New regulations. The Internal Revenue Service issued new regulations relating to the withholding of tax on, and reporting of, certain U.S. source income paid to foreign persons. The new regulations are generally effective for payments made on or after January 1, 2001. These regulations contain significant changes to the rules governing payments of U.S. source income, particularly with respect to payments made to foreign intermediaries, foreign partnerships, and foreign trusts. You should carefully evaluate the effect of the new regulations.

This publication serves as the Small Entity Compliance Guide required by section 212 of the Small Business Regulatory Enforcement Fairness Act of 1996, P.L. 104-121.

New documentation requirements. New forms replace the following forms and statement.

• Form W-8, Certificate of Foreign Status.
• Form 1001, Ownership, Exemption, or Reduced Rate Certificate.
• Form 1078, Certificate of Alien Claiming Residence in the United States.
• Form 4224, Exemption From Withholding of Tax on Income Effectively Connected With the Conduct of a Trade or Business in the United States.
• Form 8709, Exemption From Withholding on Investment Income of Foreign Governments and International Organizations.
• Statement under former regulation section 1.1441-5, relating to an individual's claim to be a U.S. citizen or resident, or a partnership's or corporation's claim that it is a domestic entity.

In addition, the address rule for dividends does not apply for any payments of dividends made after December 31, 2000. A reduced rate of withholding applies to dividends only if the withholding agent has received valid documentation.

The following are the new forms. For more information, see Documentation, later.

• Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding.
• Form W-8ECI, Certificate of Foreign Person's Claim for Exemption From Withholding on Income Effectively Connected With the Conduct of a Trade or Business in the United States.
• Form W-8EXP, Certificate of Foreign Government or Other Foreign Organization for United States Tax Withholding.
• Form W-8IMY, Certificate of Foreign Intermediary, Foreign Flow-Through Entity, or Certain U.S. Branches for United States Tax Withholding.

Generally, Form W-8BEN replaces Forms W-8 and 1001, Form W-8ECI replaces Form 4224, and Form W-8EXP replaces Form 8709. Form W-8IMY is a new form that had no counterpart under prior law. Form W-9, Request for Taxpayer Identification Number and Certification, replaces Form 1078.

New reporting requirements. The new regulations make significant changes to the method for reporting payments to foreign persons, particularly with respect to payments made to foreign intermediaries, partnerships, and trusts. In addition, Form 1042-S, Foreign Person's U.S. Source Income Subject to Withholding, has been significantly revised to reflect changes in the new regulations. Withholding agents that rely on automated systems to report income paid to foreign persons should ensure that they have made the necessary changes to their systems to comply with these new reporting requirements.

Income tax treaties. A new income tax treaty with Denmark went into effect for taxes withheld at source for amounts paid or credited on or after May 1, 2000, and for other taxes, for tax years beginning on or after January 1, 2001.

A new income tax treaty with Ukraine went into effect for taxes withheld on interest, dividends, and royalties paid or credited on or after August 1, 2000, and for other taxes, for tax periods beginning on or after January 1, 2001.

A new income tax treaty with Luxembourg went into effect on January 1, 2001.

Tables at the end of this publication show the countries with which the United States has income tax treaties and the rates of withholding that apply in cases where all conditions of the particular treaty articles are satisfied. The new treaties are shown in these tables.

Generally, a person entitled to benefits under the previous treaty with that country (for Ukraine, the treaty with the former Soviet Union) can elect to have that treaty apply in its entirety for one year following the date the new treaty would otherwise apply.

Notice 2001-4. The IRS issued Notice 2001-4 to provide guidance regarding certain transitional and other issues for qualified intermediaries and U.S. withholding agents. Some of the provisions of that notice are discussed next. For more details and other provisions, see Notice 2001-4 in Internal Revenue Bulletin 2001-2.

Documentation. During calendar year 2001, you (a U.S. withholding agent) may rely on forms received under the regulations in effect prior to January 1, 2001 (old forms), if you can show that you have made a good faith effort to get the appropriate new form. This applies even if the validity period of those old forms has expired.

You cannot use the address rule for dividends paid after December 31, 2000. You must have documentation to treat a payee as a foreign person or apply a reduced rate of withholding. During calendar year 2001, you meet this requirement if you have an old Form W-8 or a Form 1001 for the same payee.

