Federal Register / Vol. 65, No. 128 / Monday, July 3, 2000 / Rules and Regulations 40993

1APB Opinion No. 20, ¶ 13 and ¶ 36–37 describe

and provide the accounting and disclosure

requirements applicable to the correction of an error

in previously issued financial statements. Because

the term ‘‘error’’ as used in APB Opinion No. 20

includes ‘‘oversight or misuse of facts that existed

at the time that the financial statements were

prepared,’’ that term includes both unintentional

errors as well as intentional fraudulent financial

reporting and misappropriation of assets as

described in Statement on Auditing Standards No.

82, Consideration of Fraud in a Financial Statement

Audit.

of the Commission, nor are they

published as bearing the Commission’s

official approval. They represent

interpretations and practices followed

by the Division of Corporation Finance

and the Office of the Chief Accountant

in administering the disclosure

requirements of the Federal securities

laws.

Dated: June 26, 2000.

Margaret H. McFarland,

Deputy Secretary.

PART 211—[AMENDED]

Accordingly, Part 211 of Title 17 of

the Code of Federal Regulations is

amended by adding Staff Accounting

Bulletin No. 101B to the table found in

Subpart B.

Staff Accounting Bulletin No. 101B

[The text of Staf Accounting Bulletin

No. 101B will not appear in the Code of

Federal Regulations.]

The staff hereby amends Question 2 of

Section B of Topic 13 of the Staff

Accounting Bulletin Series.

Topic 13: Revenue Recognition

* * * * *

B. Disclosures

Question 1

* * * * *

Question 2

Question: Will the staff expect retroactive

changes by registrants to comply with the

accounting described in this bulletin?

Interpretive Response: All registrants are

expected to apply the accounting and

disclosures described in this bulletin. The

staff, however, will not object if registrants

that have not applied this accounting do not

restate prior financial statements provided

they report a change in accounting principle

in accordance with APB Opinion No. 20,

Accounting Changes, and FASB Statement

No. 3, Reporting Accounting Changes in

Interim Financial Statements, no later than

the fourth fiscal quarter of the fiscal year

beginning after December 15, 1999. In

periods subsequent to transition, registrants

should disclose the amount of revenue (if

material to income before income taxes)

recognized in those periods that was

included in the cumulative effect adjustment.

If a registrant files financial statements with

the Commission before applying the

guidance in this bulletin, disclosures similar

to those described in Staff Accounting

Bulletin Topic 11–M, Disclosure of the

Impact that Recently Issued Accounting

Standards Will Have on the Financial

Statements of a Registrant When Adopted in

a Future Period, should be provided. With

regard to question 10 of Topic 13–A and

Topic 8–A regarding income statement

presentation, the staff would normally expect

retroactive application to all periods

presented unless the effect of applying the

guidance herein is immaterial.

However, if registrants have not previously

complied with generally accepted accounting

principles, for example, by recording revenue

for products prior to delivery that did not

comply with the applicable bill-and-hold

guidance, those registrants should apply the

guidance in APB Opinion No. 20 for the

correction of an error.1 In addition,

registrants should be aware that the

Commission may take enforcement action

where a registrant in prior financial

statements has violated the antifraud or

disclosure provisions of the securities laws

with respect to revenue recognition.

[FR Doc. 00–16580 Filed 6–30–00; 8:45 am]

BILLING CODE 8010–01–P

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 8889]

RIN 1545–AV10

Guidance Regarding Claims for Certain

Income Tax Convention Benefits

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final

regulations relating to treaty

withholding rates for items of income

received by entities that are fiscally

transparent in the United States and/or

a foreign jurisdiction. The regulations

affect the determination of tax treaty

benefits available to foreign persons

with respect to such items of income.

DATES: Effective Dates: These

regulations are effective June 30, 2000.

Applicability Dates: These regulations

apply to items of income paid on or

after June 30, 2000.

FOR FURTHER INFORMATION CONTACT:

Shawn R. Pringle, (202) 622–3850 (not

a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

This document contains final

regulations relating to the Income Tax

Regulations (CFR part 1) under section

894 of the Internal Revenue Code

(Code). On June 30, 1997, the IRS and

Treasury issued temporary regulations

(TD 8722 [1997–2 C.B. 81]) in the

Federal Register (62 FR 35673, as

corrected at 62 FR 46876, 46877) under

section 894 of the Code relating to

eligibility for benefits under income tax

treaties for payments to entities. A

notice of proposed rulemaking ([1997–2

C.B. 646]) cross-referencing the

temporary regulations was also

published in the same issue of the

Federal Register (62 FR 35755).

Need for Changes

Since the publication of TD 8722 and

proposed regulation § 1.894(d)(REG–

104893–97, 62 FR 35755), the IRS and

Treasury have received numerous

comments. This Treasury decision

contains changes made in response to

some of those comments.

Explanation of Provisions

I. General

These final section 894 regulations

clarify the availability of treaty benefits

with respect to an item of U.S. source

income paid to an entity that is treated

as fiscally transparent under the laws of

one or more jurisdictions (including the

United States) with respect to that item

of income. An entity that is treated as

fiscally transparent in one jurisdiction

but not another is referred to as a hybrid

entity. If an item of U.S. source income

is paid to a hybrid entity, the United

States may regard the entity as fiscally

transparent with respect to the item of

income and the foreign treaty

jurisdiction may regard the entity as

deriving the item of income.

Alternatively, the United States may

regard the entity as deriving the item of

income under U.S. tax principles, but a

foreign treaty jurisdiction may regard

the entity as fiscally transparent and

may therefore regard the interest holders

as deriving the item of income. This

dual classification may give rise to

inappropriate and unintended results

under tax treaties, such as double nontaxation or double taxation of the item

of income, unless the tax treaties are

interpreted to resolve the conflict of

laws.

These final regulations clarify how to

apply U.S. treaties when the entity

classification law of the United States

and a foreign treaty jurisdiction conflict

by providing that a reduced treaty rate

for an item of U.S. source income is

available only if the income is derived

by a foreign recipient resident in the

applicable treaty jurisdiction. This

general rule, which has been simplified

but not substantially changed from the

rule contained in the temporary and

40994 Federal Register / Vol. 65, No. 128 / Monday, July 3, 2000 / Rules and Regulations

proposed section 894 regulations, is

discussed in greater detail below.

These final regulations are fully

consistent with existing U.S. treaties.

They rely on the basic principle that tax

treaties are intended to relieve double

taxation or excessive taxation.

