Federal Register Vol 61_ No 78 Monday_ April 22_ 1996

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Federal Register  Vol 61_ No 78  Monday_ April 22_ 1996 Powered By Docstoc
					                 Federal Register / Vol. 61, No. 78 / Monday, April 22, 1996 / Proposed Rules                               17619

regulations contain a number of              a statement from a financial institution     regulations, the withholding certificate
transition rules designed to phase out       for bearer obligations offered or sold in    would not have to state a taxpayer
currently outstanding withholding            the United States. The proposed              identifying number (although one may
certificates (e.g., Forms W–8 and 1001)      regulations would also eliminate the         be provided, if desired). See § 35a.9999–
                                             requirement that the holder deliver a        5(b), A–9.
Section-by-Section Analysis                  confirmation to a financial institution         In the case of a payment to a foreign
Section 1.163–5 Denial of Interest           for obligations offered or sold outside      person that acts as an intermediary (e.g.,
Deduction on Certain Obligations Issued      the United States. These changes are         an agent, representative, nominee, etc.),
After December 31, 1982, Unless Issued       proposed to reduce the documentation         the proposed procedures under section
in Registered Form                           burden associated with secondary             1441 would require either that the
                                             market transactions. The documentary         intermediary furnish an intermediary
  Section 1.163–5(c) contains foreign
                                             evidence requirement for delivery            withholding certificate or, if the
targeting procedures applicable to
                                             outside the United States to a foreign       intermediary acts as the agent of the
certain obligations issued in bearer
                                             person other than a financial institution    withholding agent, that the intermediary
form. Section 1.163–5(c)(2)(i)(B)(5)
                                             is retained. The proposed regulations        be an authorized foreign agent. Under
would be revised to modify the cross-        would clarify that the holder may
reference to the documentary evidence                                                     proposed § 1.1441–1(e)(3)(iv) or
                                             receive such evidence electronically         proposed § 1.871–14(c)(2)(iii), the
rules since the Q&A regulations under
part 35a are proposed to be eliminated       Section 1.871–14 Rules for Portfolio         certificate could be, as under current
                                             Interest                                     rules, a certificate to which the
Section 1.165–12 Denial of Deduction                                                      beneficial owner documentation is
for Losses on Registration-Required             Under sections 871(h) and 881(c),
                                                                                          attached (see § 35a.9999–5(b), A–9).
Obligations Not in Registered Form           interest that qualifies as portfolio
                                                                                          Alternatively, under proposed § 1.1441–
                                             interest is generally exempt from tax
   Section 165(j)(1) and 1.165–12(a)                                                      1(e)(3)(ii), it could be a certificate by
                                             and is exempt from withholding at
deny a loss deduction to a holder of a                                                    which the intermediary certifies for the
                                             source under section 1441(b)(9). Section
registration-required obligation that is                                                  beneficial owner (or other
                                             1.871–14 proposes procedures
not in registered form unless the holder                                                  intermediaries) without being required
                                             governing whether interest (including
meets certain exceptions. Under                                                           to attach beneficial owner
                                             original issue discount) qualifies as
§ 1.165–12(c)(1) (iii) and (iv), the loss                                                 documentation. The latter certificate
                                             portfolio interest described in section
disallowance rule does not apply to a        871(h)(2). Section 1.1441–2(d) provides      could be issued only by a qualified
holder that delivers a registration-         the exemption from withholding.              intermediary, i.e., a person that has an
required obligation that is in bearer form      For interest on bearer obligations, the   agreement with the IRS. The qualified
and that is offered or sold in the United    existing provisions in § 35a.9999–5(a),      intermediary certificate would be issued
States if the holder delivers the            A–1 (dealing with portfolio interest on      based upon certifications or
obligation to a financial institution, and   bearer obligations) and in § 35a.9999–       documentation obtained by the
the financial institution provides a         5(c) (dealing with convertible               qualified intermediary. The same
statement that it is a financial             obligations) will be incorporated in         standards would apply to these
institution within the meaning of            § 1.871–14(b) without substantive            documents as are proposed to be
§ 1.165–12(c)(1)(v), it is purchasing the    changes and are not reproposed. These        applied to documents that a U.S.
obligation for its own account, the          rules will be restated in proposed           withholding agent is required to obtain
account of another financial institution,    § 1.871–14 (b)(1) and (b)(2) that are        when paying directly to a beneficial
or an exempt organization, that will         currently shown as reserved                  owner. Therefore, a taxpayer identifying
comply with section 165(j)(3) (A), (B), or      For interest on registered obligations,   number is not required to be shown on
(C). The loss disallowance rule also does    section 871(h)(2)(B)(ii) provides that       a beneficial owner withholding
not apply if a holder delivers a             such interest qualifies as portfolio         certificate provided to the qualified
registration-required obligation in bearer   interest only if the U.S. withholding        intermediary. Alternatively, the
form that is offered or sold outside the     agent receives a statement that the          qualified intermediary could rely on
United States if it is delivered to a        beneficial owner is not a United States      documentary evidence for accounts held
financial institution and the holder         person. Paragraph (c)(2)(i) provides that    at foreign branches. In addition,
gives the financial institution a            the statement requirement would be           different procedures may apply under
confirmation stating that any U.S.           satisfied if the beneficial owner            the terms of a qualified intermediary’s
taxpayer that holds the obligation in        furnishes the type of documents              agreement with the IRS.
bearer form and that is not exempt           described in proposed § 1.1441–                 Where a withholding agent acts
under section 165(j)(3) (A), (B), or (C)     1(e)(1)(i) for a withholding agent to rely   through an authorized foreign agent,
will be denied a deduction for any loss      on a claim of foreign status. Thus, in the   certificates received by the agent would
or capital gain treatment with respect to    case of a payment to a beneficial owner,     be deemed to be received by the
the obligation. A holder may deliver a       the beneficial owner must provide a          withholding agent. In that case, no
registration-required obligation in bearer   beneficial owner withholding certificate     certificate would be required from the
form that is offered and sold outside the    described in proposed § 1.1441–1(e)(2)       authorized agent. See proposed
United States to a person other than a       or, if the payment is made on an             § 1.1441–7(c)(2) for the description of an
financial institution only if the holder     account held at a foreign branch,            authorized foreign agent and proposed
has documentary evidence, as described       documentary evidence may be                  § 1.1461–1 (b)(2)(iii) and (c)(4)(iii) for
in                                           substituted (see paragraph (c)(2)(ii)).      the filing of returns by the withholding
                                             The ability to use documentary               agent and its authorized foreign agent.
Section 35a.9999–4T, A–5 That the            evidence on foreign branch accounts is       Paragraph (c)(2)(iv) specifies that other
Person Is Not a U.S. Person                  a significant change from current law        procedures may apply under a
  These proposed regulations would           and one that intends to reduce the           competent authority agreement with a
revise § 1.165–12(c)(1)(iv) to eliminate     burden on transactions outside the           country with which the United States
the requirement that the holder receive      United States. Further, as under current     has an income tax treaty.