Nonresident Aliens: 2012 Supplement Do Not Print

Transcription

1 Nonresident Aliens: 2012 Supplement Do Not Print 2012 Presented by: gettechnical inc 7575 Jefferson Hwy PMB # 183 Baton Rouge, LA or Fax: Website: gettechnical@msn.com NRA 2012gettechnical inc 1

2 The material used in this text has been drawn from sources believed to be reliable. Every effort has been made to assure the accuracy of the material; however, the accuracy of this information is not guaranteed. The laws are often changed without prior notice from the government. The NON-RESIDENT ALIENS: CIP, CDD, W-8BENS, ITINS, & IRS REPORTING 2012 MANUAL is sold with the understanding that the publisher and the editor are not engaging in the practice of law or accounting. We are not responsible for the actions of your company s employees. The text is designed to address most teller compliance issues. However, you will wish to consult your attorney when you are unsure of an answer. Published by: gettechnical inc 7575 Jefferson Hwy PMB # 183 Baton Rouge, LA Office: or Fax: Website: gettechnical@msn.com All rights reserved. This material may not be reproduced in whole or in part in any form or by any means without written permission from the publishers. Printed in the United States of America. NRA 2012gettechnical inc 2

3 INSTRUCTOR Deborah Crawford is the President of gettechnical inc, a Baton Rouge-based firm, specializing in the education of banks and credit unions across the nation. Her 27+ years of banking and teaching experience began at Hibernia National Bank in New Orleans. She graduated from Louisiana State University with both her bachelor's and master s degrees. Deborah's specialty is in the deposit side of the financial institution where she teaches seminars on regulations, documentation, insurance and Individual Retirement Accounts (Voice Mail for Debbie Crawford) (Fax) gettechnical@msn.com ( ) (website) NRA 2012gettechnical inc 3

4 TABLE OF CONTENTS IRS REPORTING & CHANGES... 6 DEPARTMENT OF THE TREASURY: FINAL RULE GUIDANCE ON REPORTING INTEREST PAID TO NONRESIDENT ALIENS...7 DEPARTMENT OF THE TREASURY: REVENUE PROCEDURE...45 RESIDENT OR NONRESIDENT ALIEN? PUBLICATION 519: U.S. TAX GUIDE FOR ALIENS...50 PUBLICATION 519: GREEN CARD TEST...51 PUBLICATION 519: SUBSTANTIAL PRESENCE TEST...53 PUBLICATION 519: CLOSER CONNECTION TO A FOREIGN COUNTRY...60 PUBLICATION 519: EFFECT OF TAX TREATIES...63 PUBLICATION 519: DUAL-STATUS ALIENS...64 PUBLICATION 519: NONRESIDENT SPOUSE TREATED AS A RESIDENT...74 PUBLICATION 519: SOURCE OF INCOME...77 WITHHOLDING AND REPORTING PUBLICATION 515: WITHHOLDING OF TAX ON NONRESIDENT ALIENS AND FOREIGN ENTITIES...80 FORM 1042-S ANNUAL TAX RETURN FOR U.S. SOURCE OF INCOME OF FOREIGN PERSONS...96 CUSTOMER IDENTIFICATION PROGRAM AND BSA EXAM ISSUES CIP COMPLIANCE: NEW ACCOUNT INTERVIEW COMPONENTS IS IT AN ACCOUNT OR A CUSTOMER AS DEFINED IN CIP? IN THE LAW: ACCOUNT IN THE LAW: BANK IN THE LAW: CUSTOMER THE INFORMATION IN THE LAW: INFORMATION REQUIRED BY CIP THE DOCUMENTS EXPANDED IDENTIFICATION FOR NONRESIDENT ALIENS (NRA) VERIFYING THE CUSTOMER THROUGH NONDOCUMENTS UNDER CIP LAW: CUSTOMER VERIFICATION WHAT TO DO IF WE CANNOT VERIFY IDENTITY LAW: LACK OF VERIFICATION CIP PROCEDURES NRA 2012gettechnical inc 4

5 CIP RECORDKEEPING LAW: CIP RECORDKEEPING LAW: GOVERNMENT LISTS CIP CUSTOMER NOTICE IN LOBBY RELIANCE ON ANOTHER FINANCIAL INSTITUTION AND THIRD PARTIES UNDER CIP CUSTOMER DUE DILIGENCE UNDER BSA ENHANCED DUE DILIGENCE UNDER BSA BSA EXAM MANUAL: NONRESIDENT ALIENS AND FOREIGN INDIVIDUALS OVERVIEW EXAMINATION PROCEDURES EXAMPLE: NONRESIDENT ALIENS ENHANCED DUE DILIGENCE OFAC OFAC FREQUENTLY ASKED QUESTIONS AND ANSWERS PUTTING TOGETHER CIP & CDD NRAs & SETTING UP INTEREST BEARING ACCOUNTS OVERVIEW: SSN, EIN OR ITIN OVERVIEW: TAXPAYER IDENTIFICATION NUMBERS REQUEST FOR TAXPAYER IDENTIFICATION NUMBER AND CERTIFICATION (FORM W-9) (DEC 2011) INSTRUCTIONS FOR W-9 (JAN 2011) OVERVIEW: NONRESIDENT ALIENS FORM: W-8BEN CERTIFICATE OF FOREIGN STATUS & INSTRUCTIONS INSTRUCTIONS FOR FORM W-8BEN (FEB 2006) FORM: W-7 (JAN 2012) SAMPLE LETTER FROM WITHHOLDING AGENT NRA 2012gettechnical inc 5

6 IRS REPORTING & CHANGES NRA 2012gettechnical inc 6

7 DEPARTMENT OF THE TREASURY: FINAL RULE GUIDANCE ON REPORTING INTEREST PAID TO NONRESIDENT ALIENS [Federal Register Volume 77, Number 76 (Thursday, April 19, 2012)] [Rules and Regulations] [Pages ] From the Federal Register Online via the Government Printing Office [ [FR Doc No: ] ==================================================================== DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Parts 1 and 31 [TD 9584] RIN 1545-BJ01 Guidance on Reporting Interest Paid to Nonresident Aliens AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Final regulations SUMMARY: This document contains final regulations regarding the reporting requirements for interest that relates to deposits maintained at U.S. offices of certain financial institutions and is paid to certain nonresident alien individuals. These regulations will affect commercial banks, savings institutions, credit unions, securities brokerages, and insurance companies that pay interest on deposits. DATES: Effective Date: These regulations are effective April 19, Applicability Date: These regulations apply to payments of interest made on or after January 1, FOR FURTHER INFORMATION CONTACT: Kathryn Holman, (202) (not a toll free number). NRA 2012gettechnical inc 7

8 SUPPLEMENTARY INFORMATION: Paperwork Reduction Act The collection of information contained in these final regulations has been reviewed and approved by the Office of Management and Budget for review in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)) under control number The collection of information in these proposed regulations is in Sec (b)(5)(i) and Sec (e)(4)(i) and (ii). The collection of information is mandatory and the respondents are commercial banks, savings institutions, credit unions, securities brokerages, and insurance companies that maintain deposit accounts for nonresident alien individuals. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it 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. Information collected under these regulations will be return information as defined in 26 U.S.C Tax returns and return information are confidential as required by 26 U.S.C Background On January 7, 2011, the Treasury Department and the IRS published a notice of proposed rulemaking (REG ) (the 2011 proposed regulations) in the Federal Register (76 FR 1105, corrected by 76 FR 2852, 76 FR 20595, and 76 FR 22064) under section 6049 of the Internal Revenue Code (Code). The 2011 proposed regulations withdrew proposed regulations that had been issued on August 2, 2002 (67 FR 50386) (the 2002 proposed regulations). The 2002 proposed regulations would have required reporting of interest payments to nonresident alien individuals that are residents of certain specified countries. The 2011 proposed regulations provide that payments of interest aggregating $10 or more on a deposit maintained at a U.S. office of a financial institution and paid to any nonresident alien individual are subject to information reporting. Written comments were received by the Treasury Department and the IRS in response to the 2011 proposed regulations. A public hearing on the 2011 proposed regulations was held on May 18, 2011, at which further comments were received. All comments were considered and are available for public inspection at or upon request. After consideration of the written comments and the comments provided at the public hearing, the 2011 proposed regulations are adopted as revised by this Treasury decision. Explanation and Summary of Comments Objectives of This Regulatory Action The reporting required by these regulations is essential to the U.S. Government's efforts to combat offshore tax evasion for several reasons. First, it ensures that the IRS can, in appropriate circumstances, exchange information relating to tax enforcement with other jurisdictions. In order to ensure that U.S. taxpayers cannot evade U.S. tax by hiding income and assets offshore, NRA 2012gettechnical inc 8

9 the United States must be able to obtain information from other countries regarding income earned and assets held in those countries by U.S. taxpayers. Under present law, the measures available to assist the United States in obtaining this information include both treaty relationships and statutory provisions. The effectiveness of these measures depends significantly, however, on the United States' ability to reciprocate. The United States has constructed an expansive network of international agreements, including income tax or other conventions and bilateral agreements relating to the exchange of tax information (collectively referred to as information exchange agreements), which provide for the exchange of information related to tax enforcement under appropriate circumstances. These information exchange relationships are based on cooperation and reciprocity. A jurisdiction's willingness to share information with the IRS to combat offshore tax evasion by U.S. taxpayers depends, in large part, on the ability of the IRS to exchange information that will assist that jurisdiction in combating offshore tax evasion by its own residents. These regulations, by requiring reporting of deposit interest to the IRS, will ensure that the IRS is in a position to exchange such information reciprocally with a treaty partner when it is appropriate to do so. Second, in 2010, Congress supplemented the established network of information exchange agreements by enacting, as part of the Hiring Incentives to Restore Employment Act of 2010 (Pub. L ), provisions commonly known as the Foreign Account Tax Compliance Act (FATCA) that require overseas financial institutions to identify U.S. accounts and report information (including interest payments) about those accounts to the IRS. In many cases, however, the implementation of FATCA will require the cooperation of foreign governments in order to overcome legal impediments to reporting by their resident financial institutions. Like the United States, those foreign governments are keenly interested in addressing offshore tax evasion by their own residents and need tax information from other jurisdictions, including the United States, to support their efforts. These regulations 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. Finally, the reporting of information required by these regulations will also directly enhance U.S. tax compliance by making it more difficult for U.S. taxpayers with U.S. deposits to falsely claim to be nonresidents in order to avoid U.S. taxation on their deposit interest income. International Standard for Transparency and Information Exchange Under the international standard for transparency and exchange of information, which is reflected in the Organisation for Economic Cooperation and Development (OECD) Model Agreement on Exchange of Information on Tax Matters, the OECD Model Tax Convention, and the United Nations Model Double Tax Convention between Developed and Developing Countries, exchange of tax information cannot be limited by domestic bank secrecy laws or the absence of a specific domestic tax interest in the information to be exchanged. Accordingly, under this global standard a country cannot refuse to share tax information based on domestic laws that do not require banks to share the information. In addition, under the global standard, a country cannot opt out of information exchange based on the fact that the country does not itself need the information to enforce its own tax rules. Thus, even countries that do not impose income taxes, and therefore do not have tax enforcement concerns, have entered into information exchange agreements to provide information about the accounts of nonresidents. NRA 2012gettechnical inc 9

10 Comments Regarding Confidentiality and Improper Use of Information Some comments on the 2011 proposed regulations expressed concerns that the information required to be reported under those regulations might be misused. For example, comments expressed concern that deposit interest information may be shared with a country that does not have laws in place to protect the confidentiality of the information exchanged or that would use the information for purposes other than the enforcement of its tax laws. These comments further suggested that these concerns could affect nonresident alien investors' decisions about the location of their deposits. The Treasury Department and the IRS believe that the concerns raised by the comments are addressed by existing legal limitations and administrative safeguards governing tax information exchange. As discussed herein, information reported pursuant to these regulations will be exchanged only with foreign governments with which the United States has an agreement providing for the exchange and when certain additional requirements are satisfied. Even when such an agreement exists, the IRS is not compelled to exchange information, including information collected pursuant to these regulations, if there is concern regarding the use of the information or other factors exist that would make exchange inappropriate. First, information reported pursuant to these regulations is return information under section Section 6103 imposes strict confidentiality rules with respect to all return information. Moreover, section 6103(k)(4) allows the IRS to exchange return information with a foreign government only to the extent provided in, and subject to the terms and conditions of an information exchange agreement. Thus, the IRS can share the information reported under these regulations only with foreign governments with which the United States has an information exchange agreement. Absent such an agreement, the IRS is statutorily barred from sharing return information with another country, and these regulations cannot and do not change that rule. Second, consistent with established international standards, all of the information exchange agreements to which the United States is a party require that the information exchanged under the agreement be treated and protected as secret by the foreign government. In addition, information exchange agreements generally prohibit foreign governments from using any information exchanged under such an agreement for any purpose other than the purpose of administering, collecting, and enforcing the taxes covered by the agreement. Accordingly, under these agreements, neither country is permitted to release the information shared under the agreement or use it for any other law enforcement purposes. Third, consistent with the international standard for information exchange and United States law, the United States will not enter into an information exchange agreement unless the Treasury Department and the IRS are satisfied that the foreign government has strict confidentiality protections. Specifically, prior to entering into an information exchange agreement with another jurisdiction, the Treasury Department and the IRS closely review the foreign jurisdiction's legal framework for maintaining the confidentiality of taxpayer information. In order to conclude an information exchange agreement with another country, the Treasury Department and the IRS must be satisfied that the foreign jurisdiction has the necessary legal safeguards in place to protect exchanged information and that adequate penalties apply to any breach of that confidentiality. Finally, even if an information exchange agreement is in effect, the IRS will not exchange information on deposit interest or otherwise with a country if the IRS determines that the country is not complying with its obligations under the agreement to protect the confidentiality of NRA 2012gettechnical inc 10

11 information and to use the information solely for collecting and enforcing taxes covered by the agreement. The IRS also will not exchange any return information with a country that does not impose tax on the income being reported because the information could not be used for the enforcement of tax laws within that country. In addition, the IRS has options regarding the appropriate form of exchange. For example, the IRS might exchange information with another jurisdiction only upon specific request. In the case of specific exchange requests, the IRS evaluates the requesting country's current practices with respect to information confidentiality. The IRS also requires the requesting country to explain the intended permitted use of the information and justify the relevance of that information to the permitted use. Alternatively, in appropriate circumstances, the IRS might exchange certain information on an automatic basis. The IRS currently exchanges deposit interest information on an automatic basis with only one jurisdiction (Canada). The IRS will not enter into a new automatic exchange relationship with a jurisdiction unless it has reviewed the country's policies and practices and has determined that such an exchange relationship is appropriate. Further, the IRS generally will not enter into an automatic exchange relationship with respect to the information collected under these regulations unless the other jurisdiction is willing and able to reciprocate effectively. The Treasury Department and the IRS believe that the legal and administrative safeguards described in the preceding paragraphs regarding the use of information collected under these regulations should adequately address the concerns identified by the comments and, therefore, these regulations should not significantly impact the investment and savings decisions of the vast majority of nonresidents who are aware of and understand these safeguards and existing law and practice. Nevertheless, to enhance awareness and further address concerns, these final regulations revise the 2011 proposed regulations to require reporting only in the case of interest paid to a nonresident alien individual resident in a country with which the United States has in effect an information exchange agreement pursuant to which the United States agrees to provide, as well as receive, information and under which the competent authority is the Secretary of the Treasury or his delegate. For this purpose, the Treasury Department and the IRS will publish a Revenue Procedure [see Department of the Treasury: Revenue Procedure ] contemporaneously with these final regulations specifically identifying the countries with which the United States has in force such an information exchange agreement. The Revenue Procedure will be updated as appropriate. With respect to any calendar year, payors will only be required to report interest on deposits maintained at an office within the United States and paid to a nonresident alien individual who is a resident of a country identified in the Revenue Procedure as of December 31 of the prior calendar year as being a country with which the United States has in effect such an information exchange agreement. To address any potential burden associated with reporting on this basis, the final regulations provide that for any year for which the information return under Sec (b)(5) is required, a payor may elect to report interest payments to all nonresident alien individuals. As previously discussed, the identification of a country as having an information exchange agreement with the United States does not necessarily mean that the information collected under these regulations will be reported to such foreign jurisdiction. As an additional measure to further increase awareness among concerned nonresidents regarding the IRS' use of information collected under these regulations, the Revenue Procedure also will include a second list identifying the countries with which the Treasury Department and the IRS have determined that NRA 2012gettechnical inc 11

12 it is appropriate to have an automatic exchange relationship with respect to the information collected under these regulations. This determination will be made only after further assessment of a country's confidentiality laws and practices and the extent to which the country is willing and able to reciprocate. In addition, in response to comments, and given the information exchange practices described in the preceding paragraphs and the information that will be available in the Revenue Procedure, these final regulations eliminate the requirement in the 2011 proposed regulations for financial institutions to include in the information statement provided to nonresident alien individuals a statement informing the individual that the information may be furnished to the government of the country where the recipient resides. In addition, these final regulations clarify that a payor or middleman may rely on the permanent residence address provided on a valid Form W-8BEN, ``Beneficial Owners Certificate of Foreign Status for U.S. Tax Withholding'', for purposes of determining the country of residence of a nonresident alien to whom reportable interest is paid unless the payor or middleman knows or has reason to know that such documentation of the country of residence is unreliable or incorrect. The final regulations also modify Sec (g)-1 of the proposed regulations to clarify that, consistent with the backup withholding rules generally, a payment of interest described in Sec (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). As under the prior regulations requiring the reporting of interest paid to Canadian non-resident alien individuals, the final regulations define interest subject to reporting to mean interest paid on deposits as defined under section 871(i)(2)(A) (including deposits with persons carrying on a banking business, deposits with certain savings institutions, and certain amounts held by insurance companies under agreements to pay interest thereon). Comments Regarding Authority and Congressional Intent Some comments expressed the view that the Treasury Department and the IRS lack the authority to require the reporting required under the 2011 proposed regulations, or that the 2011 proposed regulations are contrary to Congressional intent. The relevant statutory provisions expressly contemplate that the Treasury Department and the IRS have authority to require reporting on deposit interest paid to nonresidents. Section 6049(a) provides generally for reporting with respect to interest payments. Section 6049(b)(2)(B) and (5) provides that, except to the extent otherwise provided in regulations, reportable interest does not include interest paid to nonresident alien individuals on deposits described in section 871(i)(2)(A). Section 6049(b)(2)(B) and (5) thus provides express authority for the Treasury Department and the IRS to issue regulations requiring reporting of such interest. Special Analyses It has been determined that these regulations are not a significant regulatory action as defined in Executive Order 12866, as supplemented by Executive Order Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations. When an agency promulgates a final rule, the Regulatory Flexibility Act, 5 U.S.C. chapter 6 (RFA), requires the agency to prepare a final regulatory flexibility analysis describing the impact NRA 2012gettechnical inc 12

13 of the final rule on small entities. 5 U.S.C Section 605 of the RFA allows an agency to certify a rule, in lieu of preparing a regulatory flexibility analysis, if the final rule is not expected to have a significant economic impact on a substantial number of small entities. These regulations impose a collection of information, and thus, the Regulatory Flexibility Act (5 U.S.C. chapter 6) applies. It is hereby certified that the collection of information contained in these regulations will not have a significant economic impact on a substantial number of small entities. The preamble to the 2011 proposed regulations sets forth an analysis of the number of small entities that may be required to report under these regulations. Although this rule may affect a substantial number of small entities, the IRS has determined that the impact on entities affected by these final regulations will not be significant. Some comments expressed concern that the regulations would impose a new administrative burden on U.S. financial institutions. In addition, some comments objected that collecting and reporting this information imposes burdens on certain types of financial institutions, including community banks and banks in certain states that have a larger percentage of customers who are nonresident alien individuals. The Treasury Department and the IRS disagree. Under existing law, all U.S. financial institutions have responsibilities to withhold on and report with respect to depositors who are U.S. citizens, U.S. resident individuals, and Canadian resident individuals, and have developed the systems to perform such withholding and reporting. All nonresident alien individual account holders who maintain accounts in the United States are already required to complete a Form W-8BEN, declaring their non-u.s. status and the country in which they reside. U.S. financial institutions can use their existing W-8 information to produce Form 1042-S disclosures for the relevant nonresident alien individual account holders. Nearly all U.S. banks and other financial institutions have automated systems to produce Form 1099-INT, ``Interest Income'', for U.S. accountholders and Form 1042-S, ``Foreign Person's U.S. Source Income Subject to Withholding'', for Canadian accountholders. As a result, the information collection requirements in these regulations build on reporting and information collection systems familiar to and currently used by U.S. financial institutions, including small business entities. The amount of time required to complete the Form 1042 and Form 1042-S is minimal, and the statement that is required to be collected is brief. Accordingly, it should not be a significant burden to adapt those systems to report with respect to depositors who are resident in other countries with which the United States has an information exchange agreement. Therefore, a regulatory flexibility analysis is not required. Pursuant to section 7805(f) of the Code, the notice of proposed rulemaking preceding these final regulations was submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small businesses. The Chief Counsel for Advocacy of the Small Business Administration did not comment on the notice of proposed rulemaking. Drafting Information The principal author of the regulations is Kathryn Holman, Office of Associate Chief Counsel (International). However, other personnel from the Treasury Department and the IRS participated in their development. List of Subjects NRA 2012gettechnical inc 13

14 26 CRF Part 1 Income taxes, Reporting and recordkeeping requirements. 26 CFR Part 31 Employment taxes, Income taxes, Penalties, Pensions, Railroad retirement, Reporting and recordkeeping requirements, Social Security, Unemployment compensation. Adoption of Amendments to the Regulations Accordingly, 26 CFR parts 1 and 31 are 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 * * * Par. 2. In Sec , paragraph (b)(5) is revised to read as follows (see highlighted piece for revision): Sec Return of information as to interest paid and original issue discount includible in gross income after December 31, (a) Requirement of reporting (1) In general. Except as provided in paragraph (c) of this section, an information return shall be made by a payor, as defined in paragraph (a)(2) of this section, of amounts of interest and original issue discount paid after December 31, Such return shall contain the information described in paragraph (b) of this section. (2) Payor. For payments made after December 31, 2002, a payor is a person described in paragraph (a)(2)(i) or (ii) of this section. (i) Every person who makes a payment of the type and of the amount subject to reporting under this section (or under an applicable section under this chapter) to any other person during a calendar year. (ii) Every person who collects on behalf of another person payments of the type and of the amount subject to reporting under this section (or under an applicable section under this chapter), or who otherwise acts as a middleman (as defined in paragraph (f)(4) of this section) with respect to such payment. (b) Information to be reported (1) Interest payments. Except as provided in paragraphs (b) (3) and (5) of this section, in the case of interest other than original issue discount treated as interest under (f), an information return on Form 1099 shall be made for the calendar year showing the aggregate amount of the payments, the name, address, and taxpayer identification number of the person to whom paid, the amount of tax deducted and withheld under section 3406 from the payments, if any, and such other information as required by the forms. An information return is generally not required if the amount of interest paid to a person aggregates less than $10 or if the payment is made to a person who is an exempt recipient described in paragraph (c)(1)(ii) NRA 2012gettechnical inc 14

