Federal Register / Vol. 83, No. 242 / Tuesday, December 18, 2018 / Proposed Rules 64757 

Dated: December 13, 2018. 

Leslie Kux, 

Associate Commissioner for Policy. 

[FR Doc. 2018–27352 Filed 12–17–18; 8:45 am] 

BILLING CODE 4164–01–C 

DEPARTMENT OF THE TREASURY 

Internal Revenue Service 

26 CFR Part 1 

[REG–132881–17] 

RIN 1545–BO30 

Regulations Reducing Burden Under 

FATCA and Chapter 3 

AGENCY: Internal Revenue Service (IRS), 

Treasury. 

ACTION: Notice of proposed rulemaking. 

SUMMARY: This document contains 

proposed regulations eliminating 

withholding on payments of gross 

proceeds, deferring withholding on 

foreign passthru payments, eliminating 

withholding on certain insurance 

premiums, and clarifying the definition 

of investment entity. This notice of 

proposed rulemaking also includes 

guidance concerning certain due 

diligence requirements of withholding 

agents and guidance on refunds and 

credits of amounts withheld. 

DATES: Written or electronic comments 

and requests for a public hearing must 

be received by February 19, 2019. 

ADDRESSES: Send submissions to: 

CC:PA:LPD:PR (REG–132881–17), 

Internal Revenue Service, Room 5203, 

P.O. Box 7604, Ben Franklin Station, 

Washington, DC 20044. Submissions 

may also be hand-delivered Monday 

through Friday between the hours of 8 

a.m. and 4 p.m. to CC:PA:LPD:PR (REG– 

132881–17), Courier’s Desk, Internal 

Revenue Service, 1111 Constitution 

Avenue NW, Washington, DC 20224; or 

sent electronically via the Federal 

eRulemaking Portal at http://

www.regulations.gov (IRS REG–132881– 

17). 

FOR FURTHER INFORMATION CONTACT: 

Concerning the proposed regulations, 

John Sweeney, Nancy Lee, or Subin 

Seth, (202) 317–6942; concerning 

submissions of comments and/or 

requests for a public hearing, Regina 

Johnson, (202) 317–6901 (not toll free 

numbers). 

SUPPLEMENTARY INFORMATION: 

Background 

This document contains amendments 

to the Income Tax Regulations (26 CFR 

part 1) under chapter 4 (sections 1471 

through 1474) commonly known as the 

Foreign Account Tax Compliance Act 

(FATCA). This document also contains 

amendments to the Income Tax 

Regulations (26 CFR part 1) under 

sections 1441 and 1461. 

On January 28, 2013, the Department 

of the Treasury (Treasury Department) 

and the IRS published final regulations 

under chapter 4 in the Federal Register 

(TD 9610, 78 FR 5873), and on 

September 10, 2013, corrections to the 

final regulations were published in the 

Federal Register (78 FR 55202). The 

regulations in TD 9610 and the 

corrections thereto are collectively 

referred to in this preamble as the 2013 

final chapter 4 regulations. On March 6, 

2014, the Treasury Department and the 

IRS published temporary regulations 

under chapter 4 (TD 9657, 79 FR 12812) 

that clarify and modify certain 

provisions of the 2013 final chapter 4 

regulations, and corrections to the 

temporary regulations were published 

in the Federal Register on July 1, 2014, 

and November 18, 2014 (79 FR 37175 

and 78 FR 68619, respectively). The 

regulations in TD 9657 and the 

corrections thereto are referred to in this 

preamble as the 2014 temporary chapter 

4 regulations. A notice of proposed 

rulemaking cross-referencing the 2014 

temporary chapter 4 regulations was 

published in the Federal Register on 

March 6, 2014 (79 FR 12868). 

On March 6, 2014, the Treasury 

Department and the IRS published 

temporary regulations under chapters 3 

and 61 in the Federal Register (TD 

9658, 79 FR 12726) to coordinate with 

the regulations under chapter 4, and 

corrections to those temporary 

regulations were published in the 

Federal Register (79 FR 37181) on July 

1, 2014. Collectively, the regulations in 

TD 9657 and the corrections thereto are 

referred to in this preamble as the 2014 

temporary coordination regulations. A 

notice of proposed rulemaking crossreferencing the 2014 temporary 

coordination regulations was published 

in the Federal Register on March 6, 

2014 (79 FR 12880). 

On January 6, 2017, the Treasury 

Department and the IRS published final 

and temporary regulations under 

chapter 4 in the Federal Register (TD 

9809, 82 FR 2124), and corrections to 

those final regulations were published 

on June 30, 2017 in the Federal Register 

(82 FR 27928). Collectively, the 

regulations in TD 9809 and the 

corrections thereto are referred to in this 

preamble as the 2017 chapter 4 

regulations. A notice of proposed 

rulemaking cross-referencing the 

temporary regulations in TD 9809 and 

proposing regulations under chapter 4 

relating to verification requirements for 

certain entities was published in the 

Federal Register on January 6, 2017 (82 

FR 1629). Also on January 6, 2017, the 

Treasury Department and the IRS 

published final and temporary 

regulations under chapters 3 and 61 in 

the Federal Register (TD 9808, 82 FR 

2046), and corrections to those final 

regulations were published on June 30, 

2017 in the Federal Register (82 FR 

29719). Collectively, the regulations in 

TD 9808 and the corrections thereto are 

referred to in this preamble as the 2017 

coordination regulations. A notice of 

proposed rulemaking cross-referencing 

the temporary regulations in TD 9808 

was published in the Federal Register 

on January 6, 2017 (82 FR 1645). 

Pursuant to Executive Order 13777, 

Presidential Executive Order on 

Enforcing the Regulatory Reform 

Agenda (82 FR 9339), the Treasury 

Department is responsible for 

conducting a broad review of existing 

regulations. In a Request for Information 

published on June 14, 2017 (82 FR 

27217), the Treasury Department invited 

public comment concerning regulations 

that should be modified or eliminated in 

order to reduce unnecessary burdens. In 

addition, in Notice 2017–28 (2017–19 

I.R.B. 1235), the Treasury Department 

and the IRS invited public comment on 

recommendations for the 2017–2018 

Priority Guidance Plan for tax guidance, 

including recommendations relating to 

Executive Order 13777. In response to 

the invitations for comments in the 

Request for Information and Notice 

2017–28, the Treasury Department and 

the IRS received comments suggesting 

modifications to the regulations under 

chapters 3 and 4. See also Executive 

Order 13789, Identifying and Reducing 

Tax Regulatory Burdens, issued on 

April 21, 2017 (82 FR 19317) and the 

second report issued in response (82 FR 

48013) (stating that the Treasury 

Department continues to analyze all 

recently issued significant regulations 

and is considering possible reforms of 

recent regulations, which include 

regulations under chapter 4). 

Based on public input, and taking into 

account the burden-reducing policies 

described in Executive Orders 13777 

and 13789, these regulations propose 

certain amendments to the regulations 

under chapters 3 and 4, including 

certain refund related issues for which 

comments were received. The 

Explanation of Provisions section of this 

preamble describes these proposed 

amendments and addresses public 

comments received in response to the 

Request for Information and Notice 

2017–28, other than comments that 

would require a statutory change or 


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64758 Federal Register / Vol. 83, No. 242 / Tuesday, December 18, 2018 / Proposed Rules 

were addressed in prior Treasury 

decisions. The Explanation of 

Provisions section of this preamble also 

discusses comments to the 2017 chapter 

4 regulations and 2017 coordination 

regulations to the extent the comments 

relate to amendments that are included 

in these proposed regulations. The 

Treasury Department and the IRS 

continue to study other public 

comments. 

Explanation of Provisions 

I. Elimination of Withholding on 

Payments of Gross Proceeds From the 

Sale or Other Disposition of Any 

Property of a Type Which Can Produce 

Interest or Dividends From Sources 

Within the United States 

Under sections 1471(a) and 1472, 

withholdable payments made to certain 

foreign financial institutions (FFIs) and 

certain non-financial foreign entities 

(NFFEs) are subject to withholding 

under chapter 4. Section 1473(1) states 

that, except as otherwise provided by 

the Secretary, the term ‘‘withholdable 

payment’’ means: (i) Any payment of 

interest (including any original issue 

discount), dividends, rents, salaries, 

wages, premiums, annuities, 

compensations, remunerations, 

emoluments, and other fixed or 

determinable annual or periodical gains, 

profits, and income, if such payment is 

from sources within the United States; 

and (ii) any gross proceeds from the sale 

or other disposition of any property of 

a type which can produce interest or 

dividends from sources within the 

United States. 

Since the enactment of chapter 4, the 

Treasury Department and the IRS have 

received comments from withholding 

agents on the burden of implementing a 

requirement to withhold on gross 

proceeds. The comments have noted in 

particular the lead time required to 

implement such a requirement and the 

potential complexity of a sufficient 

regulatory framework. The comments 

assert that withholding on gross 

proceeds would require significant 

efforts by withholding agents, including 

executing brokers that do not obtain tax 

documentation. The comments assert 

that adding this withholding 

requirement is of limited incremental 

benefit in supporting the objectives of 

chapter 4 with respect to foreign entities 

investing in U.S. securities. In response 

to these comments, the Treasury 

Department and the IRS have repeatedly 

issued guidance deferring the date when 

withholding on gross proceeds would 

begin. The 2017 chapter 4 regulations 

provide that such withholding will 

begin on January 1, 2019. 

Many U.S. and foreign financial 

institutions, foreign governments, the 

Treasury Department, the IRS, and other 

stakeholders have devoted substantial 

resources to implementing FATCA 

withholding on withholdable payments. 