Accordingly, the United States and its

treaty partners agree to cede part or all

of their taxation rights on income

arising from sources within their

respective borders on the mutual

understanding that the other party is

asserting tax jurisdiction over the items

of income. This objective is generally

achieved through treaty provisions that

limit or eliminate the tax that the source

state may impose on income arising

within its borders to the extent that the

income is considered to be derived by

a resident of the other jurisdiction. In

general, an item of income will be

considered derived by a resident for

treaty purposes only when the residence

country is asserting taxing jurisdiction

over the item of income. However, the

source state does not necessarily

require, as a condition for ceding its

taxing jurisdiction, that the income

actually be taxed in the residence state

or taxed at a rate commensurate with

the rate imposed in the source state. The

source state and the residence state may

come to different conclusions regarding

the appropriate taxation principles that

apply to a particular type of taxpayer or

a particular type of income. Such

differences reflect how each state has

decided to assert its taxing jurisdiction

over that taxpayer or item of income and

may or may not affect the source state’s

willingness to forego its taxing rights in

whole or in part during the treaty

negotiation process.

The approach adopted in these final

regulations is consistent with the

evolving multilateral consensus among

the member countries of the

Organization for Economic Cooperation

and Development (OECD) on the

appropriate method for source countries

to follow to determine if they should

provide treaty benefits on items of

income paid to fiscally transparent

entities, particularly when an entity

classification conflict exists between the

source and residence states. This

evolving multilateral consensus is

described in greater detail in the OECD

report, ‘‘The Application of the OECD

Model Tax Convention to Partnerships’’

(OECD Partnership Report). The report

generally provides that a source state is

required to grant treaty benefits on

income paid to an entity only if the

income is considered to be derived by

a resident of a treaty partner for

purposes of the treaty partner’s tax laws.

IRS and Treasury will continue to

coordinate these issues with U.S. tax

treaty partners both bilaterally and

multilaterally to resolve substantive

issues arising from application of the

principles set forth in the section 894

regulations and the OECD Partnership

Report.

These regulations apply with respect

to all U.S. income tax treaties regardless

of whether such treaties contain

partnership provisions, unless the

competent authorities agree otherwise.

As with the proposed and temporary

regulations, the final regulations address

only the treatment of U.S. source

income that is not effectively connected

with the conduct of a U.S. trade or

business. The IRS and Treasury may

issue additional regulations addressing

the availability of other tax treaty

benefits, such as the application of

business profits provisions, with respect

to the income of fiscally transparent

entities, particularly where a conflict in

entity classification exists.

II. Objective Versus Subjective

Regulatory Approach

The temporary and proposed section

894 regulations adopted an objective

approach to determining whether the

United States should grant treaty

benefits on U.S. source items of income

paid to entities. Application of the

regulations did not turn on whether

there existed a tax avoidance motive for

choosing a particular transaction or

structure.

Commentators recommended a

narrower approach that would deny

treaty benefits on items of income paid

to an entity only if the entity served a

tax avoidance purpose. As part of this

approach, commentators requested

implementation of a ruling procedure

that could be used to claim treaty

benefits by rebutting any deemed tax

avoidance motive for the items of

income paid to an entity. This

suggestion was not adopted. These final

regulations are intended to provide

objective rules regarding eligibility for

treaty benefits on certain items of U.S.

source income paid to entities.

Although a ruling procedure was not

adopted, taxpayers may still invoke the

Mutual Agreement Procedures under an

applicable treaty in appropriate

circumstances.

III. Simplified Standard for Determining

When U.S. Source Income Is Derived by

a Treaty Resident

The proposed and temporary

regulations provided that the tax

imposed by sections 871(a), 881(a),

1461, and 4948(a) on an item of income

received by an entity is eligible for

reduction under the terms of an income

tax treaty to which the United States is

a party if such item of income is treated

as derived by a resident of an applicable

treaty jurisdiction, such resident is a

beneficial owner of the item of income,

and all other applicable requirements

for benefits under the treaty are

satisfied. The proposed and temporary

regulations further provided that an

item of income received by an entity is

treated as derived by a resident only to

the extent the item of income is subject

to tax in the hands of a resident of such

jurisdiction. Numerous comments were

received stating that this general rule

needed clarification. As a result, the IRS

and Treasury are eliminating the use of

the terms beneficial ownership and

subject to tax from the general rule, as

described in greater detail below.

A. Beneficial Ownership

Commentators requested clarification

regarding the relationship between

beneficial owner and the § 1.881–3 anticonduit regulations issued under the

authority of section 7701(l). The anticonduit rules under section 7701(l) are

incorporated into the U.S.

determination of beneficial owner. They

are not separate additional

requirements.

The concept of beneficial owner was

included in the proposed regulations to

explain the circumstances under which

a hybrid entity may beneficially own an

item of income for purposes of an

income tax treaty, in light of the then

proposed withholding regulations under

§ 1.1441–1(c)(6)(ii)(B). However, the

definition of beneficial owner in

§ 1.1441–1(c)(6) of the amended final

regulations (TD 8881 [2000–23 I.R.B

1158]) does not apply to claims for

reduced withholding under an income

tax treaty. Accordingly, because there is

no longer a need to clarify the meaning

of the term under the section 1441

regulations in the treaty context, these

final regulations no longer provide

specific rules for this determination.

The concept of beneficial owner

nevertheless remains an important

condition for claiming tax treaty

benefits that is determined under U.S.

tax principles, including the anticonduit rules.

B. Subject to Tax

Commentators suggested that the term

subject to tax in the proposed and

temporary regulations was ambiguous

and could be misinterpreted.

Commentators suggested that the term

subject to tax could be interpreted as

requiring that an actual tax be paid

rather than requiring an exercise of

taxing jurisdiction by the applicable

treaty jurisdiction, whether or not there

Federal Register / Vol. 65, No. 128 / Monday, July 3, 2000 / Rules and Regulations 40995

is an actual tax paid. Commentators

suggested that such an interpretation

would lead to anomalous results, for

example, in cases when the applicable

treaty jurisdiction provides an

exemption from income for U.S. source

dividends under its tax laws.

The IRS and Treasury agree that the

term subject to tax could cause

unintentional confusion and that a more

direct and simpler way of ensuring that

an item of income is subject to the

taxing jurisdiction of the residence

country is to determine if the item of

income is derived by a resident of a

treaty jurisdiction. The concept of

derived by a resident is a more useful

surrogate for the concept of subject to

the taxing jurisdiction of the residence

state, the necessary prerequisite for the

grant of treaty benefits on an item of

income.

