Treasury Issues Final Regulations Relating to Withholding and Reporting Tax on Certain U.S. Source Income Paid to Foreign Persons

January 2020

Summary

On January 2, 2020, the Department of the Treasury and the Internal Revenue Service (collectively, Treasury) published in the Federal Register 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 certain U.S.-related payments to certain foreign persons and foreign financial institutions reporting certain U.S. accounts.
 

Details

Some of the key highlights to the final regulations are summarized below.
 
The final regulations largely adopt prior guidance from Notice 2017-46, Notice 2018-20, previously issued proposed regulations and the instructions to the W-8 Forms, in requiring a withholding agent to obtain a foreign taxpayer identification number (foreign TIN) and in the case of an individual account holder, the date of birth, for the withholding agent to treat a beneficial owner withholding certificate provided to document an account that is maintained at a U.S. branch or office of a financial institution as valid. Certain exceptions and special rules apply. See §1.1441-1(e)(2)(ii)(B) for additional details.
 
The final regulations also clarify that the general standards of knowledge that are applicable to withholding agents apply to a nonqualified intermediary (NQI) for reliance on payee documentation for purposes of making the representation that the information on the payees’ withholding certificates is not inconsistent with any other account information the NQI has for purposes of determining the withholding rate applicable to each payee. In addition, the final regulations provide that a NQI 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. See §1.1441-1(e)(3)(iv)(C)(3)(ii) for additional details. These rules also apply to NQI withholding statements associated with withholdable payments under chapter 4 by cross-reference to §1.1441-1(e)(3)(iv)(C)(3). See §1.1471-3(c)(3)(iii)(B)(5).
 
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 in §1.1441-1(e)(4)(i)(B) because 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 §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 §1.1441-1T(e)(4)(i)(B) for Form W-9 is unnecessary and therefore not included in the final regulations.
 
The final regulations adopt the rules already in effect under temporary regulations regarding a withholding agent’s reliance upon withholding certificates and withholding statements furnished through third-party repositories. Also, the final regulations clarify that a separate request and separate authorization to obtain a withholding certificate from a third party repository is not required for each payment made by a withholding agent when the withholding agent is otherwise permitted to rely on the withholding certificate on an obligation-by-obligation basis or as otherwise permitted under §1.1441-1(e)(4)(ix). The final regulations however, were not amended to add an allowance for a withholding agent’s reliance on a Form W-9 obtained from a third-party repository, and taxpayers should continue to refer to the other guidance applicable to reliance on a Form W-9. Additionally, the specific exclusion in §1.1441-1T(e)(4)(iv)(E) for Form W-9 is not included in the final regulations for the same reason that the exclusion for Form W-9 is not included in §1.1441-1(e)(4)(i)(B) discussed above. As the final chapter 4 regulations cross reference the final chapter 3 regulations for when a withholding agent may treat a withholding certificate received from a third party repository as provided by a payee, the above-described modifications to §1.1441-1T(e)(4)(iv)(E) also apply to a withholding certificate or withholding statement relied upon for chapter 4 purposes.
 
The final regulations adopt the standard of knowledge in the chapter 3 temporary regulations for reliance on a treaty’s limitations on benefits (LOB) provision associated with a treaty claim made on a withholding certificate without modification. See §1.1441-6(b)(1)(i) and (ii) for additional details. In addition, the final regulations incorporate the extension for preexisting accounts and extend the time for withholding agents to obtain treaty statements with the specific LOB provisions identified for preexisting accounts to January 1, 2020 (rather than the January 1, 2019, date included in the chapter 3 temporary regulations).
 
The final regulations adopt the 2018 proposed regulations relating to “hold mail” rule. See §1.1441-1(c)(38) for additional details.
 
Lastly, the final regulations make minor technical and conforming updates to the existing chapter 3 and 4 regulations.
 
For dates of applicability, see §§1.1441-1(f)(1) and (3), 1.1441- 2(f)(2), 1.1441-6(i)(1) and (3), 1.1441-7(g), 1.1471-4(j)(2), and 1.6049-6(e).
 
For additional details and rules not discussed in this tax alert, see the final regulations.
 
 

BDO Insights

Withholding agents and foreign financial institutions should review and consider the application of the final regulations to their specific situations.  Please contact an International Tax Specialist if you would like more information regarding the content of this tax alert.
 
 

CONTACT:

 
Joe Calianno
National Tax Office Partner and International Tax Technical Practice Leader
  Monika Loving
Partner and International Tax Practice Leader

 
Brandon Boyle
Principal
  Reese Fredrickson
Partner

 
Annie Lee
Partner
  Chip Morgan
Partner

 
Robert Pedersen
Partner
  Jerry Seade
Principal

 
Natallia Shapel
Partner
  Sean Dokko
National Tax Office Managing Director