At the same time, 87 jurisdictions have 

an IGA in force or in effect and 26 

jurisdictions are treated as having an 

IGA in effect because they have an IGA 

signed or agreed in substance, which 

allows for international cooperation to 

facilitate FATCA implementation. The 

Treasury Department and the IRS have 

determined that the current withholding 

requirements under chapter 4 on U.S. 

investments already serve as a 

significant incentive for FFIs investing 

in U.S. securities to avoid status as 

nonparticipating FFIs, and that 

withholding on gross proceeds is no 

longer necessary in light of the current 

compliance with FATCA. For these 

reasons, under the authority provided 

under section 1473(1) these proposed 

regulations would eliminate 

withholding on gross proceeds by 

removing gross proceeds from the 

definition of the term ‘‘withholdable 

payment’’ in § 1.1473–1(a)(1) and by 

removing certain other provisions in the 

chapter 4 regulations that relate to 

withholding on gross proceeds. As a 

result of these proposed changes to the 

chapter 4 regulations, only payments of 

U.S. source FDAP that are withholdable 

payments under § 1.1473–1(a) and that 

are not otherwise excepted from 

withholding under § 1.1471–2(a) or (b) 

would be subject to withholding under 

sections 1471(a) and 1472. 

II. Deferral of Withholding on Foreign 

Passthru Payments 

An FFI that has an agreement 

described in section 1471(b) in effect 

with the IRS is required to withhold on 

any passthru payments made to its 

recalcitrant account holders and to FFIs 

that are not compliant with chapter 4 

(nonparticipating FFIs). Section 

1471(d)(7) defines a ‘‘passthru 

payment’’ as any withholdable payment 

or other payment to the extent 

attributable to a withholdable payment. 

In Notice 2010–60 (2010–37 I.R.B. 

329), the Treasury Department and the 

IRS requested comments on methods a 

participating FFI could use to determine 

whether payments it makes are 

attributable to withholdable payments. 

In Notice 2011–34 (2011–19 I.R.B. 765), 

the Treasury Department and the IRS set 

forth a proposed framework for 

participating FFIs to withhold on such 

payments based on a methodology for 

determining a ‘‘passthru payment 

percentage’’ to be applied to certain 

payments made by FFIs. After the 

publication of Notice 2011–34, 

stakeholders noted the burdens and 

complexities in implementing a system 

for withholding on these payments 

along the lines of that described in the 

notice. In light of those comments, the 

framework outlined in Notice 2011–34 

was not incorporated into the 2013 final 

chapter 4 regulations. In addition, the 

Treasury Department and the IRS have 

repeatedly issued guidance deferring the 

date when withholding on these 

payments would begin (referred to in 

guidance as ‘‘foreign passthru 

payments’’). The 2017 chapter 4 

regulations provide that such 

withholding will not begin until the 

later of January 1, 2019, or the date of 

publication in the Federal Register of 

final regulations defining the term 

‘‘foreign passthru payment.’’ 

The Treasury Department and the IRS 

have received comments noting that 

withholding on foreign passthru 

payments may not be needed given the 

number of IGAs in effect. One comment 

also recommended that if the Treasury 

Department and the IRS determine, 

based on an evaluation of the data 

received from FFIs on payments to 

nonparticipating FFIs in 2015 and 2016, 

that withholding on foreign passthru 

payments is necessary, the Treasury 

Department and the IRS should develop 

a more targeted solution. 

Both in recognition of the time 

necessary to implement a system for 

withholding on foreign passthru 

payments and in recognition of the 

successful engagement of Treasury and 

partner jurisdictions to conclude 

intergovernmental agreements to 

implement FATCA, these proposed 

regulations further extend the time for 

withholding on foreign passthru 

payments. Accordingly, under proposed 

regulation § 1.1471–4(b)(4), a 

participating FFI will not be required to 

withhold tax on a foreign passthru 

payment made to a recalcitrant account 

holder or nonparticipating FFI before 

the date that is two years after the date 

of publication in the Federal Register of 

final regulations defining the term 

‘‘foreign passthru payment.’’ The 

proposed regulations also make 

conforming changes to other provisions 

in the chapter 4 regulations that relate 

to foreign passthru payment 

withholding. 

Notwithstanding these proposed 

amendments, the Treasury Department 

and the IRS remain concerned about the 

long-term omission of withholding on 

foreign passthru payments. The 

Treasury Department and the IRS 

acknowledge the progress made in 

implementing FATCA. Nevertheless, 

concerns remain regarding account 


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holders of participating FFIs that remain 

recalcitrant account holders or 

nonparticipating FFIs and regarding 

payments made to nonparticipating 

FFIs. Withholding on foreign passthru 

payments serves important purposes. 

First, it provides one way for an FFI that 

has entered into an FFI agreement to 

continue to remain in compliance with 

its agreement, even if some of its 

account holders have failed to provide 

the FFI with the information necessary 

for the FFI to properly determine 

whether the accounts are U.S. accounts 

and perform the required reporting, or, 

in the case of account holders that are 

FFIs, have failed to enter into an FFI 

agreement. Second, withholding on 

foreign passthru payments prevents 

nonparticipating FFIs from avoiding 

FATCA by investing in the United 

States through a participating FFI 

‘‘blocker.’’ For example, a participating 

FFI that is an investment entity could 

receive U.S. source FDAP income free of 

withholding under chapter 4 and then 

effectively pay the amount over to a 

nonparticipating FFI as a corporate 

distribution. Despite being attributable 

to the U.S. source payment, the payment 

made to the nonparticipating FFI may 

be treated as foreign source income and 

therefore not a withholdable payment 

subject to chapter 4 withholding. 

Accordingly, the Treasury Department 

and the IRS continue to consider the 

feasibility of a system for implementing 

withholding on foreign passthru 

payments. The Treasury Department 

and the IRS request additional 

comments from stakeholders on 

alternative approaches that would serve 

the same compliance objectives as 

would foreign passthru payment 

withholding and that could be more 

efficiently implemented by FFIs. 

III. Elimination of Withholding on NonCash Value Insurance Premiums Under 

Chapter 4 

Under § 1.1473–1(a)(1), a 

withholdable payment generally 

includes any payment of U.S. source 

FDAP income, subject to certain 

exclusions, such as for ‘‘excluded 

nonfinancial payments.’’ Excluded 

nonfinancial payments do not include 

premiums for insurance contracts. The 

2013 final chapter 4 regulations 

included, however, a transitional rule 

that deferred withholding on payments 

with respect to offshore obligations until 

January 1, 2017, which was extended in 

the 2014 chapter 4 regulations to 

include premiums paid by persons 

acting as insurance brokers with respect 

to offshore obligations. Additionally, in 

response to comments noting the 

burden of providing to withholding 

agents withholding certificates and 

withholding statements for payments of 

insurance premiums, the chapter 4 

regulations provide a rule generally 

allowing a withholding agent to treat as 

a U.S. payee a U.S. broker receiving a 

payment of an insurance premium in its 

capacity as an intermediary or an agent 

of a foreign insurer. The IRS also 

generally permits non-U.S. insurance 

brokers that are NFFEs to become 

qualified intermediaries in order to 

alleviate burden on the foreign brokers 

and U.S. withholding agents. 

Notwithstanding these allowances, 

the Treasury Department and the IRS 

continued to receive comments 

requesting elimination of withholding 

under chapter 4 on premiums for 

insurance contracts that do not have 

cash value (non-cash value insurance 

premiums). The comments cited the 

burden on insurance brokers of 

documenting insurance carriers, 

intermediaries, and syndicates of 

insurers for chapter 4 purposes, noting 

examples to demonstrate the volume 

and complexity of placements with 

insurers of the insurance policies 

typically arranged by the brokers for 

their clients. The comments argued that 

withholding on non-cash value 

insurance premiums is not necessary to 

further the purposes of chapter 4. 

At the same time, certain foreign 

entities that conducted a relatively 

small amount of insurance business had 

taken the position that they were not 

passive foreign investment companies 

(PFICs) under section 1297(a). Section 

1297(a) generally defines a PFIC as a 

foreign corporation if 75 percent or 

more of the corporation’s gross income 

for the taxable year is passive income or 

50 percent or more of its assets produce, 

or are held for the production of, 

passive income. Section 1297(b)(2)(B), 

prior to a recent change in law 

(described below), provided an 

exception from the U.S. owner reporting 

and anti-deferral rules applicable to 

PFICs for corporations ‘‘predominantly 

engaged’’ in an insurance business. 

Withholding under chapter 4 on noncash value insurance premiums 

strengthened the IRS’s enforcement 

efforts, with respect to the use of the 

exception in section 1297(b)(2)(B) by 

U.S. owners of foreign corporations for 

tax avoidance and evasion, by 

facilitating reporting of the U.S. owners 

to avoid withholding on premiums 

received by the entity. 

The preamble to the 2017 chapter 4 

regulations noted that future changes to 

the PFIC rules may create an 

opportunity to revise the treatment of 

foreign insurance companies under 

chapter 4. 82 FR 2140. On December 22, 

2017, the Tax Cuts and Jobs Act, Public 

Law 115–97 (2017) amended section 

1297(b)(2)(B) to provide a more limited 

exception to PFIC status by replacing 

the exception for corporations 

predominantly engaged in an insurance 

business with a more stringent test 

based generally on a comparison of the 

corporation’s insurance liabilities and 

its total assets. This amendment is 

expected to mitigate the need for 

reporting on the U.S. owners of these 

companies under chapter 4 because the 

Treasury Department and the IRS 

anticipate that these entities will either 

amend their business models on 

account of the change in law or will 

otherwise comply with the PFIC 

reporting requirements. 

In light of the aforementioned change 

in law and in furtherance of the burdenreducing policies in Executive Orders 

13777 and 13789, these proposed 

regulations provide that premiums for 

insurance contracts that do not have 

cash value (as defined in § 1.1471– 

5(b)(3)(vii)(B)) are excluded 

nonfinancial payments and, therefore, 

not withholdable payments. 

IV. Clarification of Definition of 

Investment Entity 

Under § 1.1471–5(e)(4)(i)(B), an entity 

is an investment entity (and therefore a 

financial institution) if the entity’s gross 

income is primarily attributable to 

investing, reinvesting, or trading in 

financial assets and the entity is 

‘‘managed by’’ another entity that is a 

depository institution, custodial 

institution, insurance company, or an 

investment entity described in § 1.1471– 

5(e)(4)(i)(A). Section 1.1471–5(e)(4)(v), 

Example 2, illustrates this rule with an 

example in which a fund is an 

investment entity because another 

financial institution (an investment 

advisor) provides investment advice to 

the fund and has discretionary 

management of the assets held by a fund 

and the fund meets the gross income 

test. In Example 6 of § 1.1471–5(e)(4)(v), 

a trust is an investment entity because 

the trustee (an FFI) manages and 

administers the assets of the trust in 

accordance with the terms of the trust 

instrument and the trust meets the gross 

income test. Section 1.1471–5(e)(4)(v), 

Example 8, provides an example in 

which an entity is an investment entity 

because an introducing broker (that is, 

a broker using another broker to clear 

and settle its trades) has discretionary 

authority to manage the entity’s assets 

and provides services as an investment 

advisor and manager to the entity and 

the entity meets the gross income test. 