C. New General Rule Based on ‘‘Derived

By’’ Standard

The regulations now provide three

specific situations in which income is

derived by a resident of a treaty

jurisdiction, and thus considered

subject to the taxing jurisdiction of the

residence jurisdiction and eligible for

treaty benefits.

In the first situation, an item of

income paid to an entity is considered

to be derived by the entity if the entity

is not fiscally transparent with respect

to the item of income under the laws of

the entity’s jurisdiction. The entity’s

jurisdiction is generally the place of the

entity’s organization, although it may be

the place of management and control of

the entity if it is a resident in a

jurisdiction by reason of such factors.

In the second situation, regardless of

whether the entity is found to be fiscally

transparent with respect to the item of

income under the laws of the entity’s

jurisdiction, an interest holder in the

entity may derive the item of income if

that interest holder can establish that,

under the laws of the jurisdiction in

which the interest holder is a resident,

the entity is fiscally transparent with

respect to the item of income. Under

this test, the interest holder itself must

not be considered fiscally transparent

with respect to the item of income

under the laws of its jurisdiction in

order to claim the treaty benefit of that

jurisdiction.

In the third situation, an item of

income paid to a type of entity

specifically listed in a treaty as a

resident of that treaty jurisdiction is

treated as derived by a resident of that

jurisdiction. The reason for this rule is

that the two treaty partners reached an

explicit agreement on the appropriate

treatment of that entity and treaty

benefits accordingly should be provided

on items of income paid to it.

In some circumstances, both the

entity and the interest holders in the

entity will be treated as deriving the

item of income under the foregoing

tests. In that event, both the interest

holder and the entity may be entitled to

treaty benefits if all other conditions are

satisfied. See § 1.1441–6(b)(2) for

procedures for dual rate claims under

separate income tax treaties.

IV. Determining Fiscal Transparency

A. Generally

The concept of fiscally transparent

therefore is critical to the determination

of whether an item of income is derived

by an entity or an interest holder in an

entity. Paragraph (d)(4)(ii) of the

proposed and temporary regulations

provided that an entity is treated as

fiscally transparent by a jurisdiction to

the extent the jurisdiction requires

interest holders in the entity to take into

account separately on a current basis

their respective shares of the items of

income paid to the entity and to

determine the character of such item as

if such items were realized directly from

the source from which realized by the

entity for purposes of the tax laws of the

jurisdiction. The proposed and

temporary regulations further provided

that entities that are fiscally transparent

for U.S. federal income tax purposes

include partnerships, common trust

funds described under section 584,

simple trusts, grantor trusts, as well as

certain other entities (including entities

that have a single interest holder) that

are treated as partnerships or as

disregarded entities for U.S. federal

income tax purposes.

The IRS and Treasury received

numerous comments regarding the

definition of fiscally transparent under

the proposed regulations. The

comments stated that it is unclear, in

situations when multiple foreign

jurisdictions are involved, which

jurisdiction’s laws apply in determining

whether an entity is fiscally transparent.

The comments further stated that the

requirement that all items of income be

separately stated is not consistent with

the U.S. tax rules regarding

partnerships, which permit partners not

to state separately certain items if the

outcome is the same whether or not the

item is separately stated. Commentators

also suggested that the regulations were

unclear as to whether fiscal

transparency is an item by item

determination or a determination made

with respect to the entity as a whole.

In response to the comments, several

simplifying and clarifying changes were

made to the regulations. When an entity

is invoking the treaty, paragraph

(d)(3)(ii) of the final regulations

provides a definition for purposes of

determining whether the entity will be

treated as fiscally transparent under the

laws of the entity’s jurisdiction with

respect to an item of income received by

the entity. When an interest holder in an

entity is invoking the treaty, paragraph

(d)(3)(iii) of the final regulations

provides a definition for purposes of

determining whether the entity will be

fiscally transparent under the laws of

the interest holder’s jurisdiction. This

clarifies which jurisdiction’s laws apply

in determining fiscal transparency in

cases in which multiple foreign

jurisdictions are involved.

Paragraphs (d)(3)(ii) and (iii) of the

final regulations generally retain the

definition of fiscally transparent as

provided by the proposed and

temporary regulations, with certain

clarifications and modifications. They

provide that an entity will be fiscally

transparent only if inclusion by the

interest holders in the entity is required

whether or not an item of income is

distributed to such interest holders and,

generally, the character and source of

the item in the hands of the interest

holder are determined as if such item

were realized directly from the source

from which realized by the entity. They

also provide that fiscal transparency is

determined on an item of income by

item of income basis. Accordingly, for

example, an entity can be fiscally

transparent with respect to interest

income, but not with respect to

dividend income. The regulations

further provide, however, that if an item

of income is not separately taken into

account by its interest holders, the

entity may still be fiscally transparent

with respect to that item of income if

failure to take the item of income into

account separately does not result in a

treatment under the tax laws of the

applicable treaty jurisdiction different

from that which would be required if

the interest holder did separately take

the share of such item into account.

This is consistent with the U.S. tax

provisions with respect to partnerships.

Because the final regulations adopt an

item by item determination of fiscal

transparency, the provision in the

proposed regulations stating that

partnerships, common trust funds

described in section 584, simple trusts,

grantor trusts and certain other entities

are fiscally transparent for U.S. federal

income tax purposes has been deleted

from the final regulations. The foregoing

language implied that fiscal

transparency is determined with respect

to the entity as a whole. Although the

40996 Federal Register / Vol. 65, No. 128 / Monday, July 3, 2000 / Rules and Regulations

final regulations remove this language,

it is anticipated that such entities

ordinarily will be fiscally transparent

for federal income tax purposes with

regard to all items of income received by

them.

B. Investment Vehicles

Commentators also requested

clarification regarding the treatment of

investment vehicles that may be

allowed an exclusion or deduction from

income for amounts distributed to

interest holders. The final regulations

clarify that if an entity such as an

investment company is not otherwise

fiscally transparent as defined in

paragraphs (d)(3)(ii) and (iii) of the final

regulations, it will not be deemed to be

fiscally transparent merely because it is

allowed to exclude or deduct from

income amounts distributed to interest

holders. Examples provide further

guidance with respect to foreign

investment vehicles, most of which will

not be fiscally transparent under the

final regulations.

