SUMMARY: This document contains final regulations relating to the 
withholding of income tax under sections 1441, 1442, and 1443 on 
certain U.S. source income paid to foreign persons, the related tax 
deposit and reporting requirements under section 1461, and the related 
requirements governing collection, refunds, and credits of withheld 
amounts under sections 1461 through 1463 and sections 6402 and 6413. 
Additionally, this document contains final regulations relating to the 
statutory exemption under sections 871(h) and 881(c) for portfolio 
interest. This document removes temporary employment tax regulations under the 
Interest and Dividend Compliance Act of 1983 and amends existing 
regulations under sections 6041A and 6050N. This document finalizes 
changes to the proposed regulations contained in project number INTL-
52-86, published on February 29, 1988, under sections 6041, 6042, 6044, 
6045, and 6049. This document also finalizes proposed regulations 
contained in project number IA-33-95, published on December 21, 1995 , 
relating to the effective date of certain temporary employment tax 
regulations. This document finalizes related changes to the regulations 
under sections 163(f), 165(j), 3401, 3406, 6109, 6114, 6413, and 6724. 
This document removes certain regulations under income tax treaties.

EFFECTIVE DATES: These regulations are effective January 1, 1999, 
except the addition of Sec. 31.9999-0, the removal of Sec. 35a.9999-0T 
and the addition of Sec. 35a.9999-0, which are effective October 14, 
1997.

FOR FURTHER INFORMATION CONTACT: Lilo Hester or Teresa Burridge Hughes, 
telephone (202) 622-3840 (not a toll-free number), for questions on the 
regulations generally; Carl Cooper, telephone (202) 622-3840 (not a 
toll-free number), for questions on portfolio interest and qualified 
intermediary agreements; Renay France, telephone (202) 622-4940 (not a 
toll-free number), for questions on the regulations relating to chapter 
61 of the Internal Revenue Code or section 3406.

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collections of information contained in these final regulations 
have been reviewed and approved by the Office of Management and Budget 
in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507) 
under control number 1545-1484. Responses to these collections of 
information are required to obtain a benefit (to claim an exemption to, 
or a reduction in, the withholding tax), and to facilitate tax 
compliance (to verify entitlement to an exemption or a reduced rate).
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless the collection of 
information displays a valid OMB control number.
    The estimate of the reporting burden in these final regulations 
will be reflected in the burdens of Forms W-8, 1042, 1042S, 8233, 8833, 
and the income tax return of a foreign person filed for purposes of 
claiming a refund of tax.
    Comments concerning the accuracy of this burden estimate and 
suggestions for reducing the burden should be sent to the Internal 
Revenue Service, Attn: IRS Reports Clearance Officer, T:FP, Washington, 
DC 20224, and to the Office of Management and Budget, Attn: Desk 
Officer for the Department of the Treasury, Office of Information and 
Regulatory Affairs, Washington, DC 20503.
    Books or records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.

Background

    This document contains final amendments to the Income Tax 
Regulations (CFR parts 1, 31, 35a and 301) under sections 163(f), 
165(j), 871, 881, 1441, 1442, 1443, 1461, 1462, 1463, 3401, 3406, 6041, 
6041A, 6042, 6045, 6049, 6050A, 6050N, 6109, 6114, 6402, 6413, and 6724 
of the Internal Revenue Code (Code) . This document also removes 
certain regulations under income tax treaties.
    On April 15, 1996, (61 FR 17614) the IRS and Treasury published a 
notice of proposed rulemaking under a number of sections of the Code, 
dealing with the withholding of tax under section 1441, 1442, or 1443 
on amounts paid to foreign persons, procedures for claiming foreign 
status to avoid backup withholding under section 3406 on certain 
payments, and the reporting to the IRS of payments to foreign persons. 
Reporting to the IRS may be required under sections 6011 and 1461 or 
under the reporting provisions of chapter 61 of the Code, such as 
sections 6041, 6041A, 6042, 6044, 6045, 6049, 6050A, or 6050N, (the 
Form 1099 reporting provisions). Comments responding to the notice were 
received and a public hearing was held on July 24, 1996. After 
considering the comments submitted in writing and at the hearings, the 
proposed regulations are adopted as revised by this Treasury decision. 
The revisions are discussed below.
    Payments to domestic and foreign persons create a number of 
withholding and information reporting obligations for both the payor 
and the recipient of these payments under various provisions of the 
Code. These procedures are important to the operation of IRS matching 
systems. Those systems are part of a compliance program that allows the 
IRS to match information provided by payors with income reported on a 
payee's income tax return and help detect U.S. taxpayers that fail to 
file returns or underreport income. The withholding of tax at source 
and the reporting of payments to foreign persons are also important to 
insure that foreign persons comply with their U.S. tax obligations. The 
final regulations contained in this document deal mostly with payments 
to foreign persons, and the U.S. income tax liability resulting from 
such payments.
    Under sections 871(a) and 881(a) of the Code, nonresident alien 
individuals and foreign corporations are subject to a 30-percent tax on 
most items of income they receive from sources within the United States 
that are not effectively connected with the conduct of a trade or 
business in the United States. Income taxable under these provisions 
includes interest, dividends, royalties, compensation, other fixed or 
determinable annual or periodical (FDAP) income and certain gains. The 
tax liability imposed under sections 871(a) and 881(a) is generally 
collected by way of withholding at source under chapter 3 of the Code 
pursuant to section 1441(a) (for payments to nonresident alien 
individuals and foreign partnerships), section 1442(a) (for payments to 
foreign corporations), or section 1443(a) (for payments of certain 
income to foreign tax-exempt entities). Other special withholding 
provisions apply under section 1443(b) (dealing with the withholding of 
the 4-percent tax imposed under section 4948), section 1445 (dealing 
with gains from the disposition of U.S. real property) and section 1446 
(dealing with effectively connected income of foreign partners in a 
partnership). The tax liability imposed under sections 871, 881, 1441, 
1442, and 1443 also extends to payments to other foreign persons, 
including foreign trusts and estates.
    The 30-percent rate is often reduced under the Code or an income 
tax treaty. Under current regulations, a withholding agent may 
generally rely on a statement furnished by, or for, the beneficial 
owner certifying eligibility for a reduced rate. The procedural 
requirements for claiming a reduced rate of withholding may vary 
depending upon the type of income, the status of the taxpayer, or 
whether an income tax treaty applies. For example, the portfolio 
interest exception under sections 871(h) and 881(c) for U.S. interest 
on an obligation in registered form is conditioned upon the beneficial 
owner of the interest providing a statement of foreign status to the 
U.S. withholding agent, which can be provided on a Form W-8. See Sec. 35a.9999-5(b), A-9. If a reduction is 
claimed under an income tax treaty, the withholding agent may generally 
rely on a Form 1001 provided by, or for, the beneficial owner claiming 
residence in a treaty country. For dividends, however, the current 
rules do not require certification of foreign status in order to obtain 
a reduced rate of withholding at source under an income tax treaty. 