The Treasury Department and the IRS 

received a comment requesting that 


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‘‘discretionary authority’’ be more 

narrowly construed for purposes of 

treating an entity as an investment 

entity described in § 1.1471– 

5(e)(4)(i)(B). The comment suggested 

that an entity should not be treated as 

an investment entity solely because the 

entity invests in a mutual fund or 

similar vehicle because the investments 

made by the mutual fund are not 

tailored to the entity that invests in it. 

The comment requested the same result 

for a variety of other types of investment 

products and solutions with varying 

degrees of investor involvement and 

standardization, including an 

investment in a ‘‘discretionary 

mandate.’’ According to the comment, a 

‘‘discretionary mandate’’ is an 

investment product or solution offered 

by a financial institution to certain 

clients where the financial institution 

manages and invests the client’s funds 

directly (rather than the client investing 

in a separate entity) in accordance with 

the client’s investment goals. The 

comment noted that some discretionary 

mandate clients claim to be passive 

NFFEs rather than FFIs. 

As described in the examples, the 

‘‘managed by’’ category of investment 

entities generally covers entities that 

receive specific professional 

management advice from an advisor that 

is tailored to the investment needs of 

the entity. A financial institution does 

not have discretionary authority over an 

entity merely because it sells the entity 

shares in a widely-held fund that 

employs a predetermined investment 

strategy. These proposed regulations 

clarify that an entity is not ‘‘managed 

by’’ another entity for purposes of 

§ 1.1471–5(e)(4)(i)(B) solely because the 

first-mentioned entity invests all or a 

portion of its assets in such other entity, 

and such other entity is a mutual fund, 

an exchange traded fund, or a collective 

investment entity that is widely held 

and is subject to investor-protection 

regulation. In contrast, an investor in a 

discretionary mandate described above 

is ‘‘managed by’’ the financial 

institution under § 1.1471–5(e)(4)(i)(B). 

The clarification in these proposed 

regulations is similar to the guidance 

published by the OECD interpreting the 

definition of a ‘‘managed by’’ 

investment entity under the Common 

Reporting Standard. 

V. Modifications to Due Diligence 

Requirements of Withholding Agents 

Under Chapters 3 and 4 

A. Treaty Statements Provided With 

Documentary Evidence for Chapter 3 

Under chapter 3, a withholding agent 

must generally obtain either a 

withholding certificate or documentary 

evidence and a treaty statement in order 

to apply a reduced rate of withholding 

based on a payee’s claim for benefits 

under a tax treaty. The 2017 

coordination regulations added a 

requirement that when a treaty 

statement is provided with documentary 

evidence by an entity beneficial owner 

to claim treaty benefits, the statement 

must identify the specific limitation on 

benefits (LOB) provision relied upon in 

the treaty. In addition, the 2017 

coordination regulations added a threeyear validity period applicable to treaty 

statements provided with documentary 

evidence and a transition period that 

expires January 1, 2019, for withholding 

agents to obtain new treaty statements 

that comply with the new LOB 

requirement for accounts that were 

documented with documentary 

evidence before January 6, 2017 

(preexisting accounts). The QI 

agreement in Revenue Procedure 2017– 

15, 2017–3 I.R.B. 437 (2017 QI 

agreement) cross-references the 2017 

coordination regulations for the threeyear validity period for treaty statements 

provided with documentary evidence 

and provides a two-year transition rule 

for accounts documented before January 

1, 2017. Similar provisions are included 

in the WP and WT agreements in 

Revenue Procedure 2017–21, 2017–6 

I.R.B. 791 (2017 WP and WT 

agreements). 

Comments have noted the burden of 

complying with the new treaty 

statement requirements, including 

difficulties in obtaining new treaty 

statements for preexisting accounts 

within the transitional period given the 

large number of account holders 

impacted by this requirement. The 

comments requested an additional oneyear period for withholding agents to 

obtain new treaty statements for 

preexisting accounts, and the removal of 

the three-year validity period for a treaty 

statement that meets the LOB 

requirement. A comment also noted that 

a three-year validity period for a treaty 

statement is not needed for certain 

categories of entities whose treaty status 

is unlikely to change, such as publicly 

traded corporations and government 

entities. 

In response to these comments, these 

proposed regulations include several 

changes to the rules on treaty statements 

provided with documentary evidence. 

First, these proposed regulations extend 

the time for withholding agents to 

obtain treaty statements with the 

specific LOB provision identified for 

preexisting accounts until January 1, 

2020 (rather than January 1, 2019). 

Second, these proposed regulations add 

exceptions to the three-year validity 

period for treaty statements provided by 

tax exempt organizations (other than 

tax-exempt pension trusts or pension 

funds), governments, and publicly 

traded corporations, entities whose 

qualification under an applicable treaty 

is unlikely to change. See proposed 

§ 1.1441–1(e)(4)(ii)(A)(2). In addition, 

these proposed regulations correct an 

inadvertent omission of the actual 

knowledge standard for a withholding 

agent’s reliance on the beneficial 

owner’s identification of an LOB 

provision on a treaty statement provided 

with documentary evidence, the same as 

the standard that applies to a 

withholding certificate used to make a 

treaty claim. See proposed § 1.1441– 

6(c)(5)(i). The proposed amendments 

described in this section V.A. will also 

be incorporated into the 2017 QI 

agreement and 2017 WP and WT 

agreements, and a QI, WP, or WT may 

rely upon these proposed modifications 

until such time. 

B. Permanent Residence Address 

Subject to Hold Mail Instruction for 

Chapters 3 and 4 

In response to comments received on 

the 2014 temporary coordination 

regulations and the 2014 QI agreement 

regarding the definition of a ‘‘permanent 

residence address,’’ the 2017 

coordination regulations (and the 2017 

chapter 4 regulations by cross-reference) 

allow an address to be treated as a 

permanent residence address despite 

being subject to a hold mail instruction 

when a person provides documentary 

evidence establishing residence in the 

country in which the person claims to 

be a resident for tax purposes. 

Comments noted that the allowance to 

obtain documentary evidence 

establishing residence in a particular 

country is unnecessarily strict when the 

person is not claiming treaty benefits, 

and that it is unclear what documentary 

evidence may be used to establish 

residence for purposes of this 

allowance. 

These proposed regulations provide 

that the documentary evidence required 

in order to treat an address that is 

provided subject to a hold mail 

instruction as a permanent residence 

address is documentary evidence that 

supports the person’s claim of foreign 

status or, for a person claiming treaty 

benefits, documentary evidence that 

supports the person’s residence in the 

country where the person claims treaty 

benefits. Regardless of whether the 

person claims treaty benefits, the 

documentary evidence on which a 

withholding agent may rely is the 

documentary evidence described in 


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§ 1.1471–3(c)(5)(i), without regard to the 

requirement that the documentation 

contain a permanent residence address. 

A comment also requested the 

removal of any limitation on reliance on 

a permanent residence address subject 

to a hold mail instruction because many 

account holders prefer to receive 

electronic correspondence rather than 

paper mail. In response to this 

comment, proposed § 1.1471–1(b)(62) 

adds a definition of a hold mail 

instruction to clarify that a hold mail 

instruction does not include a request to 

receive all correspondence (including 

account statements) electronically. 

These proposed regulations apply for 

purposes of chapters 3 and 4. A QI, WP, 

or WT may rely upon these proposed 

modifications until they are 

incorporated into the 2017 QI agreement 

and 2017 WP and WT agreements. 

VI. Revisions Related to Credits and 

Refunds of Overwithheld Tax 

A. Withholding and Reporting in a 

Subsequent Year 

Under § 1.1441–5(b)(2)(i)(A), a U.S. 

partnership is required to withhold on 

an amount subject to chapter 3 

withholding (as defined in § 1.1441– 

2(a)) that is includible in the gross 

income of a partner that is a foreign 

person. A U.S. partnership satisfies this 

requirement by withholding on 

distributions to the foreign partner that 

include an amount subject to chapter 3 

withholding. To the extent a foreign 

partner’s distributive share of income 

subject to chapter 3 withholding is not 

actually distributed to the partner, the 

U.S. partnership must withhold on the 

partner’s distributive share of the 

income on the earlier of the date that the 

statement required under section 

6031(b) (Schedule K–1, Partner’s Share 

of Income, Deductions, Credits, etc.) is 

mailed or otherwise provided to the 

partner or the due date for furnishing 

the statement. Under section 6031(b), a 

partnership that files its return for a 

calendar year (calendar-year 

partnership) must generally furnish to 

each partner a Schedule K–1 on or 

before March 15 following the close of 

the taxable year, a due date that may be 

extended up to six months. See 

§§ 1.6031(b)–1T(b) and 1.6081–2T(a). 

Similar requirements apply to a foreign 

partnership that has entered into an 

agreement with the IRS to act as a WP. 

See the 2017 WP agreement. A foreign 

partnership other than a WP generally 

satisfies its withholding requirement in 

the same manner for amounts received 

from a withholding agent that failed to 

withhold to the extent required. See 

§ 1.1441–5(c)(2) and (c)(3)(v). For 

purposes of chapter 4, similar 

withholding rules apply to a partnership 

that receives a withholdable payment 

allocable to a foreign partner. See 

§ 1.1473–1(a)(5)(ii) and (vi). 

Under § 1.1461–1(c)(1) and (2), a 

partnership is required to report on 

Form 1042–S, Foreign Person’s U.S. 