C. Treatment of Tax Exempt

Organizations

In addition to the foregoing, several

commentators suggested that the

regulations undermine reciprocal treaty

exemptions for pension funds and other

tax exempt organizations by, for

example, denying treaty benefits under

circumstances when the fund or

organization invests in U.S. LLCs that

are treated as partnerships for purposes

of U.S. tax law and as corporations

under the laws of the applicable treaty

jurisdiction. Treasury does not believe

that the regulations conflict with U.S.

treaty obligations to provide reduced

treaty rates to pension funds and other

tax exempt organizations investing in

the United States. In most cases, the

denial of benefits described by

commentators can be avoided by

ensuring that the pension fund or tax

exempt organization invests directly or

through an entity treated as fiscally

transparent under the laws of the

jurisdiction of the fund or organization,

with the result that the fund or

organization will still be able to claim

exemptions under the applicable treaty.

In addition, treaties may be negotiated

that permit pensions and other tax

exempt organizations to invest in the

United States through nonfiscally

transparent entities and still obtain

reduced treaty rates. (See for example

paragraph 2(b) of Article XXI of the

U.S.-Canada treaty, with respect to

pension funds). Further, paragraph

(d)(4) gives the competent authorities

the flexibility, in appropriate

circumstances, to enter into a mutual

reciprocal understanding that would

depart from the rules of paragraph (d)

with respect to certain classes of

entities.

D. Treatment of Complex Trusts

The proposed and temporary

regulations did not specifically address

the treatment of section 661 trusts that

are permitted to accumulate income

from year to year. Commentators

suggested that they should be treated as

fiscally transparent for U.S. tax

purposes because, under section 662,

the distributable net income of such

trusts retains its character in the hands

of the beneficiaries if it is distributed in

the current year and not accumulated.

The definitions of fiscally transparent as

set forth in the final regulations provide

that, in order for the entity to be fiscally

transparent with respect to an item of

income, the interest holder must be

required to take that item of income into

account in a taxable year whether or not

the item is distributed, and generally the

character and source of the item in the

hands of the interest holder are

determined as if such item were realized

directly from the source from which

realized by the entity.

Thus, to the extent the beneficiaries of

a trust are required under section 662 to

take an item of the trust’s income into

account in a taxable year, whether or

not the item is distributed, and the

character and source of the item in the

hands of the beneficiaries are

determined as if such item were realized

directly from the source from which

realized by the entity, the trust will be

treated as fiscally transparent for U.S.

tax purposes with respect to that item of

income. If inclusion by the interest

holders is not required whether or not

such item of income is distributed, or

the character and source of the item in

the hands of the interest holder are

determined as if such item were realized

directly from the source from which

realized by the entity, the trust will not

be treated as fiscally transparent for U.S.

tax purposes. In determining whether a

trust, or any other entity, is fiscally

transparent with respect to an item of

income under the laws of any other

jurisdiction, the treatment of that item

of income under the laws of that

jurisdiction controls, not the treatment

under U.S. laws.

E. Effect of Anti-Deferral Regimes

Commentators also argued that

controlled foreign corporations should

be treated as fiscally transparent to the

extent interest holders are required to

account for the controlled foreign

corporation’s net passive income on a

current basis. This suggestion was

rejected because the nature of an

inclusion under an anti-deferral regime

is that of a deemed distribution of aftertax profits of the controlled foreign

corporation, while an inclusion because

an entity is fiscally transparent is in the

nature of a share of the item of income

itself, as if the interest holder realized

the income directly. This follows from

the definition of fiscal transparency

contained in paragraph (d)(3)(iii),

relating to whether an entity is fiscally

transparent under the laws of the

interest holder’s jurisdiction.

V. Treatment of Payments To and From

Domestic Reverse Hybrid Entities

Section 1.894–1T(d)(3) provided

guidance on the appropriate treatment

of items of income paid to an entity that

is treated as a domestic corporation for

U.S. tax purposes but is treated as

fiscally transparent under the laws of an

interest holder’s jurisdiction (a

‘‘domestic reverse hybrid’’ entity). That

section provided that § 1.894–1T(d)(1)

may not be applied to reduce the

amount of federal income tax on U.S.

source income received by a domestic

reverse hybrid entity through

application of an income tax treaty.

Commentators expressed concern that

this rule did not provide sufficient

guidance and could lead to

inappropriate results, noting that an

item of income paid by a domestic

reverse hybrid entity could be viewed as

neither ‘‘received by’’ the interest holder

nor ‘‘subject to tax’’ because the interest

holder’s jurisdiction would treat the

domestic reverse hybrid entity as

fiscally transparent. Thus, the interest

holder’s jurisdiction would view the

interest holder as ‘‘receiving’’ the items

of income paid to the domestic reverse

hybrid entity and as being ‘‘subject to

tax’’ on those items of income on an

immediate basis, but may not recognize

the items of income paid by the

domestic reverse hybrid entity to the

interest holder.

The IRS and Treasury are also aware

of certain abusive structures involving

domestic reverse hybrid entities, which

are designed to manipulate differences

in U.S. and foreign entity classification

rules to produce inappropriate

reductions in U.S. tax. These

transactions give rise to some of the

same concerns that led to the

promulgation of the temporary and

proposed regulations and caused

Congress to enact section 894(c).

Treasury and the IRS expect to issue

guidance shortly regarding payments by

domestic reverse hybrid entities to their

interest holders in a separate regulation

package. Thus, these final regulations

reserve on the question of eligibility for

Federal Register / Vol. 65, No. 128 / Monday, July 3, 2000 / Rules and Regulations 40997

treaty benefits with respect to payments

by domestic reverse hybrid entities.

Effective Date

The final regulations apply to items of

income paid on or after June 30, 2000.

Withholding agents should consider the

effect of these regulations on their

withholding obligations, including the

need to obtain a new withholding

certificate to confirm claims of treaty

benefits for items of income paid on or

after the effective date.

Special Analyses

It has been determined that this

treasury decision 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 these

regulations do not impose on small

entities a collection of information

requirement, the Regulatory Flexibility

Act (5 U.S.C. chapter 6) does not apply.

Therefore, a Regulatory Flexibility

Analysis is not required.

Drafting Information: The principal

author of these regulations is Shawn R.

Pringle of the Office of Associate Chief

Counsel (International). However, other

personnel from the IRS and Treasury

participated in their development.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and

recordkeeping requirements.

Adoption of Amendments to the

Regulations

Accordingly, CFR 26 part 1 is

amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority for part 1

is amended by revising the entry for

section 1.894–1 to read in part as

follows:

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

1.894–1 also issued under 26 U.S.C. 894 and

7701(l). * * *

Par. 2. In § 1.894–1, paragraph (d) is

revised to read as follows:

§ 1.894–1 Income affected by treaty.