Instead, the withholding agent may generally rely on the address of the 
payee and grant a reduced rate of withholding at source if the 
recipient's address is in a treaty country.
    A withholding agent is generally required to file an annual income 
tax return on Form 1042 to report amounts upon which an amount was 
actually withheld under chapter 3 of the Code or would have been 
required to be withheld but for an exemption under the regulations, or 
an income tax treaty. An information return on a Form 1042-S must be 
attached to the Form 1042 and must report each recipient's name and 
address, amounts paid, and amounts withheld, if any. See Sec. 1.1461-2 
(b) and (c).
    A payor making payments to foreign persons must also be aware of 
the information reporting provisions under chapter 61 of the Code and 
of other withholding regimes, such as section 3406 (backup 
withholding), section 3402 (wage withholding), and section 3405 
(withholding on pensions, annuities, etc.). Payors subject to these 
reporting and withholding rules include both U.S. persons and foreign 
persons, subject to certain exceptions. Under chapter 61 of the Code, 
many types of payments, such as interest, dividends, royalties, broker 
proceeds, etc. (reportable payments) must be reported on a Form 1099 if 
paid to certain U.S. persons. The form is filed with the IRS and a copy 
is furnished to the recipient of the payment. In addition, section 3406 
requires those same U.S. payees to furnish a taxpayer identifying 
number (TIN) to the payor, generally on a Form W-9, and, for reportable 
interest and dividends, a certification that the payee is not subject 
to notified payee underreporting. Failure to provide a TIN would 
generally require the payor to backup withhold on the payment at the 
rate of 31-percent. A payor that fails to obtain a TIN or other 
required information in the manner required or to backup withhold when 
required under section 3406 may also be liable, under section 3403, for 
interest and penalties, in addition to any amount that should have been 
withheld under section 3406.
    Payments to foreign persons are exempt from Form 1099 information 
reporting and backup withholding. However, the exemption is generally 
conditioned upon the recipient furnishing a certificate supporting its 
foreign status. The existing regulations under the information 
reporting provisions of chapter 61 contain guidance to help payors 
determine when payments are made to a foreign person. Generally, 
depending upon the type of payment involved, a payor may rely on a 
certification of foreign status made on Form W-8, Form 1001, Form 4224, 
or, in the case of certain payments outside the United States, on 
alternative evidence of foreign status. See, for example, 
Sec. 35a.9999-3, A-34. Therefore, even if an amount paid to a foreign 
person is exempt from withholding under chapter 3 of the Code (e.g., 
gain from the sale of securities), a payor must nevertheless comply 
with specified certification procedures in order to avoid being subject 
to penalties for failure to comply with the information reporting and 
the backup withholding procedures (only amounts subject to reporting 
under the Form 1099 reporting provisions are subject to backup 
withholding under section 3406; see section 3406(b) and 
Sec. 31.3406(a)-1(a) and, for example, Sec. 31.3406(b)(2)-1(a)).
    As explained in the preamble to the proposed regulations, the IRS 
and Treasury have reviewed the current withholding and reporting 
procedures applicable to cross-border payment flows and have concluded 
that changes are necessary to accommodate the size and growth of 
international financial markets. The IRS and Treasury have concluded 
that allowing the benefit of the reduced rate at source, rather than 
through a refund procedure, continues to be desirable. A regime based 
on reduction of withholding at source avoids the administrative costs 
and delays that can occur when applying for a refund of overwithheld 
amounts. This regime, however, depends on withholding agents performing 
important compliance functions. They must obtain documentation 
substantiating claims of foreign status and of reduced rates of 
withholding and must provide information to the IRS.
    One of the important objectives of the revisions is to eliminate 
unnecessary burdens that the lack of standardization and coordination 
of current procedures may impose on withholding agents. While it is 
unavoidable that different information be required for different types 
of income or recipients, the forms currently in use apply different 
standards of proof and are not uniform in the manner in which the 
information is furnished to withholding agents. The final regulations 
unify the documentation requirements and seek to facilitate compliance 
by clarifying uncertainties that may exist under current rules (e.g., 
the scope of due diligence standards imposed on withholding agents).
    These regulations also address important issues relating to 
payments to intermediaries (e.g., nominees, agents, etc.), including 
whether intermediaries should certify status on behalf of beneficial 
owners and, if so, how. Intermediary procedures under current rules 
have proved difficult to implement in a number of cases. In particular, 
U.S. source interest on obligations in registered form do not qualify 
as portfolio interest under sections 871(h) and 881(c) unless the U.S. 
withholding agent receives a statement that the beneficial owner of the 
obligation is not a U.S. person (see section 871(h)(2)(B)(ii)). When 
the payment is made to a foreign person acting as an intermediary on 
behalf of the beneficial owner or of other intermediaries, the current 
regulations require that the beneficial owner certification be passed 
up through the chain of intermediaries to the U.S. withholding agent. 
See Sec. 35a.9999-5(b), A-9. The final regulations offer alternative 
procedures and respond to the concerns expressed by various 
representatives of the financial community regarding compliance costs.
    The final regulations are also responsive to the Congressional 
mandate in section 342 of the Tax Equity and Fiscal Responsibility Act 
of 1982 (TEFRA) that Treasury consider a range of options for replacing 
the address/self-certification method of administering income tax 
treaty benefits. The IRS and Treasury have studied several options for 
improving the withholding procedures to respond to this mandate, 
including a system of certification of residence in a treaty country 
and refund systems. At hearings held in February of 1985 on proposed 
regulations issued in 1984 under section 1441, comments from the public 
and several U.S. treaty partners made it apparent that certification 
requirements, as proposed, would create too many administrative 
problems for payments made through nominees. The final regulations 
reflect these comments. The procedures adopted for documenting 
eligibility for benefits under tax treaties are similar to those 
applicable to portfolio interest on obligations in registered form.
    Streamlining the current procedures and implementing workable 
intermediary certification procedures represent a substantial simplification and reduction of burden. The IRS 
and Treasury expect that this, in turn, should result in greater 
compliance and improve the ability of withholding agents and the IRS to 
detect abusive claims of foreign status or of benefits under U.S. 
income tax treaties or under the Code.
    On December 21, 1995, at 60 FR 66243, a notice of proposed 
rulemaking (IA-33-95) was published proposing to add Sec. 31.9999-0. 
This document finalizes the proposed regulations. The effective date of 
this addition is October 14, 1997.