15 of this section, unless the payor backup withholds under section 3406 on such payment (because, for example, the payee (i.e., exempt recipient) has failed to furnish a Form W 9 on request), in which case the payor must make a return under this section, unless the payor refunds the amount withheld pursuant to (a) 3 of this chapter (Employment Tax Regulations). For reporting interest paid to a Canadian nonresident alien individual, see (2) Original issue discount. Except as provided in paragraph (b)(3) and (b)(5) of this section, in the case of original issue discount, an information return on Forms 1096 and 1099 shall be made for each calendar year of any holder of an obligation as to which there is original issue discount includible in gross income aggregating $10 or more. For calendar years before 1992, semiannual record date reporting under (a)(1)(ii)(b)(1) may be used, and if it is used, the original issue discount includible in gross income is determined by treating each holder as holding the obligation on every day it was outstanding during the calendar year. An information return shall be made, however, in any case in which an amount of tax is required to be deducted and withheld under section In such case, the amount required to be reported is the amount subject to withholding even if the amount of original issue discount includible in gross income is less than $10. With respect to an obligation described in A (e) or (f) (relating respectively to deposits in banks and similar financial institutions and to face-amount certificates), (a)(1)(ii)(d) and the last sentence of (a)(1)(ii)(a)(2) shall apply. The information return shall show: (i) The name, address, and taxpayer identification number of each record holder for whom an amount of original issue discount is includible in gross income; (ii) The account, serial, or other identifying number of each obligation with respect to which a return is being made; (iii) The aggregate amount of original issue discount includible in the gross income of each holder for the period during the calendar year for which the return is made (or, if the aggregation rules of (a)(1)(ii)(b)(2) are being used, the aggregate amount or original issue discount for the period such holder held the obligations). For calendar years before 1992, semiannual record date reporting under (a)(1)(ii)(b)(1) may be used, and if it is used, the original issue discount includible in gross income is determined by treating each holder as holding the obligation on every day it was outstanding during the calendar year. For purposes of this section, an obligation shall be considered to be outstanding from the date of original issue (as defined in (b)(3)); (iv) The amount of tax withheld under section 3406, if any; (v) The name and address of the person filing the return: and (vi) Such other information as is required by the forms. Section (a)(1)(ii)(b)(2) and, for calendar years before 1992, (a)(1)(ii)(b)(1), and (c), apply for purposes of this paragraph. (3) Returns made by middleman (i) In general. Except as provided in paragraph (b)(5) of this section, every person acting as a middleman (as defined in paragraph (f)(4) of this section) shall make an information return for the calendar year. In the case of interest payments (other than original issue discount and other than interest described in ), the information return shall be made on Form 1099 and shall show the aggregate amount of the interest, the name, address, and taxpayer identification number of the person on whose behalf received, the amount of tax withheld under section 3406, if any, and such other information as required by the forms. In the case of original issue discount, the information return shall show the information required to be shown for the person on whose behalf received, as described in paragraph (b)(2) of this NRA 2012gettechnical inc 15

16 section. See (f) to determine whether a middleman is required to make an information return with respect to original issue discount. A middleman shall make an information return regardless of whether the middleman receives a Form A middleman shall not be required to make an information return if the payment of interest aggregates less than $10 or if the payment is made to an exempt recipient described in paragraph (c)(1)(ii) of this section, unless the payor backup withholds under section 3406 on such payment (because, for example, the payee has failed to furnish a Form W 9 on request), in which case the payor must make a return under this section, unless the payor refunds the amount withheld pursuant to (a) 3 of this chapter (Employment Tax Regulations). (ii) Forwarding of interest coupons and original issue discount obligations. In the case of a middleman who, from within the United States, forwards an interest coupon or discount obligation on behalf of a payee for presentation, collection or payment outside the United States, the middleman shall make an information return on Form 1099 for the calendar year showing, in the case of an interest coupon, the information required under paragraph (b)(3)(i) of this section and, in the case of a discount obligation, information required under paragraph (b)(2) of this section. For purposes of this paragraph (b)(3)(ii), a middleman is considered to forward an interest coupon or discount obligation on behalf of a payee for presentation, collection or payment outside the United States if the middleman forwards the coupon or obligations outside the United States on or after the date when the payee is entitled to be paid or at an earlier date that is within 90 days of such date or if the middleman has actual knowledge that the coupon or obligation is being forwarded outside the United States for presentation, collection, or payment outside the United States. However, the transfer, although subject to information reporting under this section, is not subject to backup withholding under section (iii) Example. The following example illustrates the provisions of paragraph (b)(3)(ii) of this section: Example. Individual F, who is entitled to payment on an interest coupon, instructs an office of Bank M in the United States to forward the coupon to Bank N for collection by Bank N outside the United States. Bank M in the United States forwards the interest coupon to Bank N outside the United States. Bank M is required to make an information return for the calendar year under paragraph (b)(3)(ii) of this section showing the aggregate amount of the interest coupon forwarded, the name, address of the permanent residence, and the taxpayer identification number, if any, of Individual F and such other information as the form requires. (4) Returns made with respect to payments on certificates of deposit issued in bearer form. Except as provided in paragraph (b)(5) of this section, every person carrying on the banking business who makes payments of interest to another person (whether or not aggregating $10 or more) during a calendar year with respect to a certificate of deposit issued in bearer form shall make an information return on Forms 1096 and The information return shall show the information required in (a)(1)(vi) (a) through (e) inclusive and a statement as to the amount of tax withheld under section 3406, if any. (5) Interest payments to certain 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 Sec (a), the payor shall make an information return on Form 1042-S, ``Foreign Person's U.S. Source Income Subject to Withholding,'' 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 Sec. Sec (b) (rules NRA 2012gettechnical inc 16

17 regarding the preparation of a Form 1042) and (e)(4) (rules for furnishing a copy of the Form 1042-S to the recipient). To determine whether an information return is required for original issue discount, see Sec. Sec (f) and (a). (ii) Effective/applicability date. Paragraph (b)(5)(i) of this section shall be applicable for payments made on or after January 1, (For interest paid to a Canadian nonresident alien individual on or before December 31, 2012, see paragraph (b)(5) of this section as in effect and contained in 26 CFR part 1 revised April 1, 2000.) Par. 3. Section is amended as follows (see highlighted piece for revisions): In paragraph (b)(12), the last sentence is revised. 2. In paragraph (f), the last sentence is revised. The revisions read as follows: Sec Interest and original issue discount subject to reporting after December 31, (a) Interest subject to reporting requirement. For purposes of , and this section, except as provided in paragraph (b) of this section, the term interest means: (1) Interest on an obligation: (i) In registered form (as defined in 5f.103 1(c)), or (ii) Of a type offered to the public. Principles consistent with 5f shall be applied to determine whether an obligation is of a type offered to the public. (2) Interest on deposits with persons carrying on the banking business. Such term shall include deposits evidenced by time certificates of deposit issued in any amount whether negotiable or non-negotiable. The term interest includes payments to a mortgage escrow account and amounts paid with respect to repurchase agreements and banker's acceptances. Property which the payee receives from the payor as interest (or in lieu of a cash payment of interest) shall be interest for purposes of section The amount subject to reporting is the fair market value of such property. (3) Amounts, whether or not designated as interest, paid or credited by mutual savings banks, savings and loan associations, building and loan associations, cooperative banks, homestead associations, credit unions, industrial loan associations or banks, or similar organizations, in respect of deposits, face amount certificates, investment certificates, or withdrawable or repurchasable shares. Thus, even though amounts paid or credited by such organizations with respect to deposits are designated as dividends, such amounts are included in the definition of interest for purposes of section The term interest includes payments to a mortgage escrow account and amounts paid with respect to repurchase agreements. Property which the payee receives from the payor as interest (or in lieu of a cash payment of interest) is interest for purposes of section The fair market value of such property is the amount subject ot reporting. (4) Interest on amounts held by insurance companies under an agreement to pay interest thereon. Any increment in value of advance premiums, prepaid premiums, or premium deposit funds which is applied to the payment of premiums due on insurance policies, or made available for withdrawal by the policyholder, shall be considered interest subject to reporting. Interest that an insurance company pays pursuant to an agreement with the policyholder to a beneficiary because he payment due has been delayed is interest subject to reporting. Interest subject to reporting also includes interest paid by insurance companies with respect to policy dividend NRA 2012gettechnical inc 17

18 accumulations (see sections 61 and 451 and the regulations thereunder for rules as to when such interest is considered paid), and interest paid with respect to the proceeds of insurance policies left with the insurer. The so-called interest element in the case of annuity or installment payments under life insurance or endowment contracts does not constitute interest for purposes of section (5) Interest on deposits with brokers as defined in section 6045(c) and the regulations thereunder. Any payment made in lieu of interest to a person whose obligation has been borrowed in connection with a short sale or other similar transaction is subject to reporting under section See T for reporting requirements with respect to payments in lieu of tax-exempt interest. See for reporting requirements with respect to payments in lieu of taxexempt interest. (6) Interest paid on amounts held by investment companies as defined in section 3 of the Investment Company Act (15 U.S.C. section 80 a) and on amounts paid on pooled funds or trusts. The interest to be reported with respect to a widely held fixed investment trust, as defined in (b)(22), shall be the interest earned on the assets held by the trust. See for the reporting rules for widely held fixed investment trusts (as defined under that section). (b) Interest excluded from reporting requirement. The term interest or original issue discount (OID) does not include (1) Interest on any obligation issued by a natural person as defined in (f)(2), irrespective of whether such interest is collected on behalf of the holder of the obligation by a middleman. (2) Interest on any obligation if such interest is exempt from taxation under section 103(a), relating to certain governmental obligations, or interest which is exempt from taxation under any other provision of law without regard to the identity of the holder. The holder of a tax exempt obligation that is not in registered form must provide written certification to the payor (other than the issuer of the obligation) that the obligation is exempt from taxation. A statement that interest coupons are tax exempt on the envelope or shell commonly used by financial institutions to process such coupons, signed by the payee, will be sufficient for this purpose if the envelope is properly completed (i.e., shows the name, address, and taxpayer identification number of the payee). A payor may rely on such written certification in treating such interest as tax exempt for purposes of section See (d)(8) with respect to the requirement that the issuer of a taxable obligation shall make an information return if such issuer receives an envelope which improperly claims that the interest coupons contained therein are tax exempt. (3) Interest on amounts held in escrow to guarantee performance on a contract or to provide security. However, interest on amounts held in escrow with a person described in paragraph (a)(2) or (3) of this section is interest subject to reporting under section (4) Interest that a governmental unit pays with respect to tax refunds. (5) Interest on deposits for security, such as deposits posted with a public utility company. However, interest on deposits posted for security with a person described in paragraph (a)(2) or (3) of this section is interest subject to reporting under section (6) Amounts from sources outside the United States (determined under the provisions of part I, subchapter N, chapter 1 of the Internal Revenue Code (Code) and the regulations under those provisions) paid outside the United States by a non-u.s. payor or a non-u.s. middleman (as defined in paragraph (c)(5) of this section). See paragraph (e) of this section for circumstances in which a payment is considered to be made outside the United States. NRA 2012gettechnical inc 18

19 (7) Portfolio interest, as defined in (b)(1), paid with respect to obligations in bearer form described in section 871(h)(2)(A) or 881(c)(2)(A) or with respect to a foreign-targeted registered obligation described in (e)(2) for which the documentation requirements described in (e)(3) and (4) have been satisfied (other than by a U.S. middleman (as defined in paragraph (c)(5) of this section) that, as a custodian or nominee of the payee, collects the amount for, or on behalf of, the payee, regardless of whether the middleman is also acting as agent of the payor). (8) Portfolio interest described in (c)(1)(ii), paid with respect to obligations in registered form described in section 871(h)(2)(B) or 881(c)(2)(B) that is not described in paragraph (b)(7) of this section. (9) Any amount paid by an international organization described in (c)(1)(ii)(G) (or its paying, transfer, or other agent that is not also a payee's agent) with respect to an obligation of which the international organization is the issuer. (10)(i) Amounts paid outside the United States (other than by a U.S. middleman (as defined in paragraph (c)(5) of this section) that, as a custodian or nominee or other agent of the payee, collects the amount for, or on behalf of, the payee, regardless of whether the middleman is also acting as agent of the payor) with respect to an obligation that: Has a face amount or principal amount of not less than $500,000 (as determined based on the spot rate on the date of issuance if in foreign currency); has a maturity (at issue) of 183 days or less; satisfies the requirements of sections 163(f)(2)(B)(i) and (ii)(i) and the regulations thereunder (as if the obligation would otherwise be a registration-required obligation within the meaning of section 163(f)(2)(A)) (however, an original issue discount obligation with a maturity of 183 days or less from the date of issuance is not required to satisfy the certification requirement of (c)(2)(i)(D)(3)) and is issued in accordance with the procedures of (c)(2)(i)(D); and has on its face the following statement (or a similar statement having the same effect): By accepting this obligation, the holder represents and warrants that it is not a United States person (other than an exempt recipient described in section 6049(b)(4) of the Internal Revenue Code and regulations thereunder) and that it is not acting for or on behalf of a United States person (other than an exempt recipient described in section 6049(b)(4) of the Internal Revenue Code and the regulations thereunder). (ii) If the obligation is in registered form, it must be registered in the name of an exempt recipient described in (c)(1)(ii). For purposes of this paragraph (b)(10), a middleman may treat an obligation as described in section 163(f)(2)(B)(i) and (ii)(i) and the regulations under that section if the obligation, or coupons detached therefrom, whichever is presented for payment, contains the statement described in this paragraph (b)(10). The exemption from reporting described in this paragraph (b)(10) shall not apply if the payor has actual knowledge that the payee is a U.S. person who is not an exempt recipient. (11) Amounts paid with respect to an account or deposit with a U.S. or foreign branch of a domestic or foreign corporation or partnership that is paid with respect to an obligation described in either paragraph (b)(11)(i) or (ii) of this section, if the branch is engaged in the commercial banking business; and the interest or OID is paid outside the United States (other than by a U.S. middleman (as defined in paragraph (c)(5) of this section) that acts as a custodian, nominee, or other agent of the payee, and collects the amount for, or on behalf of, the payee, regardless of whether the middleman is also acting as agent of the payor). The exemption from reporting described in this paragraph (b)(11) shall not apply if the payor has actual knowledge that the payee is a U.S. person who is not an exempt recipient. NRA 2012gettechnical inc 19

20 (i) An obligation is described in this paragraph (b)(11)(i) if it is not in registered form (within the meaning of section 163(f) and the regulations under that section), is described in section 163(f)(2)(B) and issued in accordance with the procedures of (c)(2)(i)(C) or (D), and, in the case of a U.S. branch, is part of a larger single public offering of securities. For purposes of this paragraph (b)(11)(i), a middleman may treat an obligation as described in section 163(f)(2)(B) if the obligation, and any detachable coupons, contains the statement described in section 163(f)(2)(B)(ii)(II) and the regulations under that section. (ii)(a) An obligation is described in this paragraph (b)(11)(ii) if it produces income described in section 871(i)(2)(A); has a face amount or principal amount of not less than $500,000 (as determined based on the spot rate on the date of issuance if in foreign currency); satisfies the requirements of sections 163(f)(2)(B)(i) and (ii)(i) and the regulations thereunder (as if the obligation would otherwise be a registration-required obligation within the meaning of section 163(f)(2)(A)) and is issued in accordance with the procedures of (c)(2)(i) (C) or (D) (however, an original issue discount obligation with a maturity of 183 days or less from the date of issuance is not required to satisfy the certification requirement of (c)(2)(i)(D)(3)). For purposes of this paragraph (b)(11)(ii), a middleman may treat an obligation as described in sections 163(f)(2)(b) (i) and (ii) and the regulations under that section if the obligation, or any detachable coupon, contains the statement described in paragraph (b)(11)(ii)(b) of this section. (B) The obligation must have on its face, and on any detachable coupons, the following statement (or a similar statement having the same effect): By accepting this obligation, the holder represents and warrants that it is not a United States person (other than an exempt recipient described in section 6049(b)(4) and regulations under that section) and that it is not acting for or on behalf of a United States person (other than an exempt recipient described in section 6049(b)(4) and the regulations under that section). (C) If the obligation is in registered form, it must be registered in the name of an exempt recipient described in (c)(1)(ii). (12) Payments that a payor can, prior to payment, reliably associate with documentation upon which it may rely to treat the payment as made to a foreign beneficial owner in accordance with (e)(1)(ii) or as made to a foreign payee in accordance with paragraph (d)(1) of this section or presumed to be made to a foreign payee under paragraph (d)(2) or (3) of this section. However, such payments may be reportable under (b) and (c). The provisions of shall apply by substituting the term payor for the term withholding agent and without regard to the fact that the provisions apply only to amounts subject to withholding under chapter 3 of the Code. In the event of a conflict between the provisions of and paragraph (d) of this section in determining the foreign status of the payee, the provisions of shall govern for payments of amounts subject to withholding under chapter 3 of the Code and the provisions of paragraph (d) of this section shall govern in other cases. This paragraph (b)(12) does not apply to interest paid on or after January 1, 2013, to a nonresident alien individual to the extent provided in Sec (13) Amounts for the period that the debt obligation with respect to which the interest arises represents an asset blocked as described in (e)(3). Payment of such amounts, including interest that is past due and OID on obligations that mature on or before the date that the assets are no longer blocked, is deemed to occur in accordance with the rules of (e)(3). (14) Payments made by a foreign intermediary described in (e)(3)(i) of amounts that it has received in its capacity as an intermediary and that are associated with a valid withholding NRA 2012gettechnical inc 20

21 certificate described in (e)(3)(ii) or (iii) and payments made by a U.S. branch of a foreign bank or of a foreign insurance company described in (b)(2)(iv) (other than a U.S. branch that is treated as a U.S. person) that are associated with a valid withholding certificate described in (e)(3)(v), which certificate the intermediary or branch has furnished to the payor or middleman from whom it has received the payment, unless, and to the extent, the intermediary or branch knows that the payments are required to be reported under and were not so reported. For example, if a foreign intermediary or U.S. branch described in (b)(2)(iv) fails to provide information regarding U.S. persons that are not exempt from reporting under (c)(1)(ii) to the person from whom the intermediary or U.S. branch receives the payment, the amount paid by the foreign intermediary or U.S. branch to such person is interest or original issue discount. The exception of this paragraph (b)(14) shall not apply to a qualified intermediary that assumes reporting responsibility under chapter 61 of the Internal Revenue Code. (15) Amounts of interest as determined under the provisions of (g)(4) (dealing with interest in the case of a significant non-periodic payment with respect to a notional principal contract). Such amounts are governed by the provisions of section See (d)(5). (c) Applicable rules (1) Documentary evidence for offshore accounts and for possessions accounts. A payor may rely on documentary evidence described in this paragraph (c)(1) instead of a beneficial owner withholding certificate described in (e)(2)(i) in the case of a payment made outside the United States to an offshore account, in the case of a payment made to a U.S. possessions account or, in the case of broker proceeds described in (c)(2), in the case of a sale effected outside the United States (as defined in (g)(3)(iii)(A)). For purposes of this paragraph (c)(1), an offshore account means an account maintained at an office or branch of a U.S. or foreign bank or other financial institution at any location outside the United States (i.e., other than in any of the fifty States or the District of Columbia) and outside of possessions of the United States. Thus, for example, an account maintained in a foreign country at a branch of a U.S. bank or of a foreign subsidiary of a U.S. bank is an offshore account. For purposes of this paragraph (c)(1), a U.S. possessions account means an account maintained at an office or branch of a U.S. or foreign bank or other financial institution located within a possession of the United States. For the definition of a payment made outside the United States, see paragraph (e) of this section. A payor may rely on documentary evidence if the payor has established procedures to obtain, review, and maintain documentary evidence sufficient to establish the identity of the payee and the status of that person as a foreign person (including, but not limited to, documentary evidence described in (c)(3) or (4)); and the payor obtains, reviews, and maintains such documentary evidence in accordance with those procedures. A payor maintains the documents reviewed by retaining the original, certified copy, or a photocopy (or microfiche or similar means of record retention) of the documents reviewed and noting in its records the date on which and by whom the document was received and reviewed. Documentary evidence furnished for the payment of an amount subject to withholding under chapter 3 of the Internal Revenue Code must contain all of the information that is necessary to complete a Form 1042-S for that payment. A payor may also rely on documentary evidence associated with a flow-through withholding certificate for payments treated as made to foreign partners of a nonwithholding foreign partnership, as defined in (c)(28), the foreign beneficiaries of a foreign simple trust, as defined in (c)(24), or foreign owners of a foreign grantor trust, as defined in (c)(26), even though the partnership or trust account is maintained in the United States. NRA 2012gettechnical inc 21

22 (2) Other applicable rules. The provisions of (e)(4)(i) through (ix) (regarding who may sign a certificate, validity period of certificates, retention of certificates, etc.) shall apply (by substituting the term payor for the term withholding agent and disregarding the fact that the provisions under (e)(4) only apply to amounts subject to withholding under chapter 3 of the Code) to withholding certificates and documentary evidence furnished for purposes of this section. See (b)(2)(vii) for provisions dealing reliable association of a payment with documentation. (3) Standards of knowledge. A payor may not rely on a withholding certificate or documentary evidence described in paragraph (c)(1) or (4) of this section if it has actual knowledge or reason to know that any information or certification stated in the certificate or documentary evidence is unreliable. A payor has reason to know that information or certifications are unreliable only if the payor would have reason to know under the provisions of (b)(2)(ii) and (3) that the information and certifications provided on the certificate or in the documentary evidence are unreliable or, in the case of a Form W 9 (or an acceptable substitute), it cannot reasonably rely on the documentation as set forth in (h) 3(e) of this chapter (see the information and certification described in (h) 3(e)(2)(i) through (iv) of this chapter that are required in order for a payor reasonably to rely on a Form W 9). The provisions of (b)(2)(ii) and (3) shall apply for purposes of this paragraph (c)(3) irrespective of the type of income to which (b)(2)(ii) is otherwise limited. The exemptions from reporting described in paragraphs (b)(10) and (11) of this section shall not apply if the payor has actual knowledge that the payee is a U.S. person who is not an exempt recipient. (4) Special documentation rules for certain payments. This paragraph (c)(4) modifies the provisions of paragraph (c)(1) of this section for payments to offshore accounts maintained at a bank or other financial institution of amounts that are not subject to withholding under chapter 3 of the Internal Revenue Code, other than amounts described in paragraph (d)(3)(iii) of this section (dealing with U.S. short-term OID and U.S. bank deposit interest). Amounts are not subject to withholding under chapter 3 of the Internal Revenue Code if they are not included in the definition of amounts subject to withholding under (a) (e.g., deposit interest with foreign branches of U.S. banks, foreign source income, or broker proceeds). (i) Special rule when non-renewable documentary evidence is customary. If it is customary in the country in which a branch or office of a bank or other financial institution is located to obtain documentary evidence described in paragraph (c)(1) of this section, but it is not customary for such documentary evidence to be renewed, then a payor may, in lieu of obtaining a withholding certificate, request such documentary evidence for an account maintained at such branch or office. The bank or other financial institution may rely on such documentary evidence to treat a person as a foreign person without renewing such documentary evidence in accordance with paragraph (c)(2) of this section and (e)(4)(ii) if it may rely on the documentary evidence as sufficient to establish the person's foreign status under (b)(7) and (8). If, however, the bank or other financial institution may, under (b)(8) treat a payee as a foreign person even though it has a residence or mailing address for the payee in the United States, or has standing instructions to pay amounts from its account to an address in the United States or an account maintained in the United States, then the payor shall rely on the documentary evidence only for a period of three full calendar years after the calendar year in which the documentary evidence is provided to the payor or, if earlier, until the payor is aware of a change of circumstances that affects the validity of the documentation as establishing the payee's status as a foreign person. NRA 2012gettechnical inc 22

