Guidance on Reporting of Deposit Interest
Paid to Nonresident Aliens

DEPARTMENT OF THE TREASURY
Internal Revenue Service 26 CFR Parts 1 and 31 [REG-126100-00] RIN
1545-AY62

TITLE: Guidance on Reporting of Deposit Interest Paid to Nonresident
Aliens

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

SUMMARY: This document contains proposed regulations that provide
guidance on the reporting requirements for interest on deposits
maintained at the U.S. office of certain financial institutions and
paid to nonresident alien individuals. These proposed regulations
affect persons making payments of interest with respect to such a
deposit. This document also provides a notice of public hearing on
these proposed regulations.

DATES: Written or electronic comments must be received by February
27, 2001. Requests to speak (with outlines of oral comments to be
discussed) at the public hearing scheduled for 10 a.m. on March 21,
2001, must be received by February 27, 2001.

ADDRESSES: Send submissions to: CC:M&SP:RU (REG-126100-00), Room
5226, Internal Revenue Service, POB 7604, Ben Franklin Station,
Washington, DC 20044. Submissions also may be hand delivered Monday
through Friday between the hours of 8 a.m. and 5 p.m. to: CC:M&SP:RU
(REG-126100-00), Courier's Desk, Internal Revenue Service 1111
Constitution Avenue, NW., Washington, DC. Alternatively, taxpayers
may submit comments electronically via the Internet by selecting the
"Tax Regs" option on the IRS Home Page, or by submitting comments
directly to the IRS Internet site at
http://www.irs.gov/prod/tax_regs/regslist.html. The public hearing
will be held in Room 4718, Internal Revenue Building, 1111
Constitution Avenue, NW., Washington, DC.

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

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information contained in this notice of proposed
rulemaking has been submitted to the Office of Management and Budget
for review in accordance with the Paperwork Reduction Act of 1995
(44 U.S.C. 3507(d)). Comments on the collection of information
should be sent to the Office of Management and Budget , Attn: Desk
Officer for the

DEPARTMENT OF THE TREASURY, Office of Information and Regulatory
Affairs, Washington, DC 20503, with copies to the Internal Revenue
Service , Attn: IRS Reports Clearance Officer, W:CAR:MP:FP:S:O,
Washington, DC 20224. Comments on the collections of information
should be received by ( DATE THAT IS 60 DAYS AFTER PUBLICATION OF
THIS DOCUMENT IN THE FEDERAL REGISTER ). Comments are specifically
requested concerning:

Whether the proposed collection of information is necessary for the
proper operation of the functions of the IRS, including whether the
information will have practical utility;

The accuracy of the estimated burden associated with the proposed
collection of information (see below);

How the quality, utility, and clarity of the information to be
collected may be enhanced;

How the burden of complying with the proposed collection of
information may be minimized, including through the application of
automated collection techniques or other forms of information
technology; and

Estimates of capital or start-up costs and costs of operation,
maintenance, and purchase of service to provide information.

The collection of information in these proposed regulations is in
§§1.6049-4(b)(5)(i), 1.6049-6(e)(4)(i), and (ii). This
information is required to determine if taxpayers have properly
reported amounts received as income. The collection of information
is mandatory. The likely respondents are businesses and other for-
profit institutions. The estimated average annual burden per
respondent and/or recordkeeper required by §§1.6049-4(b)
(5)(i), 1.6049-6(e)(4)(i), and (ii) will be reflected in the burdens
of Forms W-8, 1042, 1042-S, and the income tax return of a foreign
person.

Further, the estimated average annual burden per respondent and/or
recordkeeper for the statement required by §1.6049-6(e)(4)(i)
is as follows:

Estimated total annual reporting burden: 500 hours.

Estimated average annual burden per respondent: 15 minutes.

Estimated number of respondents: 2,000.

Estimated annual frequency of responses: annually.

An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless the collection of
information displays a valid control number assigned by the Office
of Management and Budget.

Books or records relating to a collection of information must be
retained as long as their contents may become material in the
administration of any internal revenue law. Generally, tax returns
and tax return information are confidential, as required by 26
U.S.C. 6103.

Background and Explanation of Provisions

The IRS previously determined that information concerning interest
paid on deposits from U.S. bank accounts to nonresident alien
individuals who are residents of Canada would be significant in
furthering its compliance efforts. Consequently, §1.6049-8(a)
requires the reporting of such interest on a Form 1042-S.

The proposed regulations extend the information reporting
requirement for bank deposit interest paid to nonresident alien
individuals who are residents of other foreign countries. This
extension is appropriate for two reasons. First, requiring routine
reporting to the IRS of all bank deposit interest paid within the
United States will help to ensure voluntary compliance by U.S.
taxpayers by minimizing the possibility of avoidance of the U.S.
information reporting system (such as through false claims of
foreign status). Second, several countries that have tax treaties or
other agreements that provide for the exchange of tax information
with the United States have requested information concerning bank
deposits of individual residents of their countries. Because of the
importance that the United States attaches to exchanging tax
information as a way of encouraging voluntary compliance and
furthering transparency, see e.g. S. Exec. Rep. No. 106-8, at 15 (1
Sess. 1999), Treasury and the IRS believe it is important for the
United States to st facilitate, wherever possible, the effective
exchange of all relevant tax information with our treaty partners.

