By Harrison Cohen and Janet Elsbernd

On 17 April 2012, the U.S. Treasury Department amended the final regulations under §6049 of the Internal Revenue Code that require Form 1042-S reporting of certain deposit interest paid to certain nonresident alien individuals (NRAs).¹ The old regulations require reporting only on payments to Canadian residents; the newly amended regulations, together with a revenue procedure issued on the same day, will also require reporting on payments to residents of 77 other countries, effective for interest paid after 2012.

The amendment does not go as far as the 2011 proposed regulations on which it is based. The proposed regulations would have mandated reporting on all NRA holders of deposits maintained at U.S. offices.² The newly amended final regulations permit financial institutions to limit reporting to payments on deposits maintained at U.S. offices that are held by those NRAs who are residents of countries that have entered into treaties, or other tax information exchange agreements, with the U.S.

Background

Section 6049 generally requires every entity that makes payments of interest aggregating USD 10 or more to any individual during any calendar year to make a return setting forth the amount of the payments and the name and address of the payee. Except to the extent otherwise provided in regulations, the term “interest” for this purpose excludes, among other things, any amount that would be subject to §1441 withholding by the payor “but for the fact that . . . such amount is described in section 871(i)(2).”³ Among the amounts described in §871(i)(2) are “interest on deposits, if such interest is not effectively connected with the conduct of a trade or business within the United States.”⁴ (Because of §871(i), such interest is exempt from the 30% U.S. gross-basis tax that is generally imposed by §§871(a) and 1441 on the U.S. source interest income of NRAs.)

Since 1997, there has been a regulation on the books (namely, Reg. §1.6049-4(b)(5)) that has “turned off” the above statutory reporting exclusion, and thus has required Form 1042-S reporting, in the case of interest described in Reg. §1.6049-8(a). Until its amendment on 17 April, Reg. §1.6049-8(a) described interest paid to Canadian resident individuals with respect to deposits maintained at offices within the U.S. (This regulatory reporting requirement has no adverse effect on the §871(i) exemption of deposit interest from tax.)

Since January 2001, the Treasury Department has at various times proposed, withdrawn and re-proposed amendments to the §6049 regulations that would have turned off the statutory reporting exclusion in the case of all interest paid to all NRAs with respect to deposits maintained at offices within the U.S.,⁵ and has proposed and withdrawn a regulatory amendment to extend reporting to deposit interest paid to residents of 13 European countries, Australia and New Zealand on deposits maintained at offices within the U.S.⁶

Final regulations as amended

The newly amended final Reg. §1.6049-8(a) treats as “interest,” for reporting purposes, interest with respect to which all of the following are true:

1. The interest is with respect to a deposit maintained at an office within the U.S.
2. The interest is paid to an NRA who is a resident of a country that is identified in an applicable revenue procedure as of 31 December prior to the calendar year in which the interest is paid.
3. The revenue procedure identifies the country as one with which the U.S. has in effect an income tax or other convention or bilateral agreement.
4. The convention or other agreement relates to the exchange of tax information within the meaning of §6103(k)(4).
5. Under the convention or other agreement:
   1. The competent authority is the Secretary of the Treasury or his delegate, and
   2. The U.S. agrees to provide, as well as receive, information.⁷

At the payor’s option, the payor may treat all deposit interest that meets criterion 1 above, and that is paid to an NRA, as reportable interest described in Reg. §1.6049-8(a).

The amended final regulations allow a payor or middleman to rely on the permanent residence address provided on a valid “Beneficial Owners Certificate of Foreign Status for U.S. Tax Withholding” (Form W-8BEN) for purposes of determining the payee’s country of residence, unless the payor or middleman knows or has reason to know that such documentation is unreliable or incorrect.

The preamble to the amendments states that the revenue procedure listing the countries to which the new rule applies also will include a second list identifying the countries with which the Treasury Department and the Internal Revenue Service (IRS) have determined that it is appropriate to have an automatic exchange relationship with respect to the information collected under these regulations. The preamble states that a country will be added to this list only after further assessment of the country’s confidentiality laws and practices, as well as further analysis of the extent to which the country is willing and able to reciprocate.