23 (ii) Statement in lieu of documentary evidence. If under the local laws, regulations, or practices applicable to a type of account or transaction it is not customary to obtain documentary evidence described in paragraph (c)(1) of this section, the bank or other financial institution may, instead of obtaining a beneficial owner withholding certificate described in (e)(2)(i) or documentary evidence described in paragraph (c)(1) of this section, establish a payee's foreign status based on the statement described in this paragraph (4)(ii) (or such substitute statement as the Internal Revenue Service may prescribe) made on an account opening form. The statement shall be valid only if the mailing and residence addresses of the payee are outside the United States and there are no other indicia of U.S. status. If reliance is not permitted because there are indicia of U.S. status then the payor must obtain either documentary evidence described in paragraph (c)(1) of this section or a Form W 8 described in (e)(2)(i) to treat the customer as a foreign payee. In such a case, the form or documentary evidence must be renewed every three years in accordance with the renewal procedures set forth in (e)(4)(ii)(A) for as long as indicia of U.S. status continue to be present. The statement referred to in this paragraph (c)(4)(i) of this section must appear near the signature line and must read as follows: By opening this account and signing below, the account owner represents and warrants that he/she/it is not a U.S. person for purposes of U.S. Federal income tax and that he/she/it is not acting for, or on behalf of, a U.S. person. A false statement or misrepresentation of tax status by a U.S. person could lead to penalties under U.S. law. If your tax status changes and you become a U.S. citizen or a resident, you must notify us within 30 days. (iii) Continuous validity of declaration of foreign status subject to due diligence by financial institution. A declaration of foreign status described in paragraph (c)(4)(ii) of this section does not expire unless the bank or financial institution becomes aware of circumstances indicating that the customer may be a U.S. person. (iv) Exception for existing accounts. The rules of paragraphs (c)(4)(i) and (iii) of this section shall apply to accounts opened on or after January 1, For accounts opened before 2001, a bank or other financial institution may rely on the rules contained in 35a (ii) Q&A 34 and 35a T Q&A 1 and 5 of this chapter in effect prior to January 1, 2001 (see 26 CFR Parts revised as of April 1, 2000). (5) U.S. payor, U.S. middleman, non-u.s. payor, and non-u.s. middleman. The terms payor and middleman have the meanings ascribed to them under (a). A non-u.s. payor or non- U.S. middleman means a payor or middleman other than a U.S. payor or U.S. middleman. The term U.S. payor or U.S. middleman means (i) Definition. (A) A person described in section 7701(a)(30) (including a foreign branch or office of such person); (B) The government of the United States or the government of any State or political subdivision thereof (or any agency or instrumentality of any of the foregoing); (C) A controlled foreign corporation within the meaning of section 957(a); (D) A foreign partnership, if at any time during its tax year, one or more of its partners are U.S. persons (as defined in (c)(2)) who, in the aggregate hold more than 50 percent of the income or capital interest in the partnership or if, at any time during its tax year, it is engaged in the conduct of a trade or business in the United States; (E) A foreign person 50 percent or more of the gross income of which, from all sources for the three-year period ending with the close of its taxable year preceding the collection or payment (or such part of such period as the person has been in existence), was effectively connected with the conduct of trade or business within the United States; or NRA 2012gettechnical inc 23

24 (F) A U.S. branch of a foreign bank or a foreign insurance company described in (b)(2)(iv). (ii) Reporting by U.S. payors in U.S. possessions. U.S. payors are not required to report on Form 1099 income that is from sources within a possession of the United States and that is exempt from taxation under section 931, 932, or 933, each of which sections exempts certain income from sources within a possession of the United States paid to a bona fide resident of that possession. For purposes of this paragraph (c)(5)(ii), a U.S. payor may treat the beneficial owner as a bona fide resident of the possession of the United States from which the income is sourced if, prior to payment of the income, the U.S. payor can reliably associate the payment with valid documentation that supports the claim of residence in the possession of the United States from which the income is sourced. This paragraph (c)(5)(ii) shall not apply if the U.S. payor has actual knowledge or reason to know that the documentation is unreliable or incorrect or that the income does not satisfy the requirements for exemption under section 931, 932, or 933. For the rules determining whether income is from sources within a possession of the United States, see section 937(b) and the regulations thereunder. (6) Examples. The following examples illustrate the provisions of paragraphs (b) and (c) of this section: Example 1. FC is a foreign corporation that is not engaged in a trade or business in the United States during the current calendar year. D, an individual who is a resident and citizen of the United States, holds a registered obligation issued by FC in a public offering. Interest is paid on the obligation within the United States by DC, a U.S. corporation that is the designated paying agent of FC. D does not have an account with DC. Although interest paid on the obligation issued by FC is foreign source, the interest paid by DC to D is considered to be interest for purposes of information reporting under section 6049 because it is paid in the United States. Example 2. The facts are the same as in Example 1 except that D is a nonresident alien individual who has furnished DC with a Form W 8 in accordance with the provisions of (e)(1)(ii). By reason of paragraph (b)(12) of this section, the payment of interest by DC to D is not considered to be a payment of interest for purposes of information reporting under section Therefore, DC is not required to make an information return under section Example 3. The facts are the same as in Example 2 except that the obligation of FC is held in a custodial account for D by FB, a foreign branch of a U.S. financial institution. By reason of paragraph (c)(5) of this section, FB is considered to be a U.S. middleman. Therefore, FB is required to make an information return unless FB may treat D as a beneficial owner that is a foreign person in accordance with the provisions of (e)(1)(ii). Example 4. The facts are the same as in Example 3 except that the FC obligation is held for D by NC, in a custodial account at NC's foreign branch. NC is a foreign corporation that is a non-u.s. middleman described in paragraph (c)(5) of this section. Under paragraph (b)(6) of this section, the payment by NC to D is not considered to be a payment of interest for purposes of section Therefore, NC is not required to make an information return under section 6049 with respect to the payment. (d) Determination of status as U.S. or foreign payee and applicable presumptions in the absence of documentation (1) Identifying the payee. The provisions of (b)(2), (c)(1), (e)(2) and (3) shall apply (by applying the term payor instead of the term withholding agent) to identify the payee for purposes of this section (and other sections of the regulations under this chapter to which this paragraph (d)(1) applies), except to the extent provided in this NRA 2012gettechnical inc 24

25 paragraph (d)(1) in the case of a payment of amounts that are not subject to withholding under chapter 3 of the Internal Revenue Code. Amounts are not subject to withholding under chapter 3 of the Code if they are not included in the definition of amounts subject to withholding under (a) (e.g., deposit interest with foreign branches of U.S. banks, foreign source income, or broker proceeds). The exceptions to the application of (b)(2) to amounts that are not subject to withholding under chapter 3 of the Code are as follows: (i) The provisions of (b)(2)(ii), dealing with payments to a U.S. agent of a foreign person, shall not apply. Thus, a payment to a U.S. agent of a foreign person is treated as a payment to a U.S. payee. (ii) Payments to U.S. branches of certain banks or insurance companies described in (b)(2)(iv) shall be treated as payments to a foreign payee, irrespective of the fact that the U.S. branch may have arranged with the payor to be treated as a U.S. person for payments of amounts subject to withholding and irrespective of the fact that the branch is treated as a U.S. payor for purposes of paragraph (c)(5) of this section. (2) Presumptions of U.S. or foreign status in the absence of documentation (i) In general. Except as otherwise provided in this paragraph (d)(2)(i), for purposes of this section (and other sections of regulations under this chapter to which this paragraph (d)(2) applies), the provisions of (b)(3)(i) through (ix) and (d) and (e)(6) shall apply (by applying the term payor instead of the term withholding agent) to determine the classification (e.g., individual, corporation, partnership, trust), status (i.e., a U.S. or a foreign person), and other relevant characteristics (e.g., beneficial owner or intermediary) of a payee if a payment cannot be reliably associated with valid documentation under (b)(2)(vii) irrespective of whether the payments are subject to withholding under chapter 3 of the Internal Revenue Code. The provisions of (b)(3)(iii)(D) and (vii)(b) shall not apply, however, to payments to amounts that are not subject to withholding. The rules of (b)(2)(vii) shall apply for purposes of determining when a payment can reliably be associated with documentation, by applying the term payor instead of the term withholding agent. For this purpose, the documentary evidence or statement described in paragraph (c)(4) of this section can be treated as documentation with which a payment can be associated. (ii) Grace period in the case of indicia of a foreign payee. When the conditions of this paragraph (d)(2)(ii) are satisfied, the 30-day grace period provisions under section 3406(e) shall not apply and the provisions of this paragraph (d)(2)(ii) shall apply instead. A payor that, at any time during the grace period described in this paragraph (d)(2)(ii), credits an account with payments described in (c)(2) (or credits an account with broker proceeds from securities described in (c)(2)), that are reportable under sections 6042, 6045, 6049, or 6050N may, instead of treating the account as owned by a U.S. person and applying backup withholding under section 3406, if applicable, choose to treat the account as owned by a foreign person if, at the beginning of the grace period, the address that the payor has in its records for the account holder is in a foreign country, the payor has been furnished the information contained in a withholding certificate described in (e) (2)(i) or (3)(i) (by way of a facsimile copy of the certificate or other non-qualified electronic transmission of the information required to be stated on the certificate), or the payor holds a withholding certificate that is no longer reliable other than because the validity period as described in (e)(4)(ii)(A) has expired. In the case of a newly opened account, the grace period begins on the date that the payor first credits the account. NRA 2012gettechnical inc 25

26 In the case of an existing account for which the payor holds a Form W 8 or documentary evidence of foreign status, the grace period begins on the date that the payor first credits the account after the existing documentation held with regard to the account can no longer be relied upon (other than because the validity period described in (e)(4)(ii)(A) has expired). A new account shall be treated as an existing account if the account holder already holds an account at the branch location at which the new account is opened. It shall also be treated as an existing account if an account is held at another branch location if the institution maintains a coordinated account information system described in (e)(4)(ix). The grace period terminates on the earlier of the close of the 90th day from the date on which the grace period begins or the date that the documentation is provided. The grace period also terminates when the remaining balance in the account (due to withdrawals or otherwise) is equal to or less than 31 percent of the total amounts credited since the beginning of the grace period that would be subject to backup withholding if the provisions of this paragraph (d)(2)(ii) did not apply. At the end of the grace period, the payor shall treat the amounts credited to the account during the grace period as paid to a U.S. or foreign payee depending upon whether documentation has been furnished and the nature of any such documentation furnished upon which the payor may rely to treat the account as owned by a U.S. or foreign payee. If the documentation has not been received on or before the date of expiration of the grace period, the payor may also apply the presumptions described in this paragraph (d) to amounts credited to the account after the date on which the grace period expires (until such time as the payor can reliably associate the documentation with amounts credited). See (a) 3(a)(1)(iv) of this chapter for treating backup withheld amounts under section 3406 as erroneously withheld when the documentation establishing foreign status is furnished prior to the end of the calendar year in which backup withholding occurs. If the provisions of this paragraph (d)(2)(ii) apply, the provisions of (d) 3 of this chapter shall not apply. For purposes of this paragraph (d)(2)(ii), an account holder's reinvestment of gross proceeds of a sale into other instruments constitutes a withdrawal and a non-qualified electronic transmission of information on a withholding certificate is a transmission that is not in accordance with the provisions of (e)(4)(iv). See (d) 1 for a definition of the term actively traded for purposes of this paragraph (d)(2)(ii). (iii) Joint owners. Amounts paid to accounts held jointly for which a certificate or documentation is required as a condition for being exempt from reporting under paragraph (b) of this section are presumed made to U.S. payees who are not exempt recipients if, prior to payment, the payor cannot reliably associate the payment either with a Form W 9 furnished by one of the joint owners in the manner required in (d) 1 through (d)-5 of this chapter, or with documentation described in paragraph (b)(12) of this section furnished by each joint owner upon which it can rely to treat each joint owner as a foreign payee or foreign beneficial owner. For purposes of applying this paragraph (d)(2)(iii), the grace period described in paragraph (d)(2)(ii) of this section shall apply only if each payee qualifies for such grace period. (3) Payments to foreign intermediaries or flow-through entities (i) Payments of amounts subject to withholding under chapter 3 of the Internal Revenue Code. In the case of payments of amounts that the payor may treat as made to a foreign intermediary or flow-through entity in accordance with (b)(3)(ii)(C) and (b)(3)(v)(a), (c) or (e) and that are subject to withholding under (a), the provisions of (b)(2)(v) and (c)(1), (e)(2), and (3) shall apply (by applying the term payor instead of the term withholding agent) to identify the payee. If a payment of an amount subject to withholding cannot be reliably NRA 2012gettechnical inc 26

27 associated with valid documentation from a payee in accordance with (b)(2)(vii) the presumption rules of (b)(3)(v) and (d) and (e)(6) shall apply to determine the payee's status for purposes of this section (and other sections of regulations under this chapter to which this paragraph (d)(3) applies). (ii) Payments of amounts not subject to withholding under chapter 3 of the Internal Revenue Code. Except as provided in paragraph (d)(3)(iii) of this section, amounts that are not subject to withholding under chapter 3 of the Internal Revenue Code that the payor may treat as paid to a foreign intermediary or flow-through entity shall be treated as made to an exempt recipient described in (c) except to the extent that the payor has actual knowledge that any person for whom the intermediary or flow-through entity is collecting the payment is a U.S. person who is not an exempt recipient. In the case of such actual knowledge, the payor shall treat the payment that it knows is allocable to such U.S. person as a payment to a U.S. payee who is not an exempt recipient and has actual knowledge of the amount allocable to such a person. (iii) Special rule for payments of certain short-term original issue discount and bank deposit interest (A) General rule. A payment of U.S. source deposit interest described in section 871(i)(2)(A) or 881(d)(3) or interest or original issue discount on the redemption of an obligation with a maturity from the date of issue of 183 days or less (short-term OID) described in section 871(g)(1)(B) or 881(e) that the payor may treat as paid to a foreign intermediary or flow-through entity in accordance with the provisions of (b)(3)(ii)(C), (v)(a), (d) or (e), shall be treated as paid to an undocumented U.S. payee that is not an exempt recipient under paragraph (c) unless the payor has documentation from the payees of the payment and the payment is allocated to foreign payees, as a group, and to each U.S. non-exempt recipient payee. See (e)(3)(iv)(C)(2). (B) Payee may be an intermediary. If a payment is made to a person described in (c)(1)(ii) that has not provided an intermediary withholding certificate under (e)(3)(i) but the payor knows or has reason to know that the payee may be an intermediary, the payor must apply the rules of paragraph (d)(3)(iii)(a) of this section. A payor has reason to know that such a person may be an intermediary if that person has provided documentation as an intermediary for another account with the same payor. (iv) Short-term deposits and repurchase transactions. The provisions of paragraph (d)(3)(ii) of this section and not paragraph (d)(3)(iii) of this section shall apply to deposits with banks and other financial institutions that remain on deposit for a period of two weeks or less, to amounts of original issue discount arising from a sale and repurchase transaction that is completed within a period of two weeks or less, or to amounts described in paragraphs (b)(7), (10) and (11) of this section (relating to certain obligations issued in bearer form). (4) Examples. The rules of paragraphs (d)(1) through (3) of this section are illustrated by the following examples: Example 1. (i) Facts. USP is a U.S. payor as defined in paragraph (c)(5) of this section. USP pays interest from sources within the United States to an account maintained in the United States by X. The interest is not deposit interest described in sections 871(i)(2)(A) or 881(d). USP does not have a withholding certificate from X as defined in (c)(16). Moreover, USP cannot treat X as an exempt recipient, as defined in (c)(1)(ii), without documentation and there is no indication that X is an individual, trust, or estate. (ii) Analysis. The U.S. source interest is an amount subject to withholding as defined in (a). Under paragraph (d)(1) of this section, USP must apply the provisions of (b)(2) and (c) and (e) to determine the payee of the interest. Under (b)(2)(i), X, the NRA 2012gettechnical inc 27

28 person to whom the payment is made, is considered to be the payee, unless X is determined to be a flow-through entity, in which case the rules of apply to determine the payee. Under paragraph (d)(2)(i) of this section, the rules of (b)(3)(ii) apply to determine the classification of a payee as an individual, trust, estate, corporation, or partnership. Under (b)(3)(ii)(B), X is presumed to be a partnership, since X does not appear to be an individual, trust or estate, and X cannot be presumed to be an exempt recipient in the absence of documentation. Paragraph (d)(2)(i) of this section requires USP to apply the provisions of (b)(3)(iii) and (d) to determine whether X is presumed to be a U.S. or foreign partnership. Under (b)(3)(iii) and (d)(2), X is presumed to be a U.S. partnership in absence of any indicia of foreign partnership status. The U.S. source interest paid to X is reportable under section 6049 on Form 1099 and the interest is subject to backup withholding under section 3406 because X has not provided its TIN on a valid Form W 9. Example 2. (i) Facts. The facts are the same as in Example 1, except that the interest paid by USP is from sources outside the United States. (ii) Analysis. Interest from sources outside the United States is not an amount subject to withholding, as defined in (a). Under paragraph (d)(1) of this section, USP must apply the provisions of (b)(2) and (c) and (e) to determine the payee. Under (b)(2)(i), X, the person to whom the payment is made, is considered to be the payee, unless X is determined to be a flow-through entity, in which case the rules of (c) or (e) apply to determine the payee. Under paragraph (d)(2)(i) of this section, the rules of (b)(3)(ii) apply to determine the classification of a payee as an individual, trust, estate, corporation, or partnership. These rules apply irrespective of whether the payment is an amount subject to withholding. Under (b)(3)(ii)(B), X is presumed to be a partnership, since X does not appear to be an individual, trust or estate, and X cannot be presumed to be an exempt recipient in the absence of documentation. Paragraph (d)(2)(i) of this section requires USP to apply the provisions of (b)(3)(iii) and (d) to determine whether, X is presumed to be a U.S. or foreign partnership. Under (b)(3)(iii) and (d)(2), X is presumed to be a U.S. partnership in absence of any indicia of foreign partnership status. The foreign source interest is a payment subject to reporting on Form 1099 under (a). Further, because X is a non-exempt recipient that has failed to provide its TIN on a valid Form W 9, the foreign source interest is subject to backup withholding under section Example 3. (i) Facts. USP is a U.S. payor as defined in paragraph (c)(5) of this section. USP makes a payment of U.S. source interest outside the United States to an offshore account of X. See paragraphs (c)(1) for a definition of offshore account and (e) for a payment outside the United States. USP does not have a withholding certificate from X as defined in (c)(16) nor does it have documentary evidence as described in (e)(1)(ii)(A)(2) and (c)(1). (ii) Analysis. The interest is an amount subject to withholding as defined in (a). Under paragraph (d)(1) of this section, USP must apply the provisions of (b)(2) and (c) and (e) to determine the payee. Under (b)(2)(i), X, the person to whom the payment is made, is considered to be the payee, unless X is determined to be a flow-through entity, in which case the rules of (c) or (e) apply to determine the payee. Under paragraph (d)(2)(i) of this section, the rules of (b)(3)(ii) apply to determine the classification of a payee as an individual, trust, estate, corporation, or partnership. Under (b)(3)(ii)(B), X is presumed to be a partnership, since X does not appear to be an individual, trust or estate, and X cannot be presumed to be an exempt recipient in the absence of NRA 2012gettechnical inc 28

29 documentation. Paragraph (d)(2)(i) of this section requires USP to apply the provisions of (b)(3)(iii) and (d) to determine whether, X is presumed to be a U.S. or foreign partnership. Under (b)(3)(iii)(D) and (d)(2), X is presumed to be a foreign partnership. Therefore, under paragraph (d)(1) of this section and (c)(1)(i)(E), the payees of the interest are presumed to be the partners of X. Under (d)(3), the partners are presumed to be undocumented foreign persons. Therefore, USP must withhold 30 percent of the interest payment under (b)(1) and report the payment on Form 1042 S in accordance with (c). Example 4. (i) Facts. The facts are the same as in Example 3, except that the interest is paid by F, a non-u.s. payor. (ii) Analysis. The analysis and result are the same as in Example 3. F is a withholding agent under and its status as a non-u.s. payor under paragraph (c)(5) of this section is irrelevant. Example 5. (i) Facts. USP is a U.S. payor as defined in paragraph (c)(5) of this section. USP makes a payment outside the United States of interest from sources outside the United States to an offshore account of X. USP does not have a withholding certificate from X as defined in (c)(16) nor does it have documentary evidence as described in (e)(1)(ii)(A)(2) and (c)(1). USP does not have actual knowledge of an employer identification number for X. X does not appear to be an individual, trust, or estate and cannot be treated as an exempt recipient, as defined in (c)(1)(ii) in the absence of documentation. (ii) Analysis. The interest is not an amount subject to withholding as defined in (a). Under paragraph (d)(1) of this section, USP must apply the rules of (b)(2) and (c) and (e) to determine the payee of the interest. Under (b)(2)(i), X, the person to whom the payment is made, is considered to be the payee, unless X is determined to be a flow-through entity, in which case the rules of (c) or (e) apply to determine the payee. Under paragraph (d)(2)(i) of this section, (b)(3)(ii) applies to determine X's classification as an individual, trust, estate, corporation or partnership. Under (b)(3)(ii)(B), X is treated as a partnership, since it does not appear to be an individual, trust, or estate and cannot be treated as an exempt recipient without documentation. Paragraph (d)(2)(i) of this section requires USP to apply the provisions of (b)(3)(iii) and (d) to determine whether, X is presumed to be a U.S. or foreign partnership. Paragraph (d)(2)(i) also states that the presumptions of foreign status for payments made to offshore accounts contained in (b)(3)(iii)(D) and (d)(2) do not apply to amounts that are not subject to withholding. Therefore, under (b)(3)(iii) and (d)(2), X is presumed to be a U.S. partnership because it does not have actual knowledge that X's employer identification number begins with the digits 98. Therefore, USP must treat X as a U.S. person that is not an exempt recipient and report the payment on Form 1099 under section Under (g) 1(e) of this chapter, however, USP is not required to backup withhold on the payment unless it has actual knowledge that X is a U.S. person that is not an exempt recipient. Example 6. (i) Facts. The facts are the same as in Example 5, except that the interest is paid by F, a non-u.s. payor, as defined under paragraph (c)(5) of this section. (ii) Analysis. The analysis is the same as under Example 5. However, because F is a non-u.s. payor paying foreign source interest outside the United States, paragraph (b)(6) of this section exempts the payment from reporting under section Example 7. (i) Facts. USP, a U.S. payor as defined in paragraph (c)(5) of this section, makes a payment of U.S. source interest to NQI, a foreign corporation and a nonqualified intermediary as NRA 2012gettechnical inc 29

30 defined in (c)(14). The interest is not deposit interest as defined in sections 871(i)(2)(A) and 881(d). The interest is paid inside the United States to an account maintained in the United States. NQI has provided USP with a nonqualified intermediary withholding certificate, as described in (e)(3)(iii), but has not attached any documentation from the persons on whose behalf it acts or a withholding statement as described in (e)(3)(iv). (ii) Analysis. U.S. source interest is an amount subject to withholding under (a). USP may treat the payment as made to a foreign intermediary under (b)(3)(v)(A) because USP has received a nonqualified intermediary withholding certificate from NQI. Under paragraph (d)(3)(i) of this section, USP must apply (b)(2)(v) to determine the payees of the payment. Under (b)(2)(v)(A), USP must treat the persons on whose behalf NQI is acting as the payees. Paragraph (d)(3)(i) of this section also requires USP to apply the presumption rules of (b)(3)(v) if it cannot reliably associate the payment with valid documentation from a payee. See (b)(2)(vii). Under (b)(3)(v)(B), the interest is treated as paid to an unknown foreign payee because it cannot be reliably associated with documentation under (b)(2)(vii). Therefore, the payment is not subject to reporting on Form 1099 under paragraph (b)(12) of this section because the payment is presumed made to a foreign person. The payment is subject to withholding, however, under (b) at a rate of 30 percent and is subject to reporting on Form 1042 S under (c). Example 8. (i) Facts. The facts are the same as in Example 7, except that the interest is paid outside the United States, as defined in paragraph (e) of this section to an offshore account, as defined in paragraph (c)(1) of this section. (ii) Analysis. The analysis and results are the same as in Example 7. The rules of (b)(3)(v) apply irrespective of where the account is maintained or the payment made. Example 9. (i) Facts. The facts are the same as in Example 8, except that the interest is paid by F, a non-u.s. payor, as defined in paragraph (c)(5) of this section. (ii) Analysis. The analysis and results are the same as in Example 7. Example 10. (i) USP, a U.S. payor as defined in paragraph (c)(5) of this section, makes a payment of foreign source interest to NQI, a foreign corporation and a nonqualified intermediary as defined in (c)(14). NQI has provided USP with a nonqualified intermediary withholding certificate, as described in (e)(3)(iii), but has not attached any documentation from the persons on whose behalf it acts or a withholding statement as described in (e)(3)(iv). (ii) Analysis. Foreign source interest is not an amount subject to withholding under chapter 3 of the Internal Revenue Code. See (a). Under paragraph (d)(3)(ii)(a) of this section, amounts that are not subject to withholding under chapter 3 of the Internal Revenue Code that a payor may treat as paid to a foreign intermediary are treated as made to an exempt recipient described in (c). Therefore, the foreign source interest is not subject to reporting on Form Example 11. (i) Facts. USP is a U.S. payor as defined in paragraph (c)(5) of this section. USP pays U.S. source original issue discount from the redemption of an obligation described in section 871(g)(1)(B) to NQI, a foreign corporation that is a nonqualified intermediary as defined in (c)(14). The redemption proceeds are paid to an account NQI has with USP in the United States. NQI provides a nonqualified intermediary withholding certificate as described in (e)(3)(iii) but does not attach any payee documentation or a withholding statement described in (e)(3)(iv). NRA 2012gettechnical inc 30