* * * * *

(d) Special rule for items of income

received by entities—(1) In general. The

tax imposed by sections 871(a), 881(a),

1443, 1461, and 4948(a) on an item of

income received by an entity, wherever

organized, that is fiscally transparent

under the laws of the United States and/

or any other jurisdiction with respect to

an item of income shall be eligible for

reduction under the terms of an income

tax treaty to which the United States is

a party only if the item of income is

derived by a resident of the applicable

treaty jurisdiction. For this purpose, an

item of income may be derived by either

the entity receiving the item of income

or by the interest holders in the entity

or, in certain circumstances, both. An

item of income paid to an entity shall

be considered to be derived by the

entity only if the entity is not fiscally

transparent under the laws of the

entity’s jurisdiction, as defined in

paragraph (d)(3)(ii) of this section, with

respect to the item of income. An item

of income paid to an entity shall be

considered to be derived by the interest

holder in the entity only if the interest

holder is not fiscally transparent in its

jurisdiction with respect to the item of

income and if the entity is considered

to be fiscally transparent under the laws

of the interest holder’s jurisdiction with

respect to the item of income, as defined

in paragraph (d)(3)(iii) of this section.

Notwithstanding the preceding two

sentences, an item of income paid

directly to a type of entity specifically

identified in a treaty as a resident of a

treaty jurisdiction shall be treated as

derived by a resident of that treaty

jurisdiction.

(2) Application to domestic reverse

hybrid entities—(i) In general. An

income tax treaty may not apply to

reduce the amount of federal income tax

on U.S. source payments received by a

domestic reverse hybrid entity. Further,

notwithstanding paragraph (d)(1) of this

section, the foreign interest holders of a

domestic reverse hybrid entity are not

entitled to the benefits of a reduction of

U.S. income tax under an income tax

treaty on items of income received from

U.S. sources by such entity. A domestic

reverse hybrid entity is a domestic

entity that is treated as not fiscally

transparent for U.S. tax purposes and as

fiscally transparent under the laws of

the interest holder’s jurisdiction, with

respect to the item of income received

by the domestic entity.

(ii) Payments by domestic reverse

hybrid entities. [Reserved].

(3) Definitions—(i) Entity. For

purposes of this paragraph (d), the term

entity shall mean any person that is

treated by the United States or the

applicable treaty jurisdiction as other

than an individual. The term entity

includes disregarded entities, including

single member disregarded entities with

individual owners.

(ii) Fiscally transparent under the law

of the entity’s jurisdiction—(A) General

rule. For purposes of this paragraph (d),

an entity is fiscally transparent under

the laws of the entity’s jurisdiction with

respect to an item of income to the

extent that the laws of that jurisdiction

require the interest holder in the entity,

wherever resident, to separately take

into account on a current basis the

interest holder’s respective share of the

item of income paid to the entity,

whether or not distributed to the

interest holder, and the character and

source of the item in the hands of the

interest holder are determined as if such

item were realized directly from the

source from which realized by the

entity. However, the entity will be

fiscally transparent with respect to the

item of income even if the item of

income is not separately taken into

account by the interest holder, provided

the item of income, if separately taken

into account by the interest holder,

would not result in an income tax

liability for that interest holder different

from that which would result if the

interest holder did not take the item into

account separately, and provided the

interest holder is required to take into

account on a current basis the interest

holder’s share of all such nonseparately

stated items of income paid to the

entity, whether or not distributed to the

interest holder. In determining whether

an entity is fiscally transparent with

respect to an item of income in the

entity’s jurisdiction, it is irrelevant that,

under the laws of the entity’s

jurisdiction, the entity is permitted to

exclude such item from gross income or

that the entity is required to include

such item in gross income but is entitled

to a deduction for distributions to its

interest holders.

(B) Special definitions. For purposes

of this paragraph (d)(3)(ii), an entity’s

jurisdiction is the jurisdiction where the

entity is organized or incorporated or

may otherwise be considered a resident

under the laws of that jurisdiction. An

interest holder will be treated as taking

into account that person’s share of

income paid to an entity on a current

basis even if such amount is taken into

account by the interest holder in a

taxable year other than the taxable year

of the entity if the difference is due

solely to differing taxable years.

(iii) Fiscally transparent under the

law of an interest holder’s jurisdiction—

(A) General rule. For purposes of this

paragraph (d), an entity is treated as

fiscally transparent under the law of an

interest holder’s jurisdiction with

respect to an item of income to the

extent that the laws of the interest

holder’s jurisdiction require the interest

holder resident in that jurisdiction to

separately take into account on a current

basis the interest holder’s respective

share of the item of income paid to the

40998 Federal Register / Vol. 65, No. 128 / Monday, July 3, 2000 / Rules and Regulations

entity, whether or not distributed to the

interest holder, and the character and

source of the item in the hands of the

interest holder are determined as if such

item were realized directly from the

source from which realized by the

entity. However, an entity will be

fiscally transparent with respect to the

item of income even if the item of

income is not separately taken into

account by the interest holder, provided

the item of income, if separately taken

into account by the interest holder,

would not result in an income tax

liability for that interest holder different

from that which would result if the

interest holder did not take the item into

account separately, and provided the

interest holder is required to take into

account on a current basis the interest

holder’s share of all such nonseparately

stated items of income paid to the

entity, whether or not distributed to the

interest holder. An entity will not be

treated as fiscally transparent with

respect to an item of income under the

laws of the interest holder’s jurisdiction,

however, if, under the laws of the

interest holder’s jurisdiction, the

interest holder in the entity is required

to include in gross income a share of all

or a part of the entity’s income on a

current basis year under any type of

anti-deferral or comparable mechanism.

In determining whether an entity is

fiscally transparent with respect to an

item of income under the laws of an

interest holder’s jurisdiction, it is

irrelevant how the entity is treated

under the laws of the entity’s

jurisdiction.

(B) Special definitions. For purposes

of this paragraph (d)(3)(iii), an interest

holder’s jurisdiction is the jurisdiction

where the interest holder is organized or

incorporated or may otherwise be

considered a resident under the laws of

that jurisdiction. An interest holder will

be treated as taking into account that

person’s share of income paid to an

entity on a current basis even if such

amount is taken into account by such

person in a taxable year other than the

taxable year of the entity if the

difference is due solely to differing

taxable years.

(iv) Applicable treaty jurisdiction. The

term applicable treaty jurisdiction

means the jurisdiction whose income

tax treaty with the United States is

invoked for purposes of reducing the

rate of tax imposed under sections

871(a), 881(a), 1461, and 4948(a).

(v) Resident. The term resident shall

have the meaning assigned to such term

in the applicable income tax treaty.

(4) Application to all income tax

treaties. Unless otherwise explicitly

agreed upon in the text of an income tax

treaty, the rules contained in this

paragraph (d) shall apply in respect of

all income tax treaties to which the

United States is a party.