In addition to extending the information reporting requirement for
interest paid on deposits maintained at a bank's office within the
United States to all nonresident alien individuals, the proposed
regulations also make the following minor changes and
clarifications.

Section 1.6049-6 provides that a copy of Form 1042-S must be
furnished to the recipient for interest paid on deposits maintained
at a bank's office within the United States. Paragraph (e)(4)(i) of
that section has been revised to clarify that the payor or middleman
can satisfy this requirement by furnishing a copy of Form 1042-S
either in person or to the last known address of the recipient.

A new paragraph (e)(4)(ii) has been added to §1.6049-6 to
provide guidance on the manner in which a Form 1042-S is furnished
when there are joint account holders. Specifically, if any joint
account holder is a U.S. non-exempt recipient, the payor or
middleman must report the entire payment to that person. If all
joint account holders are foreign persons, the payor or middleman
must report the payment to the nonresident alien individual that is
a resident of a country with which the United States has an income
tax treaty or a tax information exchange agreement (TIEA). If more
than one of the joint account holders is a foreign person and is a
resident of a country with which the United States has an income tax
treaty or a TIEA, the payor or middleman must report the payment to
the person that is the primary account holder. The payor or
middleman must, however, furnish a Form 1042-S to any account holder
who requests it.

Section 1.6049-8(a) provides that interest paid with respect to a
deposit maintained at an office within the United States to
individuals who are Canadian residents must be reported. The payor
or middleman may rely on the permanent address found on Form W-8 to
make the determination of whether the nonresident alien individual
resides in Canada. However, the regulation also provides that a
payor or middleman may rely on its actual knowledge of the
individual's residence address in Canada, even if a valid Form W-8
has not been provided, to make such a determination. This "actual
knowledge of the individual's residence address" rule has been
eliminated because it creates a result that is contrary to the
presumption rules contained in §1.1441-1(b)(3)(iii) (and made
applicable to reportable payments by §1.6049-5(d)(2)).
Accordingly, §1.6049-8(a) has been clarified to provide that,
while amounts described in §1.6049-8(a) generally are not
subject to backup withholding under section 3406, the payor must
report the payment on a Form 1099 as made to a U.S. non-exempt
recipient in accordance with the presumption rules of
§§1.6049-5(d)(2) and 1.1441-1(b)(3)(iii) if the payor or
middleman does not have either a valid Form W-8 or valid Form W-9.
Further, such payment is subject to backup withholding under section
3406.

Proposed Effective Date

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

Special Analyses

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

Comments and Public Hearing

Before these proposed regulations are adopted as final regulations,
consideration will be given to any written comments (a signed
original and eight (8) copies) that are submitted timely (in the
manner described in the "ADDRESSES" portion of this preamble) to the
IRS. The IRS and Treasury Department request comments on the clarity
of the proposed rules and how they can be made easier to understand.
All comments will be available for public inspection and copying.

A public hearing has been scheduled for March 21, 2001, beginning at
10 a.m. in Room 4718, Internal Revenue Building, 1111 Constitution
Avenue, NW., Washington, DC. Due to building security procedures,
visitors must enter at the 10th Street entrance, located
between Constitution and Pennsylvania Avenues, NW. In addition, all
visitors must present photo identification to enter the building.
Because of access restrictions, visitors will not be admitted beyond
the immediate entrance area more than 15 minutes before the hearing
starts. For information about having your name placed on the
building access list to attend the hearing, see the "FOR FURTHER
INFORMATION CONTACT" portion of this preamble.

The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who
wish to present oral comments must submit written comments and an
outline of the topics to be discussed and the time to be devoted to
each topic (a signed original and eight (8) copies) by February 27,
2001. A period of 10 minutes will be allotted to each person for
making comments. An agenda showing the scheduling of the speakers
will be prepared after the deadline for reviewing outlines has
passed. Copies of the agenda will be available free of charge at the
hearing.

Drafting Information

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

Proposed Amendments to the Regulations

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

PART 1 -- INCOME TAXES

Paragraph 1. The authority citation for part 1 continues to read in
part as follows: Authority: 26 U.S.C. 7805 * * *

Par. 2. In section 1.6049-4, paragraph (b)(5) is revised to read as
follows: §1.6049-4 Return of information as to interest paid
and original issue discount includible in gross income after
December 31, 1982.

* * * * *

(b) * * *

(5) Interest payments to nonresident alien individuals--

(i) General rule. In the case of interest aggregating $10 or more
paid to a nonresident alien individual (as defined in section
7701(b)(1)(B)) that is reportable under §1.6049-8(a), the payor
shall make an information return on Form 1042-S for the calendar
year in which the interest is paid. The payor or middleman shall
prepare and file Form 1042-S at the time and in the manner
prescribed by section 1461 and the regulations under that section
and by the form and its accompanying instructions. See
§§1.1461-1(b) (rules regarding the preparation of a Form
1042) and 1.6049-6(e)(4) (rules for furnishing a copy of the Form
1042-S to the payee). To determine whether an information return is
required for original issue discount, see §§1.6049-5(f)
and 1.6049-8(a).

