[Federal Register: August 2, 2002 (Volume 67, Number 149)]
[Proposed Rules]               
[Page 50386-50389]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr02au02-16]                         

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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 31

[REG-133254-02; REG-126100-00]
RIN 1545-BA86; RIN 1545-AY62

 
Guidance on Reporting of Deposit Interest Paid to Nonresident 
Aliens

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking; notice of public hearing; and 
withdrawal of previously proposed rulemaking.

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SUMMARY: This document contains proposed regulations that provide 
guidance on the reporting requirements for interest on deposits 
maintained at U.S. offices of certain financial institutions and paid 
to nonresident alien individuals that are residents of certain 
specified countries. These proposed regulations affect persons making 
payments of interest with respect to such deposits. This document also 
provides a notice of public hearing on these proposed regulations and 
withdraws the notice of proposed rulemaking (REG 126100-00, 66 FR 3925) 
published on January 17, 2001.

DATES: Written or electronic comments must be received by November 14, 
2002. Requests to speak (with outlines of oral comments to be 
discussed) at the public hearing scheduled for 10 a.m. on December 5, 
2002, must be received by November 14, 2002. The proposed rule 
published on January 17, 2001 (66 FR 3925) and corrected on March 21, 
2001 (66 FR 15820) and March 22, 2001 (66 FR 16019) is withdrawn as of 
August 2, 2002.

ADDRESSES: Send submissions to: CC:DOM:ITA:RU (REG-133254-02), room 
5226, Internal Revenue Service, POB 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions also may be hand delivered Monday 
through Friday between the hours of 8 a.m. and 5 p.m. to: CC:DOM:ITA:RU 
(REG-133254-02), Courier's Desk, Internal Revenue Service 1111 
Constitution Avenue, NW., Washington, DC. Alternatively, taxpayers may 
submit comments electronically directly to the IRS Internet site at 
www.irs.gov/regs. The public hearing will be held in Room 4718, 
Internal Revenue Building, 1111 Constitution Avenue, NW., Washington, 
DC.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Alexandra K. Helou, (202) 622-3840 (not a toll free number); concerning 
submissions of comments, the hearing, and/or to be placed on the 
building access list to attend the hearing, Treena Garrett, (202) 622-
7180 (not a toll free number).

SUPPLEMENTARY INFORMATION:   

Paperwork Reduction Act

    The collection of information contained in this notice of proposed 
rulemaking has been submitted to the Office of Management and Budget 
for review in accordance with the Paperwork Reduction Act of 1995 (44 
U.S.C. 3507(d)). Comments on the collection of information should be 
sent 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, with copies to the Internal Revenue 
Service, Attn: IRS Reports Clearance Officer, W:CAR:MP:FP:S, 
Washington, DC 20224. Comments on the collections of information should 
be received by October 1, 2002. Comments are specifically requested 
concerning:
    Whether the proposed collection of information is necessary for the 
proper operation of the functions of the Internal Revenue Service, 
including whether the information will have practical utility;
    The accuracy of the estimated burden associated with the proposed 
collection of information (see below);
    How the quality, utility, and clarity of the information to be 
collected may be enhanced; How the burden of complying with the 
proposed collection of information may be minimized, including through 
the application of automated collection techniques or other forms of 
information technology; and
    Estimates of capital or start-up costs and costs of operation, 
maintenance, and purchase of service to provide information.
    The collection of information in these proposed regulations is in 
Secs. 1.6049-4(b)(5)(i) and 1.6049-6(e)(4) (i) and (ii). This 
information is required to determine if taxpayers have properly 
reported amounts received as income. The collection of information is 
mandatory. The likely respondents are businesses and other for-profit 
institutions.
    The estimated average annual burden per respondent and/or 
recordkeeper required by Secs. 1.6049-4(b)(5)(i) and 1.6049-6(e)(4) (i) 
and (ii) will be reflected in the burdens of Forms 1042, 1042-S and the 
income tax return of a foreign person.
    Further, the estimated average annual burden per respondent and/or 
recordkeeper for the statement required by Sec. 1.6049-6(e)(4)(i) is as 
follows:
    Estimated total annual reporting burden: 500 hours.
    Estimated average annual burden per respondent: 15 minutes.
    Estimated number of respondents: 2000.
    Estimated annual frequency of responses: Annually.
    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 control number assigned by the Office of 
Management and Budget.
    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 and Explanation of Provisions