Explanation of Provisions and Revisions

A. Comments and Changes to Sec. 1.871-14 and Related Reporting 
Requirements Under Section 6049

    Consistent with the proposed regulations, the final regulations 
incorporate without substantive changes the relevant provisions from 
the existing temporary regulations implementing the repeal of the 30-
percent tax on portfolio interest (Questions and Answers Relating to 
the Repeal of 30-percent Withholding by Section 127 of the Tax Reform 
Act of 1984 and to the Application of Information Reporting and Backup 
Withholding in Light of such Repeal). These provisions deal with bearer 
obligations, convertible obligations, and pass-through certificates. 
Section 1.871-14(b)(1) incorporates the provisions in Sec. 35a.9999-
5(a), A-1 and the rules in Sec. 5f.103-1(c) defining a bearer 
obligation. It also reflects the rules in Sec. 5f.103-1(c) regarding 
obligations in registered form that are convertible into bearer form. 
At the request of commentators, the definition of an obligation in 
registered form contained in Sec. 5f.103-1(c) is restated in 
Sec. 1.871-14(c)(1)(i). The definition restates the rules in 
Sec. 35a.9999-5(c), A-18, regarding the effect of convertibility 
features on the status of an obligation as an obligation in bearer or 
registered form. Further, at the request of commentators, the 
provisions in Sec. 35a.9999-5(b), A-12 through 15 regarding obligations 
issued in registered form and targeted to foreign markets are retained 
without substantive changes. Comments received from U.S. agencies and 
instrumentalities indicate that they have relied on these procedures in 
the past and that they plan to do so again.
    One commentator requested additional clarifications under 
Sec. 1.165-12(c). In response to these comments, the $1 million minimum 
denomination requirement under Sec. 1.165-12(c)(1)(ii) is eliminated in 
order to conform that provision to Sec. 1.165-12(c)(3)(iii). In 
addition, in Sec. 1.165-12(c), the term United States is replaced with 
the term United States and its possessions to coordinate the provisions 
with Sec. 1.163-5(c)(2)(i) (C) and (D). In Sec. 1.165-12(c)(1)(iii), a 
provision was added to explain that a holder delivering a bearer 
obligation to a financial institution or exempt organization may rely 
on a written statement furnished by the institution or organization. 
Further, although the commentator suggested adding a sentence to 
Sec. 1.165-12(c)(1) to clarify that each of paragraphs (i) through 
(iii) must be satisfied in order to avoid holder sanctions, this change 
is unnecessary because the need to meet all of the requirements in each 
of these clauses is sufficiently clear. The commentator proposed 
various changes to the rules governing the foreign targeting of bearer 
obligations on original issuance. However, the final regulations do not 
address these changes which are outside the scope of this project.
    The proposed regulations regarding the certification requirements 
for obligations in registered form are finalized without substantive 
changes. As in the proposed regulations, a TIN is not required to be 
stated on a Form W-8 used to claim the benefit of the portfolio 
interest exemption, regardless of whether the debt obligation is 
publicly traded.
    Several commentators have asked that, in the case of portfolio 
interest on obligations in registered form, the provisions dealing with 
late-received documentation be conformed to similar provisions under 
proposed Sec. 1.1441-1(f)(5). Under proposed Secs. 1.871-14(c)(3) and 
1.1441-1(f)(5), the failure to timely receive appropriate documentation 
(i.e., in most cases, a Form W-8) may be cured by obtaining the 
documentation later. Under the proposed regulations, the cure 
procedures apply for purposes of withholding under section 1441 and for 
purposes of meeting the requirement under sections 871(h) and 881(d) 
that the U.S. withholding agent receive a statement. However, proposed 
Sec. 1.871-14(c)(3) requires that the documentation be received before 
the expiration of the limitations period of the beneficial owner. In 
contrast, proposed Sec. 1.1441-1(f)(5) requires that the documentation 
be received before the expiration of the limitations period of the 
withholding agent. Commentators have asked that the relevant 
limitations period for qualifying interest as portfolio interest under 
sections 871(h) and 881(d) be that of the withholding agent and not of 
the beneficial owner. This comment is not adopted because of the 
special conditions for interest to qualify as portfolio interest. Under 
section 871(h)(2)(B)(ii), interest on an obligation in registered form 
is portfolio interest only if the U.S. withholding agent receives a 
statement that the beneficial owner of the obligation is not a U.S. 
person. The legislative history to the amended provisions (see section 
1810(d)(3)(B) of the Tax Reform Act of 1986 (Public Law 99-514)) 
specifies that the statement may be received late, but no later than 
the expiration of the beneficial owner's statute of limitation. This 
indicates that, if the required statement is received after the 
beneficial owner's statute of limitation has expired, the interest can 
no longer qualify as portfolio interest. Although the withholding agent 
is permitted to receive documentation at any time within its own 
limitations period and establish an applicable reduction in the 
withholding rate after the fact (e.g., under an income tax treaty), 
such cure procedure is not effective to confer portfolio interest 
status to the interest if it occurs after the beneficial owner's 
statute of limitations has expired. A cross-reference to Sec. 1.1441-
1(b)(7) (i.e., proposed Sec. 1.1441-1(f)(5) as renumbered under the 
final regulations) is included in Sec. 1.871-14(c)(3) to clarify the 
difference between the two cure procedures.

B. Comments and Changes to Sec. 1.1441-1

1. Coordination With Other Withholding and Information Reporting 
Provisions
    Commentators noted that withholding and information reporting 
requirements applicable to payments to foreign persons are governed by 
a complex web of statutory provisions and that the relationship of 
these provisions among themselves may be difficult to understand. In 
response to these comments, a number of changes have been made to help 
payors and their advisers locate relevant guidance.
    As suggested, the table of contents in Sec. 1.1441-0 has been 
expanded. Section 1.1441-1(b) (4) and (5) has been added to provide an 
overview of how the withholding and reporting procedures under chapter 
3 of the Code relate to the information reporting provisions under 
chapter 61 of the Code and other withholding regimes under sections 
3402 (wage withholding), 3405 (withholding on pensions, annuities, 
etc.), and 3406 (backup withholding). Provisions explaining the 
interaction of applicable withholding and reporting provisions in the case of payments 
to foreign intermediaries or foreign partnerships have been added also. 
See explanation of those rules, under the heading ``Clarification of 
Reporting and Withholding Obligations for Payments to and by Foreign 
Intermediaries'' of this preamble. Where appropriate, additional cross 
references to chapter 61 and to sections 3402, 3405, and 3406 have been 
added in Sec. 1.1441-1 and cross-references in regulations under 
sections 3402, 3405 and 3406 have also been added.