Source Income Subject to Withholding, 

any amount subject to withholding that 

is allocable to a foreign partner for a 

calendar year. The partnership must file 

Form 1042–S (and furnish a copy to the 

partner) by March 15 of the calendar 

year following the year in which it 

receives the amount subject to 

withholding. The due date for filing a 

Form 1042–S may be automatically 

extended by 30 days (and an additional 

30 days at the discretion of the IRS). See 

§ 1.6081–8T(a). Amounts that are 

reportable on Forms 1042–S are also 

required to be reported on a 

withholding agent’s income tax return, 

Form 1042, Annual Withholding Tax 

Return for U.S. Source Income of 

Foreign Persons. The due date for Form 

1042 is March 15, which may be 

automatically extended for six months. 

See § 1.6081–10. Similar reporting rules 

apply to a partnership that receives a 

withholdable payment and withholds 

under chapter 4. See § 1.1474–1(c) and 

(d)(1). 

Because the extended due date for 

filing a Form 1042–S generally occurs 

before the extended due date for 

furnishing a Schedule K–1 to a foreign 

partner, a partnership may be required 

to report an amount subject to 

withholding on a Form 1042–S before it 

performs all of the withholding required 

on such amount under § 1.1441– 

5(b)(2)(i)(A) or § 1.1473–1(a)(5)(ii) and 

(vi). To address this case, the 

Instructions for Form 1042 require a 

domestic partnership to report any 

withholding that occurs with respect to 

an amount that a partnership received 

but did not distribute to a partner in a 

calendar year (preceding year) on the 

partnership’s Form 1042 for the 

following calendar year (subsequent 

year) (referred to as the ‘‘lag method’’ of 

reporting). In this case, the partnership 

would deposit the amount in the 

subsequent year and designate the 

deposit as made for that year for 

reporting on Form 1042. To correspond 

to the timing of the reporting on Form 

1042, the partnership must also report 

this withholding on Forms 1042–S filed 

and issued for the subsequent year. For 

example, a calendar year domestic 

partnership that receives U.S. source 

dividends in 2017 (but does not make a 

distribution to its foreign partners), 

must withhold on the foreign partners’ 

share of the dividend income by the 

time the partnership issues Schedules 

K–1 to the foreign partners, which could 

be as late as September 15, 2018. The 

lag method of reporting requires the 

partnership to report the withholding on 

the Forms 1042–S and 1042 for the 2018 

year (which are issued and filed in 

2019). The WP agreement includes a 

similar requirement to that described in 

this paragraph when a WP withholds 

after the due date for Form 1042–S 

(including extensions). The Instructions 

for Form 1042 provide a similar 

reporting rule for a domestic trust that 

withholds in a subsequent year on 

income of the trust that it is required to 

distribute but has not actually 

distributed to a foreign beneficiary. See 

§ 1.1441–5(b)(2)(ii) and (iii). The WT 

agreement includes a similar 

requirement for a WT. 

Apart from the cases described in the 

preceding paragraph, in certain other 

cases, a withholding agent is permitted 

to withhold an amount in a subsequent 

year that relates to the preceding year. 

For example, a withholding agent 

adjusting underwithholding under 

§ 1.1461–2(b) or § 1.1474–2(b) may 

withhold the additional amount by the 

due date (without extensions) of Form 

1042. In these cases, the Instructions for 

Form 1042 provide that, in contrast to 

the reporting required by partnerships 

and certain trusts described in the 

preceding paragraph, a withholding 

agent withholding in a subsequent year 

must designate the deposit and report 

the tax for the preceding year. 

Comments have noted issues that 

arise under the lag method when a 

partner files an income tax return to 

report the partnership income allocated 

to the partner and to claim credit under 

section 33 (or a refund) based on the 

partnership’s withholding. When a 

partnership applies the lag method, it 

issues a Form 1042–S for the subsequent 

year (and the related withholding) that 

generally reflects the income received 

by the partnership in the preceding 

year. However, the income is reported to 

the partner on Schedule K–1 for the 

preceding year, thus resulting in a 

mismatch between the income allocated 

to the partner and the withholding on 

that income. Because a partner must 

attach to its income tax return a Form 

1042–S that it receives from a 

partnership to claim a credit or refund 

of overwithholding under § 301.6402– 

3(e), the partner cannot support the 

claim with the Form 1042–S until after 

the year in which the partner is required 

to report the income shown on the 

Schedule K–1. 

These proposed regulations generally 

require a withholding agent (including a 

partnership or trust) that withholds in a 


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subsequent year to designate the deposit 

as attributable to the preceding year and 

report the amount on Forms 1042 and 

1042–S for the preceding year. This 

proposed rule incorporates the existing 

rule for withholding agents (other than 

partnerships and trusts) from the form 

instructions, and extends the rule to 

partnerships and trusts. An exception to 

this requirement for a partnership that 

is not a calendar-year partnership (a 

fiscal-year partnership) provides that 

such partnership may designate a 

deposit as made for the subsequent year 

and report the amount on Forms 1042 

and 1042–S for the subsequent year. 

This exception allows a fiscal-year 

partnership flexibility to determine the 

year for reporting that will result in the 

best matching of the income and the 

related withholding. 

These proposed regulations also 

provide a revised due date for a 

partnership to file and furnish Form 

1042–S when it withholds the tax after 

March 15 of the subsequent year that it 

designates as deposited for the 

preceding year. Under this new rule, the 

due date for a partnership to file and 

furnish a Form 1042–S in such a case 

will be September 15 of the subsequent 

year. This revised due date corresponds 

to the due date for a partnership to file 

Form 1042 with an extension and the 

due date for a calendar-year partnership 

to furnish a Schedule K–1 to a partner 

with an extension so that the 

partnership has sufficient time to 

determine the amount of withholding 

due and to coordinate with the extended 

due date for furnishing the Schedule K– 

1. 

Based on the revisions included in 

these proposed regulations, the IRS 

intends to amend the Instructions for 

the 2019 Form 1042 to remove the 

requirement that a partnership or trust 

apply the lag method and to incorporate 

these proposed regulations. The IRS also 

intends to amend the Instructions to the 

2019 Form 1042–S to require that in a 

case when a partnership is filing Form 

1042–S after March 15 for a partner’s 

distributive share of an amount received 

by the partnership in the preceding 

year, the partnership must file and issue 

a separate Form 1042–S for such 

amount for the preceding year (in 

addition to any Forms 1042–S filed and 

issued to the partner for amounts that 

are withheld when distributed to the 

partner before March 15 and reported 

for the preceding year). 

The Treasury Department and the IRS 

intend to amend the WP and WT 

agreements to the extent necessary to 

incorporate the proposed regulations, 

and until such time a WP or WT may 

rely on these proposed modifications for 

purposes of its filing and deposit 

requirements. 

B. Adjustments to Overwithholding 

Under the Reimbursement and Set-Off 

Procedures 

Under § 1.1461–2(a), a withholding 

agent that has overwithheld and 

deposited the tax may adjust the 

overwithheld amount under either the 

reimbursement procedure or the set-off 

procedure. Under the reimbursement 

procedure, a withholding agent may 

repay the beneficial owner or payee the 

amount of tax overwithheld and then 

reimburse itself by reducing, by the 

amount of such repayment, any deposit 

of withholding tax otherwise required to 

be made before the end of the calendar 

year following the year of 

overwithholding. The withholding agent 

must make any repayment to the 

beneficial owner or payee before the 

earlier of the due date for filing Form 

1042–S (without extensions) for the 

calendar year of overwithholding or the 

date on which the Form 1042–S is 

actually filed with the IRS, and must 

state on a timely filed Form 1042 

(without extensions) for the calendar 

year of overwithholding that the filing 

constitutes a claim for credit in 

accordance with § 1.6414–1. 

Under the set-off procedure, a 

withholding agent may apply the 

overwithheld amount against any 

amount which would otherwise be 

subject to withholding that is paid to the 

beneficial owner or payee before the 

earlier of the due date for filing Form 

1042–S (without extensions) for the 

calendar year of overwithholding or the 

date that the Form 1042–S is actually 

filed with the IRS. Similar rules for 

adjusting overwithholding apply for 

purposes of chapter 4. See § 1.1474– 

2(a)(3) and (4). 

If a withholding agent cannot apply 

the reimbursement or set-off procedure, 

a beneficial owner or payee must file a 

claim for credit or refund with the IRS 

in order to recover the overwithheld tax. 

Informal comments have requested to 

expand the cases in which a 

withholding agent may apply the 

reimbursement and set-off procedures in 

order to limit the need for a beneficial 

owner or payee to claim a credit or 

refund. These proposed regulations 

respond to these comments by 

modifying the reimbursement procedure 

to allow a withholding agent to use the 

extended due date for filing Forms 1042 

and 1042–S to make a repayment and 

claim a credit. These proposed 

regulations also include revisions to 

conform the requirements for the set-off 

procedures to those that apply to the 

reimbursement procedures. In addition, 

these proposed regulations remove the 

requirement that a withholding agent 

include with its Form 1042 a statement 

that the filing constitutes a claim for 

credit when it applies reimbursement in 

the year following the year of the 

overwithholding. This statement is no 

longer necessary because Form 1042 

was revised in 2016 to provide separate 

fields for adjustments to 

overwithholding and underwithholding. 

These proposed regulations also 

provide that a withholding agent may 

not apply the reimbursement and set-off 

procedures after the date on which 

Form 1042–S has been furnished to the 

beneficial owner or payee (in addition 

to, under the current regulations, after 

the date a Form 1042–S has been filed). 

Because of the liberalizing amendments 

described in the preceding paragraph, 

this change is needed to ensure that a 

Form 1042–S furnished to a beneficial 

owner or payee reflects any repayments 

made pursuant to these adjustment 

procedures and is consistent with the 

associated Form 1042–S that is filed 

with the IRS. A QI, WP, or WT may rely 

upon the proposed modifications 

described in this section VI.B until they 

are incorporated into the 2017 QI 

agreement and 2017 WP and WT 

agreements. 

