of our past Biweekly Tax Bulletins, 22 volumes of expert analysis, 250 Client Letters, Bob Jennings Practice Aids, time saving election statements and our comprehensive, fully updated primary source library.

Try Our Easy, Powerful Search Engine

A Professional Tax Research Solution that gives you instant access to 22 volumes of expert analysis and 185,000 authoritative source documents. But having access won’t help if you can’t quickly and easily find the materials that answer your questions. That’s where Parker’s search engine – and it’s uncanny knack for finding the right documents – comes into play

Things that take half a dozen steps in other products take two steps in ours. Search results come up instantly and browsing them is a cinch. So is linking from Parker’s analysis to practice aids and cited primary source documents. Parker’s powerful, user-friendly search engine ensures that you quickly find what you need every time you visit Our Tax Research Library.

Dear Tax Professional,

My name is James Levey, and a few years back I founded a company named Kleinrock Publishing. I started Kleinrock out of frustration with the prohibitively high prices and difficult search engines of BNA, CCH, and RIA tax research products ... kind of reminiscent of the situation practitioners face today.

Now that Kleinrock has disappeared into CCH, prices are soaring again and ease-of-use has fallen by the wayside. The needs of smaller firms and sole practitioners are simply not being met.

To address the problem, I’ve partnered with a group of highly talented tax writers to create Parker Tax Publishing ... a company dedicated to the idea that comprehensive, authoritative tax information service can be both easy-to-use and highly affordable.

Our product, the Parker Tax Pro Library, is breathtaking in its scope. Check out the contents listing to the left to get a sense of all the valuable material you'll have access to when you subscribe.

Or better yet, take a minute to sign yourself up for a free trial, so you can experience first-hand just how easy it is to get results with the Pro Library!

Sincerely,

James Levey

Parker Tax Pro Library - An Affordable Professional Tax Research Solution. www.parkertaxpublishing.com