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.