C. Reporting of Withholding by 

Nonqualified Intermediaries 

A withholding agent that makes a 

payment subject to chapter 3 

withholding to a nonqualified 

intermediary (as defined in § 1.1441– 

1(c)(14)) can reliably associate the 

payment with documentation when it 

obtains a valid intermediary 

withholding certificate (that is, Form 

W–8IMY, Certificate of Foreign 

Intermediary, Foreign Flow-Through 

Entity, or Certain U.S. Branches for 

United States Tax Withholding) from 

the nonqualified intermediary and a 

withholding statement that allocates the 

payment among the payees and includes 

the documentation for each payee as 

described in § 1441–1(b)(2)(vii)(B) and 

(e)(3)(iii). For purposes of chapter 4, a 

withholding agent making a 

withholdable payment to a nonqualified 

intermediary that is a participating FFI 

or a registered deemed-compliant FFI 

may rely on a withholding statement 

that includes an allocation of the 

payment to a chapter 4 withholding rate 

pool of payees, and must obtain payeespecific documentation for payees that 

are not includible in a chapter 4 

withholding rate pool to permit any 

reduced rate of withholding. See 

§ 1.1471–3(c)(3)(iii)(B). 

To the extent that a withholding agent 

cannot reliably associate a withholdable 


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payment made to a nonqualified 

intermediary with valid documentation 

under § 1.1471–3(c), the withholding 

agent must presume that the payment is 

made to a nonparticipating FFI and 

withhold 30 percent of the payment. See 

§ 1.1471–3(f)(5). In such a case, the 

withholding agent is required to report 

the payment as a chapter 4 reportable 

amount made to an unknown recipient 

on a Form 1042–S that reports the 

nonqualified intermediary as an 

intermediary and the amount withheld 

as chapter 4 withholding. See the 

Instructions for Form 1042–S. If the 

amount withheld upon under chapter 4 

is an amount subject to withholding 

under chapter 3, the withholding agent 

is relieved from its obligation to also 

withhold under chapter 3 on the 

payment. § 1.1441–3(a)(2). To the extent 

that a nonqualified intermediary is 

required to report the same payments to 

its account holders on Forms 1042 and 

1042–S under the chapter 3 or 4 

regulations, the nonqualified 

intermediary need not withhold when 

chapter 3 or 4 withholding has already 

been applied by its withholding agent, 

and it substantiates the withholding by 

attaching to its Form 1042 a copy of the 

Form 1042–S furnished by the 

withholding agent. 

Comments have noted that some U.S. 

withholding agents charge fees for the 

administrative burden associated with 

reviewing underlying documentation 

that is included with a withholding 

statement provided by a nonqualified 

intermediary. In other cases, 

nonqualified intermediaries may not be 

able to obtain such documentation from 

account holders. For these reasons, 

some nonqualified intermediaries 

provide withholding agents with valid 

Forms W–8IMY to establish their 

chapter 4 statuses but do not provide 

any underlying payee documentation or 

withholding rate pool information to 

substantiate the allocations to payees 

shown on a withholding statement. 

Comments have stated that the 

requirement for withholding agents to 

report the withholding applied to 

withholdable payments as chapter 4 

withholding in these cases (because the 

payees are presumed to be 

nonparticipating FFIs) has made it 

difficult for account holders to claim 

foreign tax credits from foreign 

jurisdictions that do not view the 

chapter 4 withholding tax as a 

creditable income tax. These comments 

recommended various proposals to 

allow a nonqualified intermediary to 

report the withholding as chapter 3 

withholding applied to its account 

holders. 

In response to the comments 

described in the preceding paragraph, 

these proposed regulations modify the 

rules for reporting by a nonqualified 

intermediary under §§ 1.1461–1(c)(4)(iv) 

and 1.1474–1(d)(2)(ii) to address a case 

in which a nonqualified intermediary 

receives a payment for which a 

withholding agent has withheld at the 

30-percent rate under chapter 4 and 

reported the payment on Form 1042–S 

as made to an unknown recipient. In 

such a case, these proposed regulations 

permit a nonqualified intermediary that 

is a participating FFI or registered 

deemed-compliant FFI to report the 

withholding applied to the nonqualified 

intermediary on a Form 1042–S as 

chapter 3 withholding to the extent that 

the nonqualified intermediary 

determines that the payment is not an 

amount for which withholding is 

required under chapter 4 based on the 

payee’s chapter 4 status. Under the 

existing reporting requirements, the 

nonqualified intermediary would be 

required to file a Form 1042 and would 

need to be furnished a copy of the Form 

1042–S filed by the withholding agent 

to substantiate the credit against its 

withholding tax liability for the 

withholding applied by its withholding 

agent. Under the modified requirement, 

the nonqualified intermediary would be 

permitted to substantiate the credit even 

though the Form 1042–S furnished to it 

reports chapter 4 withholding and the 

corresponding Forms 1042–S that the 

nonqualified intermediary issues reports 

chapter 3 withholding. This change 

should assist account holders using 

Form 1042–S to claim foreign tax credits 

in their jurisdictions of residence in 

these cases. The Treasury Department 

and the IRS are of the view that this 

determination should be limited to a 

nonqualified intermediary that is a 

participating FFI or registered deemedcompliant FFI given the role of these 

FFIs in documenting their account 

holders for chapter 4 purposes and their 

compliance requirements under the 

chapter 4 regulations or an applicable 

IGA jurisdiction. 

Reliance on Proposed Regulations 

Under section 7805(b)(1)(C), taxpayers 

may rely on the proposed regulations 

until final regulations are issued, except 

as otherwise provided in this paragraph. 

With respect to the elimination of 

withholding on non-cash value 

insurance premiums under proposed 

§ 1.1473–1(a)(3)(iii), the clarification of 

the definition of a ‘‘managed by’’ 

investment entity under proposed 

§ 1.1471–5(e)(4)(i)(B), and the revised 

allowance for a permanent residence 

address subject to a hold mail 

instruction under proposed §§ 1.1441– 

1(c)(38) and 1.1471–1(b)(99), taxpayers 

may apply the modifications in these 

proposed regulations for all open tax 

years until final regulations are issued. 

For the revisions included in these 

proposed regulations that relate to 

credits and refunds of withheld tax, 

taxpayers may not rely on these 

proposed regulations until Form 1042 

and Form 1042–S are updated for the 

2019 calendar year. 

Special Analyses 

The Administrator of the Office of 

Information and Regulatory Affairs 

(OIRA), Office of Management and 

Budget (OMB), has waived review of 

this proposed rule in accordance with 

section 6(a)(3)(A) of Executive Order 

12866. OIRA will subsequently make a 

significance determination of the final 

rule, pursuant to section 3(f) of 

Executive Order 12866 and the April 11, 

2018, Memorandum of Agreement 

between the Treasury Department and 

the OMB. 

The Treasury Department and the IRS 

expect the proposed regulation, when 

final, to be an Executive Order 13771 

deregulatory action and request 

comment on this designation. 

Paperwork Reduction Act 

The collection of information 

contained in these proposed regulations 

is in a number of provisions, including 

§§ 1.1441–1, 1.1461–1, 1.1461–2, 

1.1474–1, and 1.1474–2. The IRS 

intends that the information collection 

requirements of these regulations will 

be implemented through the use of 

Forms 1042 and 1042–S. As a result, for 

purposes of the Paperwork Reduction 

Act (44 U.S.C. 3507), the reporting 

burden associated with the collection of 

information in these regulations will be 

reflected in the information burden and 

OMB control number of the appropriate 

IRS form. 

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. 

The proposed regulations will not 

increase the number of taxpayers 

required to file a return. Current filers 

may have to modify slightly how they 

report, but the burden of reporting 

should not increase. 

As described in section VI.A of the 

Explanations of Provisions, the 

proposed regulations allow a 

partnership that withholds in a 

subsequent year to designate the deposit 

as attributable to the preceding year and 

report the withholding on Forms 1042 

and 1042–S for the preceding year 


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64764 Federal Register / Vol. 83, No. 242 / Tuesday, December 18, 2018 / Proposed Rules 

(rather than the subsequent year). In 

addition, the proposed regulations allow 

a partnership that withholds after March 

15 of the subsequent year to file Form 

1042–S on or before September 15 of 

such year. The IRS intends to modify 

Form 1042–S to add a check box to the 

form so that a partnership filer can 

indicate that it qualifies for the 

September 15 due date for filing the 

form. A partnership that relies on the 

September 15 due date may need to file 

an additional Form 1042–S if it is filing 

to report a partner’s distributive share of 

an amount received by the partnership 

in the preceding year and it has already 

filed a Form 1042–S for such partner for 

the same year. Information on the 

number of partnerships that withhold in 

a year subsequent to the year in which 

the amount was received is not 

available. However, as an upper bound, 

table 1 shows the estimated number of 

partnerships that file Form 1042. 

As explained in section IV.B of the 

Explanation of Provisions, the proposed 

regulations provide additional time for 

withholding agents to apply the 

reimbursement or set-off procedure to 

adjust overwithholding. The proposed 

revision may increase the amounts 

reported by filers of Forms 1042 and 

1042–S, but should not affect the 

number of filers. It is unknown how 

many withholding agents will use the 

reimbursement and set-off procedures as 

a result of the modifications to those 

procedures in the proposed regulations. 

However, as an upper bound, table 1 

shows the estimated number of 

withholding agents that report non-zero 

amounts as adjustments to 

overwithholding. 

Finally, as described in section IV.C 

of the Explanation of Provisions, the 

proposed regulations permit certain 

nonqualified intermediaries to report on 

certain payments on Form 1042–S using 

the code for chapter 3 withholding 

rather than the code for chapter 4 

withholding in certain cases in which 

chapter 4 withholding is applied on 

payments made to the nonqualified 

intermediaries. This modification in the 

proposed regulations should not affect 

the number of filers or increase any 

burdens, but rather change how 

nonqualified intermediaries report to 

certain recipients. It is not possible to 

estimate the number of nonqualified 

intermediaries that may change the code 

from chapter 4 to chapter 3, so as an 

upper bound, table 1 shows the 

estimated number of withholding agents 

that are nonqualified intermediaries that 

file Form 1042–S. 

TABLE 1—RELATED TAX FORM

COUNTS

Number of 

respondents 

(estimated) 

Total number of Form 1042 

filers ................................. 45,000–50,000 

Partnership filers of Form 

1042 ................................ 2,000–3,000 

Form 1042 filers reporting 

adjustments to overwithholding ............................. 4,000–5,000 

Nonqualified intermediaries 

filers of Form 1042–S ..... 500 

Tax Form 1042 data are from 

administrative tax files while the Form 

1042–S information is from a 2016 data 

file on foreign tax withholding. 