Notwithstanding the foregoing sentence,

the competent authorities may agree on

a mutual basis to depart from the rules

contained in this paragraph (d) in

appropriate circumstances. However, a

reduced rate under a tax treaty for an

item of U.S. source income paid will not

be available irrespective of the

provisions in this paragraph (d) to the

extent that the applicable treaty

jurisdiction would not grant a reduced

rate under the tax treaty to a U.S.

resident in similar circumstances, as

evidenced by a mutual agreement

between the relevant competent

authorities or by a public notice of the

treaty jurisdiction. The Internal Revenue

Service shall announce the terms of any

such mutual agreement or public notice

of the treaty jurisdiction. Any denial of

tax treaty benefits as a consequence of

such a mutual agreement or notice shall

affect only payment of U.S. source items

of income made after announcement of

the terms of the agreement or of the

notice.

(5) Examples. This paragraph (d) is

illustrated by the following examples:

Example 1. Treatment of entity treated as

partnership by U.S. and country of

organization. (i) Facts. Entity A is a business

organization formed under the laws of

Country X that has an income tax treaty in

effect with the United States. A is treated as

a partnership for U.S. federal income tax

purposes. A is also treated as a partnership

under the laws of Country X, and therefore

Country X requires the interest holders in A

to separately take into account on a current

basis their respective shares of the items of

income paid to A, whether or not distributed

to the interest holders, and the character and

source of the items in the hands of the

interest holders are determined as if such

items were realized directly from the source

from which realized by A. A receives royalty

income from U.S. sources that is not

effectively connected with the conduct of a

trade or business in the United States.

(ii) Analysis. A is fiscally transparent in its

jurisdiction within the meaning of paragraph

(d)(3)(ii) of this section with respect to the

U.S. source royalty income in Country X and,

thus, A does not derive such income for

purposes of the U.S.-X income tax treaty.

Example 2. Treatment of interest holders in

entity treated as partnership by U.S. and

country of organization. (i) Facts. The facts

are the same as under Example 1. A’s

partners are M, a corporation organized

under the laws of Country Y that has an

income tax treaty in effect with the United

States, and T, a corporation organized under

the laws of Country Z that has an income tax

treaty in effect with the United States. M and

T are not fiscally transparent under the laws

of their respective countries of incorporation.

Country Y requires M to separately take into

account on a current basis M’s respective

share of the items of income paid to A,

whether or not distributed to M, and the

character and source of the items of income

in M’s hands are determined as if such items

were realized directly from the source from

which realized by A. Country Z treats A as

a corporation and does not require T to take

its share of A’s income into account on a

current basis whether or not distributed.

(ii) Analysis. M is treated as deriving its

share of the U.S. source royalty income for

purposes of the U.S.-Y income tax treaty

because A is fiscally transparent under

paragraph (d)(3)(iii) with respect to that

income under the laws of Country Y. Under

Country Z law, however, because T is not

required to take into account its share of the

U.S. source royalty income received by A on

a current basis whether or not distributed, A

is not treated as fiscally transparent.

Accordingly, T is not treated as deriving its

share of the U.S. source royalty income for

purposes of the U.S.-Z income tax treaty.

Example 3. Dual benefits to entity and

interest holder. (i) Facts. The facts are the

same as under Example 2, except that A is

taxable as a corporation under the laws of

Country X. Article 12 of the U.S.-X income

tax treaty provides for a source country

reduced rate of taxation on royalties of 5-

percent. Article 12 of the U.S.-Y income tax

treaty provides that royalty income may only

be taxed by the beneficial owner’s country of

residence.

(ii) Analysis. A is treated as deriving the

U.S. source royalty income for purposes of

the U.S.-X income tax treaty because it is not

fiscally transparent with respect to the item

of income within the meaning of paragraph

(d)(3)(ii) of this section in Country X, its

country of organization. M is also treated as

deriving its share of the U.S. source royalty

income for purposes of the U.S.-Y income tax

treaty because A is fiscally transparent under

paragraph (d)(3)(iii) of this section with

respect to that income under the laws of

Country Y. T is not treated as deriving the

U.S. source royalty income for purposes of

the U.S.-Z income tax treaty because under

Country Z law A is not fiscally transparent.

Assuming all other requirements for

eligibility for treaty benefits have been

satisfied, A is entitled to the 5-percent treaty

reduced rate on royalties under the U.S.-X

income tax treaty with respect to the entire

royalty payment. Assuming all other

requirements for treaty benefits have been

satisfied, M is also entitled to a zero rate

under the U.S.-Y income tax treaty with

respect to its share of the royalty income.

Example 4. Treatment of grantor trust. (i)

Facts. Entity A is a trust organized under the

laws of Country X, which does not have an

income tax treaty in effect with the United

States. M, the grantor and owner of A for U.S.

income tax purposes, is a resident of Country

Y, which has an income tax treaty in effect

with the United States. M is also treated as

the grantor and owner of the trust under the

laws of Country Y. Thus, Country Y requires

M to take into account all items of A’s

income in the taxable year, whether or not

distributed to M, and determines the

character of each item in M’s hands as if such

item was realized directly from the source

Federal Register / Vol. 65, No. 128 / Monday, July 3, 2000 / Rules and Regulations 40999

from which realized by A. Country X does

not treat M as the owner of A and does not

require M to account for A’s income on a

current basis whether or not distributed to M.

A receives interest income from U.S. sources

that is neither portfolio interest nor

effectively connected with the conduct of a

trade or business in the United States.

(ii) Analysis. A is not fiscally transparent

under the laws of Country X within the

meaning of paragraph (d)(3)(ii) of this section

with respect to the U.S. source interest

income, but A may not claim treaty benefits

because there is no U.S.-X income tax treaty.

M, however, does derive the income for

purposes of the U.S.-Y income tax treaty

because under the laws of Country Y, A is

fiscally transparent.

Example 5. Treatment of complex trust. (i)

Facts. The facts are the same as in Example

4 except that M is treated as the owner of the

trust only under U.S. tax law, after

application of section 672(f), but not under

the law of Country Y. Although the trust

document governing A does not require that

A distribute any of its income on a current

basis, some distributions are made currently

to M. There is no requirement under Country

Y law that M take into account A’s income

on a current basis whether or not distributed

to him in that year. Under the laws of

Country Y, with respect to current

distributions, the character of the item of

income in the hands of the interest holder is

determined as if such item were realized

directly from the source from which realized

by A. Accordingly, upon a current

distribution of interest income to M, the

interest income retains its source as U.S.

source income.