    As a general matter, a withholding agent (whether U.S. or foreign) 
must ascertain whether the payee is a U.S. or a foreign person. If the 
payee is a U.S. person, the withholding provisions under chapter 3 of 
the Code do not apply; however, information reporting under chapter 61 
of the Code may apply; further, if a TIN is not furnished in the manner 
required under section 3406, backup withholding may also apply. If the 
payee is a foreign person, however, the withholding provisions under 
chapter 3 of the Code apply instead. To the extent withholding is 
required under chapter 3 of the Code, or is excused based on 
documentation that must be provided, none of the information reporting 
provisions under chapter 61 of the Code apply, nor do the provisions 
under section 3406. If, however, withholding under chapter 3 of the 
Code does not apply irrespective of documentation (e.g., in the case of 
foreign source income or gross proceeds dealt with under section 6045), 
documentation may nevertheless have to be furnished to the withholding 
agent under the provisions of chapter 61 of the Code in order to be 
excused from Form 1099 information reporting and, possibly, from backup 
withholding under section 3406. Determinations of payee's status are 
generally made at each level of the chain of payment, until, 
ultimately, the payment is made to the beneficial owner. The following 
example illustrates how these rules interact under the final 
regulations.
    For example, assume that a U.S. bank acting as a paying agent of a 
U.S. issuer of an obligation pays interest to a U.S. brokerage firm. 
Chapter 3 withholding does not apply to that payment because the payee 
is a U.S. person. Form 1099 information reporting under section 6049 is 
not required because the brokerage firm is an exempt recipient (i.e., a 
securities dealer), meaning that it is exempt from having the payment 
reported on a Form 1099. See Sec. 1.6049-4(c)(1)(i). The U.S. brokerage 
firm may or may not have to provide a Form W-9 to the U.S. bank to 
establish its exempt recipient status depending on whether it meets one 
of the ``eyeball'' tests under Sec. 1.6049-4(c)(1)(ii). Assume further 
that the U.S. brokerage firm credits the interest to the account of a 
customer. If the brokerage firm does not hold a Form W-9 (or a Form W-
8) and cannot otherwise ascertain the exempt recipient status of the 
customer under Sec. 1.6049-4(c)(1)(ii), it is required to backup 
withhold 31-percent under section 3406. See Sec. 31.3406(a)-1(b). If it 
determines that the customer is a U.S. person (e.g., the firm holds a 
Form W-9 for the customer), then chapter 3 does not govern the payment. 
Instead, the payment is governed by sections 3406 and 6049. If, 
however, the U.S. brokerage firm determines that the customer is a 
foreign person (e.g., it holds a valid Form W-8), then chapter 3 
governs the payment and the payment is not reportable for purposes of 
section 6049, meaning that it is also not subject to backup withholding 
under section 3406. Thus, Form 1042 reporting and withholding at a 30-
percent rate are required unless the income is exempt under the Code or 
an income tax treaty. For example, if the interest is of a kind that 
may qualify as portfolio interest, then withholding is excused if the 
brokerage firm holds a valid Form W-8 from the customer (but would 
still be reportable on Form 1042-S).
    If the payment to the customer is an amount exempt from withholding 
under chapter 3 of the Code without the need to furnish documentation 
(e.g., foreign source interest income), documentation may nevertheless 
be required for purposes of chapter 61 of the Code. In this example, 
the U.S. brokerage firm must report the payment of foreign source 
interest on a Form 1099 unless the customer is an exempt recipient or 
is a foreign person. If the customer's status as an exempt recipient 
cannot be ascertained on an ``eyeball'' basis under Sec. 1.6049-
4(c)(1)(ii), the brokerage firm must obtain a Form W-9 or a Form W-8 
from the customer. If the documentation that the brokerage firm 
receives reliably indicates an exempt recipient or foreign status, no 
information reporting or withholding is required. If documentation is 
not obtained or is not reliable, Form 1099 information reporting is 
required under section 6049 and backup withholding is required under 
section 3406.
    Assume, however, that the customer is not the beneficial owner of 
the payment of U.S. and foreign source interest income. Instead, it is 
a foreign bank acting on behalf of the beneficial owner. With respect 
to the payment that is U.S. source interest, the brokerage firm would 
be permitted to pay the interest free of withholding (assuming it would 
qualify as portfolio interest if appropriate documentation were 
received) if it held a Form W-8 (or alternative documentary evidence) 
from the ultimate beneficial owner that is transmitted by the foreign 
bank or if it held a Form W-8 from the foreign bank as a qualified 
intermediary who, under the final regulations, is permitted to certify 
on behalf of its own customer. See Sec. 1.1441-1(e)(5). In either case, 
the brokerage firm must report the payment on a Form 1042 and must also 
make an information return on Form 1042-S. The Form 1042-S must state 
the name of the beneficial owner as shown on the Form W-8 (or 
alternative documentary evidence) or the name of the foreign bank if 
the bank is a qualified intermediary.
    Continuing with the same example, the foreign bank also has 
obligations under sections 1441, 6049, and 3406 when it, in turn, makes 
a payment to its own customer. However, to the extent it received a 
valid Form W-8 (or alternative documentary evidence) from the 
beneficial owner and furnished a copy to the U.S. brokerage firm (or 
complied with the documentation requirements as a qualified 
intermediary), it would meet its obligation under applicable 
withholding and reporting provisions and, accordingly, would be exempt 
from withholding any amount from the payment and from reporting the 
payment. See Secs. 1.1441-1(b)(6) and 1.6049-5(b)(14).
    With respect to the foreign source interest paid to the foreign 
bank acting as an intermediary, the only requirement imposed on the 
U.S. brokerage firm is to obtain the Form W-8 of the foreign bank (and 
not of the beneficial owner). Because the exemption sought by the 
foreign bank is an exemption from Form 1099 information reporting and 
backup withholding, the foreign bank may do so by establishing its 
foreign status with a Form W-8 or by establishing its status as an 
exempt recipient. Under the final regulations, a foreign bank's status 
as an exempt recipient can be established on an ``eyeball'' test basis 
if the bank s name reasonably indicates that it is a bank. However, as 
is the case for U.S. income subject to chapter 3 withholding, the 
foreign bank, acting as an agent for its own customer, may be required 
to report the foreign source payment under section 6049 and to backup 
withhold under 3406 when it, in turn, pays the amount to its customer 
if the foreign bank is a U.S. payor (e.g., it is a controlled foreign 
corporation). If it is not a U.S. payor or a U.S. middleman, it has no withholding or reporting obligations under chapter 3 of the 
Code due to the nature of the payment (i.e., foreign source income), 
unless it makes the payment in the United States. If the foreign bank 
makes a payment to its customer in the United States, then the payment 
is reportable under section 6049 and the bank must obtain a Form W-8 or 
a Form W-9 from its customer, unless the exempt status of the customer 
can be established on an ``eyeball'' basis. If the customer is a U.S. 
person who is not an exempt recipient, the bank must report the payment 
on a Form 1099 and, if the customer has not provided a Form W-9 as 
required under section 3406, backup withholding is required. The 
provisions of Sec. 1.6049-5(b)(14) do not apply to exempt the foreign 
bank from its reporting and withholding obligations because it has not 
provided the required documentation to the U.S. withholding agent or 
certified on behalf of the beneficial owner.