    On January 17, 2001, the IRS and Treasury published a notice of 
proposed rulemaking (REG 126100-00) in the Federal Register (66 FR 
3925, corrected by 66 FR 15820 and 66 FR 16019) under section 6049 (the 
2001 proposed regulations), which would provide that U.S. bank deposit 
interest paid to any nonresident alien individual must be reported 
annually to the IRS. Under regulations currently in effect, reporting 
of U.S. bank deposit interest is required only if the interest is paid 
to a U.S. person or a nonresident alien individual who is a resident of 
Canada.
    The IRS and Treasury requested comments on the 2001 proposed 
regulations, and a public hearing regarding the 2001 proposed 
regulations was held on June 21, 2001. The IRS and Treasury received 
numerous comments on the proposed regulations, and several

[[Page 50387]]

commentators spoke at the public hearing on the 2001 proposed 
regulations. After careful consideration of all the comments received, 
the IRS and Treasury have concluded that the 2001 proposed regulations 
should be withdrawn and a new notice of proposed rulemaking should be 
issued on this subject. Accordingly, this document withdraws the 2001 
proposed regulations and provides new proposed regulations (the 2002 
proposed regulations).
    Most of the comments received on the 2001 proposed regulations were 
highly critical of the regulations. In particular, many commentators 
expressed the view that the administrative burden imposed by the 2001 
proposed regulations would significantly outweigh any benefits obtained 
by the IRS from the additional information collected. Some commentators 
also stated that the 2001 proposed regulations could have a severe 
negative impact on U.S. banks, particularly U.S. banks with a deposit 
base that included a significant number of nonresident alien 
individuals, some of whom had expressed concerns that the information 
collected under the 2001 proposed regulations might be misused. Other 
commentators raised certain technical concerns regarding the 2001 
proposed regulations, particularly with respect to the reporting 
requirements for bank deposit interest paid to joint account holders.
    After consideration of the comments received, the IRS and Treasury 
have concluded that the 2001 proposed regulations were overly broad in 
requiring annual information reporting with respect to U.S. bank 
deposit interest paid to any nonresident alien. The IRS and Treasury 
have decided instead that reporting should be required only for 
nonresident alien individuals that are residents of certain designated 
countries. The IRS and Treasury believe that limiting reporting to 
residents of these countries will facilitate the goals of improving 
compliance with U.S. tax laws and permitting appropriate information 
exchange without imposing an undue administrative burden on U.S. banks. 
Accordingly, the 2002 proposed regulations would modify the current 
regulations (which require reporting of U.S. bank deposit interest only 
if paid to Canadian residents) by requiring in addition reporting of 
U.S. bank deposit interest paid to residents of Australia, Denmark, 
Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, New 
Zealand, Norway, Portugal, Spain, Sweden, and the United Kingdom. 
Payors may, however, at their option, choose to report bank deposit 
interest paid to all nonresident aliens or to any nonresident alien who 
is a resident of a country other than the countries listed above. If 
the IRS and Treasury determine that this list of countries should be 
modified in the future, regulations providing such a modification will 
be proposed and comments will be requested on those proposed 
regulations.
    In other respects, the 2002 proposed regulations generally follow 
the approach set forth in the 2001 proposed regulations. Thus, the 2002 
proposed regulations provide that, if a nonresident alien who is a 
recipient of U.S. bank deposit interest is a resident of a country for 
which reporting of such interest is required, a copy of Form 1042-S, 
``Foreign Person's U.S. Source Income Subject to Withholding'', must be 
furnished to the nonresident alien. Like the 2001 proposed regulations, 
the 2002 proposed regulations provide that the payor or middleman can 
satisfy this requirement by furnishing a copy of Form 1042-S either in 
person or to the last known address of the nonresident alien.
    In addition, to conform to the changes made in the 2002 proposed 
regulations, the Form 1042-S requirements have been modified with 
respect to joint accounts. For example, the 2001 proposed regulations 
provide that, if a joint account holder is a U.S. non-exempt recipient, 
the payor or middleman must report the entire payment to that person. 
If all joint account holders are foreign persons, the 2001 proposed 
regulations require the payor or middleman to report the payment to the 
nonresident alien individual that is a resident of a country with which 
the United States has an income tax treaty or a tax information 
exchange agreement (TIEA). The 2002 proposed regulations retain the 
requirement that the entire payment be reported to a U.S. non-exempt 
recipient if there is a U.S. non-exempt recipient that is a joint 
account holder. However, the 2002 proposed regulations modify the 2001 
proposed regulations by providing that, if all joint account holders 
are foreign persons, reporting is required to any one of the joint 
account holders that is a resident of one of the listed countries.
    Section 1.6049-8(a) currently provides, for purposes of the 
requirement that U.S. bank deposit interest paid to individuals who are 
Canadian residents must be reported, that the payor or middleman may 
rely on the permanent address found on an applicable withholding 
certificate described in Sec. 1.1441-1(c)(16) (Form W-8) to make the 
determination of whether the nonresident alien individual resides in 
Canada. However, the regulation also provides that a payor or middleman 
may rely on its actual knowledge of the individual's residence address 
in Canada, even if a valid Form W-8 has not been provided, to make such 
a determination. The 2002 proposed regulations, like the 2001 proposed 
regulations, eliminate this ``actual knowledge of the individual's 
residence address'' rule because it creates a result that is contrary 
to the presumption rules contained in Sec. 1.1441-1(b)(3)(iii) (and 
made applicable to reportable payments by Sec. 1.6049-5(d)(2)). In this 
regard, the presumption rules generally provide that interest on a U.S. 
bank deposit that cannot be reliably associated with a valid Form W-8 
or Form W-9, ``Request for Taxpayer Identification Number and 
Certification'', must be presumed to be paid to an undocumented U.S. 
non-exempt recipient. Accordingly, the 2002 proposed regulations 
clarify that a payor of interest on such a deposit must report the 
payment on a Form 1099 as made to a U.S. non-exempt recipient in 
accordance with the presumption rules. Further, such payment is subject 
to backup withholding under section 3406.