Books and records relating to a 

collection of information must be 

retained as long as their contents may be 

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. 

Regulatory Flexibility Act 

It is hereby certified that the 

collection of information requirements 

in this notice of proposed rulemaking 

will not have a significant economic 

impact on a substantial number of small 

business entities within the meaning of 

section 601(6) of the Regulatory 

Flexibility Act (5 U.S.C. chapter 6). This 

notice of proposed rulemaking reduces 

the information required to be reported 

under chapters 3 and 4 as required by 

TDs 9610, 9657, 9658, 9808, and 9809, 

information collections that were 

certified by the Treasury Department 

and the IRS as not resulting in a 

significant economic impact on a 

substantial number of small business 

entities. The burden-reducing 

information collections of this notice of 

proposed rulemaking provide benefits 

for small business entities consistent 

with the Regulatory Flexibility Act’s 

objective that information collections 

achieve statutory objectives while 

minimizing any significant impact on 

small business entities. Therefore, a 

Regulatory Flexibility Analysis is not 

required. 

Pursuant to section 7805(f), this 

regulation has been submitted to the 

Chief Counsel for Advocacy of the Small 

Business Administration for comment 

on its impact on small businesses. 

Statement of Availability of IRS 

Documents 

IRS Revenue Procedures, Revenue 

Rulings, Notices, and other guidance 

cited in this preamble are published in 

the Internal Revenue Bulletin (or 

Cumulative Bulletin) and are available 

from the Superintendent of Documents, 

U.S. Government Publishing Office, 

Washington, DC 20402, or by visiting 

the IRS website at www.irs.gov. 

Comments and Requests for Public 

Hearing 

Before these proposed regulations are 

adopted as final regulations, 

consideration will be given to any 

comments that are submitted timely to 

the IRS as prescribed in this preamble 

under the ‘‘Addresses’’ heading. The 

Treasury Department and the IRS 

request comments on all aspects of the 

proposed rules but specifically on 

foreign passthru payment withholding 

and the definition of investment entity, 

as discussed in section II of the 

Explanation of Provisions. All 

comments will be available for public 

inspection and copying. A public 

hearing will be scheduled if requested 

in writing by any person that timely 

submits written comments. If a public 

hearing is scheduled, notice of the date, 

time, and place for the public hearing 

will be published in the Federal 

Register. 

Drafting Information 

The principal authors of these 

proposed regulations are John Sweeney, 

Nancy Lee, and Subin Seth, Office of 

Associate Chief Counsel (International). 

However, other personnel from the IRS 

and the Treasury Department 

participated in their development. 

List of Subjects in 26 CFR Part 1 

Income taxes, Reporting and 

recordkeeping requirements. 

Proposed Amendments to the 

Regulations 

Accordingly, 26 CFR part 1 is 

proposed to be amended as follows: 

PART 1—INCOME TAXES 

■ Paragraph 1. The authority citation 

for part 1 is amended by revising the 

entries for §§ 1.1471–1, 1.1471–2, 

1.1471–3, 1.1471–4, and 1.1474–4 to 

read in part as follows: 

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

* * * * * 

Section 1.1471–1 also issued under 26 

U.S.C. 1471 and 26 U.S.C. 1473. 

Section 1.1471–2 also issued under 26 

U.S.C. 1471 and 26 U.S.C. 1473. 

Section 1.1471–3 also issued under 26 

U.S.C. 1471 and 26 U.S.C. 1473. 

Section 1.1471–4 also issued under 26 

U.S.C. 1471 and 26 U.S.C. 1474. 

* * * * * 


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Section 1.1474–1 also issued under 26 

U.S.C. 1473 and 26 U.S.C. 1474. 

* * * * * 

■ Par. 2. Section 1.1441–1 is amended 

by revising paragraphs (c)(38) and 

(e)(4)(ii)(A)(2) to read as follows: 

§ 1.1441–1 Requirement for the deduction 

and withholding of tax on payments to 

foreign persons. 

* * * * * 

(c) * * * 

(38) Permanent residence address—(i) 

In general. The term permanent 

residence address is the address in the 

country of which the person claims to 

be a resident for purposes of that 

country’s income tax. In the case of a 

withholding certificate furnished in 

order to claim a reduced rate of 

withholding under an income tax treaty, 

whether a person is a resident of a treaty 

country must be determined in the 

manner prescribed under the applicable 

treaty. See § 1.1441–6(b). The address of 

a financial institution with which the 

person maintains an account, a post 

office box, or an address used solely for 

mailing purposes is not a permanent 

residence address unless such address is 

the only address used by the person and 

appears as the person’s registered 

address in the person’s organizational 

documents. Further, an address that is 

provided subject to a hold mail 

instruction (as defined in § 1.1471– 

1(b)(62)) is not a permanent residence 

address unless the person provides the 

documentary evidence described in 

paragraph (c)(38)(ii) of this section. If, 

after a withholding certificate is 

provided, a person’s permanent 

residence address is subsequently 

subject to a hold mail instruction, the 

addition of the hold mail instruction is 

a change in circumstances requiring the 

person to provide the documentary 

evidence described in paragraph 

(c)(38)(ii) of this section in order for a 

withholding agent to use the address as 

a permanent residence address. If the 

person is an individual who does not 

have a tax residence in any country, the 

permanent residence address is the 

place at which the person normally 

resides. If the person is an entity and 

does not have a tax residence in any 

country, then the permanent residence 

address of the entity is the place at 

which the person maintains its 

principal office. 

(ii) Hold mail instruction. An address 

that is subject to a hold mail instruction 

(as defined in § 1.1471–1(b)(62)) can be 

used by a withholding agent as a 

permanent residence address if the 

person has provided the withholding 

agent with documentary evidence 

described in § 1.1471–3(c)(5)(i) (without 

regard to the requirement in § 1.1471– 

3(c)(5)(i) that the documentary evidence 

contain a permanent residence address). 

The documentary evidence described in 

§ 1.1471–3(c)(5)(i) must support the 

person’s claim of foreign status or, in 

the case of a person that is claiming 

treaty benefits, must support residence 

in the country where the person is 

claiming a reduced rate of withholding 

under an income tax treaty. 

* * * * * 

(e) * * * 

(4) * * * 

(ii) * * * 

(A) * * * 

(2) Documentary evidence for treaty 

claims and treaty statements. 

Documentary evidence described in 

§ 1.1441–6(c)(3) or (4) shall remain valid 

until the last day of the third calendar 

year following the year in which the 

documentary evidence is provided to 

the withholding agent, except as 

provided in paragraph (e)(4)(ii)(B) of 

this section. A statement regarding 

entitlement to treaty benefits described 

in § 1.1441–6(c)(5) (treaty statement) 

shall remain valid until the last day of 

the third calendar year following the 

year in which the treaty statement is 

provided to the withholding agent 

except as provided in this paragraph 

(e)(4)(ii)(A)(2). A treaty statement 

provided by an entity that identifies a 

limitation on benefits provision for a 

publicly traded corporation shall not 

expire at the time provided in the 

preceding sentence if a withholding 

agent determines, based on publicly 

available information at each time for 

which the treaty statement would 

otherwise be renewed, that the entity is 

publicly traded. A withholding agent 

described in the preceding sentence 

must retain a record of the information 

relied upon (to confirm that the entity 

is publicly traded) for as long as it may 

be relevant to the determination of the 

withholding agent’s tax liability under 

section 1461 and § 1.1461–1. 

Notwithstanding the second sentence of 

this paragraph (e)(4)(ii)(A)(2), a treaty 

statement provided by an entity that 

identifies a limitation on benefits 

provision for a government or taxexempt organization (other than a taxexempt pension trust or pension fund) 

shall remain valid indefinitely. 

Notwithstanding the validity periods (or 

exceptions thereto) prescribed in this 

paragraph (e)(4)(ii)(A)(2), a treaty 

statement will cease to be valid if a 

change in circumstances makes the 

information on the statement unreliable 

or incorrect. For accounts opened and 

treaty statements obtained prior to 

January 6, 2017 (including those from 

publicly traded corporations, 

governments, and tax-exempt 

organizations), the treaty statement will 

expire January 1, 2020. 

* * * * * 

■ Par. 3. Section 1.1441–6 is amended 

by adding a sentence at the end of 

paragraph (c)(5)(i) to read as follows: 

§ 1.1441–6 Claim of reduced withholding 

under an income tax treaty. 

* * * * * 

(c) * * * 

(5) * * * 

(i) * * * A withholding agent may 

rely on the taxpayer’s claim on a treaty 

statement regarding its reliance on a 

specific limitation on benefits provision 

absent actual knowledge that such claim 

is unreliable or incorrect. 

* * * * * 

■ Par. 4. Section 1.1461–1 is amended 

by: 

■ 1. Adding two sentences after the first 

sentence in paragraph (a)(1). 

■ 2. Redesignating paragraph (c)(1)(i) as 

paragraph (c)(1)(i)(A) and adding 

paragraphs (c)(1)(i) introductory text 

and (c)(1)(i)(B). 

■ 3. Adding a sentence at the end of 

paragraph (c)(4)(iv). 

The additions read as follows: 

§ 1.1461–1 Payment and returns of tax 

withheld. 

(a)* * * (1) * * * In a case in which 

a withholding agent is permitted to 

withhold on an amount subject to 

reporting (as defined in paragraph (c)(2) 

of this section) in a calendar year 

(subsequent year) following the calendar 

year (preceding year) in which the 

withholding agent paid such amount 

(or, for a partnership or trust 

withholding with respect to a foreign 

partner, beneficiary, or owner, the year 

the partnership or trust received such 

amount), the withholding agent shall 

designate the deposit of the withholding 

as made for the preceding year and 

report the tax liability on Form 1042 for 

the preceding year. In the case of a 

partnership that withholds as described 

in the preceding sentence and does not 

file its federal income tax return on a 

calendar-year basis, however, such 

partnership may instead designate the 

deposit as made for the subsequent year 

and report the tax liability on Form 

1042 for the subsequent year. * * * 

* * * * * 

(c) * * * 

(1) * * * 

(i) Withholding agent information 

reporting. This paragraph (c)(1)(i) 

describes the general requirements for a 

withholding agent to file an information 

return on Form 1042–S and describes a 

special rule for a withholding agent that 


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withholds in a subsequent year as 

described in paragraph (a)(1) of this 

section. 