    These examples are illustrative only. Different rules may apply 
depending upon a number of factors, the most significant being the 
nature of the payment (FDAP or not FDAP, U.S. source or foreign 
source), the status of the payor (U.S. or foreign), the status of the 
payee (U.S. or foreign, beneficial owner or intermediary), where the 
payment is made (in the U.S. or outside the U.S.), and where the 
account is held (on-shore or offshore).
2. U.S. Agent of Foreign Person
    Under the proposed regulations, a payment to a U.S. person gives 
rise to withholding liability if the payor has actual knowledge that 
the U.S. person is acting as an agent for a foreign person. 
Commentators suggested that the withholding liability should be imposed 
on the last U.S. person who makes the payment to a foreign person. At a 
minimum, commentators asked that the final regulations limit the 
obligation to withhold to situations where the withholding would seem 
jeopardized. This comment is accepted. Under the final regulations, a 
U.S. person making a payment to a U.S. financial institution is not 
required to withhold even if it knows that the payee is collecting the 
payment for a foreign person, if the U.S. person has no reason to 
believe that the financial institution will not comply with its 
obligation to withhold when it makes the payment to the foreign person. 
See Sec. 1.1441-1(b)(2)(ii).
3. Payments to Wholly-Owned Entities
    The final regulations under Sec. 1.1441-1(b)(2)(iii) provide 
guidance on applicable withholding procedures for payments to a 
domestic or foreign wholly-owned entity that is disregarded for federal 
tax purposes (i.e., treated as a branch of its single owner) under 
Sec. 301.7701-1(c)(2). As a general rule, a payment to a disregarded 
wholly-owned entity is treated as a payment to its owner. Thus, for 
example, if a foreign person owns a domestic disregarded entity, a 
person making a payment to the disregarded entity is treated as the 
withholding agent because the owner is a foreign person. However, 
because the fact that the entity is disregarded for tax purposes 
generally may not be apparent to a person making a payment to the 
entity, the person making the payment can rely on documentation 
received from the recipient to determine its withholding and reporting 
obligations. Thus, if the person receives a Form W-9 from the entity 
representing that the recipient is a domestic corporation, the person 
may rely on the form to treat the entity as a U.S. person unless it has 
actual knowledge or reason to know that the representation is 
incorrect. If the entity is a wholly-owned entity disregarded for 
federal tax purposes, then it must furnish documentation representing 
the status of its owner. For example, if the disregarded domestic 
entity is owned by a foreign person, it must furnish a Form W-8 from 
its single owner. In that case, a person making a payment to the entity 
may rely on the Form W-8 that the entity provides for its foreign owner 
and comply with withholding and reporting requirements accordingly. A 
domestic disregarded entity that does not furnish a certificate is 
subject to Form 1099 information reporting on payments that are 
reportable and subject to backup withholding under section 3406 
because, lacking the words ``inc.'', ``incorporated'', ``corp.'' or 
``corporation'' in its name, it could not be treated as an exempt 
recipient on an ``eyeball'' basis. If the entity had one of these words 
in its name, it would be a per se corporation for U.S. tax purposes 
because any of these words would indicate that the entity is organized 
under a corporate statute; thus, it could not be a disregarded entity. 
The TIN to be stated on the Form W-9 or the Form W-8, if required, is 
that of the single owner and not that of the disregarded entity.
    Different documentation procedures apply if the benefit of a 
reduced rate is claimed under an income tax treaty and the entity is 
not treated as fiscally transparent in the applicable treaty 
jurisdiction. See Secs. 1.1441-6(b)(4) and 1.894-1T(d).
4. Payments to U.S. Branches of Foreign Institutions
    Commentators also suggested that a payment to a U.S. branch of a 
foreign bank or other financial institution should not be subject to 
withholding. Instead, the U.S. branch should be responsible for 
withholding when it makes the payment to the foreign person. In 
addition, commentators have asked that the regulations eliminate the 
requirement for a U.S. branch to furnish a certificate representing 
that the payment it receives is effectively connected with the conduct 
of a U.S. trade or business. In response to these comments, the rules 
governing payments to the U.S. branch of certain foreign financial 
institutions have been modified to alleviate the certification burden 
for those U.S. branches that operate in a manner equivalent to U.S. 
companies.
    Therefore, Sec. 1.1441-4(a)(2)(ii) of the final regulations 
provides that a payment to a U.S. branch of either a foreign financial 
institution that is registered with the Federal Reserve Board or of a 
foreign insurance company that is required to file an annual ``NAIC'' 
statement with a State Insurance Commissioner is presumed to be a 
payment of effectively connected income for withholding purposes. 
Section 1.1441-1(b)(2)(iv) has been added to provide that a U.S. branch 
may rebut this presumption by furnishing a Form W-8 to the withholding 
agent certifying that the payment that it receives is not effectively 
connected with its conduct of a U.S. trade or business. For a 
description of the form that a U.S. branch must furnish, see 
Sec. 1.1441-1(e)(3)(v). Under the final regulations, the U.S. branch 
that furnishes a Form W-8 may agree with the withholding agent to 
assume responsibility for all withholding and reporting obligations for 
the payments it receives from the withholding agent. In the absence of 
such an agreement, the withholding agent remains responsible for the 
withholding and reporting obligations associated with the payment. This 
means, for example, that, if the U.S. branch receives the payment on 
behalf of its home office and the home office is covered by a qualified 
intermediary agreement that the IRS has concluded with the foreign 
financial institution, the U.S. branch must give to the withholding 
agent the home office's Form W-8. If the branch receives the payment 
for its own customers, it must give to the withholding agent all of the 
required certificates for its customers.
    Similar withholding procedures are available to other U.S. branches 
to the extent permitted by the district director or the Assistant Commissioner 
(International). Procedures for obtaining such permission existed under 
prior regulations under Sec. 1.1441-4(f). These provisions are restated 
in Sec. 1.1441-1(b)(2)(iv)(E) of the final regulations.
    The final regulations do not eliminate the requirement to report on 
a Form 1042 or 1042-S payments to these branches, including payments 
for which the branch has assumed withholding and reporting 
responsibility. In such a case, however, the reporting is made to the 
branch as recipient of the amount for which it has assumed withholding 
responsibility rather than to the beneficial owner. See Sec. 1.1461-
1(b)(2)(vi) and (c)(4)(v). Although commentators asked that these 
reporting requirements be eliminated for payments of effectively 
connected income, the IRS and Treasury believe that the reporting 
serves an important compliance function.
5. Beneficial Owner
    The definition of the term beneficial owner is clarified to 
indicate that ownership is determined on the basis of existing 
principles governing the determination of tax ownership, including 
substance-over-form principles, such as those reflected in section 
7701(l) dealing with conduit transactions. The special definition of 
beneficial owner in proposed Sec. 1.1441-1(c)(6)(ii)(B) for purposes of 
tax treaties has been eliminated. See the explanation below under 
Sec. 1.1441-6 for claims of tax treaty-reduced rates for payments to 
entities that are treated as fiscally transparent in the U.S. or in the 
applicable treaty jurisdiction, or both.