Proposed Effective Date

    These regulations are proposed to apply to payments made after 
December 31 of the year in which they are published as final 
regulations in the Federal Register.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
12866. Therefore, a regulatory assessment is not required. It has also 
been determined that section 553(b) of the Administrative Procedure Act 
(5 U.S.C. chapter 5) does not apply to these regulations, and, because 
the regulations do not impose a collection of information on small 
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not 
apply. Pursuant to section 7805(f) of the Code, this notice of proposed 
rulemaking will be submitted to the Chief Counsel for Advocacy of the 
Small Business Administration for comment on its impact on small 
business.

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written comments (a signed original 
and eight (8) copies) that are submitted timely (in the manner 
described in the ADDRESSES portion of this preamble) to the IRS. The 
IRS and Treasury

[[Page 50388]]

Department request comments on the clarity of the proposed rules and 
how they can be made easier to understand. All comments will be 
available for public inspection and copying.
    A public hearing has been scheduled for December 5, 2002, beginning 
at 10 a.m. in Room 4718, Internal Revenue Building, 1111 Constitution 
Avenue, NW., Washington, DC. Due to building security procedures, 
visitors must enter at the main entrance, located at 1111 Constitution 
Avenue, NW. In addition, all visitors must present photo identification 
to enter the building. Because of access restrictions, visitors will 
not be admitted beyond the immediate entrance area more than 30 minutes 
before the hearing starts. For information about having your name 
placed on the building access list to attend the hearing, see the FOR 
FURTHER INFORMATION CONTACT portion of this preamble.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who 
wish to present oral comments must submit written comments and an 
outline of the topics to be discussed and the time to be devoted to 
each topic (a signed original and eight (8) copies) by November 14, 
2002. A period of 10 minutes will be allotted to each person for making 
comments. An agenda showing the scheduling of the speakers will be 
prepared after the deadline for reviewing outlines has passed. Copies 
of the agenda will be available free of charge at the hearing.

Drafting Information

    The principal author of the regulations is Alexandra K. Helou, 
Office of Associate Chief Counsel (International). However, other 
personnel from the IRS and Treasury Department participated in their 
development.