(ii) Analysis. M does not derive the U.S.

source interest income because A is not

fiscally transparent under paragraph (d)(3)(ii)

of this section with respect to the U.S. source

interest income under the laws of Country Y.

Although the character of the interest in the

hands of M is determined as if realized

directly from the source from which realized

by A, under the laws of Country Y, M is not

required to take into account his share of A’s

interest income on a current basis whether or

not distributed. Accordingly, neither A nor M

is entitled to claim treaty benefits, since A is

a resident of a non-treaty jurisdiction and M

does not derive the U.S. source interest

income for purposes of the U.S.-Y income tax

treaty.

Example 6. Treatment of interest holders

required to include passive income under

anti-deferral regime. (i) Facts. The facts are

the same as under Example 2. However,

Country Z does require T, who is treated as

owning 60-percent of the stock of A, to take

into account its respective share of the

royalty income of A under an anti-deferral

regime applicable to certain passive income

of controlled foreign corporations.

(ii) Analysis. T is still not eligible to claim

treaty benefits with respect to the royalty

income. T is not treated as deriving the U.S.

source royalty income for purposes of the

U.S.-Z income tax treaty under paragraph

(d)(3)(iii) of this section because T is only

required to take into account its pro rata

share of the U.S. source royalty income by

reason of Country Z’s anti-deferral regime.

Example 7. Treatment of contractual

arrangements operating as collective

investment vehicles. (i) Facts. A is a

contractual arrangement without legal

personality for all purposes under the laws

of Country X providing for joint ownership

of securities. Country X has an income tax

treaty in effect with the United States. A is

a collective investment fund which is of a

type known as a Common Fund under

Country X law. Because of the absence of

legal personality of the arrangement, A is not

liable to tax at the entity level in Country X

and is not a resident within the meaning of

the Residence Article of the U.S.-X income

tax treaty. A is treated as a partnership for

U.S. income tax purposes and receives U.S.

source dividend income. Under the laws of

Country X, however, investors in A only take

into account their respective share of A’s

income upon distribution from the Common

Fund. Some of A’s interest holders are

residents of Country X and some of Country

Y. Country Y has no income tax treaty in

effect with the United States.

(ii) Analysis. A is not fiscally transparent

under paragraph (d)(3)(ii) of this section with

respect to the U.S. source dividend income

because the interest holders in A are not

required to take into account their respective

shares of such income in the taxable year

whether or not distributed. Because A is an

arrangement without a legal personality that

is not considered a resident of Country X

under the Residence Article of the U.S.-X

income tax treaty, however, A does not

derive the income for purposes of the U.S.-

X income tax treaty. Further, because A is not

fiscally transparent under paragraph

(d)(3)(iii) of this section with respect to the

U.S. source dividend income, A’s interest

holders that are residents of Country X do not

derive the income as residents of Country X

for purposes of the U.S.-X income tax treaty.

Example 8. Treatment of person

specifically listed as resident in applicable

treaty. (i) Facts. The facts are the same as in

Example 7 except that A (the Common Fund)

is organized in Country Z and the Residence

Article of the U.S.-Z income tax treaty

provides that ‘‘the term ’resident of a

Contracting State’ includes, in the case of

Country Z, Common Funds.* * *’’

(ii) Analysis. A is treated, for purposes of

the U.S.-Z income tax treaty as deriving the

dividend income as a resident of Country Z

under paragraph (d)(1) of this section because

the item of income is paid directly to A, A

is a Common Fund under the laws of Country

Z, and Common Funds are specifically

identified as residents of Country Z in the

U.S.-Z treaty. There is no need to determine

whether A meets the definition of fiscally

transparent under paragraph (d)(3)(ii) of this

section.

Example 9. Treatment of investment

company when entity receives distribution

deductions, and all distributions sourced by

residence of entity. (i) Facts. Entity A is a

business organization formed under the laws

of Country X, which has an income tax treaty

in effect with the United States. A is treated

as a partnership for U.S. income tax

purposes. Under the laws of Country X, A is

an investment company taxable at the entity

level and a resident of Country X. It is also

entitled to a distribution deduction for

amounts distributed to its interest holders on

a current basis. A distributes all its net

income on a current basis to its interest

holders and, thus, in fact, has no income tax

liability to Country X. A receives U.S. source

dividend income. Under Country X law, all

amounts distributed to interest holders of

this type of business entity are treated as

dividends from sources within Country X

and Country X imposes a withholding tax on

all payments by A to foreign persons. Under

Country X laws, the interest holders in A do

not have to separately take into account their

respective shares of A’s income on a current

basis if such income is not, in fact,

distributed.

(ii) Analysis. A is not fiscally transparent

under paragraph (d)(3)(ii) of this section with

respect to the U.S. source dividends because

the interest holders in A do not have to take

into account their respective share of the U.S.

source dividends on a current basis whether

or not distributed. A is also not fiscally

transparent under paragraph (d)(3)(ii) of this

section because there is a change in source

of the income received by A when A

distributes the income to its interest holders

and, thus, the character and source of the

income in the hands of A’s interest holder are

not determined as if such income were

realized directly from the source from which

realized by A. Accordingly, A is treated as

deriving the U.S. source dividends for

purposes of the U.S.-Country X treaty.

Example 10. Item by item determination of

fiscal transparency. (i) Facts. Entity A is a

business organization formed under the laws

of Country X, which has an income tax treaty

in effect with the United States. A is treated

as a partnership for U.S. income tax

purposes. Under the laws of Country X, A is

an investment company taxable at the entity

level and a resident of Country X. It is also

entitled to a distribution deduction for

amounts distributed to its interest holders on

a current basis. A receives both U.S. source

dividend income and interest income from

U.S. sources that is neither portfolio interest

nor effectively connected with the conduct of

a trade or business in the United States.

Country X law sources all distributions

attributable to dividend income based on the

residence of the investment company. In

contrast, Country X law sources all

distributions attributable to interest income

based on the residence of the payor of the

interest. No withholding applies with respect

to distributions attributable to U.S. source

interest and the character of the distributions

attributable to the interest income remains

the same in the hands of A’s interest holders

as if such items were realized directly from

the source from which realized by A.

However, under Country X law the interest

holders in A do not have to take into account

their respective share of the interest income

received by A on a current basis whether or

not distributed.

(ii) Analysis. An item by item analysis is

required under paragraph (d) of this section.