* * * * * 

(B) Special reporting by withholding 

agents that withhold in a subsequent 

year. Notwithstanding the first sentence 

of paragraph (c)(1)(i)(A) of this section, 

if a withholding agent designates the 

deposit of such withholding as made for 

the preceding calendar year as described 

in paragraph (a)(1) of this section, the 

withholding agent is required to report 

the amount on Form 1042–S for the 

preceding year. With respect to a 

withholding agent described in the 

previous sentence that is a partnership 

and that withholds after March 15 of the 

subsequent year, such partnership may 

file and furnish the Form 1042–S on or 

before September 15 of that year. In the 

case of a partnership that designates the 

deposit of such withholding as made for 

the subsequent year as permitted in 

paragraph (a)(1) of this section, 

however, the partnership shall report 

the amount on Form 1042–S for the 

subsequent year. 

* * * * * 

(4) * * * 

(iv) * * * If a nonqualified 

intermediary that is a participating FFI 

or a registered deemed-compliant FFI 

receives a payment that has been 

withheld upon at a 30-percent rate 

under chapter 4 by another withholding 

agent and that is reported as made to an 

unknown recipient on Form 1042–S 

provided to the nonqualified 

intermediary, the nonqualified 

intermediary may report the payment 

(or portion of the payment) on Form 

1042–S as made to a recipient that has 

been withheld upon under chapter 3 

when the payment is not an amount for 

which withholding is required under 

chapter 4 based on the payee’s chapter 

4 status and the nonqualified 

intermediary reports the correct 

withholding rate for the recipient. 

* * * * * 

■ Par. 5. Section 1.1461–2 is amended 

by: 

■ 1. Revising the second sentence of 

paragraph (a)(2)(i) introductory text. 

■ 2. Revising paragraphs (a)(2)(i)(A) and 

(B). 

■ 3. Adding paragraph (a)(2)(i)(C). 

■ 4. Revising paragraph (a)(3). 

The revisions and addition read as 

follows: 

§ 1.1461–2 Adjustments for 

overwithholding or underwithholding of tax. 

(a) * * * 

(2) * * * 

(i) * * * In such a case, the 

withholding agent may reimburse itself 

by reducing, by the amount of tax 

actually repaid to the beneficial owner 

or payee, the amount of any deposit of 

withholding tax otherwise required to 

be made by the withholding agent under 

§ 1.6302–2(a)(1)(iii) for any subsequent 

payment period occurring before the 

end of the calendar year following the 

calendar year of overwithholding. * * * 

(A) The repayment to the beneficial 

owner or payee occurs before the 

earliest of the due date (including 

extensions) for filing the Form 1042–S 

for the calendar year of 

overwithholding, the date the Form 

1042–S is actually filed with the IRS, or 

the date the Form 1042–S is furnished 

to the beneficial owner or payee; 

(B) The withholding agent states on a 

timely filed (including extensions) Form 

1042–S for the calendar year of 

overwithholding the amount of tax 

withheld and the amount of any actual 

repayment; and 

(C) The withholding agent states on a 

timely filed (including extensions) Form 

1042 for the calendar year of 

overwithholding the amount of 

adjustments made to overwithholding 

under paragraph (a)(1) of this section 

and the amount of any credit claimed 

under § 1.6414–1. 

* * * * * 

(3) Set-off. Under the set-off 

procedure, the withholding agent may 

repay the beneficial owner or payee by 

applying the amount overwithheld 

against any amount of tax which 

otherwise would be required under 

chapter 3 or 4 of the Internal Revenue 

Code or the regulations under part 1 of 

this chapter to be withheld from income 

paid by the withholding agent to such 

person. Any such set-off that occurs for 

a payment period in the calendar year 

following the calendar year of 

overwithholding shall be allowed only 

if— 

(i) The repayment to the beneficial 

owner or payee occurs before the 

earliest of the due date (including 

extensions) for filing the Form 1042–S 

for the calendar year of 

overwithholding, the date the Form 

1042–S is actually filed with the IRS, or 

the date the Form 1042–S is furnished 

to the beneficial owner or payee; 

(ii) The withholding agent states on a 

timely filed (including extensions) Form 

1042–S for the calendar year of 

overwithholding the amount of tax 

withheld and the amount of any 

repayment made through set-off; and 

(iii) The withholding agent states on 

a timely filed (including extensions) 

Form 1042 for the calendar year of 

overwithholding the amount of 

adjustments made to overwithholding 

under paragraph (a)(1) of this section 

and the amount of any credit claimed 

under § 1.6414–1. 

* * * * * 

■ Par. 6. Section 1.1471–1 is amended 

by: 

■ 1. Removing paragraph (b)(60) and 

redesignating paragraphs (b)(61) and 

(b)(62) as new paragraphs (b)(60) and 

(b)(61). 

■ 2. Adding new paragraph (b)(62). 

■ 3. Revising paragraph (b)(99). 

The addition and revision read as 

follows: 

§ 1.1471–1 Scope of chapter 4 and 

definitions. 

* * * * * 

(b) * * * 

(62) Hold mail instruction. The term 

hold mail instruction means a current 

instruction by a person to keep the 

person’s mail until such instruction is 

amended. An instruction to send all 

correspondence electronically is not a 

hold mail instruction. 

* * * * * 

(99) Permanent residence address. 

The term permanent residence address 

has the meaning set forth in § 1.1441– 

1(c)(38). 

* * * * * 

■ Par. 7. Section 1.1471–2 is amended 

by: 

■ 1. Removing the language ‘‘or 

constitutes gross proceeds from the 

disposition of such an obligation’’ from 

the first sentence of paragraph (a)(1). 

■ 2. Removing and reserving paragraph 

(a)(2)(iii)(B). 

■ 3. Removing paragraph (a)(2)(vi). 

■ 4. Removing the language ‘‘, or any 

gross proceeds from the disposition of 

such an obligation’’ from the first and 

second sentences of paragraph (b)(1). 

■ 5. Removing the language ‘‘and the 

gross proceeds allocated to a partner 

from the disposition of such obligation 

as determined under § 1.1473– 

1(a)(5)(vii)’’ from paragraph (b)(3)(i). 

■ 6. Removing the language ‘‘and 

further includes a beneficiary’s share of 

the gross proceeds from a disposition of 

such obligation as determined under 

§ 1.1473–1(a)(5)(vii)’’ from paragraph 

(b)(3)(ii). 

■ 7. Removing the language ‘‘and the 

gross proceeds from the disposition of 

such obligation to the extent such owner 

is treated as owning the portion of the 

trust that consists of the obligation’’ 

from paragraph (b)(3)(iii). 

The revision reads as follows: 

§ 1.1471–2 Requirement to deduct and 

withhold tax on withholdable payments to 

certain FFIs. 

(a) * * * 

(2) * * * 


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(iii) * * * 

(B) [Reserved] 

* * * * * 

§ 1.1471–3 [Amended] 

■ Par. 8. Section 1.1471–3 is amended 

by: 

■ 1. Removing the language that reads 

‘‘and that is excluded from the 

definition of a withholdable payment 

under § 1.1473–1(a)(4)’’ from paragraph 

(a)(3)(ii)(A)(4). 

■ 2. Removing paragraph (c)(8)(iv) and 

redesignating paragraph (c)(8)(v) as new 

paragraph (c)(8)(iv). 

■ Par. 9. Section 1.1471–4 is amended 

by: 

■ 1. Removing the language ‘‘or the 

gross proceeds from the disposition of 

such an obligation’’ from the seventh 

sentence of paragraph (b)(1). 

■ 2. Revising paragraph (b)(4). 

The revision reads as follows: 

§ 1.1471–4 FFI agreement. 

* * * * * 

(b) * * * 

(4) Foreign passthru payments. A 

participating FFI is not required to 

deduct and withhold tax on a foreign 

passthru payment made by such 

participating FFI to an account held by 

a recalcitrant account holder or to a 

nonparticipating FFI before the date that 

is two years after the date of publication 

in the Federal Register of final 

regulations defining the term foreign 

passthru payment. 

* * * * * 

■ Par. 10. Section 1.1471–5 is amended 

by adding a sentence at the end of 

paragraph (e)(4)(i)(B) to read as follows: 

§ 1.1471–5 Definitions applicable to 

section 1471. 

* * * * * 

(e) * * * 

(4) * * * 

(i) * * * 

(B) * * * Notwithstanding the 

preceding sentence, an entity is not 

managed by another entity for purposes 

of this paragraph (e)(4)(i)(B) solely 

because the first-mentioned entity 

invests all or a portion of its assets in 

such other entity, if such other entity is 

a mutual fund, exchange traded fund, or 

a collective investment entity that is 

widely-held and is subject to investor 

protection regulation. 

* * * * * 

■ Par. 11. Section 1.1473–1 is amended 

by: 

■ 1. Revising paragraph (a)(1). 

■ 2. Removing the fourth sentence of 

paragraph (a)(2)(vii)(A). 

■ 3. Removing and reserving paragraph 

(a)(3). 

■ 4. Revising paragraph (a)(4)(iii). 

■ 5. Removing paragraph (a)(4)(iv) and 

redesignating paragraphs (a)(4)(v) 

through (viii) as new paragraphs 

(a)(4)(iv) through (vii). 

■ 6. Removing paragraph (a)(5)(vii). 

The revisions read as follows: 

§ 1.1473–1 Section 1473 definitions. 

(a) * * * (1) In general. Except as 

otherwise provided in this paragraph (a) 

and § 1.1471–2(b) (regarding 

grandfathered obligations), the term 

withholdable payment means any 

payment of U.S. source FDAP income 

(as defined in paragraph (a)(2) of this 

section). 

* * * * * 

(3) [Reserved] 

(4) * * * 

(iii) Excluded nonfinancial payments. 