6. Forms
    a. Format and Design. Many comments were received regarding the 
format and design of the revised Form W-8. In particular, several 
commentators suggested that the IRS retain separate forms for 
effectively connected income and payments to foreign governments. The 
IRS is considering these comments and agrees that it may be more 
convenient to keep certain forms separate from the basic beneficial 
owner Form W-8. The revised forms will be released for public comments 
before they are finalized.
    b. Content of Forms. The final regulations are modified in several 
respects regarding the Form W-8. A Form W-8 furnished by the beneficial 
owner is generally payee-specific and applies to all income received 
from the withholding agent to whom furnished, except to the extent 
provided in forms and instructions (e.g., effectively connected 
income). See Sec. 1.1441-1(e)(2)(i). Entitlement to different types of 
reduced rates may require different types of information or 
representations on a Form W-8. For example, entitlement to exemption 
from withholding on portfolio interest requires only proof of foreign 
status. Claims of treaty benefits may require a certified TIN (that is, 
a TIN that the IRS has certified as belonging to a person who is a 
resident of a country with which the U.S. has an income tax treaty in 
effect; see Sec. 1.1441-6(c) for procedures to have a TIN certified by 
the IRS). A withholding agent is responsible for making sure that the 
information or representations relevant to a particular type of income 
or applicable rate appear on the form and for requesting a new form 
where an existing form fails to support a claim of reduced rate for a 
different type of income. For example, a beneficial owner who furnishes 
a Form W-8 for portfolio interest (and therefore, does not complete the 
information on the form relating to claims of treaty benefits) would be 
required to furnish a new form to the withholding agent if it receives 
from the same withholding agent other income for which it claims a 
reduced rate of withholding under a tax treaty. The new form could 
serve both for portfolio interest and the other income for which treaty 
benefits are claimed.
    In response to comments, the final regulations clarify that, where 
a person, other than an individual, does not have a tax residence in 
any country, the required permanent residence address is the address of 
the person's principal office, even though the principal office is not 
in its country of incorporation (as was required in the proposed 
regulations). Because of this change, the final regulations require 
that the entity's country of organization or incorporation be stated on 
the form. See Sec. 1.1441-1(e)(2)(ii).
    c. Signature of Forms under Power of Attorney. Some commentators 
have asked that custodians be permitted to execute the Form W-8 on 
behalf of their customers, based upon a power of attorney. This 
suggestion is not adopted. Like a tax return, a Form W-8 must be signed 
under penalties of perjury. As such, the IRS and Treasury view the 
signature of a Form W-8 as governed by the same rules that govern the 
signature of a tax return. Therefore, the final regulations clarify in 
Sec. 1.1441-1(e)(4)(i) that a withholding certificate may be signed by 
any person authorized to sign a declaration under penalties of perjury 
on behalf of the person issuing the certificate as provided under 
section 6061 (for individuals), 6062 (for corporations), or 6063 (for 
partnerships).
    d. Facsimile and Electronic Transmission. Commentators have asked 
that withholding agents be allowed to rely on a faxed copy or 
electronically transmitted Form W-8 as if they were original forms. The 
proposed regulations permit a faxed Form W-8 to indicate foreign status 
for purposes of the grace period under proposed Sec. 1.1441-
1(f)(2)(i)(B), but do not allow it to be used for other purposes. The 
question of whether and to what extent a faxed certificate ought to be 
allowed instead of an original certificate arises because, under 
current law, a faxed document (like a photocopy) has weaker evidentiary 
value than an original document. This question is not unique to the 
Form W-8 and is currently under study by the IRS. Pending completion of 
the study, the final regulations allow a withholding agent to rely on a 
faxed form only for purposes of presuming foreign status in order to 
reduce the rate of withholding during a 90-day grace period. However, 
an original form must be provided before the grace period expires.
    On the other hand, the proposed regulations provide general 
authority for the electronic transmission of Forms W-8, subject to 
procedures issued by the IRS. The final regulations retain this rule 
and, regulations issued together with these final regulation propose to 
amend Sec. 1.1441-1(e)(4)(iv) of the final regulations by prescribing 
the standards that electronic systems must meet in order to effect an 
acceptable transmission of Forms W-8. The IRS believes that the 
evidentiary value of documents transmitted with electronic systems 
meeting these standards would equate with that of an original document. 
See project REG-107872-97, published elsewhere in this issue of the 
Federal Register. The option to use electronic transmission systems 
should help alleviate the burden of having to mail original Forms W-8 
in paper form.
    e. Single Form for Related Withholding Agents. Commentators have 
asked that several withholding agents be allowed to rely on a single 
Form W-8. In response to this comment, a number of changes were made to 
the final regulations. First, under Sec. 1.1441-1(e)(4)(ix)(A), a 
withholding agent may rely on the Form W-8 furnished for another 
account at the same branch location, at a different branch location of 
the same entity, or at a different branch location of a related person 
if the entity or group of entities uses a universal account system or 
uses another type of coordinated account information system that allows the withholding agent to easily access 
information regarding the nature of the certificate furnished, the 
information on the certificate, and its validity status.
    In addition, the system must allow the withholding agent to keep a 
record of how and when it accesses the information and, if applicable, 
of how and when it communicates relevant facts affecting the 
reliability of the certificate to the location where the certificate is 
kept. Second, the rule in proposed Sec. 1.1441-1(e)(2)(i) allowing the 
beneficial owner to provide a single Form W-8 with respect to a family 
of mutual funds is extended to investors in affiliated partnerships and 
corporations under Sec. 1.1441-1(e)(4)(ix)(B) of the final regulations. 
Further, the final regulations also adopt a suggestion that a 
withholding agent be able to rely on representations from a broker that 
it holds a valid withholding certificate from a beneficial owner. See 
Sec. 1.1441-1(e)(4)(ix)(C). The final regulations clarify that a 
withholding agent has knowledge of all information in the system. See 
Sec. 1.1441-7(b)(3).
    f. Forms from Foreign Partnerships. In response to comments, the 
provisions under proposed Sec. 1.1441-1(e)(3)(iii) dealing with 
withholding certificates furnished by a foreign partnership have been 
moved to Sec. 1.1441-5(c), which contains most of the withholding 
provisions governing payments to foreign partnerships (see explanation 
of the changes under Sec. 1.1441-5).
    g. Forms from Non-Qualified Intermediaries. In response to 
comments, provisions have been added to clarify the manner in which a 
non-QI must transmit documentation to the withholding agent and the 
information that it must contain. Proposed Sec. 1.1441-1(e)(3)(iv) 
(renumbered as Sec. 1.1441-1(e)(3)(iii) in the final regulations) is 
expanded to explain the manner in which withholding certificates or 
other appropriate documentation is passed up a chain of non-QIs. The 
final regulations allow the intermediary to furnish copies of an 
original Form W-8 so as to avoid requesting multiple originals for 
different accounts that the intermediary may hold on behalf of the same 
beneficial owner. See Sec. 1.1441-1(e)(3)(iii).