The analysis is the same as Example 9 with

respect to the dividend income. A is also not

fiscally transparent under paragraph (d)(3)(ii)

of this section with respect to the interest

income because, although the character of the

41000 Federal Register / Vol. 65, No. 128 / Monday, July 3, 2000 / Rules and Regulations

distributions attributable to the interest

income in the hands of A’s interest holders

is determined as if realized directly from the

source from which realized by A, under

Country X law the interest holders in A do

not have to take into account their respective

share of the interest income received by A on

a current basis whether or not distributed.

Accordingly, A derives the U.S. source

interest income for purpose of the U.S.-X

treaty.

Example 11. Treatment of charitable

organizations. (i) Facts. Entity A is a

corporation organized under the laws of

Country X that has an income tax treaty in

effect with the United States. Entity A is

established and operated exclusively for

religious, charitable, scientific, artistic,

cultural, or educational purposes. Entity A

receives U.S. source dividend income from

U.S. sources. A provision of Country X law

generally exempts Entity A’s income from

Country X tax due to the fact that Entity A

is established and operated exclusively for

religious, charitable, scientific, artistic,

cultural, or educational purposes. But for

such provision, Entity A’s income would be

subject to tax by Country X.

(ii) Analysis. Entity A is not fiscally

transparent under paragraph (d)(3)(ii) of this

section with respect to the U.S. source

dividend income because, under Country X

law, the dividend income is treated as an

item of income of A and no other persons are

required to take into account their respective

share of the item of income on a current

basis, whether or not distributed.

Accordingly, Entity A is treated as deriving

the U.S. source dividend income.

Example 12. Treatment of pension trusts.

(i) Facts. Entity A is a trust established and

operated in Country X exclusively to provide

pension or other similar benefits to

employees pursuant to a plan. Entity A

receives U.S. source dividend income. A

provision of Country X law generally

exempts Entity A’s income from Country X

tax due to the fact that Entity A is established

and operated exclusively to provide pension

or other similar benefits to employees

pursuant to a plan. Under the laws of

Country X, the beneficiaries of the trust are

not required to take into account their

respective share of A’s income on a current

basis, whether or not distributed and the

character and source of the income in the

hands of A’s interest holders are not

determined as if realized directly from the

source from which realized by A.

(ii) Analysis. A is not fiscally transparent

under paragraph (d)(3)(ii) of this section with

respect to the U.S. source dividend income

because under the laws of Country X, the

beneficiaries of A are not required to take

into account their respective share of A’s

income on a current basis, whether or not

distributed. A is also not fiscally transparent

under paragraph (d)(3)(ii) of this section with

respect to the U.S. source dividend income

because under the laws of Country X, the

character and source of the income in the

hands of A’s interest holders are not

determined as if realized directly from the

source from which realized by A.

Accordingly, A derives the U.S. source

dividend income for purposes of the U.S.-X

income tax treaty.

(6) Effective date. This paragraph (d)

applies to items of income paid on or

after June 30, 2000.

Robert E. Wenzel,

Deputy Commissioner of Internal Revenue.

Approved: June 28, 2000.

Jonathan Talisman,

Deputy Assistant Secretary of the Treasury

(Tax Policy).

[FR Doc. 00–16761 Filed 6–30–00; 8:45 am]

BILLING CODE 4830–01–P

DEPARTMENT OF THE INTERIOR

Minerals Management Service

30 CFR Part 250

RIN 1010–AC–73

Oil and Gas and Sulphur Operations in

the Outer Continental Shelf—

Production Measurement Document

Incorporated by Reference

AGENCY: Minerals Management Service

(MMS), Interior.

ACTION: Final rule.

SUMMARY: MMS is adding a production

measurement document incorporated by

reference to the regulations governing

oil, gas, and sulphur operations in the

Outer Continental Shelf (OCS). The

document will continue to ensure that

lessees are able to use the best available

and most accurate technologies while

operating in the OCS. The document is

from the American Petroleum Institute’s

Manual of Petroleum Measurement

Standards.

DATES: This rule is effective August 2,

2000. The incorporation by reference of

publications listed in the regulation is

approved by the Director of the Federal

Register as of August 2, 2000.

FOR FURTHER INFORMATION CONTACT:

Sharon Buffington, Engineering and

Research Branch, at (703) 787–1147.

SUPPLEMENTARY INFORMATION: MMS uses

standards, specifications, and

recommended practices developed by

standard-setting organizations and the

oil and gas industry as a means of

establishing requirements for activities

in the OCS. This practice, known as

incorporation by reference, allows MMS

to incorporate the requirements of

technical documents into the

regulations without increasing the

volume of the Code of Federal

Regulations (CFR). MMS currently

incorporates by reference approximately

85 documents into the offshore

operating regulations.

The regulations found at 1 CFR part

51 govern how MMS and other Federal

agencies incorporate various documents

by reference. Agencies can only

incorporate by reference through

publication in the Federal Register.

Agencies must also gain approval from

the Director of the Federal Register for

each publication incorporated by

reference.

Incorporation by reference of a

document or publication is limited to

the edition of the document or

publication cited in the regulations.

This means that newer editions,

amendments, or revisions to documents

already incorporated by reference in

regulations are not part of MMS’s

regulations.

This rule adds the following API

document to those currently

incorporated by reference into MMS

regulations:

• API Manual of Petroleum

Measurement Standards (MPMS),

Chapter 10, Section 9, Standard Test

Method for Water in Crude Oils by

Coulometric Karl Fischer Titration, First

Edition, November 1993.

MMS has reviewed this document

and has determined that it must be

incorporated into regulations to ensure

that industry is able to use the best

available and most accurate

technologies. Our review shows that the

option to use this standard will not

impose additional costs on the offshore

oil and gas industry. In fact, industry

will still have the option to use the

other procedures in current documents

incorporated, as approved. Therefore,

MMS is including this document via a

final rule. MMS has determined under

the Administrative Procedure Act (5

U.S.C. 553(b)(3)(B)) that publishing this

rule as a notice of proposed rulemaking

would be contrary to the public interest.

The regulations found at 30 CFR

250.198(a)(2) allow updating documents

without opportunity to comment when

MMS determines that the revisions to a

document result in safety improvements

or represent new industry standard

technology and do not impose undue

costs on the affected parties.

A summary of MMS’s review of the

document is provided below:

API MPMS Chapter 10, Section 9,

Standard Test Method for Water in

Crude Oils by Coulometric Karl Fischer

Titration, First Edition, November, 1993.

This document lists the method for

directly determining water in crude oils

by volume and weight. It represents an

industry standard that would be newly

used in the OCS. The MMS will retain

the documents from MPMS, Chapter 10,

Sediment and Water, that describe the

other methods of determining water in

crude oils.