2001 Changes

Foreign Earned Income Exclusion Increased

In 2001, the maximum foreign earned income exclusion increases from $76,000 to $78,000.

Tax Withholding

The Internal Revenue Service issued regulations relating to the withholding of tax on, and reporting of, certain U.S. source income paid to foreign persons. These regulations are generally effective for payments made on or after January 1, 2001. For more information, see Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Corporations.

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 you have received valid documentation.

The following are the new forms that should be used under the new regulations.

• 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.

Document transition rules. During calendar year 2001, you, a U.S. withholding agent, may rely on old Form W-8, Form 1001, Form 1078, Form 4224, and Form 8709 obtained under the regulations in effect prior to January 1, 2001, even if the validity period of those forms has expired, provided you can show that you have made good faith efforts to obtain Forms W-8BEN, W-8ECI, W-8EXP, W-8IMY, and W-9 from account holders required to provide those forms. However, you cannot use the address rule for dividends paid after 2000. You must have documentation. In addition, and 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 and provided you do not know, or have reason to know, that a street address is available. Finally, you may rely on Forms W-8 for which there is a U.S. mailing address without applying the provisions of section 1.1441-7(b) of the new regulations regarding the presence of a U.S. mailing address on the Form W-8 or as part of your account information provided you received the form prior to December 31, 2001.

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 foreign financial institution is acting as an intermediary on behalf of others.

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.

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