31 (ii) Analysis. Under paragraph (d)(3)(ii)(a) of this section, USP must treat the payment as made to an undocumented U.S. payee that is not an exempt recipient and report the payment on Form Further, because the payment is made inside the United States, the exception to backup withholding for offshore accounts contained in (g) 1(e) of this chapter does not apply and the payment is subject to backup withholding. Example 12. (i) Facts. P, a payor, makes a payment to NQI of U.S. source interest on debt obligations issued prior to July 18, Therefore, the interest does not qualify as portfolio interest under section 871(h) or 881(d). NQI is a nonqualified foreign intermediary, as defined in (c)(14), and has furnished P a valid nonqualified intermediary withholding certificate described in (e)(3)(iii) to which it has attached a valid Form W 9 for A, and two valid beneficial owner Forms W 8, one for B and one for C. A is not an exempt recipient under (c). NQI furnishes a withholding statement, described in (e)(3)(iv), in which it allocates 20 percent of the U.S. source interest to A, but does not allocate the remaining 80 percent of the interest between B and C. B's withholding certificate indicates that B is a foreign pension fund, exempt from U.S. tax under the U.S. income tax treaty with Country T. C's withholding certificate indicates that C is a foreign corporation not entitled to a reduced rate of withholding. (ii) Analysis. Under paragraph (d)(3)(i) of this section, P applies the rules of (b)(2)(v) to determine the payees of the interest. Under that section, the payees are the persons on whose behalf NQI acts A, B and C. Because P can reliably associate 20 percent of the payment with valid documentation provided by A, P must treat 20 percent of the interest as paid to A, a U.S. person not exempt from reporting, and report the payment on Form P cannot reliably associate the remaining 80 percent of the payment with valid documentation under (b)(2)(vii) and, therefore, under paragraph (d)(3)(i) of this section must apply the presumption rules of (b)(3)(v). Under that section, the interest is presumed paid to an unknown foreign payee. Under paragraph (b)(12) of this section, P is not required to report the interest presumed paid to a foreign person on Form Under (b), 80 percent of the interest is subject to 30 percent withholding, however, and the interest is reportable on Form 1042-S under (c). Example 13. (i) Facts. The facts are the same as in Example 12, except that P can reliably associate 30 percent of the payment of interest to B, but cannot reliably associate the remaining 70 percent with A or C. (ii) Analysis. Under paragraph (d)(3)(i) of this section, P applies the rules of (b)(2)(v) to determine the payees of the interest. Under that section, the payees are the persons on whose behalf NQI acts A, B and C. Because P can reliably associate 30 percent of the payment with B, a foreign pensions fund exempt from withholding under an income tax treaty, P may treat that payment as paid to B and not subject to reporting on Form 1099 under paragraph (b)(12) of this section. P cannot reliably associate the remaining 70 percent of the payment with valid documentation under (b)(2)(vii) and, therefore, under paragraph (d)(3)(i) of this section must apply the presumption rules of (b)(3)(v). Under that section, the interest is presumed paid to an unknown foreign payee. Under paragraph (b)(12) of this section, P is not required to report the interest presumed paid to a foreign person on Form Under (b), 80 percent of the interest is subject to 30 percent withholding, however, and the interest is reportable on Form 1042-S under (c). Example 14. (i) Facts. The facts are the same as in Example 12, except that P also makes a payment of foreign source interest to NQI. NRA 2012gettechnical inc 31

32 (ii) Analysis. Under paragraph (d)(3)(ii)(a), P may treat the foreign source interest as paid to an exempt recipient as defined in (c) and not subject to reporting on Form 1099 even though some or all of the foreign source interest may in fact be owned by A, the U.S. person that is not exempt from reporting. (e) Determination of whether amounts are considered paid outside the United States (1) In general. For purposes of section 6049 and this section, an amount is considered to be paid by a payor or middleman outside the United States if the payor or middleman completes the acts necessary to effect payment outside the United States. See paragraphs (e)(2), (3), and (4) of this section for further clarification of where amounts are considered paid. A payment shall not be considered to be made within the United States for purposes of section 6049 merely by reason of the fact that it is made on a draft drawn on a United States bank account or by a wire or other electronic transfer from a United States account. However, without regard to the location of the account from which the amount is drawn, an amount that is described in paragraph (e)(1) (i) or (ii) of this section and paid by transfer to an account maintained by the payee in the United States or by mail to a United States address is not considered to be paid outside the United States. (i) An amount is described in this paragraph (e)(1)(i) if it is paid by an issuer or the paying agent of the issuer and the obligation is either (A) Issued by a U.S. payor, as defined in paragraph (c)(5) of this section; (B) Registered under the Securities Act of 1933 (15 U.S.C. 77a); or (C) Listed on an exchange that is registered as a national securities exchange in the United States or included in an interdealer quotation system in the United States. (ii) An amount is described in this paragraph (e)(1)(ii) if it is paid by a U.S. middleman (as defined in paragraph (c)(5) of this section) that, as a custodian, nominee, or other agent of a payee, collects the amount for or on behalf of the payee. (2) Amounts paid with respect to deposits or accounts with banks and other financial institutions. Notwithstanding paragraph (e)(1) of this section, an amount paid by a bank or other financial institution with respect to a deposit or with respect to an account with the institution is considered paid at the branch or office at which the amount is credited unless the amount is collected by the financial institution as the agent of the payee. However, an amount will not be considered to be paid at the branch or office where the amount is considered to be credited unless the branch or office is a permanent place of business that is regularly maintained, occupied, and used to carry on a banking or similar financial business; the business is conducted by at least one employee of the branch or office who is regularly in attendance at such place of business during normal business hours; and the branch or office receives deposits and engages in one or more of the other activities described in (c)(5)(i). In addition, an amount paid by a bank or other financial institution with respect to a deposit or an account with the institution is not considered paid at a branch or office outside the United States if the customer has transmitted instructions to an agent, branch, or office of the institution from inside the United States by mail, telephone, electronic transmission, or otherwise concerning the deposit or account (unless the transmission from the United States has taken place in isolated and infrequent circumstances). (3) Coupon bonds and discount obligations in bearer form. Notwithstanding paragraph (e)(1) of this section, an amount paid with respect to a bond with coupons attached (including a certificate of deposit with detachable interest coupons) or a discount obligation that is not in registered form (within the meaning of section 163(f) and the regulations thereunder) is considered to be paid where the coupon or the discount obligation is presented to the payor or its paying agent for payment. However, without regard to where the coupon or discount obligation is presented for NRA 2012gettechnical inc 32

33 payment, an amount paid with respect to either a bond with coupons attached or a discount obligation by transfer to an account maintained by the payee in the United States or by mail to the United States is considered paid in the United States if the payment is described in paragraphs (e)(3) (i) and (ii) of this section. (i) The amount is paid by an issuer or the paying agent of the issuer and the obligation is either (A) Issued by a U.S. payor, as defined in paragraph (c)(5) of this section; (B) Registered under the Securities Act of 1933 (15 U.S.C. 77a); or (C) Listed on an exchange that is registered as a national securities exchange in the United States or included in an interdealer quotation system in the United States. (ii) The amount is paid by a U.S. middleman (as defined in paragraph (c)(5) of this section) that, as a custodian, nominee, or other agent of payee, collects the amount for or on behalf of the payee. (4) Foreign-targeted registered obligations. Notwithstanding paragraph (e)(1) of this section, where the payor is the issuer or the issuer's agent, an amount is considered paid outside the United States with respect to a foreign-targeted registered obligation, as described in (e)(2), if either the amount is paid by transfer to an account maintained by the registered owner outside the United States, or by mail to an address of the registered owner outside the United States, or by credit to an international account. For purposes of this paragraph (e)(4), the term international account means the book-entry account of a financial institution (within the meaning of section 871(h)(4)(B)) or of an international financial organization with the Federal Reserve Bank of New York for which the Federal Reserve Bank of New York maintains records that specifically identify an international financial organization or a financial institution (within the meaning of section 871(h)(4)(B)) as either a non-united States person or a foreign branch of a United States person as registered owner. An international financial organization is a central bank or monetary authority of a foreign government or a public international organization of which the United States is a member to the extent that such central bank, authority, or organization holds obligations solely for its own account and is exempt from tax under section 892 or 895. (5) Examples. The application of the provisions of this paragraph (e) are illustrated by the following examples: Example 1. FC is a foreign corporation that is not a U.S. payor or U.S. middleman, as defined in paragraph (c)(5) of this section. A holds FC coupon bonds that are not in registered form under section 163(f) and the regulations thereunder, that were issued by FC in a public offering outside the United States, that are not registered under the Securities Act of 1933 (15 U.S.C. 77a), and that are neither listed on an exchange that is registered as a national securities exchange in the United States nor included in an interdealer quotation system. DC, a U.S. corporation that is engaged in a commercial banking business, is the designated fiscal agent for FC. FB, a foreign branch of DC, is the designated paying agent with respect to the bonds issued by FC. A does not have an account with FB. A presents a coupon from a FC bond for payment to FB at its office outside the United States. FB pays A with a check drawn against a bank account maintained in the United States. For purposes of section 6049, the place of payment of interest on the FC bond by FB to A is considered to be outside the United States under paragraph (e)(3) of this section. Example 2. The facts are the same as in Example 1 except that A presents the coupon to FB at its office outside the United States with instructions to transfer funds in payment to a bank account maintained by A in the United States. FB transfers the funds in accordance with A's instructions. Even though the amount is credited to an account in the United States, the place of payment of NRA 2012gettechnical inc 33

34 interest on the FC bonds is considered to be outside the United States under paragraph (e)(3) of this section because the coupon is presented for payment outside the United States; because FC is a foreign person that is not a U.S. payor or U.S. middleman, as defined in paragraph (d)(1) of this section; because FB is not acting as A's agent; and because the obligation is not registered under the Securities Act of 1933 (15 U.S.C. 77a), listed on a securities exchange that is registered as a national securities exchange in the United States, or included in an interdealer quotation system. Example 3. FC is a foreign corporation that is not a U.S. payor or U.S. middleman, as defined in paragraph (d)(1) of this section. B, a United States citizen, holds a bond issued by FC in registered form under section 163(f) and the regulations thereunder and registered under the Securities Act of 1933 (15 U.S.C. 77a). The bond is not a foreign-targeted registered obligation as defined in (e)(2). DB, a United States branch of a foreign corporation engaged in the commercial banking business, is the registrar of the bonds issued by FC. DB supplies FC with a list of the holders of the FC bonds. Interest on the FC bonds is paid to B and other bondholders by checks prepared by FC at its principal office outside the United States, and B's check is mailed from there to his designated address in the United States. The bond is described in paragraph (e)(1)(i)(b) of this section. The place of payment to B by FC of the interest on the FC bonds is considered to be inside the United States under paragraph (e)(1) of this section. Example 4. The facts are the same as in Example 3 except that the checks are prepared and mailed in the United States by DC, a U.S. corporation engaged in the commercial banking business that is the designated paying agent with respect to the bonds issued by FC, and B's check is mailed to his designated address outside the United States. For purposes of section 6049, the place of payment by DC of the interest on the FC bonds is considered to be within the United States under paragraph (e)(1) of this section. Example 5. Individual C deposits funds in an account with FB, a foreign country X branch of DB, a U.S. corporation engaged in the commercial banking business. FB maintains an office and employees in foreign country X, accepts deposits, and conducts one or more of the other activities listed in (c)(5)(i). The terms of C's deposit provide that it will be payable in six months with accrued interest. On the day that the interest is credited to C's account with FB, C telephones DB from inside the United States and asks DB to direct FB to transfer the funds in his account with FB to an account C maintains in the United States with DB. Transmissions from the United States concerning this account have taken place in isolated and infrequent circumstances. Under paragraph (e)(2) of this section, FB is considered to have paid the interest on C's deposit outside the United States. Example 6. The facts are the same as in Example 5 except that C has placed his deposit with FB for an indefinite period of time. Interest will be credited to C's account daily. C has instructed FB to wire the interest at 90-day intervals to C's account with DB within the United States. FB is considered to have paid the interest credited to A's account within the United States under paragraph (e)(2) of this section because the regular crediting of the account disqualifies the transmission from being isolated or infrequent. Example 7. DC, a U.S. corporation engaged in the commercial banking business, maintains FB, a branch in foreign country X. FB has an office and employees in foreign country X, accepts deposits, and engages in one or more of the other activities listed in (c)(5)(i). D, a United States citizen, purchases a certificate of deposit issued in 1980 by FB. The certificate of deposit has a maturity of 20 years and has detachable interest coupons payable at six-month intervals. D presents some of the coupons at the U.S. office of DC and receives payment in cash. NRA 2012gettechnical inc 34

35 Because the coupon is presented to DC for payment within the United States, DC is considered to have made the payment within the United States under paragraph (e)(3) of this section. Example 8. FB is recognized by both foreign country X and by the Federal Reserve Bank as a foreign country X branch of DC, a U.S. corporation engaged in the commercial banking business. A local foreign country X bank serves as FB's resident agent in Country X. FB maintains no physical office or employees in foreign country X. All the records, accounts, and transactions of FB are handled at the United States office of DC. E deposits funds in an amount maintained with FB. Interest earned on the deposit is periodically credited to E's account with FB by employees of DC. For purposes of section 6049, the place of payment of the interest on E's deposit with FB is considered to be within the United States by reason of paragraphs (e)(1) and (2) of this section. Example 9. DC is a U.S. corporation. A holds bonds that were issued by DC in registered form under section 163(f) and the regulations thereunder and that are foreign-targeted registered obligations as defined in (e)(2). DB, a commercial banking business, is the registrar of bonds issued by DC. Interest on the DC bonds is paid to A and other bondholders by check prepared by DB at its principal office inside the United States and mailed from there to A's address outside the United States. The check is drawn on a United States account maintained by DC with DB within the United States. The place of payment to A by DB of the interest on the DC bonds is considered to be outside the United States under paragraph (e)(4) of this section. (f) Original issue discount treated as payment of interest. In determining whether an obligation is one which was issued at a discount and the amount of discount which is includible in income of the holder, a payor (other than the issuer of the obligation) may rely on the Internal Revenue Service's publication of publicly traded original issue discount obligations. In the case of an obligation as to which there is during any calendar year an amount of original issue discount includible in the gross income of any holder (as determined under sections 1232 and 1232A and the regulations thereunder), the issuer of the obligation or a middleman (as defined in (f)(4)) shall be treated as having paid to such holder during such calendar year an amount of interest equal to the amount of original issue discount so includible without regard to any reduction by reason of a purchase allowance under sections 1232(a)(2)(C)(ii), 1232A (a)(6) or (b)(4) or a purchase at a premium under 1232A(c)(4)(A) or paragraph (d)(2) of Thus, the determination of the amount of original issue discount includible in the gross income of any holder with respect to any obligation shall be determined as if any holder of the obligation were the original holder. In the case of (1) an obligation to which section 1232A does not apply (for example, a short-term government obligation as defined in section 1232(a)(3)) and (2) an obligation issued on or before December 31, 1982, in bearer form, the amount of original issue discount includible in gross income shall be treated as if paid in the calendar year in which the date of maturity occurs or in which the date of redemption occurs if redemption occurs before maturity. The amount subject to reporting on an obligation issued in bearer form with a maturity at the date of issue of more than 1 year (a long term obligation) is the amount of original issue discount includible in the gross income of the holder during the calendar year of maturity or redemption if redemption occurs before maturity. The amount of original issue discount subject to reporting on a long term obligation shall not be reduced to reflect any purchase allowance. Discount on short term government obligations as defined in section 1232(a)(3), such as Treasury bills, and discount on other obligations with a maturity at the date of issue of not more than 1 year (a short term obligation), including commercial paper, when paid at maturity or redemption if redemption occurs before maturity, shall constitute a payment of interest for NRA 2012gettechnical inc 35

36 purposes of section In general, the amount subject to reporting on short term obligations is the difference between the stated redemption price at maturity and the original issue price. The procedure set forth in section 3455(b)(2)(B) and (b) 1(b)(3) for establishing the price at which a holder purchased an obligation subsequent to the date of original issue shall apply for purposes of section Original issue discount on an obligation (including an obligation with a maturity of not more than six months from the date of original issue) held by a nonresident alien individual or foreign corporation is interest described in paragraph (b)(1)(vi)(a) or (B) of this section and, therefore is not interest subject to reporting under section 6049 unless it is described in Sec (a) (relating to deposit interest paid on or after January 1, 2013, to certain nonresident alien individuals). (g) Effective date (1) General rule. The provisions of paragraphs (b)(6) through (15), (c), (d), and (e) of this section apply to payments made after December 31, (2) Transition rules. The validity of a withholding certificate (namely, Form W 8 or other form upon which the payor is permitted to rely to hold the payee as a foreign person) that was valid on January 1, 1998, under the regulations in effect prior to January 1, 2001 (see 26 CFR parts 1 and 35a, revised April 1, 1999) and expired, or will expire, at any time during 1998, is extended until December 31, The validity of a withholding certificate that is valid on or after January 1, 1999, remains valid until its validity expires under the regulations in effect prior to January 1, 2001 (see 26 CFR parts 1 and 35a, revised April 1, 1999) but in no event shall such a withholding certificate remain valid after December 31, The rule in this paragraph (g)(2), however, does not apply to extend the validity period of a withholding certificate that expires solely by reason of changes in the circumstances of the person whose name is on the certificate. Notwithstanding the first three sentences of this paragraph (g)(2), a payor may choose not to take advantage of the transition rule in this paragraph (g)(2) with respect to one or more withholding certificates valid under the regulations in effect prior to January 1, 2001 (see 26 CFR parts 1 and 35a, revised April 1, 1999) and, therefore, may require withholding certificates conforming to the requirements described in this section (new withholding certificates). For purposes of this section, a new withholding certificate is deemed to satisfy the documentation requirement under the regulations in effect prior to January 1, 2001 (see 26 CFR parts 1 and 35a, revised April 1, 1999). Further, a new withholding certificate remains valid for the period specified in (e)(4)(ii), regardless of when the certificate is obtained. Par. 4. Section is amended as follows (see highlighted piece for revisions): The paragraph heading and text of paragraph (e)(4) is revised. In paragraph (e)(5), the paragraph heading and first sentence are revised and a new sentence is added at the end of the paragraph. The additions and revisions read as follows: Sec Statements to recipients of interest payments and holders of obligations for attributed original issue discount. (a) Requirement of furnishing statement to recipient. Every person filing a Form 1099 under section 6049(a) and (e) shall furnish to the person whose identifying number is required to be shown on the form a written statement showing the information required by paragraph (b) of this section. With respect to interest other than interest reported on a transactional basis under (e), no statement is required to be furnished under section 6049(c) and this section if the aggregate of the payments for the calendar year is less than $10, NRA 2012gettechnical inc 36

37 unless such payment is subject to the tax imposed under section In the case of any payment that is subject to withholding under section 3406, a statement shall be furnished irrespective of the amount of the payment. With respect to payments which are reported on a transactional basis, no statement is required to be furnished under section 6049(c) and this section to a person if the payment of interest to (or received on behalf of) such person for the transaction is less than $10 unless the payment is subject to withholding under section Again, in the case of any payment that is subject to withholding under section 3406, a statement shall be furnished irrespective of the amount of the payment. (b) Form of statement. The written statement required to be furnished to a person under paragraph (a) of this section shall show the following information: (1) With respect to payments of interest (other than original issue discount) to any person during a calendar year, the statement shall show: (i) The aggregate amount of payments shown on Form 1099 as having been made to (or received on behalf of) such person; (ii) The amount of tax withheld under section 3406, if any; (iii) The name and address of the person filing the form; and (iv) A legend stating that such amount is being reported to the Internal Revenue Service. (2) With respect to original issue discount includible in the gross income of a holder of an obligation during a calendar year, the statement shall show: (i) The aggregate amount of original issue discount includible in the gross income by (or on behalf of) such person for the calendar year with respect to the obligation (determined by applying the rules of paragraph (b)(2) of ); (ii) The amount of tax withheld under section 3406, if any; (iii) The account, serial, or other identifying number of each obligation with respect to which a return is being made; (iv) All other items shown on Form 1099 for such calendar year; and (v) A legend stating that such amount and such items are being reported to the Internal Revenue Service. (c) Time for furnishing statements. Each statement required by this section to be furnished to any person for a calendar year with respect to a payment of interest (other than interest where a middleman or a Federal agency makes a return on a transactional basis (as described in paragraph (e) of )) shall be furnished to such person after April 30 of the year of payment and on or before January 31 of the following year, but no statement may be furnished before the final interest payment for the calendar year. If a middleman or a Federal agency makes a return on a transactional basis, the statement shall be furnished at, or any time subsequent to, the time of payment, but in no event later than January 31 of the year following the calendar year of payment. (d) Special rule. The requirements of this section for the furnishing of a statement to any person, including the legend requirement of paragraph (b)(1)(iv) and (2)(v) of this section, may be met by the furnishing to such person a copy of the Form 1099 filed pursuant to , or an acceptable substitute, in respect of such person. However, in the case of Form 1099 with respect to original issue discount on obligations subject to section 1232A, a copy of the instructions must also be sent to such person. A statement shall be considered to be furnished to a person within the meaning of this section if it is mailed to such person at his last known address. (e) Statements to recipients (1) Requirement. A person required to make an information return under section 6049(a) and must furnish a statement to each recipient whose NRA 2012gettechnical inc 37

38 identifying number is required to be shown on the related information return for interest or original issue discount paid or accrued. (2) Form, manner, and time for providing statements to recipients. The statement required by paragraph (e)(1) of this section must be either the official Form 1099 prescribed by the Internal Revenue Service for the respective calendar year or an acceptable substitute statement. The rules under (relating to statements with respect to dividends) apply comparably in determining the form of an acceptable substitute statement permitted by this paragraph (e). Those rules also apply for purposes of determining the manner of and time for providing the Form 1099 or its acceptable substitute to a recipient under paragraph (e)(1) of this section. However, with respect to original issue discount, the Form 1099 or acceptable substitute statement required by paragraph (e)(1) of this section must show the aggregate amount of original issue discount includible in the gross income by the recipient for the calendar year with respect to the obligation (determined by applying the rules of (b)(2)), and the amount, serial number, or other identifying number of each obligation with respect to which a return is being made. With respect to interest or original issue discount, the Form 1099 or acceptable substitute statement required by paragraph (e)(1) of this section must be furnished to the recipient on or before January 31 of the year following the calendar year for which the return under section 6049(a)(1) was required to be made. (3) Cross-reference to penalty. For provisions relating to the penalty provided for failure to furnish timely a correct payee statement required under section 6049(c) and (a), see of this chapter (Procedure and Administration Regulations). See of this chapter for the waiver of a penalty if the failure is due to reasonable cause and is not due to willful neglect. (4) Special rule for amounts described in Sec (a). In the case of amounts described in Sec (a) (relating to payments of deposit interest to certain nonresident alien individuals) paid on or after January 1, 2013, any person who makes a Form 1042-S, ``Foreign Person's U.S. Source Income Subject to Withholding,'' under section 6049(a) and Sec (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 Sec (b)(5) and a statement to the effect that the information on the form is being furnished to the United States Internal Revenue Service. (5) Effective/applicability date. Paragraph (e)(4) of this section applies to payee statements reporting payments of deposit interest to nonresident alien individuals paid on or after January 1, For the substantially similar statement mailing requirements that apply with respect to forms required to be filed after October 22, 1986, and before January 1, 1996, see Rev. Proc ( C.B. 716) (or successor revenue procedures). (For interest paid to a Canadian nonresident alien individual on or before December 31, 2012, see paragraph (e)(4) of this section as in effect and contained in 26 CFR part 1 revised April 1, 2000.) Par. 5. In Sec , the section heading and paragraph (a) are revised to read as follows (see highlighted piece for revision): Sec Interest and original issue discount paid to certain nonresident aliens. (a) Interest subject to reporting requirement. For purposes of Sec. Sec , , and this section, and except as provided in paragraph (b) of this section, the term interest means interest described in section 871(i)(2)(A) that relates to a deposit maintained at an office within NRA 2012gettechnical inc 38