Payments for the following: services 

(including wages and other forms of 

employee compensation (such as stock 

options)), the use of property, office and 

equipment leases, software licenses, 

transportation, freight, gambling 

winnings, awards, prizes, scholarships, 

interest on outstanding accounts 

payable arising from the acquisition of 

goods or services, and premiums for 

insurance contracts that do not have 

cash value (as defined in § 1.1471– 

5(b)(3)(vii)(B)). Notwithstanding the 

preceding sentence, excluded 

nonfinancial payments do not include 

the following: Payments in connection 

with a lending transaction (including 

loans of securities), a forward, futures, 

option, or notional principal contract, or 

a similar financial instrument; 

premiums for cash value insurance 

contracts or annuity contracts; amounts 

paid under cash value insurance or 

annuity contracts; dividends; interest 

(including substitute interest described 

in § 1.861–2(a)(7)) other than interest 

described in the preceding sentence; 

investment advisory fees; custodial fees; 

and bank or brokerage fees. 

* * * * * 

■ Par. 12. Section 1.1474–1 is amended 

by: 

■ 1. Adding two sentences after the first 

sentence in paragraph (b)(1). 

■ 2. Revising paragraph (b)(2). 

■ 3. Redesignating paragraph (d)(1)(i) as 

paragraph (d)(1)(i)(A) and adding 

paragraphs (d)(1)(i) introductory text 

and (d)(1)(i)(B). 

■ 4. Adding a sentence after the first 

sentence in paragraph (d)(2)(ii). 

The revisions and additions read as 

follows: 

§ 1.1474–1 Liability for withheld tax and 

withholding agent reporting. 

* * * * * 

(b) * * * 

(1) * * * In a case in which a 

withholding agent is permitted to 

withhold on a chapter 4 reportable 

amount (as defined in paragraph (d)(2) 

of this section) in a calendar year 

(subsequent year) following the calendar 

year (preceding year) in which the 

withholding agent paid such amount 

(or, for a partnership or trust 

withholding with respect to a foreign 

partner, beneficiary, or owner, the year 

the partnership or trust received such 

amount), the withholding agent shall 

designate the deposit of the withholding 

as made for the preceding year and shall 

report the tax liability on Form 1042 for 

the preceding year. In the case of a 

partnership that withholds as described 

in the preceding sentence and does not 

file its federal income tax return on a 

calendar-year basis, however, such 

partnership may instead designate the 

deposit as made for the subsequent year 

and report the tax liability on Form 

1042 for the subsequent year.* * * 

(2) Special rule for foreign passthru 

payments that include an undetermined 

amount of income subject to tax. 

[Reserved] 

* * * * * 

(d) * * * 

(1) * * * 

(i) Withholding agent information 

reporting. This paragraph (d)(1)(i) 

describes the general requirements for a 

withholding agent to file an information 

return on Form 1042–S and describes a 

special rule for a withholding agent that 

withholds in a subsequent year as 

described in paragraph (b)(1) of this 

section. 

* * * * * 

(B) Special reporting by withholding 

agents that withhold in a subsequent 

year. Notwithstanding the first sentence 

of paragraph (d)(1)(i)(A) of this section, 

if a withholding agent designates the 

deposit of such withholding as made for 

the preceding calendar year as described 

in paragraph (b)(1) of this section, the 

withholding agent is required to report 

the amount on Form 1042–S for the 

preceding year. With respect to a 

withholding agent described in the 

previous sentence that is a partnership 

and that withholds after March 15 of the 

subsequent year, such partnership may 

file and furnish the Form 1042–S on or 

before September 15 of that year. In the 

case of a partnership that designates the 

deposit of such withholding as made for 

the subsequent year as permitted in 

paragraph (b)(1) of this section, 

however, the partnership shall report 

the chapter 4 reportable amount on 

Form 1042–S for the subsequent year. 

* * * * * 

(2) * * * 

(ii) * * * A chapter 4 reportable 

amount also does not include an 


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64768 Federal Register / Vol. 83, No. 242 / Tuesday, December 18, 2018 / Proposed Rules 

amount received by a nonqualified 

intermediary that is a participating FFI 

or a registered deemed-compliant FFI if 

the nonqualified intermediary reports 

such amount as having been withheld 

upon under chapter 3 to the extent 

permitted under § 1.1461–1(c)(4)(iv). 

* * * 

* * * * * 

■ Par. 13. Section 1.1474–2 is amended 

by revising the second sentence of 

paragraph (a)(3)(i) introductory text, 

paragraphs (a)(3)(i)(A) through (C), and 

paragraph (a)(4) to read as follows: 

§ 1.1474–2 Adjustments for 

overwithholding or underwithholding of tax. 

(a) * * * 

(3) * * * 

(i) * * * In such a case, the 

withholding agent may reimburse itself 

by reducing, by the amount of tax 

actually repaid to the beneficial owner 

or payee, the amount of any deposit of 

withholding tax otherwise required to 

be made by the withholding agent under 

§ 1.6302–2(a)(1)(iii) for any subsequent 

payment period occurring before the 

end of the calendar year following the 

calendar year of overwithholding. * * * 

(A) The repayment to the beneficial 

owner or payee occurs before the 

earliest of the due date (including 

extensions) for filing the Form 1042–S 

for the calendar year of 

overwithholding, the date the Form 

1042–S is actually filed with the IRS, or 

the date the Form 1042–S is furnished 

to the beneficial owner or payee; 

(B) The withholding agent states on a 

timely filed (including extensions) Form 

1042–S for the calendar year of 

overwithholding the amount of tax 

withheld and the amount of any actual 

repayment; and 

(C) The withholding agent states on a 

timely filed (including extensions) Form 

1042 for the calendar year of 

overwithholding the amount of 

adjustments made to overwithholding 

under paragraph (a)(1) of this section 

and the amount of any credit claimed 

under § 1.6414–1. 

* * * * * 

(4) Set-off. Under the set-off 

procedure, the withholding agent may 

repay the beneficial owner or payee by 

applying the amount overwithheld 

against any amount of tax which 

otherwise would be required under 

chapter 3 or 4 of the Internal Revenue 

Code or the regulations under part 1 of 

this chapter to be withheld from income 

paid by the withholding agent to such 

person. Any such set-off that occurs for 

a payment period in the calendar year 

following the calendar year of 

overwithholding shall be allowed only 

if— 

(i) The repayment to the beneficial 

owner or payee occurs before the 

earliest of the due date (including 

extensions) for filing the Form 1042–S 

for the calendar year of 

overwithholding, the date the Form 

1042–S is actually filed with the IRS, or 

the date the Form 1042–S is furnished 

to the beneficial owner or payee; 

(ii) The withholding agent states on a 

timely filed (including extensions) Form 

1042–S for the calendar year of 

overwithholding the amount of tax 

withheld and the amount of any 

repayment made through set-off; and 

(iii) The withholding agent states on 

a timely filed (including extensions) 

Form 1042 for the calendar year of 

overwithholding the amount of 

adjustments made to overwithholding 

under paragraph (a)(1) of this section 

and the amount of any credit claimed 

under § 1.6414–1. 

* * * * * 

Kirsten Wielobob, 

Deputy Commissioner for Services and 

Enforcement. 

[FR Doc. 2018–27290 Filed 12–13–18; 4:15 pm] 

BILLING CODE 4830–01–P 

DEPARTMENT OF DEFENSE 

Office of the Secretary 

32 CFR Part 220 

[Docket ID: DOD–2016–HA–0107] 

RIN 0720–AB68 

Collection From Third Party Payers of 

Reasonable Charges for Healthcare 

Services 

AGENCY: Office of the Assistant 

Secretary of Defense (Health Affairs), 

DoD. 

ACTION: Proposed rule. 

SUMMARY: This rule exercises the 

Department of Defense’s (DoD’s) 

authority to update current regulations 

to compute reasonable charges for 

inpatient and ambulatory (outpatient) 

institutional resources and also for 

pharmaceuticals, durable medical 

equipment (DME), supplies, 

immunizations, injections or other 

medications administered or furnished 

by DoD military treatment facilities 

(MTFs) under their three existing 

healthcare cost recovery programs— 

Third Party Collections, Medical 

Services Account, and Medical 

Affirmative Claims. Specifically, the 

rule updates the reasonable charges 

methodologies for inpatient and 

ambulatory institutional billing to allow 

for the use of Itemized Resource 

Utilization (IRU) based rates— 

developed from the cost to provide 

inpatient and ambulatory institutional 

healthcare resources—in addition to 

current bundled prospective 

reimbursement approaches of diagnostic 

related group (DRG), ambulatory 

payment classification (APC), 

ambulatory surgery center (ASC) and 

ambulatory procedure visit (APV) based 

rates. It also revises the reasonable 

charges methodology for 

pharmaceuticals, DME, supplies, 

immunizations, injections or medication 

administered to allow for their 

calculation using either Civilian Health 

and Medical Program of the Uniformed 

Services (CHAMPUS) prevailing rates or 

IRU based rates—developed from the 

cost to provide these healthcare items 

and resources– regardless of whether 

CHAMPUS prevailing rates are 

available. The additional IRU 

methodology implements an itemized 

rate and reasonable charges structure 

that improves collections and operation 

of DoD’s healthcare cost recovery 

programs by ensuring MTFs receive 

appropriate reimbursement for 

institutional healthcare resources as 

well as for pharmaceuticals, DME, 

supplies, immunizations, injections or 

medication provided or administered 

and is more consistent with civilian 

health insurance industry practice. The 

proposed rule also replaces ‘‘hospital’’ 

with ‘‘institutional’’ throughout most of 

the regulation to align it with civilian 

health insurance industry terminology 

and better promote identification and 

separate billing of institutional and 

professional services. 

DATES: Comments must be received by 

February 19, 2019. 

ADDRESSES: You may submit comments, 

identified by docket number and/or 

Regulatory Information Number (RIN) 

and title, by any of the following 

methods: 

• Federal Rulemaking Portal: http://

www.regulations.gov. Follow the 

instructions for submitting comments. 

• Mail: Department of Defense, Office 

of the Deputy Chief Management 

Officer, Directorate for Oversight and 

Compliance, 4800 Mark Center Drive, 

Mailbox #24, Alexandria, VA 22350– 

1700. 

Instructions: All submissions received 

must include the agency name and 

docket number or RIN for this Federal 

Register document. The general policy 

for comments and other submissions 

from members of the public is to make 

these submissions available for public 

viewing on the internet at http://

www.regulations.gov as they are 


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