    Also, proposed Sec. 1.1441-1(e)(3)(iv) (C) and (D) (renumbered as 
Sec. 1.1441-1(e)(3)(iii) (C) and (D) in the final regulations) has been 
modified and paragraph (e)(3)(iv) has been added in response to 
comments that the regulations should explain the information required 
from a non-qualified intermediary to insure proper withholding by a 
withholding agent making a payment to a non-qualified intermediary. In 
particular, if different withholding rates apply to different owners of 
the payment flowing through an intermediary, the withholding agent must 
know which rate applies to each portion of the payment. Where such 
information is necessary, the final regulations provide that the 
intermediary must, in a statement attached to the withholding 
certificate from the non-qualified intermediary, provide (and update as 
often as is necessary) sufficient information for the withholding agent 
or payor to determine the proportion of each payment subject to 
withholding that is attributable to each person to whom the 
intermediary certificate relates, including persons for whom the 
intermediary has not attached a withholding certificate or other 
appropriate documentation. Such statement is not necessary, however, if 
the allocation information is known to the withholding agent due to the 
account structure that it uses (for example, the withholding agent uses 
separate accounts for different categories of income and applicable 
withholding rates).
    h. Validity Period. Comments were received under Sec. 1.1441-
1(e)(4)(ii) regarding the period of validity of a properly executed 
Form W-8. Commentators requested that, irrespective of whether a Form 
W-8 includes a TIN, all forms should be valid indefinitely, or at least 
those furnished for a claim of effectively connected income. Some 
commentators suggested that a Form W-8 should not expire where a payor 
continues to send all correspondence to a mailing address that is also 
the permanent address on a Form W-8. These suggestions are not adopted 
because the IRS and Treasury believe that it is important for taxpayers 
to re-certify status periodically. Similar re-certification is also 
important for effectively connected income, since income may cease to 
be effectively connected due to a change in the taxpayer's business 
structure, without the withholding agent becoming aware of such 
changes. However, the final regulations provide relief by presuming 
that payments made to certain U.S. branches are effectively connected 
income, thereby avoiding the need to provide a certificate in such a 
case. See Sec. 1.1441-4(a)(2)(ii).
    Also, Sec. 1.1441-1(e)(4)(ii)(B) is modified to make all 
intermediary certificates and certificates for non-withholding foreign 
partnerships valid indefinitely. (The indefinite validity period does 
not apply to the withholding certificates or documentary evidence 
required to be attached to a certificate from a non-qualified 
intermediary, a U.S. branch of a foreign institution, or a foreign non-
withholding partnership.) In addition, Forms W-8 furnished by an 
integral part of a foreign government, a foreign central bank of issue, 
or the Bank for International Settlements are valid indefinitely. For 
these certificates, the information required is likely to change only 
infrequently. What may change more frequently is the withholding rate 
information that an intermediary or foreign partnership may have to 
furnish to a withholding agent on a separate statement, which the 
intermediary or partnership must update as often as is necessary to 
insure that the withholding agent withholds at the proper rates. See 
Sec. 1.1441-1(e) (3)(iv) and (5)(v) for a description of the statement 
and Sec. 1.1441-1(e)(4)(ii)(D) for related validity rules.
    i. Effect of Changes in Circumstances. Proposed Sec. 1.1441-
1(e)(4)(ii)(D), dealing with changes in circumstances affecting the 
validity of a Form W-8, is revised to clarify the due diligence imposed 
on a non-qualified intermediary who becomes aware of a change in the 
circumstances affecting the validity of a withholding certificate that 
it has received and transmitted to the U.S. withholding agent or 
another intermediary. The final regulations provide that, in such a 
case, the non-qualified intermediary must inform the person to whom it 
provided the affected withholding certificate (i.e., the U.S. 
withholding agent or the other intermediary). It must also obtain a new 
withholding certificate or other documentation to replace the 
certificate or documentation that is no longer valid due to changes in 
circumstances. The same rules apply to foreign partnerships that are 
not withholding foreign partnerships and to a U.S. branch that passes 
through documentation to a U.S. withholding agent.
    The final regulations also clarify that a withholding agent does 
not have a duty to inquire into possible changes of circumstances. In 
other words, a withholding agent may assume that circumstances have not 
changed unless it knows of facts suggesting that changes in 
circumstances have occurred that may affect the validity of 
documentation. Changes in circumstances relevant to the information and 
certification provided on a withholding certificate, a statement, or in 
documentary evidence affect the validity of the certificate, statement, 
or documentary evidence as of the date that the withholding agent has 
actual knowledge or reason to know of the changes. The final 
regulations are revised to clarify that point and give withholding agents the same 90-
day period as is given for a new account for perfecting documentation 
(i.e., inquire into the change of circumstances and obtain a new 
certificate, if necessary). See Secs. 1.1441-1(b)(3)(iv) and 1.6049-
5(d)(2)(ii).
    j. Acceptable Substitute Form. In addition, proposed Sec. 1.1441-
1(e)(4)(vi) is modified in response to comments that asked that the 
meaning of the cross-reference to Sec. 31.3406(h)-3(c)(1) defining an 
acceptable substitute form be clarified. The revised provisions 
enumerate the type of information and certifications that must appear 
on any substitute form for purposes of the regulations under chapter 3 
of the Code. The rules are similar to the rules contained in 
Sec. 31.3406(h)-3(c)(1). Under the final regulations, a withholding 
agent must provide a copy of the instructions to the recipient only to 
the extent specified in the form and in the instructions to the 
official form. As is the case for the Form W-9, the IRS expects that 
the form instructions will waive the obligation to furnish the official 
Form W-8 instructions to customers. Further, withholding agents are 
also authorized to develop customized substitute Forms W-8 and 
incorporate them as part of account opening documents.
    k. Guidance Regarding Reliance on Withholding Certificates. Several 
commentators asked for clearer guidance on the extent to which 
withholding agents may rely on forms and the extent of their duty to 
inquire into the truthfulness of information stated on forms. In 
response to these comments, the final regulations contain a number of 
clarifications. Section 1.1441-1(e)(4)(viii) has been added to provide 
that a withholding agent may rely on a foreign entity's certification 
of corporate (or other) status on a Form W-8. In the case of a 
withholding certificate by or for a foreign entity whose name is on the 
list of per se foreign corporations described in Sec. 301.7701-
2(b)(8)(i) that claims to be a partnership, the certificate must 
represent that the entity's partnership status was grandfathered under 
the regulations and has not been terminated. Further, a withholding 
agent that receives a beneficial owner certificate from a foreign 
financial institution may rely on such certificate to treat the 
institution as the beneficial owner unless it has information in its 
records that would indicate otherwise, or unless the certificate 
contains information that would contradict such claim (e.g., sub-
account numbers or names). If a foreign intermediary receives payments 
both in its capacity as an intermediary and for its own account, it 
must furnish two certificates in order to allow the withholding agent 
to apply the proper withholding rate and report the amounts 
accordingly. Additional reliance guidance has been added regarding 
claims of benefits under a tax treaty (see explanation under 
Sec. 1.1441-6, below). Further, the provisions dealing with a 
withholding agent's due diligence are also expanded and clarified (see 
explanation under Sec. 1.1441-7, below).