39 the United States, and that is paid to a nonresident alien individual who is a resident of a country that is identified, in an applicable revenue procedure (see Sec (d)(2) of this chapter) as of December 31 prior to the calendar year in which the interest is paid, as a country with which the United States has in effect an income tax or other convention or bilateral agreement relating to the exchange of tax information within the meaning of section 6103(k)(4), under which the competent authority is the Secretary of the Treasury or his delegate and the United States agrees to provide, as well as receive, information. Notwithstanding the foregoing, for purposes of Sec. Sec , , and this section, for any year for which the information return under Sec (b)(5) is required, a payor may elect to treat interest as including all interest described in section 871(i)(2)(A) that relates to a deposit maintained at an office within the United States and that is paid to any nonresident alien individual. A payor shall make this election by reporting all such interest. For purposes of the regulations under section 6049 (Sec. Sec through ), a nonresident alien individual is a person described in section 7701(b)(1)(B). A payor or middleman may rely upon the permanent residence address provided on a valid Form W-8BEN, ``Beneficial Owners Certificate of Foreign Status for U.S. Tax Withholding'', to determine the country in which a nonresident alien individual is resident unless such payor or middleman knows or has reason to know that such documentation of the country of residence is unreliable or incorrect. Amounts described in this paragraph (a) are not subject to backup withholding under section 3406 if the payor may treat the payee as a foreign beneficial owner or foreign payee under the rules of Sec (b)(12). See Sec (g)-1(d) of this chapter. However, if the payor or middleman does not have either a valid Form W-8BEN or valid Form W-9, ``Request for Taxpayer Identification Number and Certification'', 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 Sec (d)(2) and Sec (b)(3)(iii), and the payor must also backup withhold under section (For interest paid to a Canadian nonresident alien individual on or before December 31, 2012, see paragraph (a) of this section as in effect and contained in 26 CFR part 1 revised April 1, 2000). (b) Interest excluded from reporting requirement. The term interest does not include an amount that is paid by the issuer or its agent outside the United States with respect to an obligation that is described in paragraph (b) (1) or (2) of this section. (1)(i) The obligation is not in registered form (within the meaning of section 163(f) and the regulations thereunder); is part of a larger single public offering of securities; and is described in section 163(f)(2)(B). (ii) Unless it has actual knowledge to the contrary, a middleman may treat an obligation as if it is described in section 163(f)(2)(B) if the obligation or coupon therefrom, whichever is presented for payment, contains the statement described in section 163(f)(2)(B)(ii)(II) and the regulations thereunder. (2)(i) The obligation has a face or principal amount of not less than $500,000, and satisfies the requirements described in paragraphs (b)(2)(i) (A), (B), and (C) of this section. (A) The obligation satisfies the requirements of sections 163(f)(2)(B) (i) and (ii)(i) and the regulations thereunder (as if it were a registration-required obligation within the meaning of section 163(f)(2)(A)) and is issued in accordance with the procedures of (c)(2)(i)(D)). (B) If the obligation is in registered form, it is registered in the name of an exempt recipient described in (c)(1)(ii). (C) The obligation has on its face and on any detachable coupons the following statement (or a similar statement having the same effect): By accepting this obligation or coupon, the holder NRA 2012gettechnical inc 39

40 represents and warrants that it is not a United States person (other than an exempt recipient described in the regulations under section 6049(b)(4) of the Internal Revenue Code and the regulations thereunder) and that it is not acting for or on behalf of a United States person (other than an exempt recipient described in the regulations under section 6049(b)(4) of the Internal Revenue Code and the regulations thereunder). (ii) Unless the middleman has actual knowledge to the contrary, it may treat an obligation as satisfying the requirements of sections 163(f)(2)(B) (i) and (ii)(i) and the regulations thereunder if the obligation or a coupon therefrom, whichever is presented for payment, contains the statement in paragraph (b)(2)(i)(c) of this section. [T.D. 8664, 61 FR 17574, Apr. 22, 1996, as amended by T.D. 8734, 62 FR 53491, Oct. 14, 1997] PART 31--EMPLOYMENT TAXES AND COLLECTION OF INCOME TAX AT THE SOURCE Par. 6. The authority citation for part 31 continues to read in part as follows: Authority: 26 U.S.C * * * Par. 7. In Sec (g)-1, paragraph (d) is revised to read as follows (see highlighted piece for revision): Sec (g)-1 Exception for payments to certain payees and certain other payments. (a) Exempt recipients (1) In general. A payor of any reportable payment (as defined in section 3406(b)) must not withhold under section 3406 if the payee is (i) An organization exempt from taxation under section 501(a) or an individual retirement account; (ii) The United States or any wholly owned agency or instrumentality thereof; (iii) A state, the District of Columbia, a possession of the United States, any political subdivision of any of the foregoing, or any wholly owned agency or instrumentality of any one or more of the foregoing; (iv) A foreign government, a political subdivision of a foreign government, or any wholly owned agency or instrumentality of any one or more of the foregoing (as defined in regulations under section 892); or (v) An international organization or any wholly owned agency or instrumentality thereof (as defined in section 7701(a)(18)). (2) Nonexclusive list. Paragraph (a)(1) of this section does not prescribe an exclusive list of payees that are exempt from information reporting and also are exempt from withholding under section (b) Determination of whether a person is described in paragraph (a)(1) of this section. The determination of whether a person is a payee described in paragraph (a)(1) of this section must be made as provided in the applicable provisions of section 6049 and the regulations issued thereunder. A payor, even if permitted to treat a person as an exempt recipient without requiring a certificate under the provisions of section 6049, may require a payee, otherwise not required to file a certificate regarding its exempt status, to file a certificate and may treat a payee who fails to file the certificate as a person who is not an exempt recipient. See (h) 3 for a NRA 2012gettechnical inc 40

41 description of the Form W 9 or a substitute form prescribed under section 3406 for claiming exempt status. (c) Prepaid or advance premium life-insurance contracts. A payor of a reportable payment (as defined in section 3406(b)(1)) may, but is not required to, withhold under section 3406 on reportable payments made from January 1, 1984, to December 31, 1996, on prepaid or advance premium life-insurance contracts to a payee who is the owner for tax purposes of the prepaid or advance premium life-insurance contract. For purposes of this exception from backup withholding, a prepaid or advance premium life-insurance contract is one entered into on or before June 30, 1984, by the payee and under which the increment in value of the prepaid or advance premium is used for the payment of premiums during the period in which the exception from backup withholding applies. (d) Reportable payments made to nonresident alien individuals. A payment of interest to a nonresident alien individual that is described in Sec (8)(a) of this chapter is not subject to withholding under section 3406 if the payor may treat the payee as a foreign beneficial owner or foreign payee under the rules of Sec (b)(12). (For interest paid to a Canadian nonresident alien individual on or before December 31, 2012, see paragraph (d) of this section as in effect and contained in 26 CFR part 1 revised April 1, 2000.) (e) Certain reportable payments made outside the United States by foreign persons, foreign offices of United States banks and brokers, and others. For reportable payments made after December 31, 2000, a payor is not required to backup withhold under section 3406 on a reportable payment that qualifies for the documentary evidence rule described in (c)(1) or (4) of this chapter, whether or not documentary evidence is actually provided to the payor, unless the payor has actual knowledge that the payee is a United States person. Further, no backup withholding is required for payments upon which a 30-percent amount was withheld by another payor in accordance with the withholding provisions under chapter 3 of the Internal Revenue Code and the regulations under that chapter. For rules applicable to notional principal contracts, see (d)(5) of this chapter. (f) Special rule for certain payment card transactions (1) In general. No withholding under section 3406 is required for a reportable payment made through a payment card organization if the payment is made on or after January 1, 2005, the organization is a Qualified Payment Card Agent (QPCA), and (i) The payee is a qualified payee (as defined in paragraph (f)(2)(vi) of this section) with respect to the payment; or (ii) The cardholder/payor made the purchase to which the payment relates no later than two months after the last date prescribed under paragraph (f)(3) of this section for furnishing the QPCA's first notification to the cardholder/payor that the payee is not a qualified payee. (2) Definitions (i) Payment card defined. For purposes of this section, a payment card is a card (or an account) issued by a payment card organization, or one of its members, affiliates, or licensees, to a cardholder/payor which, upon presentation to a merchant/payee, represents an agreement of the cardholder to pay the merchant through the payment card organization. (ii) Payment card organization defined. For purposes of this section, a payment card organization is an entity that sets the standards and provides the mechanism, either directly or indirectly through members, affiliates, or licensees, for effectuating payment between a purchaser and a merchant in a payment card transaction. A payment card organization acting directly or indirectly through its members, affiliates, or licensees generally provides such a payment mechanism by issuing payment cards, enrolling merchants as authorized acceptors of NRA 2012gettechnical inc 41

42 payment cards for payment for goods or services, and ensuring the system conducts the transactions in accordance with prescribed standards for payment card transactions. (iii) Payment card transaction defined. For purposes of this section, a payment card transaction is a transaction in which a cardholder/payor uses a payment card to purchase goods or services and a merchant agrees to accept a payment card as a means of obtaining payment. (iv) Cardholder/payor defined. For purposes of this section, a cardholder/payor is the person that agrees to make payments through the payment card organization. Thus, in the case of a payment card issued to an employee of a person that agrees to make payments through the payment card organization, the employer rather than the employee is the cardholder/payor. (v) Qualified Payment Card Agent (QPCA) defined. For purposes of this section, a Qualified Payment Card Agent (QPCA) is a payment card organization that has a current QPCA determination from the Internal Revenue Service (IRS) under applicable procedures (see (d)(2) of this chapter). (vi) Qualified payee defined. For purposes of this section, a payee is a qualified payee with respect to a reportable payment if (A) At the time the QPCA makes the payment, the QPCA has obtained the payee's TIN and the payee's TIN has been validated through the IRS TIN Matching Program; or (B) The QPCA makes the payment during the six-month period beginning on the date on which the QPCA first makes a payment to the payee. (3) Notification of payee status. In the case of a payment to a payee other than a qualified payee as defined in paragraph (f)(2)(vi) of this section with respect to the payment, the QPCA acting directly or indirectly through its members, affiliates, or licensees must notify the payor that the payee is not a qualified payee. The notification must be furnished during the four-month period beginning on the date on which the QPCA makes the payment. Notification may be provided in a quarterly or other regular report of payee data to the cardholder/payor and may consist of an asterisk, footnote, or other mark next to the payee's name, with the text of the notification at the bottom of the page or at the end of the list of payee data. Notification by the QPCA that a payee is not a qualified payee does not constitute notice by the IRS that the payee's TIN is incorrect for purposes of section 3406(a)(1)(B) and (d) 5. (4) Time of payment. A QPCA that makes reports to cardholders on the basis of a calendar quarter or any shorter period (the reporting period) may choose to treat all payments made during the reporting period as being made on the last day of the period for purposes of paragraphs (f)(2)(vi) and (f)(3) of this section. If the QPCA treats payments as being made on the last day of a reporting period, the six-month period in paragraph (f)(2)(vi) of this section and the four-month period in paragraph (f)(3) of this section are treated as beginning on the first day of the reporting period in which the QPCA makes the payment that would otherwise begin the six-month or fourmonth period. (5) Examples. The following examples illustrate the rules of this section. For purposes of the examples, assume that Q meets all requirements and fulfills all duties necessary to obtain a QPCA determination from the IRS. The examples are as follows: Example 1. (i) Q, a QPCA, enrolls Merchant X on January 20, 2005, to accept the Q payment card as a means for obtaining payment. (The results in this example are the same whether the acts attributed to Q are performed by Q itself or by a member, affiliate, or licensee of Q.) At the time of enrollment, Q obtains Merchant X's taxpayer identification number (TIN). Merchant X is a sole proprietor engaged in the trade or business of repairing automobiles and trucks. Q's first payment to Merchant X for purchases through the payment card is made on January 31, NRA 2012gettechnical inc 42

43 (ii) On March 1, 2005, Q issues a Q payment card to Customer A to use for the purchase of goods or services in the course of its trade or business from merchants that accept the Q payment card. During 2005, Customer A uses Q payment card to purchase repairs to A's vehicles from Merchant X on April 29, 2005, July 29, 2005, and December 19, Q makes payments for the repairs on May 2, 2005, August 1, 2005, and December 20, Q provides reports of payee data to each of its cardholders, including Customer A, on the 15th of April, July, October, and January for the quarter ending on the last day of the preceding month, but does not choose to treat payments as being made on the last day of the quarter for purposes of paragraphs (f)(2)(vi) and (f)(3) of this section. (iii) On March 15, 2005, Q attempts to validate Merchant X's name/tin through the IRS TIN Matching Program. On March 20, 2005, the IRS notifies Q that the name/tin furnished by Merchant X does not match IRS data. On June 15, 2005, and September 15, 2005, Q makes further unsuccessful attempts to validate Merchant X's name/tin through the IRS TIN Matching Program. (iv) Under paragraph (f)(2)(vi)(b) of this section, Merchant X is treated as a qualified payee for the six-month period beginning on January 31, 2005 (the date of Q's first payment to Merchant X), and ending on July 30, Accordingly, the payment on May 2, 2005, is a payment to a qualified payee and, under paragraph (f)(1)(i) of this section, is not subject to backup withholding. (v) Q has not validated Merchant X's TIN at the time of the payments on August 1, 2005, and December 20, Accordingly, under paragraph (f)(3) of this section, Q must notify Customer A within four months of each of these payments that Merchant X is not a qualified payee with respect to the payments. In the case of the August 1 payment, the notification must be furnished no later than November 30, Q may provide the notification in its quarterly report of payee data for the July-September quarter furnished on October 15, (vi) Although Merchant X is not a qualified payee with respect to the payments on August 1, 2005, and December 20, 2005, paragraph (f)(1)(ii) of this section provides that backup withholding is not required for purchases made no later than two months after the last date prescribed for furnishing the first notification that Merchant X is not a qualified payee. The last date for furnishing the first notification is November 30, 2005, and the two-month period expires on January 30, Because the payments relate to purchases on July 29, 2005, and December 19, 2005, backup withholding is not required with respect to either payment. Backup withholding may be required with respect to any payment Customer A makes through the Q payment card for purchases from Merchant X after January 30, 2006, unless Q has previously succeeded in validating Merchant X's TIN. Example 2. (i) Assume the same facts as in example (1) except that Q chooses to treat payments as being made on the last day of the quarter for purposes of paragraphs (f)(2)(vi) and (f)(3) of this section. (ii) The payment Q makes on January 31, 2005, is treated under paragraph (f)(4) of this section as being made on March 31, Similarly, the payments made on May 2, 2005, August 1, 2005, and December 20, 2005, are treated as being made on June 30, 2005, September 30, 2005, and December 31, (iii) Under paragraphs (f)(2)(vi)(b) and (f)(4) of this section, Merchant X is treated as a qualified payee for the six-month period beginning on January 1, 2005 (the beginning of the reporting period during which Q makes the first payment to Merchant X), and ending on June 30, NRA 2012gettechnical inc 43

44 Accordingly, the payment treated as made on June 30, 2005, is a payment to a qualified payee and, under paragraph (f)(1)(i) of this section, is not subject to backup withholding. (iv) Q has not validated Merchant X's TIN at the time of the payments that are treated as being made on September 30, 2005, and December 31, Accordingly, under paragraphs (f)(3) and (f)(4) of this section, Q must notify Customer A within four months of the beginning of each reporting period during which Q makes these payments that Merchant X is not a qualified payee with respect to the payments. In the case of the September 30 payment, the notification must be furnished no later than October 31, Q may provide the notification in its quarterly report of payee data for the July-September quarter furnished on October 15, (v) Although Merchant X is not a qualified payee with respect to the payments that are treated as being made on September 30, 2005, and December 31, 2005, paragraph (f)(1)(ii) of this section provides that backup withholding is not required for purchases made no later than two months after the last date prescribed for furnishing the first notification that Merchant X is not a qualified payee. The last date for furnishing the first notification is October 31, 2005, and the two-month period expires on December 31, Because the payments relate to purchases on July 29, 2005, and December 19, 2005, backup withholding is not required with respect to either payment. Backup withholding may be required with respect to any payment Customer A makes through the Q payment card for purchases from Merchant X after December 31, 2005, unless Q has previously succeeded in validating Merchant X's TIN. Steven T. Miller, Deputy Commissioner for Services and Enforcement. Approved: April 12, Emily S. McMahon, (Acting) Assistant Secretary of the Treasury (Tax Policy). [FR Doc Filed ; 4:15 pm] BILLING CODE P NRA 2012gettechnical inc 44

45 DEPARTMENT OF THE TREASURY: REVENUE PROCEDURE Part III Administrative, Procedural, and Miscellaneous 26 CFR Returns Relating to Payments of Interest (Also: Exceptions to Backup Withholding) Implementation of Nonresident Alien Deposit Interest Regulations Rev. Proc SECTION 1. PURPOSE Sections (b)(5) and of the Income Tax Regulations, as revised by TD 9584, require the reporting of certain deposit interest paid to nonresident alien individuals on or after January 1, The purpose of this revenue procedure is to list, in Section 3, the countries with which the United States has in effect an income tax or other convention or bilateral agreement relating to the exchange of information within the meaning of section 6103(k)(4) pursuant to which the United States agrees to provide, as well as receive, information and under which the competent authority is the Secretary of the Treasury or his delegate, as described in (a). As discussed in the preamble to the regulations, even when such an agreement exists, the Internal Revenue Service (IRS) is not compelled to exchange information, including information collected pursuant to the regulations, if there is concern regarding the use of the information or other factors exist that would make exchange inappropriate. This revenue procedure also identifies in Section 4 the countries with which the Treasury Department and the IRS have determined that it is appropriate to have an automatic exchange relationship with respect to the information collected under the regulations. This revenue procedure will be updated as appropriate. SECTION 2. BACKGROUND The regulations provide that in the case of reportable interest aggregating $10 or more paid to a nonresident alien individual (as defined in section 7701(b)(1)(B) of the Internal Revenue Code), the payor shall make an information return on Form 1042-S for the calendar year in which the interest is paid. Reportable interest is interest described in section 871(i)(2)(A) that relates to a deposit maintained at an office within the United States, and that is paid to a nonresident alien individual who is a resident of a country identified, in an applicable revenue procedure (see (d)(2) of this chapter) as of December 31 prior to the calendar year in which the interest is paid, as a country with which the United States has in effect an income tax or other convention or bilateral agreement relating to the exchange of information within the meaning of section 6103(k)(4) pursuant to which United States agrees to provide, as well as receive, information and under which the competent authority is the Secretary of the Treasury or his delegate. This NRA 2012gettechnical inc 45

46 revenue procedure constitutes the revenue procedure referenced in (a) and will be updated by subsequent revenue procedures as appropriate. SECTION 3. COUNTRIES OF RESIDENCE WITH RESPECT TO WHICH THE REPORTING REQUIREMENT APPLIES The following are countries with which the United States has in effect an income tax or other convention or bilateral agreement relating to the exchange of tax information within the meaning of section 6103(k)(4) pursuant to which the United States agrees to provide, as well as receive, information and under which the competent authority is the Secretary of the Treasury or his delegate: Antigua & Barbuda Aruba Australia Austria Azerbaijan Bangladesh Barbados Belgium Bermuda British Virgin Islands Bulgaria Canada China Costa Rica Cyprus Czech Republic Denmark Dominica Dominican Republic Egypt Estonia Finland France Germany Gibraltar Greece Grenada Guernsey Guyana Honduras Hungary Iceland India Indonesia Ireland Isle of Man NRA 2012gettechnical inc 46

47 Israel Italy Jamaica Japan Jersey Kazakhstan Korea (South) Latvia Liechtenstein Lithuania Luxembourg Malta Marshall Islands Mexico Monaco Morocco Netherlands Netherlands island territories: Bonaire, Curacao, Saba, St. Eustatius and St. Maarten (Dutch part) New Zealand Norway Pakistan Panama Peru Philippines Poland Portugal Romania Russian Federation Slovak Rep. Slovenia South Africa Spain Sri Lanka Sweden Switzerland Thailand Trinidad and Tobago Tunisia Turkey Ukraine United Kingdom Venezuela SECTION 4. COUNTRIES WITH WHICH TREASURY AND THE IRS HAVE DETERMINED THAT AUTOMATIC EXCHANGE OF DEPOSIT INTEREST INFORMATION IS APPROPRIATE NRA 2012gettechnical inc 47

48 The following list identifies the countries with which the automatic exchange of the information collected under (b)(5) and has been determined by the Treasury Department and the IRS to be appropriate: Canada SECTION 5. EFFECTIVE DATE This revenue procedure is effective for interest paid on or after January 1, SECTION 6. DRAFTING INFORMATION The principal author of this revenue procedure is Kathryn T. Holman of the Office of Chief Counsel International (International). For further information regarding this revenue procedure contact Kathryn T. Holman on (202) (not a toll free call). NRA 2012gettechnical inc 48

49 RESIDENT OR NONRESIDENT ALIEN? NRA 2012gettechnical inc 49

50 PUBLICATION 519: U.S. TAX GUIDE FOR ALIENS Nonresident Aliens If you are an alien (not a U.S. citizen), you are considered a nonresident alien unless you meet one of the two tests described next under Resident Aliens. Resident Aliens You are a resident alien of the United States for tax purposes if you meet either the green card test or the substantial presence test for calendar year 2010 (January 1-December 31). Even if you do not meet either of these tests, you may be able to choose to be treated as a U.S. resident for part of the year. See First-Year Choice under Dual-Status Aliens. NRA 2012gettechnical inc 50

51 PUBLICATION 519: GREEN CARD TEST You are a resident for tax purposes if you are a lawful permanent resident of the United States at any time during calendar year (However, see Dual-Status Aliens.) This is known as the green card test. You are a lawful permanent resident of the United States at any time if you have been given the privilege, according to the immigration laws, of residing permanently in the United States as an immigrant. You generally have this status if the U.S. Citizenship and Immigration Services (USCIS) (or its predecessor organization) has issued you an alien registration card, also known as a green card. You continue to have resident status under this test unless the status is taken away from you or is administratively or judicially determined to have been abandoned. Resident status taken away. Resident status is considered to have been taken away from you if the U.S. government issues you a final administrative or judicial order of exclusion or deportation. A final judicial order is an order that you may no longer appeal to a higher court of competent jurisdiction. Resident status abandoned. An administrative or judicial determination of abandonment of resident status may be initiated by you, the USCIS, or a U.S. consular officer. If you initiate the determination, your resident status is considered to be abandoned when you file either of the following with the USCIS or U.S. consular officer. Your application for abandonment. Your Alien Registration Receipt Card attached to a letter stating your intent to abandon your resident status. You must file the letter by certified mail, return receipt requested. You must keep a copy of the letter and proof that it was mailed and received. If the USCIS or U.S. consular officer initiates this determination, your resident status will be considered to be abandoned when the final administrative order of abandonment is issued. If you are granted an appeal to a federal court of competent jurisdiction, a final judicial order is required. Under U.S. immigration law, a lawful permanent resident who is required to file a tax return as a resident and fails to do so may be regarded as having abandoned status and may lose permanent resident status. A long-term resident who ceases to be a lawful permanent resident may be subject to special reporting requirements and tax provisions. See Expatriation Tax in chapter 4. NRA 2012gettechnical inc 51

52 Termination of residency after June 2004, and before June 17, If you terminated your residency after June 3, 2004, and before June 17, 2008, you will still be considered a U.S. resident for tax purposes until you notify the Secretary of Homeland Security and file Form 8854, Expatriation Information Statement. Termination of residency after June 16,2008. For information on your residency termination date, see Former long-term resident under Expatriation After June 16, 2008, in chapter 4. NRA 2012gettechnical inc 52

53 PUBLICATION 519: SUBSTANTIAL PRESENCE TEST You will be considered a U.S. resident for tax purposes if you meet the substantial presence test for calendar year To meet this test, you must be physically present in the United States on at least: days during 2011, and days during the 3-year period that includes 2011, 2010, and 2009, counting: a. All the days you were present in 2011, and b. 1 / 3 of the days you were present in 2010, and c. 1 / 6 of the days you were present in Example. You were physically present in the United States on 120 days in each of the years 2009, 2010, and To determine if you meet the substantial presence test for 2011, count the full 120 days of presence in 2011, 40 days in 2010 ( 1 / 3 of 120), and 20 days in 2009 ( 1 / 6 of 120). Because the total for the 3-year period is 180 days, you are not considered a resident under the substantial presence test for The term United States includes the following areas. All 50 states and the District of Columbia. The territorial waters of the United States. The seabed and subsoil of those submarine areas that are adjacent to U.S. territorial waters and over which the United States has exclusive rights under international law to explore and exploit natural resources. The term does not include U.S. possessions and territories or U.S. airspace. NRA 2012gettechnical inc 53