List of Subjects in 26 CFR Parts 1 and 31

    Income taxes, Reporting and recordkeeping requirements.

Withdrawal of Proposed Amendments

    Accordingly, under the authority of 26 U.S.C. 7805, the proposed 
amendment to 26 CFR parts 1 and 31 that was published in the Federal 
Register on Wednesday, January 17, 2001 (66 FR 3925, corrected by 66 FR 
15820 and 66 FR 16019) is withdrawn.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR parts 1 and 31 are proposed to be amended as 
follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805 * * *

    Par. 2. In Sec. 1.6049-4, paragraph (b)(5) is revised to read as 
follows:

Sec. 1.6049-4  Return of information as to interest paid and original 
issue discount includible in gross income after December 31, 1982.

* * * * *
    (b) * * *
    (5) Interest payments to nonresident alien individuals--(i) General 
rule. In the case of interest aggregating $10 or more paid to a 
nonresident alien individual (as defined in section 7701(b)(1)(B)) that 
is reportable under Sec. 1.6049-8(a), the payor shall make an 
information return on Form 1042-S, ``Foreign Person's U.S. Source 
Income Subject to Withholding'', for the calendar year in which the 
interest is paid. The payor or middleman shall prepare and file Form 
1042-S at the time and in the manner prescribed by section 1461 and the 
regulations under that section and by the form and its accompanying 
instructions. See Sec. 1.6049-6(e)(4) for furnishing a copy of the Form 
1042-S to the payee. To determine whether an information return is 
required for original issue discount, see Secs. 1.6049-5(f) and 1.6049-
8(a).
    (ii) Effective dates. Paragraph (b)(5)(i) of this section shall 
apply for payments made after December 31 of the year in which the 
final regulations are published in the Federal Register with respect to 
an applicable withholding certificate described in Sec. 1.1441-1(c)(16) 
(Form W-8) furnished to the payor or middleman after that date. (For 
interest paid to a Canadian nonresident alien individual on or before 
December 31 of the year in which final regulations are published in the 
Federal Register, see Sec. 1.6049-4(b)(5) in effect prior to [EFFECTIVE 
DATE OF FINAL RULE] (See 26 CFR part 1 revised April 1, 2002.))
* * * * *
    Par. 3. Section 1.6049-6 is amended as follows:
    1. Paragraph (e)(4) is revised.
    2. In paragraph (e)(5), the first sentence is revised and a new 
sentence is added at the end of the paragraph.
    The addition and revisions read as follows:

Sec. 1.6049-6  Statements to recipients of interest payments and 
holders of obligations for attributed original issue discount.

* * * * *
    (e) * * *
    (4) Special rule for amounts described in Sec. 1.6049-8(a)--(i) In 
general. In the case of amounts described in Sec. 1.6049-8(a) (relating 
to certain payments of deposit interest to nonresident alien 
individuals) paid after December 31 of the year in which the final 
regulations are published in the Federal Register, any person who files 
a Form 1042-S, ``Foreign Person's U.S. Source Income Subject to 
Withholding'', under section 6049(a) and Sec. 1.6049-4(b)(5) shall 
furnish a statement to the recipient of the interest either in person 
or by first-class mail to the recipient's last known address. The 
statement shall include a copy of the Form 1042-S required to be 
prepared pursuant to Sec. 1.6049-4(b)(5) and a statement to the effect 
that the information on the form is being furnished to the United 
States Internal Revenue Service and may be furnished to the government 
of the foreign country where the recipient resides.
    (ii) Joint account holders. In the case of joint account holders, a 
payor or middleman must report the entire amount of interest as paid to 
any one of the joint account holders that provides a valid Form W-9, 
``Request for Taxpayer Identification Number and Certification,'' or, 
if any account holder has not furnished an applicable withholding 
certificate described in Sec. 1.1441-1(c)(16) (Form W-8) or Form W-9, 
any one of the joint account holders that is presumed to be a U.S. non-
exempt recipient under Secs. 1.6049-5(d)(2) and 1.1441-1(b)(3)(iii). If 
all of the joint account holders have furnished valid Forms W-8 
certifying their status as foreign persons and any joint account holder 
is a resident of one of the countries specified in Sec. 1.6049-8(a), 
then the payor or middleman must report the payment to any one of the 
joint account holders that is a resident of one of the countries 
specified in Sec. 1.6049-8(a) (selected account holder). If, however, 
any joint account holder, including the selected account holder, 
requests its own Form 1042-S and provides information regarding the 
correct amount to be reported to him, the payor or middleman must 
furnish a Form 1042-S to such account holder and make a corresponding 
reduction to the amount reported to the selected account holder. If the 
selected account holder makes such request, the payor or middleman must 
report the corrected amount to the selected account holder and report 
the remaining amount to any