(ii) Effective date. Paragraph (b)(5)(i) of this section shall be
effective for payments made after December 31 of the year in which
the final regulations are published in the Federal Register. (For
interest paid to a Canadian nonresident alien individual on or
before December 31 of the year in which final regulations are
published in the Federal Register, see §1.6049-4(b)(5) as in
effect and contained in 26 CFR part 1 revised April 1, 2000.)

* * * * *

Par. 3. Section 1.6049-6 is amended as follows:

1. Paragraph (e)(4) is revised.

2. In paragraph (e)(5), the first sentence is revised and a new
sentence is added at the end of the paragraph.

The addition and revisions read as follows:

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

* * * * *

(e) * * *

(4) Special rule for amounts described in §1.6049-8(a)--

(i) In general. In the case of amounts described in
§1.6049-8(a) (relating to payments of deposit interest to
nonresident alien individuals) paid after December 31 of the year in
which the final regulations are published in the Federal Register,
any person who makes a Form 1042-S under section 6049(a) and
§1.6049-4(b)(5) shall furnish a statement to the recipient
either in person or by first-class mail to the recipient's last
known address. The statement shall include a copy of the Form 1042-S
required to be prepared pursuant to §1.6049-4(b)(5) and a
statement to the effect that the information on the form is being
furnished to the United States Internal Revenue Service and may be
furnished to the government of the foreign country where the
recipient resides.

(ii) Joint account holders. In the case of joint account holders, a
payor or middleman must report the entire amount of interest as paid
to any joint account holder that provides a valid Form W-9, or, if
any account holder has not furnished a Form W-8 or Form W-9, any
account holder that is presumed to be a U.S. non-exempt recipient
under §§1.6049-5(d)(2) and 1.1441-1(b)(3)(iii). If all of
the joint account holders are foreign persons, then the payor or
middleman must report the payment to the nonresident alien
individual that is a resident of a country with which the United
States has an income tax treaty or a tax information exchange
agreement. If more than one of the joint account holders is a
foreign person and is a resident of a country with which the United
States has an income tax treaty or a tax information exchange
agreement, then the payor or middleman may report the interest as
paid to any such account holder that is treated as the primary
account holder under §31.3406(h)-2(a). If, however, any account
holder requests its own Form 1042-S, the payor or middleman must
furnish a Form 1042-S to the account holder who requests it.

(5) Effective date. This paragraph (e)(4) is effective for payee
statements due after December 31 of the year in which the final
regulations are published in the Federal Register,without regard to
extensions. * * * (For interest paid to a Canadian nonresident alien
individual on or before December 31 of the year in which final
regulations are published in the Federal Register, see
§1.6049-6(e)(4) as in effect and contained in 26 CFR part 1
revised April 1, 2000.)

* * * * *

Par. 4. In section 1.6049-8, the section heading and paragraph (a)
are revised to read as follows:

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

(a) Interest subject to reporting requirement. For purposes of
§§1.6049-4, 1.6049-6, and this section and except as
provided in paragraph (b) of this section, the term interest means
interest paid to a nonresident alien individual after December 31 of
the year in.which the final regulations are published in the Federal
Register,where the interest is described in section 871(i)(2)(A)
with respect to a deposit maintained at an office within the United
States. For purposes of the regulations under section 6049, a
nonresident alien individual is a person described in section
7701(b)(1)(B). The payor or middleman may rely upon a valid Form W-8
to determine whether the payment is made to a nonresident alien
individual. Generally, amounts described in this paragraph (a) are
not subject to backup withholding under section 3406. See
§31.3406(g)-1(d) of this chapter. However, if the payor or
middleman does not have either a valid Form W-8 or valid Form W-9,
the payor or middleman must report the payment as made to a U.S.
non-exempt recipient if it must so treat the payee under the
presumption rules of §1.6049-5(d)(2) and §1.1441- 1(b)(3)
(iii) and must also backup withhold under section 3406. (For
interest paid to a Canadian nonresident alien individual on or
before December 31 of the year in which final regulations are
published in the Federal Register, see §1.6049-8(a) as in
effect and contained in 26 CFR part 1 revised April 1, 2000.)

* * * * *

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

Par. 5. The authority citation for part 31 continues to read in part
as follows: Authority: 26 U.S.C. 7805 * * *

Par. 6. In section 31.3406(g)-1, paragraph (d) is revised to read as
follows: §31.3406(g)-1 Exceptions for payments to certain
payees and certain other payment.

* * * * *

(d) Reportable payments made to nonresident alien individuals. A
payment of interest that is reported on Form 1042-S as paid to a
nonresident alien individual under §1.6049-8(a) of this chapter
is not subject to withholding under section 3406. (For interest paid
to a Canadian nonresident alien individual on or before December 31
of the year in which final regulations are published in the Federal
Register, see §31.3406(g)-1(d) as in effect and contained in 26
CFR part 1 revised April 1, 2000.)

Deputy Commissioner of Internal Revenue

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