54 Figure 1-A Nonresident Alien or Resident Alien? Days of Presence in the United States You are treated as present in the United States on any day you are physically present in the country at any time during the day. However, there are exceptions to this rule. Do not count the following as days of presence in the United States for the substantial presence test. Days you commute to work in the United States from a residence in Canada or Mexico if you regularly commute from Canada or Mexico. NRA 2012gettechnical inc 54

55 Days you are in the United States for less than 24 hours when you are in transit between two places outside the United States. Days you are in the United States as a crew member of a foreign vessel. Days you are unable to leave the United States because of a medical condition that arose while you are in the United States. Days you are an exempt individual. The specific rules that apply to each of these categories are discussed next. Regular commuters from Canada or Mexico. Do not count the days on which you commute to work in the United States from your residence in Canada or Mexico if you regularly commute from Canada or Mexico. You are considered to commute regularly if you commute to work in the United States on more than 75% of the workdays during your working period. For this purpose, commute means to travel to work and return to your residence within a 24- hour period. Workdays are the days on which you work in the United States or Canada or Mexico. Working period means the period beginning with the first day in the current year on which you are physically present in the United States to work and ending on the last day in the current year on which you are physically present in the United States to work. If your work requires you to be present in the United States only on a seasonal or cyclical basis, your working period begins on the first day of the season or cycle on which you are present in the United States to work and ends on the last day of the season or cycle on which you are present in the United States to work. You can have more than one working period in a calendar year, and your working period can begin in one calendar year and end in the following calendar year. Example. Maria Perez lives in Mexico and works for Compañía ABC in its office in Mexico. She was assigned to her firm's office in the United States from February 1 through June 1. On June 2, she resumed her employment in Mexico. On 69 days, Maria commuted each morning from her home in Mexico to work in Compañía ABC's U.S. office. She returned to her home in Mexico on each of those evenings. On 7 days, she worked in her firm's Mexico office. For purposes of the substantial presence test, Maria does not count the days she commuted to work in the United States because those days equal more than 75% of the workdays during the working period (69 workdays in the United States divided by 76 workdays in the working period equals 90.8%). Days in transit. Do not count the days you are in the United States for less than 24 hours and you are in transit between two places outside the United States. You are considered to be in transit if you engage in activities that are substantially related to completing travel to your foreign destination. For example, if you travel between airports in the United States to change planes en route to your foreign destination, you are considered to be in transit. However, you are not considered to be in transit if you attend a business meeting while in the United States. This is true even if the meeting is held at the airport. Crew members. Do not count the days you are temporarily present in the United States as a regular crew member of a foreign vessel (boat or ship) engaged in transportation between the NRA 2012gettechnical inc 55

56 United States and a foreign country or a U.S. possession. However, this exception does not apply if you otherwise engage in any trade or business in the United States on those days. Medical condition. Do not count the days you intended to leave, but could not leave the United States because of a medical condition or problem that arose while you were in the United States. Whether you intended to leave the United States on a particular day is determined based on all the facts and circumstances. For example, you may be able to establish that you intended to leave if your purpose for visiting the United States could be accomplished during a period that is not long enough to qualify you for the substantial presence test. However, if you need an extended period of time to accomplish the purpose of your visit and that period would qualify you for the substantial presence test, you would not be able to establish an intent to leave the United States before the end of that extended period. In the case of an individual who is judged mentally incompetent, proof of intent to leave the United States can be determined by analyzing the individual's pattern of behavior before he or she was judged mentally incompetent. If you qualify to exclude days of presence because of a medical condition, you must file a fully completed Form 8843 with the IRS. See Form 8843, later. You cannot exclude any days of presence in the United States under the following circumstances. You were initially prevented from leaving, were then able to leave, but remained in the United States beyond a reasonable period for making arrangements to leave. You returned to the United States for treatment of a medical condition that arose during a prior stay. The condition existed before your arrival in the United States and you were aware of the condition. It does not matter whether you needed treatment for the condition when you entered the United States. Exempt individual. Do not count days for which you are an exempt individual. The term exempt individual does not refer to someone exempt from U.S. tax, but to anyone in the following categories. An individual temporarily present in the United States as a foreign government-related individual under an A or G visa. A teacher or trainee temporarily present in the United States under a J or Q visa, who substantially complies with the requirements of the visa. A student temporarily present in the United States under an F, J, M, or Q visa, who substantially complies with the requirements of the visa. A professional athlete temporarily in the United States to compete in a charitable sports event. The specific rules for each of these four categories (including any rules on the length of time you will be an exempt individual) are discussed next. Foreign government-related individuals. A foreign government-related individual is an individual (or a member of the individual's immediate family) who is temporarily present in the United States: NRA 2012gettechnical inc 56

57 As a full-time employee of an international organization, By reason of diplomatic status, or By reason of a visa (other than a visa that grants lawful permanent residence) that the Secretary of the Treasury determines represents full-time diplomatic or consular status. Note. You are considered temporarily present in the United States regardless of the actual amount of time you are present in the United States. An international organization is any public international organization that the President of the United States has designated by Executive Order as being entitled to the privileges, exemptions, and immunities provided for in the International Organizations Act. An individual is a full-time employee if his or her work schedule meets the organization's standard full-time work schedule. An individual is considered to have full-time diplomatic or consular status if he or she: Has been accredited by a foreign government that is recognized by the United States, Intends to engage primarily in official activities for that foreign government while in the United States, and Has been recognized by the President, Secretary of State, or a consular officer as being entitled to that status. Note. If you are present in the United States under an A or G visa you are considered a foreign government-related individual (with full-time diplomatic or consular status). None of your days count for purposes of the substantial presence test. Members of the immediate family include the individual's spouse and unmarried children (whether by blood or adoption) but only if the spouse's or unmarried children's visa statuses are derived from and dependent on the exempt individual's visa classification. Unmarried children are included only if they: Are under 21 years of age, Reside regularly in the exempt individual's household, and Are not members of another household. Teachers and trainees. A teacher or trainee is an individual, other than a student, who is temporarily in the United States under a J or Q visa and substantially complies with the requirements of that visa. You are considered to have substantially complied with the visa requirements if you have not engaged in activities that are prohibited by U.S. immigration laws and could result in the loss of your visa status. Also included are immediate family members of exempt teachers and trainees. See the definition of immediate family, earlier, under Foreign government-related individuals. NRA 2012gettechnical inc 57

58 You will not be an exempt individual as a teacher or trainee in 2011 if you were exempt as a teacher, trainee, or student for any part of 2 of the 6 preceding calendar years. However, you will be an exempt individual if all of the following conditions are met. You were exempt as a teacher, trainee, or student for any part of 3 (or fewer) of the 6 preceding calendar years, A foreign employer paid all of your compensation during 2011, and A foreign employer paid all of your compensation during each of the preceding 6 years you were present in the United States as a teacher or trainee. A foreign employer includes an office or place of business of an American entity in a foreign country or a U.S. possession. If you qualify to exclude days of presence as a teacher or trainee, you must file a fully completed Form 8843 with the IRS. See Form 8843, later. Example. Carla was temporarily in the United States during the year as a teacher on a J visa. Her compensation for the year was paid by a foreign employer. Carla was treated as an exempt teacher for the previous 2 years but her compensation was not paid by a foreign employer. She will not be considered an exempt individual for the current year because she was exempt as a teacher for at least 2 of the past 6 years. If her compensation for the past 2 years had been paid by a foreign employer, she would be an exempt individual for the current year. Students. A student is any individual who is temporarily in the United States on an F, J, M, or Q visa and who substantially complies with the requirements of that visa. You are considered to have substantially complied with the visa requirements if you have not engaged in activities that are prohibited by U.S. immigration laws and could result in the loss of your visa status. Also included are immediate family members of exempt students. See the definition of immediate family, earlier, under Foreign government-related individuals. You will not be an exempt individual as a student in 2011 if you have been exempt as a teacher, trainee, or student for any part of more than 5 calendar years unless you meet both of the following requirements. You establish that you do not intend to reside permanently in the United States. You have substantially complied with the requirements of your visa. The facts and circumstances to be considered in determining if you have demonstrated an intent to reside permanently in the United States include, but are not limited to, the following. Whether you have maintained a closer connection to a foreign country (discussed later). NRA 2012gettechnical inc 58

59 Whether you have taken affirmative steps to change your status from nonimmigrant to lawful permanent resident as discussed later under Closer Connection to a Foreign Country. If you qualify to exclude days of presence as a student, you must file a fully completed Form 8843 with the IRS. See Form 8843, later. Professional athletes. A professional athlete who is temporarily in the United States to compete in a charitable sports event is an exempt individual. A charitable sports event is one that meets the following conditions. The main purpose is to benefit a qualified charitable organization. The entire net proceeds go to charity. Volunteers perform substantially all the work. In figuring the days of presence in the United States, you can exclude only the days on which you actually competed in a sports event. You cannot exclude the days on which you were in the United States to practice for the event, to perform promotional or other activities related to the event, or to travel between events. If you qualify to exclude days of presence as a professional athlete, you must file a fully completed Form 8843 with the IRS. See Form 8843, next. Form If you exclude days of presence in the United States because you fall into any of the following categories, you must file a fully completed Form You were unable to leave the United States as planned because of a medical condition or problem. You were temporarily in the United States as a teacher or trainee on a J or Q visa. You were temporarily in the United States as a student on an F, J, M, or Q visa. You were a professional athlete competing in a charitable sports event. Attach Form 8843 to your 2011 income tax return. If you do not have to file a return, send Form 8843 to the Department of the Treasury, Internal Revenue Service Center, Austin, TX , by the due date for filing Form 1040NR or Form 1040NR-EZ. The due date for filing is discussed in chapter 7. If you do not timely file Form 8843, you cannot exclude the days you were present in the United States as a professional athlete or because of a medical condition that arose while you were in the United States. This does not apply if you can show by clear and convincing evidence that you took reasonable actions to become aware of the filing requirements and significant steps to comply with those requirements NRA 2012gettechnical inc 59

60 PUBLICATION 519: CLOSER CONNECTION TO A FOREIGN COUNTRY Closer Connection to a Foreign Country Even if you meet the substantial presence test, you can be treated as a nonresident alien if you: Are present in the United States for less than 183 days during the year, Maintain a tax home in a foreign country during the year, and Have a closer connection during the year to one foreign country in which you have a tax home than to the United States (unless you have a closer connection to two foreign countries, discussed next). Closer connection to two foreign countries. You can demonstrate that you have a closer connection to two foreign countries (but not more than two) if you meet all of the following conditions. You maintained a tax home beginning on the first day of the year in one foreign country. You changed your tax home during the year to a second foreign country. You continued to maintain your tax home in the second foreign country for the rest of the year. You had a closer connection to each foreign country than to the United States for the period during which you maintained a tax home in that foreign country. You are subject to tax as a resident under the tax laws of either foreign country for the entire year or subject to tax as a resident in both foreign countries for the period during which you maintained a tax home in each foreign country. Tax home. Your tax home is the general area of your main place of business, employment, or post of duty, regardless of where you maintain your family home. Your tax home is the place where you permanently or indefinitely work as an employee or a self-employed individual. If you do not have a regular or main place of business because of the nature of your work, then your tax home is the place where you regularly live. If you do not fit either of these categories, you are considered an itinerant and your tax home is wherever you work. For determining whether you have a closer connection to a foreign country, your tax home must also be in existence for the entire current year, and must be located in the same foreign country to which you are claiming to have a closer connection. Foreign country. In determining whether you have a closer connection to a foreign country, the term foreign country means: Any territory under the sovereignty of the United Nations or a government other than that of the United States, The territorial waters of the foreign country (determined under U.S. law), The seabed and subsoil of those submarine areas which are adjacent to the territorial waters of the foreign country and over which the foreign country has exclusive rights under international law to explore and exploit natural resources, and Possessions and territories of the United States. NRA 2012gettechnical inc 60

61 Establishing a closer connection. You will be considered to have a closer connection to a foreign country than the United States if you or the IRS establishes that you have maintained more significant contacts with the foreign country than with the United States. In determining whether you have maintained more significant contacts with the foreign country than with the United States, the facts and circumstances to be considered include, but are not limited to, the following. 1. The country of residence you designate on forms and documents. 2. The types of official forms and documents you file, such as Form W-9, Form W-8BEN, or Form W-8ECI. 3. The location of: a. Your permanent home, b. Your family, c. Your personal belongings, such as cars, furniture, clothing, and jewelry, d. Your current social, political, cultural, professional, or religious affiliations, e. Your business activities (other than those that constitute your tax home), f. The jurisdiction in which you hold a driver's license, g. The jurisdiction in which you vote, and h. Charitable organizations to which you contribute. It does not matter whether your permanent home is a house, an apartment, or a furnished room. It also does not matter whether you rent or own it. It is important, however, that your home be available at all times, continuously, and not solely for short stays. When you cannot have a closer connection. You cannot claim you have a closer connection to a foreign country if either of the following applies: You personally applied, or took other steps during the year, to change your status to that of a permanent resident, or You had an application pending for adjustment of status during the current year. Steps to change your status to that of a permanent resident include, but are not limited to, the filing of the following forms. Form I-508, Waiver of Rights, Privileges, Exemptions and Immunities Form I-485, Application to Register Permanent Residence or Adjust Status Form I-130, Petition for Alien Relative, on your behalf Form I-140, Immigrant Petition for Alien Worker, on your behalf Form ETA-750, Application for Alien Employment Certification, on your behalf Form DS-230, Application for Immigrant Visa and Alien Registration Form You must attach a fully completed Form 8840 to your income tax return to claim you have a closer connection to a foreign country or countries. If you do not have to file a return, send the form to the Department of the Treasury, Internal Revenue Service Center, Austin TX , by the due date for filing Form 1040NR or Form 1040NR-EZ. The due date for filing is discussed later in chapter 7. If you do not timely file Form 8840, you cannot claim a closer connection to a foreign country or countries. This does not apply if you can show by clear and convincing evidence that you took NRA 2012gettechnical inc 61

62 reasonable actions to become aware of the filing requirements and significant steps to comply with those requirements. NRA 2012gettechnical inc 62

63 PUBLICATION 519: EFFECT OF TAX TREATIES The rules given here to determine if you are a U.S. resident do not override tax treaty definitions of residency. If you are a dual-resident taxpayer, you can still claim the benefits under an income tax treaty. A dual-resident taxpayer is one who is a resident of both the United States and another country under each country's tax laws. The income tax treaty between the two countries must contain a provision that provides for resolution of conflicting claims of residence (tie-breaker rule). If you are treated as a resident of a foreign country under a tax treaty, you are treated as a nonresident alien in figuring your U.S. income tax. For purposes other than figuring your tax, you will be treated as a U.S. resident. For example, the rules discussed here do not affect your residency time periods as discussed later under Dual-Status Aliens. Information to be reported. If you are a dual-resident taxpayer and you claim treaty benefits, you must file a return by the due date (including extensions) using Form 1040NR or Form 1040NR-EZ, and compute your tax as a nonresident alien. You must also attach a fully completed Form 8833 if you determine your residency under a tax treaty and receive payments or income items totaling more than $100,000. SeeReporting Treaty Benefits Claimed in chapter 9 for more information on reporting treaty benefits. NRA 2012gettechnical inc 63

64 PUBLICATION 519: DUAL-STATUS ALIENS You can be both a nonresident alien and a resident alien during the same tax year. This usually occurs in the year you arrive in or depart from the United States. Aliens who have dual status should see chapter 6 for information on filing a return for a dual-status tax year. First Year of Residency If you are a U.S. resident for the calendar year, but you were not a U.S. resident at any time during the preceding calendar year, you are a U.S. resident only for the part of the calendar year that begins on the residency starting date. You are a nonresident alien for the part of the year before that date. Residency starting date under substantial presence test. If you meet the substantial presence test for a calendar year, your residency starting date is generally the first day you are present in the United States during that calendar year. However, you do not have to count up to 10 days of actual presence in the United States if on those days you establish that: You had a closer connection to a foreign country than to the United States, and Your tax home was in that foreign country. See Closer Connection to a Foreign Country, earlier. In determining whether you can exclude up to 10 days, the following rules apply. You can exclude days from more than one period of presence as long as the total days in all periods are not more than 10. You cannot exclude any days in a period of consecutive days of presence if all the days in that period cannot be excluded. Although you can exclude up to 10 days of presence in determining your residency starting date, you must include those days when determining whether you meet the substantial presence test. Example. Ivan Ivanovich is a citizen of Russia. He came to the United States for the first time on January 6, 2011, to attend a business meeting and returned to Russia on January 10, His tax home remained in Russia. On March 1, 2011, he moved to the United States and resided here for the rest of the year. Ivan is able to establish a closer connection to Russia for the period January Thus, his residency starting date is March 1. Statement required to exclude up to 10 days of presence. You must file a statement with the IRS if you are excluding up to 10 days of presence in the United States for purposes of your residency starting date. You must sign and date this statement and include a declaration that it is NRA 2012gettechnical inc 64

65 made under penalties of perjury. The statement must contain the following information (as applicable). Your name, address, U.S. taxpayer identification number (if any), and U.S. visa number (if any). Your passport number and the name of the country that issued your passport. The tax year for which the statement applies. The first day that you were present in the United States during the year. The dates of the days you are excluding in figuring your first day of residency. Sufficient facts to establish that you have maintained your tax home in and a closer connection to a foreign country during the period you are excluding. Attach the required statement to your income tax return. If you are not required to file a return, send the statement to the Department of the Treasury, Internal Revenue Service Center, Austin, TX , on or before the due date for filing Form 1040NR or Form 1040NR-EZ. The due date for filing is discussed in chapter 7. If you do not file the required statement as explained above, you cannot claim that you have a closer connection to a foreign country or countries. Therefore, your first day of residency will be the first day you are present in the United States. This does not apply if you can show by clear and convincing evidence that you took reasonable actions to become aware of the requirements for filing the statement and significant steps to comply with those requirements. Residency starting date under green card test. If you meet the green card test at any time during a calendar year, but do not meet the substantial presence test for that year, your residency starting date is the first day in the calendar year on which you are present in the United States as a lawful permanent resident. If you meet both the substantial presence test and the green card test, your residency starting date is the earlier of the first day during the year you are present in the United States under the substantial presence test or as a lawful permanent resident. Residency during the preceding year. If you were a U.S. resident during any part of the preceding calendar year and you are a U.S. resident for any part of the current year, you will be considered a U.S. resident at the beginning of the current year. This applies whether you are a resident under the substantial presence test or green card test. Example. Robert Bach is a citizen of Switzerland. He came to the United States as a U.S. resident for the first time on May 1, 2010, and remained until November 5, 2010, when he returned to Switzerland. Robert came back to the United States on March 5, 2011, as a lawful permanent resident and still resides here. In calendar year 2011, Robert's U.S. residency is deemed to begin on January 1, 2011, because he qualified as a resident in calendar year First-Year Choice If you do not meet either the green card test or the substantial presence test for 2010 or 2011 and you did not choose to be treated as a resident for part of 2010, but you meet the substantial NRA 2012gettechnical inc 65

66 presence test for 2012, you can choose to be treated as a U.S. resident for part of To make this choice, you must: 1. Be present in the United States for at least 31 days in a row in 2011, and 2. Be present in the United States for at least 75% of the number of days beginning with the first day of the 31-day period and ending with the last day of For purposes of this 75% requirement, you can treat up to 5 days of absence from the United States as days of presence in the United States. When counting the days of presence in (1) and (2) above, do not count the days you were in the United States under any of the exceptions discussed earlier under Days of Presence in the United States. If you make the first-year choice, your residency starting date for 2011 is the first day of the earliest 31-day period (described in (1) above) that you use to qualify for the choice. You are treated as a U.S. resident for the rest of the year. If you are present for more than one 31-day period and you satisfy condition (2) above for each of those periods, your residency starting date is the first day of the first 31-day period. If you are present for more than one 31-day period but you satisfy condition (2) above only for a later 31-day period, your residency starting date is the first day of the later 31-day period. Note. You do not have to be married to make this choice. Example 1. Juan DaSilva is a citizen of the Philippines. He came to the United States for the first time on November 1, 2011, and was here on 31 consecutive days (from November 1 through December 1, 2011). Juan returned to the Philippines on December 1 and came back to the United States on December 17, He stayed in the United States for the rest of the year. During 2012, Juan was a resident of the United States under the substantial presence test. Juan can make the firstyear choice for 2011 because he was in the United States in 2011 for a period of 31 days in a row (November 1 through December 1) and for at least 75% of the days following (and including) the first day of his 31-day period (46 total days of presence in the United States divided by 61 days in the period from November 1 through December 31 equals 75.4%). If Juan makes the first-year choice, his residency starting date will be November 1, Example 2. The facts are the same as in Example 1, except that Juan was also absent from the United States on December 24, 25, 29, 30, and 31. He can make the first-year choice for 2011 because up to 5 days of absence are considered days of presence for purposes of the 75% requirement. NRA 2012gettechnical inc 66

67 Statement required to make the first-year choice for You must attach a statement to Form 1040 to make the first-year choice for The statement must contain your name and address and specify the following. That you are making the first-year choice for That you were not a resident in That you are a resident under the substantial presence test in The number of days of presence in the United States during The date or dates of your 31-day period of presence and the period of continuous presence in the United States during The date or dates of absence from the United States during 2011 that you are treating as days of presence. You cannot file Form 1040 or the statement until you meet the substantial presence test for If you have not met the test for 2012 as of April 17, 2012, you can request an extension of time for filing your 2011 Form 1040 until a reasonable period after you have met that test. To request an extension to file until October 15, 2012, use Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return. You can file the paper form or use one of the electronic filing options explained in the Form 4868 instructions. You should pay with this extension the amount of tax you expect to owe for 2011 figured as if you were a nonresident alien the entire year. You can use Form 1040NR or Form 1040NR-EZ to figure the tax. Enter the tax on Form If you do not pay the tax due, you will be charged interest on any tax not paid by the regular due date of your return, and you may be charged a penalty on the late payment. Once you make the first-year choice, you may not revoke it without the approval of the Internal Revenue Service. If you do not follow the procedures discussed here for making the first-year choice, you will be treated as a nonresident alien for all of However, this does not apply if you can show by clear and convincing evidence that you took reasonable actions to become aware of the filing procedures and significant steps to comply with the procedures. Choosing Resident Alien Status If you are a dual-status alien, you can choose to be treated as a U.S. resident for the entire year if all of the following apply. You were a nonresident alien at the beginning of the year. You are a resident alien or U.S. citizen at the end of the year. You are married to a U.S. citizen or resident alien at the end of the year. Your spouse joins you in making the choice. This includes situations in which both you and your spouse were nonresident aliens at the beginning of the tax year and both of you are resident aliens at the end of the tax year. Note. If you are single at the end of the year, you cannot make this choice. NRA 2012gettechnical inc 67

68 If you make this choice, the following rules apply. You and your spouse are treated as U.S. residents for the entire year for income tax purposes. You and your spouse are taxed on worldwide income. You and your spouse must file a joint return for the year of the choice. Neither you nor your spouse can make this choice for any later tax year, even if you are separated, divorced, or remarried. The special instructions and restrictions for dual-status taxpayers in chapter 6 do not apply to you. Note. A similar choice is available if, at the end of the tax year, one spouse is a nonresident alien and the other spouse is a U.S. citizen or resident. See Nonresident Spouse Treated as a Resident, later. If you previously made that choice and it is still in effect, you do not need to make the choice explained here. Making the choice. You should attach a statement signed by both spouses to your joint return for the year of the choice. The statement must contain the following information. A declaration that you both qualify to make the choice and that you choose to be treated as U.S. residents for the entire tax year. The name, address, and taxpayer identification number (SSN or ITIN) of each spouse. (If one spouse died, include the name and address of the person who makes the choice for the deceased spouse.) You generally make this choice when you file your joint return. However, you also can make the choice by filing Form 1040X, Amended U.S. Individual Income Tax Return. Attach Form 1040, Form 1040A, or Form 1040EZ and print Amended across the top of the corrected return. If you make the choice with an amended return, you and your spouse must also amend any returns that you may have filed after the year for which you made the choice. You generally must file the amended joint return within 3 years from the date you filed your original U.S. income tax return or 2 years from the date you paid your income tax for that year, whichever is later. Last Year of Residency If you were a U.S. resident in 2011 but are not a U.S. resident during any part of 2012, you cease to be a U.S. resident on your residency termination date. Your residency termination date is December 31, 2011, unless you qualify for an earlier date as discussed next. Earlier residency termination date. You may qualify for a residency termination date that is earlier than December 31. This date is: NRA 2012gettechnical inc 68