[[Page 50389]]

other joint account holder that is a resident of one of the countries 
specified in Sec. 1.6049-8(a).
    (5) Effective dates. Paragraph (e)(4) of this section applies for 
payee statements due with respect to payments made after December 31 of 
the year in which the final regulations are published in the Federal 
Register, without regard to extensions. * * * (For interest paid to a 
Canadian nonresident alien individual on or before December 31 of the 
year in which final regulations are published in the Federal Register, 
see Sec. 1.6049-6(e)(4) in effect prior to [EFFECTIVE DATE OF FINAL 
RULE] (See 26 CFR part 1 revised April 1, 2002.))
* * * * *
    Par. 4. In Sec. 1.6049-8, the section heading and paragraph (a) are 
revised to read as follows:

Sec. 1.6049-8  Certain Interest and original issue discount paid to 
nonresident alien individuals.

    (a) Interest subject to reporting requirement. For purposes of 
Secs. 1.6049-4, 1.6049-6, and this section and except as provided in 
paragraph (b) of this section, the term interest means interest 
described in section 871(i)(2)(A) with respect to a deposit maintained 
at an office within the United States by a nonresident alien individual 
who is a resident of any of the following countries: Australia, Canada, 
Denmark, Finland, France, Germany, Greece, Ireland, Italy, the 
Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, and the 
United Kingdom. For purposes of the regulations under section 6049, a 
nonresident alien individual is a person described in section 
7701(b)(1)(B). The payor or middleman may rely upon an applicable 
withholding certificate described in Sec. 1.1441-1(c)(16) (Form W-8) 
that is valid to determine whether the payment is made to a nonresident 
alien individual who is a resident of one of the countries for which 
reporting is required. Generally, amounts described in this paragraph 
(a) are not subject to backup withholding under section 3406. See 
Sec. 31.3406(g)-1(d) of this chapter. However, if the payor or 
middleman does not have either a valid Form W-8 or valid Form W-9, 
``Request for Taxpayer Identification Number and Certification'', the 
payor or middleman must report the payment as made to a U.S. non-exempt 
recipient if it must so treat the payee under the presumption rules of 
Secs. 1.6049-5(d)(2) and 1.1441-1(b)(3)(iii) and must also backup 
withhold under section 3406. (For interest paid to a Canadian 
nonresident alien individual on or before December 31 of the year in 
which final regulations are published in the Federal Register, see 
Sec. 1.6049-8(a) in effect prior to [EFFECTIVE DATE OF FINAL RULE] (See 
26 CFR part 1 revised April 1, 2002.))
* * * * *

PART 31--EMPLOYMENT TAXES AND COLLECTION OF INCOME TAX AT THE 
SOURCE

    Par. 5. The authority citation for part 31 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805 * * *

    Par. 6. In Sec. 31.3406(g)-1, paragraph (d) is revised to read as 
follows:

Sec. 31.3406(g)-1  Exceptions for payments to certain payees and 
certain other payment.

* * * * *
    (d) Reportable payments made to nonresident alien individuals. A 
payment of interest that is reported on Form 1042-S as paid to a 
nonresident alien individual under Sec. 1.6049-8(a) of this chapter is 
not subject to withholding under section 3406. (For interest paid to a 
Canadian nonresident alien individual on or before December 31 of the 
year in which final regulations are published in the Federal Register, 
see Sec. 31.3406(g)-1(d) in effect prior to [EFFECTIVE DATE OF FINAL 
RULE] (See 26 CFR part 1 revised April 1, 2002.))
* * * * *

David A. Mader,
Acting Deputy Commissioner of Internal Revenue.
[FR Doc. 02-19348 Filed 7-30-02; 1:35 pm]
BILLING CODE 4830-01-P