The final regulations remove the requirement in the 2011 proposed regulations that the maker of the Form 1042-S provide a written statement to the payee that the information reported in the Form 1042-S may be furnished to the government of the country where the recipient resides.⁸

Revenue Procedure 2012-24

Concurrent with the release of the amendments to the final regulations, the IRS issued Revenue Procedure 2012-24, listing 78 countries with conventions or other agreements in effect with the U.S. that satisfy criteria 4 and 5 above. Revenue Procedure 2012-24 lists Canada as the only country with which the automatic exchange of the information collected under Reg. §1.6049-4(b)(5) and 1.6049-8 has been determined by the Treasury Department and the IRS to be appropriate.

Coordination with backup withholding

Since 1997, the regulations under §3406 have provided that interest payments described in Reg. §1.6049-8(a) that are made to NRAs are not subject to withholding under §3406 (“backup withholding”).⁹ The new amendments to the final regulations insert this same language into Reg. §1.6049-8(a) itself, modified by adding (both there and in the §3406 regulations) “if the payor may treat the payee as a foreign beneficial owner or foreign payee under the rules of §1.6049-5(b)(12).” This is meant “to clarify that, consistent with the backup withholding rules generally, a payment of interest described in §1.6049-8(a) is not subject to withholding under section 3406 if the payor may treat the payee as a foreign person, without regard to whether the payor reported such interest (although a payor may be subject to penalties if it fails to report as required).”¹⁰

Conclusion

The amendments to the final regulations come in the wake of the “Joint Statement from the United States, France, Germany, Italy, Spain, and the United Kingdom Regarding an Intergovernmental Approach to Improving International Tax Compliance and Implementing FATCA” (dated 8 February 2012).¹¹ The Treasury Department believes that these amendments “will facilitate intergovernmental cooperation on FATCA implementation by better enabling the IRS, in appropriate circumstances, to reciprocate by exchanging information with foreign governments for tax administration purposes.”¹²

¹ TD 9584, 77 Fed. Reg. 23391 (19 April 2012).
² See REG-146097-09, 76 Fed. Reg. 1105 (7 January 2011), as corrected by 76 Fed. Reg. 2852 (18 January 2011), 76 Fed. Reg. 20595 (13 April 2011), and 76 Fed. Reg. 22064 (20 April 2011).
³ §6049(b)(2)(B)(ii) and (5)(B)(iv).
⁴ §871(i)(2)(A). “Deposits” include “deposits with persons carrying on the banking business”; certain “deposits or withdrawable accounts with savings institutions chartered and supervised as savings and loan or similar associations under Federal or State law”; and amounts held by an insurance company under an agreement to pay interest thereon. §871(i)(3).
⁵ REG-126100-00, 66 Fed. Reg. 3925 (17 January 2001) (proposed), and 67 Fed. Reg. 50386 (2 August 2002) (withdrawn); REG-146097-09, 76 Fed. Reg. 1105 (7 January 2011).
⁶ REG-133252-02, 67 Fed. Reg. 50386 (2 August 2002) (proposed), and 76 Fed. Reg. 1105 (7 January 2011) (withdrawn).
⁷ Reg. §1.6049-8(a), as amended by TD 9584.
⁸ Prop. Reg. §1.6049-6(e)(4), as proposed in REG-146097-09, 76 Fed. Reg. at 1108.
⁹ Reg. §31.3406(g)-1(d).
¹⁰ 77 Fed. Reg. at 23393.
¹¹ “FATCA” is short for “foreign account tax compliance,” the name of title V of the HIRE Act, P.L. 111-147 (2010). For additional discussion of the Joint Statement, and other FATCA developments, visit the FATCA Resource Library on deloitte.com.
¹² 77 Fed. Reg. at 23392.