69 1. The last day in 2011 that you are physically present in the United States, if you met the substantial presence test, 2. The first day in 2011 that you are no longer a lawful permanent resident of the United States, if you met the green card test, or 3. The later of (1) or (2), if you met both tests. You can use this date only if, for the remainder of 2011, your tax home was in a foreign country and you had a closer connection to that foreign country. See Closer Connection to a Foreign Country, earlier. A long-term resident who ceases to be a lawful permanent resident may be subject to special reporting requirements and tax provisions. See Expatriation Tax in chapter 4. Termination of residency. For information on your residency termination date, see Former longterm resident under Expatriation After June 16, 2008, in chapter 4. De minimis presence. If you are a U.S. resident because of the substantial presence test and you qualify to use the earlier residency termination date, you can exclude up to 10 days of actual presence in the United States in determining your residency termination date. In determining whether you can exclude up to 10 days, the following rules apply. You can exclude days from more than one period of presence as long as the total days in all periods are not more than 10. You cannot exclude any days in a period of consecutive days of presence if all the days in that period cannot be excluded. Although you can exclude up to 10 days of presence in determining your residency termination date, you must include those days when determining whether you meet the substantial presence test. Example. Lola Bovary is a citizen of Malta. She came to the United States for the first time on March 1, 2011, and resided here until August 25, On December 12, 2011, Lola came to the United States for vacation and stayed here until December 16, 2011, when she returned to Malta. She is able to establish a closer connection to Malta for the period December Lola is not a U.S. resident for tax purposes during 2011 and can establish a closer connection to Malta for the rest of calendar year Lola is a U.S. resident under the substantial presence test for 2011 because she was present in the United States for 183 days (178 days for the period March 1 to August 25 plus 5 days in December). Lola's residency termination date is August 25, Residency during the next year. If you are a U.S. resident during any part of 2012 and you are a resident during any part of 2011, you will be treated as a resident through the end of This applies whether you have a closer connection to a foreign country than the United States during 2011, and whether you are a resident under the substantial presence test or green card test. Statement required to establish your residency termination date. You must file a statement with the IRS to establish your residency termination date. You must sign and date this statement NRA 2012gettechnical inc 69

70 and include a declaration that it is made under penalties of perjury. The statement must contain the following information (as applicable). Your name, address, U.S. taxpayer identification number (if any), and U.S. visa number (if any). Your passport number and the name of the country that issued your passport. The tax year for which the statement applies. The last day that you were present in the United States during the year. Sufficient facts to establish that you have maintained your tax home in, and that you have a closer connection to, a foreign country following your last day of presence in the United States during the year or following the abandonment or rescission of your status as a lawful permanent resident during the year. The date that your status as a lawful permanent resident was abandoned or rescinded. Sufficient facts (including copies of relevant documents) to establish that your status as a lawful permanent resident has been abandoned or rescinded. If you can exclude days under the de minimis presence rule, discussed earlier, include the dates of the days you are excluding and sufficient facts to establish that you have maintained your tax home in and that you have a closer connection to a foreign country during the period you are excluding. Attach the required statement to your income tax return. If you are not required to file a return, send the statement to the Department of the Treasury, Internal Revenue Service Center, Austin, TX , on or before the due date for filing Form 1040NR or Form 1040NR-EZ. The due date for filing is discussed in chapter 7. If you do not file the required statement as explained above, you cannot claim that you have a closer connection to a foreign country or countries. This does not apply if you can show by clear and convincing evidence that you took reasonable actions to become aware of the requirements for filing the statement and significant steps to comply with those requirements. Nonresident Spouse Treated as a Resident If, at the end of your tax year, you are married and one spouse is a U.S. citizen or a resident alien and the other spouse is a nonresident alien, you can choose to treat the nonresident spouse as a U.S. resident. This includes situations in which one spouse is a nonresident alien at the beginning of the tax year, but a resident alien at the end of the year, and the other spouse is a nonresident alien at the end of the year. If you make this choice, you and your spouse are treated for income tax purposes as residents for your entire tax year. Neither you nor your spouse can claim under any tax treaty not to be a U.S. resident. You are both taxed on worldwide income. You must file a joint income tax return for the year you make the choice, but you and your spouse can file joint or separate returns in later years. NRA 2012gettechnical inc 70

71 If you file a joint return under this provision, the special instructions and restrictions for dualstatus taxpayers in chapter 6 do not apply to you. Example. Bob and Sharon Williams are married and both are nonresident aliens at the beginning of the year. In June, Bob became a resident alien and remained a resident for the rest of the year. Bob and Sharon both choose to be treated as resident aliens by attaching a statement to their joint return. Bob and Sharon must file a joint return for the year they make the choice, but they can file either joint or separate returns for later years. How To Make the Choice Attach a statement, signed by both spouses, to your joint return for the first tax year for which the choice applies. It should contain the following information. A declaration that one spouse was a nonresident alien and the other spouse a U.S. citizen or resident alien on the last day of your tax year, and that you choose to be treated as U.S. residents for the entire tax year. The name, address, and identification number of each spouse. (If one spouse died, include the name and address of the person making the choice for the deceased spouse.) Amended return. You generally make this choice when you file your joint return. However, you can also make the choice by filing a joint amended return on Form 1040X. Attach Form 1040, Form 1040A, or Form 1040EZ and print Amended across the top of the corrected return. If you make the choice with an amended return, you and your spouse must also amend any returns that you may have filed after the year for which you made the choice. You generally must file the amended joint return within 3 years from the date you filed your original U.S. income tax return or 2 years from the date you paid your income tax for that year, whichever is later. Suspending the Choice The choice to be treated as a resident alien is suspended for any tax year (after the tax year you made the choice) if neither spouse is a U.S. citizen or resident alien at any time during the tax year. This means each spouse must file a separate return as a nonresident alien for that year if either meets the filing requirements for nonresident aliens discussed in chapter 7. Example. Dick Brown was a resident alien on December 31, 2008, and married to Judy, a nonresident alien. They chose to treat Judy as a resident alien and filed joint 2008 and 2009 income tax returns. On January 10, 2010, Dick became a nonresident alien. Judy had remained a nonresident alien throughout the period. Dick and Judy could have filed joint or separate returns for 2010 because Dick was a resident alien for part of that year. However, because neither Dick nor Judy is a resident alien at any time during 2011, their choice is suspended for that year. If either meets NRA 2012gettechnical inc 71

72 the filing requirements for nonresident aliens discussed in chapter 7, they must file separate returns as nonresident aliens for If Dick becomes a resident alien again in 2012, their choice is no longer suspended. Ending the Choice Once made, the choice to be treated as a resident applies to all later years unless suspended (as explained earlier under Suspending the Choice ) or ended in one of the following ways. If the choice is ended in one of the following ways, neither spouse can make this choice in any later tax year. 1. Revocation. Either spouse can revoke the choice for any tax year, provided he or she makes the revocation by the due date for filing the tax return for that tax year. The spouse who revokes the choice must attach a signed statement declaring that the choice is being revoked. The statement must include the name, address, and identification number of each spouse. (If one spouse dies, include the name and address of the person who is revoking the choice for the deceased spouse.) The statement also must include a list of any states, foreign countries, and possessions that have community property laws in which either spouse is domiciled or where real property is located from which either spouse receives income. File the statement as follows. a. If the spouse revoking the choice must file a return, attach the statement to the return for the first year the revocation applies. b. If the spouse revoking the choice does not have to file a return, but does file a return (for example, to obtain a refund), attach the statement to the return. c. If the spouse revoking the choice does not have to file a return and does not file a claim for refund, send the statement to the Internal Revenue Service Center where you filed the last joint return. 2. Death. The death of either spouse ends the choice, beginning with the first tax year following the year the spouse died. However, if the surviving spouse is a U.S. citizen or resident and is entitled to the joint tax rates as a surviving spouse, the choice will not end until the close of the last year for which these joint rates may be used. If both spouses die in the same tax year, the choice ends on the first day after the close of the tax year in which the spouses died. 3. Legal separation. A legal separation under a decree of divorce or separate maintenance ends the choice as of the beginning of the tax year in which the legal separation occurs. 4. Inadequate records. The Internal Revenue Service can end the choice for any tax year that either spouse has failed to keep adequate books, records, and other information necessary to determine the correct income tax liability, or to provide adequate access to those records. Aliens From American Samoa or Puerto Rico If you are a nonresident alien in the United States and a bona fide resident of American Samoa or Puerto Rico during the entire tax year, you are taxed, with certain exceptions, according to the NRA 2012gettechnical inc 72

73 rules for resident aliens of the United States. For more information, see Bona Fide Residents of American Samoa or Puerto Rico in chapter 5. If you are a nonresident alien from American Samoa or Puerto Rico who does not qualify as a bona fide resident of American Samoa or Puerto Rico for the entire tax year, you are taxed as a nonresident alien. Resident aliens who formerly were bona fide residents of American Samoa or Puerto Rico are taxed according to the rules for resident aliens. NRA 2012gettechnical inc 73

74 PUBLICATION 519: NONRESIDENT SPOUSE TREATED AS A RESIDENT If, at the end of your tax year, you are married and one spouse is a U.S. citizen or a resident alien and the other spouse is a nonresident alien, you can choose to treat the nonresident spouse as a U.S. resident. This includes situations in which one spouse is a nonresident alien at the beginning of the tax year, but a resident alien at the end of the year, and the other spouse is a nonresident alien at the end of the year. If you make this choice, you and your spouse are treated for income tax purposes as residents for your entire tax year. Neither you nor your spouse can claim under any tax treaty not to be a U.S. resident. You are both taxed on worldwide income. You must file a joint income tax return for the year you make the choice, but you and your spouse can file joint or separate returns in later years. If you file a joint return under this provision, the special instructions and restrictions for dualstatus taxpayers in chapter 6 do not apply to you. Example. Bob and Sharon Williams are married and both are nonresident aliens at the beginning of the year. In June, Bob became a resident alien and remained a resident for the rest of the year. Bob and Sharon both choose to be treated as resident aliens by attaching a statement to their joint return. Bob and Sharon must file a joint return for the year they make the choice, but they can file either joint or separate returns for later years. How To Make the Choice Attach a statement, signed by both spouses, to your joint return for the first tax year for which the choice applies. It should contain the following information. A declaration that one spouse was a nonresident alien and the other spouse a U.S. citizen or resident alien on the last day of your tax year, and that you choose to be treated as U.S. residents for the entire tax year. The name, address, and identification number of each spouse. (If one spouse died, include the name and address of the person making the choice for the deceased spouse.) Amended return. You generally make this choice when you file your joint return. However, you can also make the choice by filing a joint amended return on Form 1040X. Attach Form 1040, Form 1040A, or Form 1040EZ and print Amended across the top of the corrected return. If you make the choice with an amended return, you and your spouse must also amend any returns that you may have filed after the year for which you made the choice. NRA 2012gettechnical inc 74

75 You generally must file the amended joint return within 3 years from the date you filed your original U.S. income tax return or 2 years from the date you paid your income tax for that year, whichever is later. Suspending the Choice The choice to be treated as a resident alien is suspended for any tax year (after the tax year you made the choice) if neither spouse is a U.S. citizen or resident alien at any time during the tax year. This means each spouse must file a separate return as a nonresident alien for that year if either meets the filing requirements for nonresident aliens discussed in chapter 7. Example. Dick Brown was a resident alien on December 31, 2007, and married to Judy, a nonresident alien. They chose to treat Judy as a resident alien and filed joint 2007 and 2008 income tax returns. On January 10, 2011, Dick became a nonresident alien. Judy had remained a nonresident alien throughout the period. Dick and Judy could have filed joint or separate returns for 2011 because Dick was a resident alien for part of that year. However, because neither Dick nor Judy is a resident alien at any time during 2012, their choice is suspended for that year. If either meets the filing requirements for nonresident aliens discussed in chapter 7, they must file separate returns as nonresident aliens for If Dick becomes a resident alien again in 2011, their choice is no longer suspended. Ending the Choice Once made, the choice to be treated as a resident applies to all later years unless suspended (as explained earlier under Suspending the Choice ) or ended in one of the following ways. If the choice is ended in one of the following ways, neither spouse can make this choice in any later tax year. 1. Revocation. Either spouse can revoke the choice for any tax year, provided he or she makes the revocation by the due date for filing the tax return for that tax year. The spouse who revokes the choice must attach a signed statement declaring that the choice is being revoked. The statement must include the name, address, and identification number of each spouse. (If one spouse dies, include the name and address of the person who is revoking the choice for the deceased spouse.) The statement also must include a list of any states, foreign countries, and possessions that have community property laws in which either spouse is domiciled or where real property is located from which either spouse receives income. File the statement as follows. a. If the spouse revoking the choice must file a return, attach the statement to the return for the first year the revocation applies. b. If the spouse revoking the choice does not have to file a return, but does file a return (for example, to obtain a refund), attach the statement to the return. NRA 2012gettechnical inc 75

76 c. If the spouse revoking the choice does not have to file a return and does not file a claim for refund, send the statement to the Internal Revenue Service Center where you filed the last joint return. 2. Death. The death of either spouse ends the choice, beginning with the first tax year following the year the spouse died. However, if the surviving spouse is a U.S. citizen or resident and is entitled to the joint tax rates as a surviving spouse, the choice will not end until the close of the last year for which these joint rates may be used. If both spouses die in the same tax year, the choice ends on the first day after the close of the tax year in which the spouses died. 3. Legal separation. A legal separation under a decree of divorce or separate maintenance ends the choice as of the beginning of the tax year in which the legal separation occurs. 4. Inadequate records. The Internal Revenue Service can end the choice for any tax year that either spouse has failed to keep adequate books, records, and other information necessary to determine the correct income tax liability, or to provide adequate access to those records. Special Situations If you are a nonresident alien in the United States and a bona fide resident of American Samoa or Puerto Rico during the entire tax year, you are taxed, with certain exceptions, according to the rules for resident aliens of the United States. For more information, see Bona Fide Residents of American Samoa or Puerto Rico in chapter 5. If you are a nonresident alien from American Samoa or Puerto Rico who does not qualify as a bona fide resident of American Samoa or Puerto Rico for the entire tax year, you are taxed as a nonresident alien. Resident aliens who formerly were bona fide residents of American Samoa or Puerto Rico are taxed according to the rules for resident aliens. NRA 2012gettechnical inc 76

77 PUBLICATION 519: SOURCE OF INCOME Nonresident Aliens A nonresident alien usually is subject to U.S. income tax only on U.S. source income. Under limited circumstances, certain foreign source income is subject to U.S. tax. See Foreign Income in chapter 4. The general rules for determining U.S. source income that apply to most nonresident aliens are shown in Table 2-1. The following discussions cover the general rules as well as the exceptions to these rules. Not all items of U.S. source income are taxable. See chapter 3. Interest Income Generally, U.S. source interest income includes the following items. Interest on bonds, notes, or other interest-bearing obligations of U.S. residents or domestic corporations. Interest paid by a domestic or foreign partnership or foreign corporation engaged in a U.S. trade or business at any time during the tax year. Original issue discount. Interest from a state, the District of Columbia, or the U.S. Government. The place or manner of payment is immaterial in determining the source of the income. A substitute interest payment made to the transferor of a security in a securities lending transaction or a sale-repurchase transaction is sourced in the same manner as the interest on the transferred security. Exceptions. U.S. source interest income does not include the following items. 1. Interest paid by a resident alien or a domestic corporation if for the 3-year period ending with the close of the payer's tax year preceding the interest payment, at least 80% of the payer's total gross income: a. Is from sources outside the United States, and b. Is attributable to the active conduct of a trade or business by the individual or corporation in a foreign country or a U.S. possession. 2. Interest paid by a foreign branch of a domestic corporation or a domestic partnership on deposits or withdrawable accounts with mutual savings banks, cooperative banks, credit unions, domestic building and loan associations, and other savings institutions chartered NRA 2012gettechnical inc 77

78 and supervised as savings and loan or similar associations under federal or state law if the interest paid or credited can be deducted by the association. 3. Interest on deposits with a foreign branch of a domestic corporation or domestic partnership, but only if the branch is in the commercial banking business. NRA 2012gettechnical inc 78

79 WITHHOLDING AND REPORTING NRA 2012gettechnical inc 79

80 PUBLICATION 515: WITHHOLDING OF TAX ON NONRESIDENT ALIENS AND FOREIGN ENTITIES The term NRA withholding is used in this publication descriptively to refer to withholding required under sections 1441, 1442, and 1443 of the Internal Revenue Code. Generally, NRA withholding describes the withholding regime that requires withholding on a payment of U.S. source income. Payments to foreign persons, including nonresident alien individuals, foreign entities and governments, may be subject to NRA NRA withholding does not include withholding under section 1445 of the Code (see U.S. Real Property Interest) or under section 1446 of the Code (see Partnership Withholding on Effectively Connected Income). A withholding agent (defined next) is the person responsible for withholding on payments made to a foreign person. However, a withholding agent that can reliably associate the payment with documentation from a U.S. person is not required to withhold. In addition, a withholding agent may apply a reduced rate of withholding (including an exemption from withholding) if it can reliably associate the payment with documentation from a beneficial owner that is a foreign person entitled to a reduced rate of withholding. Withholding Agent You are a withholding agent if you are a U.S. or foreign person that has control, receipt, custody, disposal, or payment of any item of income of a foreign person that is subject to withholding. A withholding agent may be an individual, corporation, partnership, trust, association, nominee (under section 1446 of the Code), or any other entity, including any foreign intermediary, foreign partnership, or U.S. branch of certain foreign banks and insurance companies. You may be a withholding agent even if there is no requirement to withhold from a payment or even if another person has withheld the required amount from the payment. Although several persons may be withholding agents for a single payment, the full tax is required to be withheld only once. Generally, the U.S. person who pays an amount subject to NRA withholding is the person responsible for withholding. However, other persons may be required to withhold. For example, a payment made by a flow-through entity or nonqualified intermediary that knows, or has reason to know, that the full amount of NRA withholding was not done by the person from which it receives a payment is required to do the appropriate withholding since it also falls within the definition of a withholding agent. In addition, withholding must be done by any qualified intermediary, withholding foreign partnership, or withholding foreign trust in accordance with the terms of its withholding agreement. Liability for tax. As a withholding agent, you are personally liable for any tax required to be withheld. This liability is independent of the tax liability of the foreign person to whom the NRA 2012gettechnical inc 80

81 payment is made. If you fail to withhold and the foreign payee fails to satisfy its U.S. tax liability, then both you and the foreign person are liable for tax, as well as interest and any applicable penalties. The applicable tax will be collected only once. If the foreign person satisifies its U.S. tax liability, you are not liable for the tax or any interest and penalties for failure to withhold. Determination of amount to withhold. You must withhold on the gross amount subject to NRA withholding. You cannot reduce the gross amount by any deductions. However, see Scholarships and Fellowship Grants, and Pay for Personal Services Performed, for when a deduction for a personal exemption may be allowed. If the determination of the source of the income or the amount subject to tax depends on facts that are not known at the time of payment, you must withhold an amount sufficient to ensure that at least 30% of the amount subsequently determined to be subject to withholding is withheld. In no case, however, should you withhold more than 30% of the total amount paid. Or, you may make a reasonable estimate of the amount from U.S. sources and put a corresponding portion of the amount due in escrow until the amount from U.S. sources can be determined, at which time withholding becomes due. When to withhold. Withholding is required at the time you make a payment of an amount subject to withholding. A payment is made to a person if that person realizes income whether or not there is an actual transfer of cash or other property. A payment is considered made to a person if it is paid for that person's benefit. For example, a payment made to a creditor of a person in satisfaction of that person's debt to the creditor is considered made to the person. A payment is also considered made to a person if it is made to that person's agent. A U.S. partnership should withhold when any distributions that include amounts subject to withholding are made. However, if a foreign partner's distributive share of income subject to withholding is not actually distributed, the U.S. partnership must withhold on the foreign partner's distributive share of the income on the earlier of the date that a Schedule K-1 (Form 1065) is provided or mailed to the partner or the due date for furnishing that schedule. If the distributable amount consists of effectively connected income, see Partnership Withholding on Effectively Connected Income. A U.S. trust is required to withhold on the amount includible in the gross income of a foreign beneficiary to the extent the trust's distributable net income consists of an amount subject to withholding. To the extent a U.S. trust is required to distribute an amount subject to withholding but does not actually distribute the amount, it must withhold on the foreign beneficiary's allocable share at the time the income is required to be reported on Form 1042-S. Withholding and Reporting Obligations You are required to report payments subject to NRA withholding on Form 1042-S and to file a tax return on Form An exception from reporting may apply to individuals who are not NRA 2012gettechnical inc 81

82 required to withhold from a payment and who do not make the payment in the course of their trade or business. Form 1099 reporting and backup withholding. You may also be responsible as a payer for reporting on Form 1099 payments made to a U.S. person. You must withhold 28% (backup withholding rate) from a reportable payment made to a U.S. person that is subject to Form 1099 reporting if (1) the U.S. person has not provided its taxpayer identification number (TIN) in the manner required, (2) the IRS notifies you that the TIN furnished by the payee is incorrect, (3) there has been a notified payee underreporting, or (4) there has been a payee certification failure. Generally, a TIN must be provided by a U.S. non-exempt recipient on Form W-9. A payer files a tax return on Form 945 for backup withholding. You may be required to file Form 1099, and, if appropriate, backup withhold, even if you do not make the payments directly to that U.S. person. For example, you are required to report income paid to a foreign intermediary or flow-through entity that collects for a U.S. person subject to Form 1099 reporting. See Identifying the Payee, for more information. Also see Section S. Special Rules for Reporting Payments Made Through Foreign Intermediaries and Foreign Flow- Through Entities on Form 1099 in the General Instructions for Forms 1099, 1098, 5498, and W- 2G. Foreign persons who provide Form W-8BEN, Form W-8ECI, or Form W-8EXP (or applicable documentary evidence) are exempt from backup withholding and Form 1099 reporting. Persons Subject to NRA Withholding NRA withholding applies only to payments made to a payee that is a foreign person. It does not apply to payments made to U.S. persons. Usually, you determine the payee's status as a U.S. or foreign person based on the documentation that person provides. See Documentation.. However, if you have received no documentation or you cannot reliably associate all or a portion of a payment with documentation, then you must apply certain presumption rules. Documentation Generally, you must withhold 30% from the gross amount paid to a foreign payee unless you can reliably associate the payment with valid documentation that establishes either of the following. The payee is a U.S. person. The payee is a foreign person that is the beneficial owner of the income and is entitled to a reduced rate of withholding. Generally, you must get the documentation before you make the payment. The documentation is not valid if you know, or have reason to know, that it is unreliable or incorrect. NRA 2012gettechnical inc 82

83 If you cannot reliably associate a payment with valid documentation, you must use the presumption rules. For example, if you do not have documentation or you cannot determine the portion of a payment that is allocable to specific documentation, you must use the presumption rules. The specific types of documentation are discussed in this section. You should, however, also see the discussion, Withholding on Specific Income, as well as the instructions to the particular forms. As the withholding agent, you may also want to see the Instructions for the Requester of Forms W-8BEN, W-8ECI, W-8EXP, and W-8IMY. Joint owners. each owner. If you make a payment to joint owners, you need to get documentation from Form W-9. Generally, you can treat the payee as a U.S. person if the payee gives you a Form W-9. The Form W-9 can only be used by a U.S. person and must contain the payee's taxpayer identification number (TIN). If there is more than one owner, you may treat the total amount as paid to a U.S. person if any one of the owners gives you a Form W-9. See U.S. Taxpayer Identification Numbers. U.S. persons are not subject to NRA withholding, but may be subject to Form 1099 reporting and backup withholding. Form W-8. Generally, a foreign person that is a beneficial owner of the income should give you a Form W-8. 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 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, If certain requirements are met, the foreign person can give you documentary evidence, rather than a Form W-8. You can rely on documentary evidence in lieu of a Form W-8 for a payment made in a U.S. possession. Other documentation. Other documentation may be required to claim an exemption from, or a reduced rate of, withholding on pay for personal services. The nonresident alien individual may have to give you a Form W-4 or a Form 8233, Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual. These forms are discussed in Pay for Personal Services Performed under Withholding on Specific Income. Beneficial Owners If all the appropriate requirements have been established on a Form W-8BEN, W-8ECI, W- 8EXP or, if applicable, on documentary evidence, you may treat the payee as a foreign beneficial owner. Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding. This form is used by a foreign person to: NRA 2012gettechnical inc 83