Until further notice, you can rely upon Forms W-8 that contain a P.O. box as a permanent residence address provided you do not know, or have reason to know, that the person providing the form is a U.S. person or that a street address is available. You may rely on Forms W-8 for which there is a U.S. mailing address provided you received the form prior to December 31, 2001. You can rely on documentary evidence in lieu of a Form W-8 for a payment made in a U.S. possession.

See New documentation requirements, earlier.

You may not rely on an old Form W-8 to treat a foreign financial institution as the beneficial owner of income if you know, or have reason to know, that the institution is acting as an intermediary.

Qualified intermediaries. Generally, a qualified intermediary (QI) is any foreign intermediary that has entered into a QI withholding agreement with the IRS. (See the discussions under Persons Subject to NRA Withholding and Documentation, later.) An applicant for a QI agreement may represent on Form W-8IMY that it is a QI for a limited period after it submits a complete application and before it receives a fully executed agreement. If the application was submitted before January 1, 2001, this period ends on June 30, 2001. If the application was submitted after December 31, 2000, this period continues until the end of the sixth full month after the month in which the application was submitted.

If the application was submitted before July 1, 2001, an applicant may apply all of the provisions of the QI agreement beginning January 1, 2001. If the application was submitted after June 30, 2001, all the following apply.

1. The applicant may represent to a withholding agent that it is a QI effective on the date it submits a complete application.
2. The QI cannot apply the following provisions of the QI agreement (see Revenue Procedure 2000-12) to any payments received before the effective date:
   1. Reporting provisions (section 8), and
   2. Collective credit or refund provisions (section 9.04).
3. The QI must report all payments it makes before the effective date as a nonqualified intermediary.

A withholding agent is not required to determine when a QI applied for an agreement or if it has received a fully executed agreement.

QI-EIN. When the IRS receives an application for a QI agreement it will issue the applicant a QI employer identification number (QI-EIN). The QI should include its QI-EIN on any Form W-8IMY it gives to a withholding agent. If Form W-8IMY is provided before the number is received, the QI should write "awaiting QI-EIN" on line 6 of Part I of the form. If the QI-EIN was not on the Form W-8IMY given to a withholding agent, the QI must give the number to the withholding agent as soon as practicable after it is received. A new Form W-8IMY is not required if all of the information on the original form remains valid. A withholding agent is not required to verify the QI-EIN.

Primary Form 1099 responsibility assumed. QIs that are not U.S. payors are no longer required to obtain IRS approval before assuming primary Form 1099 reporting and backup withholding responsibility.

Foreign partnerships. For calendar year 2001, a foreign partnership can give you a Form W-8IMY with a withholding statement that gives you information regarding withholding rate pools. The foreign partnership must associate the documentation from each of its partners with the Form W-8IMY. If a partner is a foreign person or a U.S. exempt recipient, documentation may be provided to you at any time during calendar year 2001. However, a Form W-9 must be provided for any U.S. non-exempt recipient before a payment is made to a partnership.

Services performed outside the United States. You are not required to report, under section 6041 of the Internal Revenue Code, income paid for services, even if you do not have a Form W-8 from the payee, if:

1. The payee is an individual,
2. You do not know that the payee is a U.S. citizen or resident,
3. You do not know, and have no reason to know, that the income is (or may be) effectively connected with the conduct of a U.S. trade or business, and
4. The payee performed all of the services for which payment is made outside the United States.

Photographs of missing children. The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843- 5678) if you recognize a child.

Important Reminders

Electronic deposit rules. You must use the Electronic Federal Tax Payment System (EFTPS) to make electronic deposits of all depository tax liabilities you incur after 2000, if you meet either of the following conditions.

• You had to make electronic deposits in 2000.
• You deposited more than $200,000 in federal depository taxes in 1999.

If you do not meet these conditions, electronic deposits are voluntary.

For more information about depositing electronically, see Publication 966, EFTPS: The Easiest Way to Pay Your Federal Taxes.

IRS taxpayer identification numbers for aliens. The IRS will issue an individual taxpayer identification number (ITIN) to an alien who does not have and is not eligible to get a social security number (SSN).

An ITIN is for tax use only. It does not entitle an alien to social security benefits or change his or her employment or immigration status under U.S. law.

For more information on ITINs, see U.S. Taxpayer Identification Numbers, later.

Hong Kong. Hong Kong and China continue to be treated as two separate countries for purposes of certain bilateral agreements, the Internal Revenue Code, and the Income Tax Regulations.

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