7. Non-Qualified Intermediaries
    Some commentators requested that the regulations eliminate the 
requirement that non-qualified intermediaries (non-QIs) pass through 
Forms W-8 to the U.S. withholding agent because investors and 
intermediaries will not disclose customer information to third parties. 
In particular, some commentators recommended that the regulations 
eliminate any reference to the intermediary procedures currently 
applicable under Sec. 35a.9999-5(b), A-9, dealing with certification 
required in order for interest to qualify as portfolio interest. These 
suggestions are not adopted. The qualified intermediary regime is 
designed to provide these benefits, but only where the intermediary 
follows procedures to insure adequate withholding compliance. In 
addition, as explained in the preamble to the proposed regulations, the 
intermediary procedures provided in Sec. 35a.9999-5(b), A-9 are 
retained because, if the qualified intermediary regime does not apply 
to the intermediary, these procedures may be useful.
    The final regulations also do not adopt a suggestion that, for 
income for which no TIN needs to be provided, the intermediary only 
reports the aggregate amount on Form 1042 without having to report 
individual amounts for each beneficial owner on a Form 1042-S. 
Commentators have suggested that a financial institution acting as an 
intermediary should be required to indicate only the proportion of a 
payment subject to withholding and the applicable rate. Should the 
proportion change, the certificate furnished by the intermediary would 
have to be modified to reflect the change in circumstances. This 
suggestion is not adopted because permission to report aggregate 
amounts is limited to payments made to qualified intermediaries. In the 
case of a qualified intermediary, the IRS may rely on audit procedures 
in the qualified intermediary agreement described in Sec. 1.1441-
1(e)(5)(iii) to determine whether the intermediary has properly advised 
the U.S. withholding agent regarding each portion of a payment to which 
different withholding rates should apply. The IRS' ability to check the 
representations made by a non-QI is limited, particularly if the non-QI 
is not owned by U.S. persons. In that case, it must rely on reconciling 
the amounts paid as reported on Forms 1042-S, disclosure of the 
identity of beneficial owners (or further intermediaries), and 
exchanges of information under tax treaties. In that context, 
disclosure of the exact amounts allocated to each beneficial owner (or 
further intermediary) is important to the compliance regime applicable 
to non-QIs.
8. Qualified Intermediaries
    a. Scope of Qualified Intermediary Provisions. Under the proposed 
regulations, a withholding agent may rely on the certification of a 
foreign person made on behalf of others to reduce the rate of 
withholding. If the foreign person has a qualified intermediary 
agreement with the IRS, the intermediary may certify without having to 
furnish the certificates or other documentation of the persons for whom 
it acts. Many comments were received regarding the proposal, which are 
discussed below.
    In response to comments, the final regulations are modified to 
allow a foreign branch of a U.S. financial institution to be a 
qualified intermediary (QI) in the same manner as a foreign financial 
institution. However, U.S. branches of U.S. or foreign financial 
institutions are not permitted to obtain QI status. Such difference in 
treatment conforms to the distinction in the final regulations between 
accounts maintained outside the United States and accounts maintained 
on-shore. See Sec. 1.1441-1(e)(5)(ii) (A) and (B). This distinction is 
appropriate because it reflects the policy that the Form W-8 (signed 
under penalties of perjury) is the preferred means of establishing 
foreign status for transactions in the United States. On the other 
hand, documentary evidence provides appropriate evidence of foreign 
status for transactions outside the United States, especially in those 
countries where financial institutions must document the identity of 
customers opening new accounts or for whom they process certain 
transactions.
    At the request of commentators, the definition of a clearing 
organization for purposes of Sec. 1.1441-1(e)(5)(ii)(A) is revised so 
that clearing organizations that, as members of other clearing 
organizations, do not hold physical securities, are nevertheless 
considered to hold obligations for members and, therefore, qualify for QI status. Further, the final regulations allow 
QI status for foreign corporations that receive U.S. income for which 
the benefit of a reduced rate is claimed under an income tax treaty by 
their shareholders (because the shareholders derive the income as 
residents of an applicable treaty jurisdiction within the meaning of 
Sec. 1.894-1T(d)(1)). By allowing these corporate entities to be QIs, 
the regulations intend to facilitate the processing of treaty benefits 
claims by reverse hybrid entities with large shareholdings. See 
discussion under Sec. 1.1441-6, below. Also at the request of 
commentators, a transition rule is added to Sec. 1.1441-1(e)(5)(i) 
whereby institutions that are otherwise eligible for QI status and that 
satisfy certain criteria (as will be published by the IRS) are 
permitted to act as QIs while awaiting confirmation of their QI status.
    Commentators were divided on whether the regulations should allow a 
QI to assume primary withholding responsibility as proposed in 
Sec. 1.1441-1(e)(5)(iv). In view of these comments, the final 
regulations retain the provisions that permit the shifting of primary 
responsibility for withholding and reporting under chapter 3 of the 
Code. However, because of IRS concerns regarding compliance and 
comments received from foreign institutions, the final regulations 
provide that the responsibility for Form 1099 information reporting and 
related backup withholding under section 3406 may not be assigned to a 
QI, unless the QI is a foreign branch of a U.S. bank or another U.S. 
person or establishes that the obligations related to information 
reporting and backup withholding can adequately be carried out by a 
U.S. branch of the QI (even though the branch itself cannot be a QI). 
Some commentators suggested that, if a QI is allowed to assume primary 
withholding responsibility, it should be allowed to do so only for all 
the payments that it receives from a payor with respect to a particular 
account. Permitting a QI to assume withholding responsibility with 
respect to some but not all payments to an account would make it 
difficult for payors to determine the correct amount of withholding on 
payments to a single account. This comment has been adopted and the 
final regulations are modified accordingly to provide that if a QI 
assumes primary withholding responsibility for an account, it must do 
so for all payments to the account. The decision to assume or not 
assume withholding responsibility may be made on an account-by-account 
basis. See Sec. 1.1441-1(e)(5)(iv).
    As is the c