New procedure for calculating income tax withholding on wages. Beginning with wages paid after December 31, 2005, employers are required to calculate income tax withholding on wages of nonresident alien employees using a new procedure. Under this procedure, the employer adds an amount to the employee's wages solely for the purpose of calculating the amount to withhold. The employee is no longer required to have additional tax withheld. See Wages Paid to Employees—Graduated Withholding.

New rules for partnership withholding on effectively connected income (ECI). For partnership tax years beginning after May 18, 2005, new regulations under section 1446 provide the rules for a partnership to withhold tax on ECI allocated to a foreign partner. See Partnership Withholding on Effectively Connected Income. The appropriate Form W-8 can be used to inform the partnership that the partner is a foreign partner and its tax classification. A foreign partner that provides the partnership with a valid Form W-8 for purposes of withholding under sections 1441, 1442, and 1443 of the Internal Revenue Code will generally satisfy the documentation requirements for withholding by the partnership under section 1446 of the Code. See the regulations under section 1446 for more information.

New rules for publicly traded partnership (PTP) withholding on distributions to foreign partners. For partnership tax years beginning after May 18, 2005, a PTP can no longer elect to withhold tax based on ECI allocable to its foreign partners. The PTP must withhold on the distribution of that income to its foreign partners. A nominee that receives a distribution of ECI from a PTP is treated as the withholding agent to the extent of the amount specified in the qualified notice received by the nominee. The withholding agent (PTP or nominee) must use Form 1042 and Form 1042-S to report withholding from distributions under section 1446 of the Code. For more information, see Publicly Traded Partnerships under Partnership Withholding on Effectively Connected Income. Also see Regulations section 1.1446-4.

Voluntary Compliance Program (VCP). The IRS has initiated a “Section 1441 VCP.” This program is available to certain withholding agents with respect to the withholding, payment, and reporting of certain taxes due on payments to foreign persons. Submissions under this program had to be made before January 1, 2006. This deadline has been extended to April 1, 2006. For information on the VCP, see Revenue Procedure 2004-59, which is on page 678 of the Internal Revenue Bulletin 2004-42 at www.irs.gov/pub/irs-irbs/irb04-42.pdf. Also see Revenue Procedure 2005-71 on page 985 of Internal Revenue Bulletin 2005-47.

New rules for acceptance agents. New rules apply to acceptance agents. There are four major changes to the rules.

For more information, see Revenue Procedure 2006-10 on page 293 of Internal Revenue Bulletin 2006-2 at www.irs.gov/pub/irs-irbs/irb06-02.pdf.

Note. 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.

Form W-8. There are four forms in the W-8 series. The form to use depends on the type of certification being made. As used in this publication, the term “Form W-8” refers to the appropriate document. For more information, see Documentation, later.

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 2005, if you meet either of the following conditions.

If you do not meet these conditions, electronic deposits are voluntary. For more information about depositing electronically, see Publication 966, The Secure Way to Pay Your Federal Taxes.

Filing electronically. If you file Form 1042-S electronically, you will use the Filing Information Returns Electronically (FIRE) system. You get to the system through the Internet at fire.irs.gov.

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.

Japan. The new treaty with Japan is generally effective for tax periods beginning on or after January 1, 2005. However, an individual who claimed treaty benefits under Article 19 (teachers and researchers) or Article 20 (students and trainees) of the former treaty can continue to apply those provisions.

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.

This publication is for withholding agents who pay income to foreign persons, including nonresident aliens, foreign corporations, foreign partnerships, foreign trusts, foreign estates, foreign governments, and international organizations. Specifically, it describes the persons responsible for withholding (withholding agents), the types of income subject to withholding, and the information return and tax return filing obligations of withholding agents. In addition to discussing the rules that apply generally to payments of U.S. source income to foreign persons, it also contains sections on the withholding that applies to the disposition of U.S. real property interests and the withholding by partnerships on income effectively connected with the active conduct of a U.S. trade or business.