84 Establish foreign status, Claim that such person is the beneficial owner of the income for which the form is being furnished or a partner in a partnership subject to section 1446 withholding, and If applicable, claim a reduced rate of, or exemption from, withholding under an income tax treaty. Form W-8BEN may also be used to claim that the foreign person is exempt from Form 1099 reporting and backup withholding for income that is not subject to NRA withholding. For example, a foreign person may provide a Form W-8BEN to a broker to establish that the gross proceeds from the sale of securities are not subject to Form 1099 reporting or backup withholding. Standards of Knowledge You must withhold in accordance with the presumption rules if you know or have reason to know that a Form W-8 or documentary evidence provided by a payee is unreliable or incorrect. If you rely on an agent to obtain documentation, you are considered to know, or have reason to know, the facts that are within the knowledge of your agent. Reason To Know Generally, you are considered to have reason to know that a claim of U.S. status or of a reduced rate of withholding is incorrect if statements contained in the withholding certificate or other documentation, or other relevant facts of which you have knowledge, would cause a reasonably prudent person in your position to question the claims made. Financial institutions (including a regulated investment company) are treated as having reason to know documentation is unreliable or incorrect for payments on marketable securities only in the circumstances discussed next. If the documentation is considered unreliable or incorrect, you must get new documentation. However, you may rely on the original docu- mentation if you receive the additional statements and/or documentation discussed. The circumstances, discussed next, also apply to a withholding agent that is not a financial institution or making a payment on marketable securities. However, these withholding agents are not limited to these circumstances in determining if they have reason to know that documentation is unreliable or incorrect. These withholding agents cannot base their determination on the receipt of additional statements or documents. They need to get new documentation. Withholding Certificates You have reason to know that a Form W-8 provided by a direct account holder that is a foreign person is unreliable or incorrect if: NRA 2012gettechnical inc 84

85 The Form W-8 is incomplete with respect to any item on the form that is relevant to the claims made by the account holder, The Form W-8 contains any information that is inconsistent with the account holder's claim, The Form W-8 lacks information necessary to establish entitlement to a reduced rate of withholding, if a reduced rate is claimed, or You have information not contained on the form that is inconsistent with the claims made on the form. Establishment of foreign status. You have reason to know that a Form W-8BEN or Form W- 8EXP is unreliable or incorrect to establish a direct account holder's status as a foreign person if: 1. The Form W-8 has a permanent residence address in the United States, 2. The Form W-8 has a mailing address in the United States, 3. You have a residence or mailing address as part of your account information that is an address in the United States, 4. The person providing the certificate notifies you of a new residence or mailing address in the United States, or 5. If the Form W-8 is provided with respect to an offshore account, the account holder has standing instructions directing you to pay amounts from its account to an address or account maintained in the United States. Items (2) and (3) do not apply if the U.S. mailing address is provided on a Form W-8 received before December 31, You may, however, rely on a Form W-8 as establishing the account holder's foreign status if any of the following apply: 1. You receive the Form W-8 from an individual and: a. You possess or obtain documentary evidence (that does not contain a U.S. address) that was provided within the last three years, was valid when provided, supports the claim of foreign status, and the beneficial owner provides you with a reasonable explanation in writing supporting the account holder's foreign status, or b. If the account is maintained at your office outside the United States, you are required to report annually a payment to the account holder on a tax information statement filed with the tax authority of the country in which your NRA 2012gettechnical inc 85

86 office is located and that country has an income tax treaty in effect with the United States. 2. You receive the Form W-8 from an entity that is not a flow-through entity and: a. You have in your possession or obtain documentation that substantiates that the entity is organized or created under foreign law, or b. If the account is maintained at your office outside the United States, you are required to report annually a payment to the account holder on a tax information statement filed with the tax authority of the country in which your office is located and that country has an income tax treaty in effect with the United States. 3. The account holder has provided standing instructions to make payments with respect to its offshore account to a U.S. account or U.S. address if the account holder provides a reasonable explanation in writing that supports the account holder's foreign status. Income Subject to NRA Withholding This section explains how to determine if a payment is subject to NRA withholding. A payment is subject to NRA withholding if it is from sources within the United States, and it is either: Fixed or determinable annual or periodical (FDAP) income, or Certain gains from the disposition of timber, coal, and iron ore, or from the sale or exchange of patents, copyrights, and similar intangible property. In addition, a payment is subject to NRA withholding if withholding is specifically required, even though it may not constitute U.S. source income or FDAP income. For example, corporate distributions may be subject to NRA withholding even though a portion of the distribution may be a return of capital or capital gain not otherwise subject to NRA withholding. Amounts not subject to NRA withholding. The following amounts are not subject to NRA withholding. Portfolio interest on bearer obligations or foreign-targeted registered obligations if those obligations meet certain requirements. See Interest. Bank deposit interest that is not effectively connected with the conduct of a U.S. trade or business. Original issue discount on obligations payable 183 days or less from the date of original issue.. Nonbusiness gambling income of a nonresident alien playing blackjack, baccarat, craps, roulette, or big-6 wheel in the United States.. Amounts paid as part of the purchase price of an obligation sold between interest payment dates. Original issue discount paid on the sale of an obligation other than a redemption.. Insurance premiums paid on a contract issued by a foreign insurer. NRA 2012gettechnical inc 86

87 Source of Income Generally, income is from U.S. sources if it is paid by domestic corporations, U.S. citizens or resident aliens, or entities formed under the laws of the United States or a state. Income is also from U.S. sources if the property that produces the income is located in the United States or the services for which the income is paid were performed in the United States. A payment is treated as being from sources within the United States if the source of the payment cannot be determined at the time of payment, such as fees for personal services paid before the services have been performed. Other source rules are summarized in Chart B and explained in detail in the separate discussions under Withholding on Specific Income. Generally, interest on an obligation of a foreign corporation or foreign partnership is foreignsource income. If the entity is engaged in a trade or business in the United States during its tax year, interest paid by such entity is treated as from U.S. sources only if the interest is paid by a U.S. trade or business conducted by the entity or is allocable to income that is treated as effectively connected with the conduct of a U.S. trade or business. This applies to a foreign partnership only if it is predominantly engaged in the active conduct of a trade or business outside the United States. Fixed or Determinable Annual or Periodical Income (FDAP) FDAP income is all income except: Gains from the sale of property (including market discount and option premiums but not including original issue discount), and Items of income excluded from gross income without regard to U.S. or foreign status of the owner of the income, such as tax-exempt municipal bond interest and qualified scholarship income. The following items are examples of FDAP income. Compensation for personal services. Dividends. Interest. Original issue discount. REMIC excess inclusion income. Pensions and annuities. Alimony. Real property income, such as rents, other than gains from the sale of real property. Royalties. Taxable scholarships and fellowship grants. Other taxable grants, prizes, and awards. A sales commission paid or credited monthly. A commission paid for a single transaction. NRA 2012gettechnical inc 87

88 The distributable net income of an estate or trust that is FDAP income and must be distributed currently, or has been paid or credited during the tax year. FDAP income distributed by a partnership that, or such an amount that, although not actually distributed, is includible in the gross income of a foreign partner. Taxes, mortgage interest, or insurance premiums paid to or for the account of, a nonresident alien landlord by a tenant under the terms of a lease. Publication rights. Prizes awarded to nonresident alien artists for pictures exhibited in the United States. Purses paid to nonresident alien boxers for prize fights in the United States. Prizes awarded to nonresident alien professional golfers in golfing tournaments in the United States. Interest on deposits (Income Code 29). Foreign persons are not subject to withholding on interest that is not connected with a U.S. trade or business if it is from: Deposits with persons carrying on the banking business, Deposits or withdrawable accounts with savings institutions chartered and supervised under federal or state law as savings and loan or similar associations, such as credit unions, if the interest is or would be deductible by the institutions, or Amounts left with an insurance company under an agreement to pay interest on them. Deposits include certificates of deposit, open account time deposits, Eurodollar certificates of deposit, and other deposit arrangements. The deposit interest exception does not require a Form W-8BEN. However, a Form W- 8BEN may be required for purposes of Form 1099 reporting and backup withholding. You may have to file Form 1042-S to report certain payments of interest on deposits. Pensions, Annuities, and Alimony (Income Code 14) The following rules apply to withholding on pensions, annuities, and alimony of foreign payees. Pensions and annuities. Generally, you must withhold tax on the gross amount of pensions and annuities that you pay that are from sources within the United States. This includes amounts paid under an annuity contract issued by a foreign branch of a U.S. life insurance company. However, most tax treaties provide that private pensions and annuities are exempt from withholding. In the absence of a treaty exemption, you must withhold at the statutory rate of 30% on the entire distribution that is from sources within the United States. You may, however, apply withholding at graduated rates to the portion of a distribution that arises from the performance of services in the United States after December 31, NRA 2012gettechnical inc 88

89 Employer contributions to a defined benefit plan covering more than one individual are not made for the benefit of a specific participant, but are made based on the total liabilities to all participants. All funds held under the plan are available to provide benefits to any participant. If the distribution is from such a plan, you can use the method in Revenue Procedure to allocate the distribution to sources in the United States. You can find Revenue Procedure on page 1099 of Internal Revenue Bulletin at The withholding rules that apply to payments to foreign persons generally take precedence over any other withholding rules that would apply to distributions from qualified plans and other qualified retirement arrangements. No withholding. Do not withhold tax on an annuity payment to a nonresident alien if at the time of the first payment from the plan, 90% or more of the employees eligible for benefits under the plan are citizens or residents of the United States and the payment is: 1. For the nonresident's personal services performed outside the United States, or 2. For personal services by a nonresident individual present in the United States for 90 days or less during each tax year, whose pay for those services does not exceed $3,000, and the personal services are performed for: a. A nonresident alien individual, foreign partnership, or foreign corporation not engaged in a trade or business in the United States, or b. An office or place of business of a U.S. resident or citizen which is maintained outside the United States. If the payment otherwise qualifies under these rules, but less than 90% of the employees eligible for benefits are citizens or residents of the United States, you still need not withhold tax on the payment if: The recipient is a resident of a country that gives a substantially equal exclusion to U.S. citizens and residents, or The recipient is a resident of a beneficiary developing country under the Trade Act of The foreign person entitled to the payments must provide you with a Form W-8BEN that contains the TIN of the foreign person. U.S. Taxpayer Identification Numbers As the withholding agent, you must generally request that the payee provide you with its U.S. taxpayer identification number (TIN). You must include the payee's TIN on forms, statements, and other tax documents. The payee's TIN may be any of the following. An individual may have a social security number (SSN). If the individual does not have, and is eligible for, an SSN, he or she must use Form SS-5 to get an SSN. NRA 2012gettechnical inc 89

90 The Social Security Administration will tell the individual if he or she is eligible to get an SSN. An individual may have an IRS individual taxpayer identification number (ITIN). If the individual does not have, and is not eligible for, an SSN, he or she must apply for an ITIN by using Form W-7. Any person other than an individual, and any individual who is an employer or who is engaged in a U.S. trade or business as a sole proprietor, must have an employer identification number (EIN). Use Form SS-4 to get an EIN. A TIN must be on a withholding certificate if the beneficial owner is claiming any of the following. Tax treaty benefits (see Exceptions to TIN requirement) Income is effectively connected with a U.S. trade or business. Exemption for certain annuities (see Pensions, Annuities, and Alimony, earlier). Exemption based on exempt organization or private foundation status. In addition, a TIN must be on a withholding certificate from a person claiming to be any of the following. Qualified intermediary. Withholding foreign partnership. Withholding foreign trust. Exempt organization. U.S. branch of a foreign person treated as a U.S. person (see section (b)(2)(iv) of the regulations). U.S. person. Exceptions to TIN requirement. A foreign person does not have to provide a U.S. TIN to claim a reduced rate of withholding under a tax treaty if the requirements for the following exceptions are met. Income from marketable securities (discussed earlier under Form W-8BEN). Unexpected payment to an individual (discussed next). Unexpected payment. A Form W-8BEN or a Form 8233 provided by a nonresident alien to get treaty benefits does not need a U.S. TIN if you, the withholding agent, meet all the following requirements. You are an acceptance agent. You can request an ITIN for a payee on an expedited basis. You are required to make an unexpected payment to the nonresident alien. You cannot get the ITIN because the IRS is not issuing ITINs at the time you make the payment or at any earlier time after you know you have to make the payment. You cannot reasonably delay making the unexpected payment. NRA 2012gettechnical inc 90

91 You submit a completed Form W-7 for the payee, with a certification that you have reviewed the required documentation and have no actual knowledge or reason to know that the documentation is not complete or accurate, to the IRS during the first business day after you made the payment. An acceptance agent is a person who, under a written agreement with the IRS, is authorized to assist alien individuals and other foreign persons get ITINs or EINs. For information on the application procedures for becoming an acceptance agent, see Revenue Procedure on page 293 of Internal Revenue Bulletin at A payment is unexpected if you or the beneficial owner could not have reasonably anticipated the payment during a time when an ITIN could be obtained. This could be due to the nature of the payment or the circumstances in which the payment is made. A payment is not considered unexpected solely because the amount of the payment is not fixed. Example. Mary, a citizen and resident of Ireland, visits the United States and wins $5,000 playing a slot machine in a casino. Under the treaty with Ireland, the winnings are not subject to U.S. tax. Mary claims the treaty benefits by providing a Form W-8BEN to the casino upon winning at the slot machine. However, she does not have an ITIN. The casino is an acceptance agent that can request an ITIN on an expedited basis. Situation 1. Assume that Mary won the money on Sunday. Since the IRS does not issue ITINs on Sunday, the casino can pay $5,000 to Mary without withholding U.S. tax. The casino must, on the following Monday, fax a completed Form W-7 for Mary, including the required certification, to the IRS for an expedited ITIN. Situation 2. Assume that Mary won the money on Monday. To pay the winnings without withholding U.S. tax, the casino must apply for and get an ITIN for Mary because an expedited ITIN is available from the IRS at the time of the payment. Depositing Withheld Taxes This section discusses the rules for depositing income tax withheld on FDAP income. The deposit rules discussed here do not apply to the following items. Taxes on pay subject to graduated withholding as discussed earlier. (See Form 941 for the deposit rules.) Tax withheld on pensions and annuities subject to graduated withholding or the 10% tax on nonperiodic distributions. (See Form 945 for the deposit rules.) Tax withheld on a foreign partner's share of effectively connected income of a partnership. See Partnership Withholding on Effectively Connected Income. Tax withheld on dispositions of U.S. real property interests by foreign persons. See U.S. Real Property Interes. NRA 2012gettechnical inc 91

92 Taxes on household employee. See Schedule H (Form 1040), Household Employment Taxes, to report social security and Medicare taxes, and any income tax withheld, on wages paid to a nonresident alien household employee. When Deposits Are Required A deposit required for any period occurring in one calendar year must be made separately from a deposit for any period occurring in another calendar year. A deposit of this tax must be made separately from a deposit of any other type of tax. The amount of tax you are required to withhold determines the frequency of your deposits. The following rules show how often deposits must be made. 1. If at the end of a calendar year the total amount of undeposited taxes is less than $200, you may either pay the taxes with your Form 1042 or deposit the entire amount by the due date of your Form If at the end of any month the total amount of undeposited taxes is $200 or more but less than $2,000, you must deposit the taxes within 15 days after the end of the month. If you made a deposit of $2,000 or more during the month (except December) under rule 3 below, carry over any end of the month balance of less than $2,000 to the next month. If you made a deposit of $2,000 or more during December, any end of December balance of less than $2,000 should be remitted with your Form 1042 by the due date. 3. If at the end of any quarter-monthly period the total amount of undeposited taxes is $2,000 or more, you must deposit the taxes within 3 banking days after the end of the quarter-monthly period. (A quarter-monthly period ends on the 7th, 15th, 22nd, and last day of the month.) In figuring banking days, exclude any local holidays observed by authorized financial institutions, as well as Saturdays, Sundays, and legal holidays. You are considered to meet the deposit requirements in (3) if: You deposit at least 90% of the actual tax liability for the deposit period, and You deposit any underpayment with the first deposit that you must make after the 15th day of the following month, if the quarter-monthly period is in a month other than December. You must deposit any underpayment of $200 or more for a quarter-monthly period that occurs during December by January 31. Returns Required Every withholding agent, whether U.S. or foreign, must file Forms 1042 and 1042-S to report payments of amounts subject to NRA withholding unless an exception applies. Do not use Forms 1042 and 1042-S to report tax withheld on the following: NRA 2012gettechnical inc 92

93 Wages, salaries, or other compensation reported on Form W-2 (see Wages Paid to Employees Graduated Withholding, earlier under Pay for Personal Services Performed), Any portion of a U.S. or foreign partnership's (other than a publicly traded partnership) effectively connected taxable income allocable to a foreign partner (see Partnership Withholding on Effectively Connected Income), Dispositions of U.S. real property interests by foreign persons (see U.S. Real Property Interest), Pensions, annuities, and certain other deferred income reported on Form 1099, and Income, social security, and Medicare taxes on wages paid to a household employee reported on Schedule H (Form 1040). The Forms 1042 and 1042-S must be filed by March 15 of the year following the calendar year in which the income subject to reporting was paid. If March 15 falls on a Saturday, Sunday, or legal holiday, the due date is the next business day. Form Every U.S. and foreign withholding agent that is required to file a Form 1042-S must also file an annual return on Form You must file Form 1042 even if you were not required to withhold any income tax. You must file Form 1042 with the: Ogden Service Center P.O. Box Ogden, UT Form 1042-S. Every U.S. and foreign withholding agent must file a Form 1042-S for amounts subject to NRA withholding unless an exception applies. The form can be filed electronically or on paper. A separate Form 1042-S is required for each recipient of income to whom you made payments during the preceding calendar year regardless of whether you withheld or were required to withhold tax. You must use a separate Form 1042-S for each type of income that you paid to the same recipient. See Statements to recipients. You must furnish a Form 1042-S for each recipient even if you did not withhold tax because you repaid the tax withheld to the recipient or because the income payment was exempt from tax under the Internal Revenue Code or under a U.S. income tax treaty. You must get prior annual approval to use a substitute Form 1042-S unless it meets the requirements listed in Publication 1179, General Rules and Specifications for Substitute Forms 1096, 1098, 1099, 5498, W-2G, and 1042-S. Get Publication 1179 for more information. Joint owners. If all the owners provide documentation that permits them to receive the same reduced rate of withholding (for example, under an income tax treaty) you should apply the reduced rate of withholding. You are required, however, to report the payment on one Form NRA 2012gettechnical inc 93

94 1042-S to the person whose status you rely upon to determine the withholding rate. If, however, any one of the owners requests its own Form 1042-S, you must furnish Form 1042-S to the person who requests it. If more than one Form 1042-S is issued for a single payment, the total amount paid and tax withheld reported on all Forms 1042-S cannot exceed the total amounts paid to joint owners. Electronic reporting. Withholding agents or their agents generally must file electronically if required to file 250 or more Forms 1042-S with the IRS. You are encouraged to file electronically even if you are not required to. A completed Form 4419, Application for Filing Information Returns Electronically, should be filed at least 30 days before the due date of the return. Returns may not be filed electronically until the application has been approved by the IRS. For information and instructions on filing Forms 1042-S electronically, get Publication 1187, Specifications for Filing Form 1042-S, Foreign Person's U.S. Source Income Subject to Withholding Electronically. If you file electronically, you will use the Filing Information Returns Electronically (FIRE) system. You get to the system through the Internet at fire.irs.gov. Form 1042-T. If Form 1042-S is filed on paper, it must be filed with Form 1042-T. You may need to file more than one Form 1042-T. See the instructions for that form for more information. Deposit interest paid to alien individuals who are residents of Canada. If you pay deposit interest of $10 or more to a nonresident alien individual who resides in Canada and is not a U.S. citizen, you may have to report it on Form 1042-S. This reporting requirement generally applies to interest that (a) is on a deposit maintained at a bank's office in the United States, and (b) is not effectively connected with a trade or business within the United States. However, this reporting requirement does not apply to interest paid on certain bearer certificates of deposit as described in section (b) of the regulations if you pay that interest outside the United States. How to report. Although you only have to report on Form 1042-S the deposit interest paid to residents of Canada who are not U.S. citizens, you can comply by reporting payments to all foreign persons receiving bank deposit interest, if that way is easier for you. Determining residency. You determine whether a payee is a Canadian resident based on the permanent residence address required to be provided on the Form W-8BEN. If you have actual knowledge that the payee is a U.S. person, you must report the payment on Form 1099-INT. Statements to recipients. You must furnish a statement to each recipient for whom you are filing a Form 1042-S by the due date for filing Forms 1042 and 1042-S with the IRS. You may use a copy of the official Form 1042-S for this purpose. Or, you may provide recipients with the information together with, or on, other (commercial) statements or notices. These statements must clearly identify the type of income (as described on the official form), the amount of tax withheld, the withholding rate (including if exempt), and the country involved. You may include more than one type of income on the copies of the Form 1042-S that you provide to the NRA 2012gettechnical inc 94

95 recipient of the income. You may not, however, include more than one income line on the copy of the form filed with the IRS. NRA 2012gettechnical inc 95

96 FORM 1042-S ANNUAL TAX RETURN FOR U.S. SOURCE OF INCOME OF FOREIGN PERSONS NRA 2012gettechnical inc 96

97 General Instructions Table of Contents What's New Reminders Purpose of Form Who Must File Where, When, and How To File Definitions Electronic Reporting Additional Information Record Retention Substitute Forms Penalty for filing incorrect substitute form. Deposit Requirements Amounts Subject to Reporting on Form 1042-S Amounts That Are Not Subject to Reportingon Form 1042-S Example. Withholding on Dispositions of U.S. Real Property Interests by Publicly Traded Trustsand Qualified Investment Entities (QIEs) Publicly Traded Partnerships (Section1446 Withholding Tax) Payments by U.S. Withholding Agents Payments to Recipients Payments Made to Persons Who Are Not Recipients Amounts Paid byqualified Intermediaries Amounts Paid to Private Arrangement Intermediaries NRA 2012gettechnical inc 97

98 Amounts Paid tocertain Related Partnershipsand Trusts Recipient-by-Recipient Reporting Amounts Paid by Withholding ForeignPartnerships and Trusts Amounts Paid by Nonqualified Intermediaries and Flow-Through Entities Multiple Withholding Agent Rule Penalties Avoid Common Errors Use the 2012 Form 1042-S only for income paid during Do not use the 2012 Form 1042-S for income paid during What's New Future developments. The IRS has created a page on IRS.gov for information about Form 1042-S and its instructions, at Information about any future developments affecting Form 1042-S (such as legislation enacted after we release it) will be posted on that page. Central withholding agreement for artists and athletes. Use income code 42 for earnings as an artist or athlete if there is no central withholding agreement. Use income code 43 for earnings as an artist or athlete if there is a central withholding agreement. Withholding on foreign-targeted bearer obligations. Interest paid on foreign-targeted bearer obligations issued after March 18, 2012, does not qualify as portfolio interest. Substitute dividends paid to qualified securities lender (QSL). Enter the QSL's EIN or QI-EIN in box 14 if you paid substitute dividends to a QSL. Reminders FIRE System. For files submitted on the FIRE System, it is the responsibility of the filer to check the status within 5 business days to verify the results of the transmission. The IRS will not mail error reports for files that are bad. Substitute forms. Any substitute forms must comply with the rules set out in Pub. 1179, General Rules and Specifications for Substitute Forms 1096, 1098, 1099, 5498, W-2G, and 1042-S. A substitute of Form 1042-S, Copy A, must be an exact copy of Form S, Copy A. If it is not, the form may be rejected as incorrect and the IRS may impose penalties. For more information, see Substitute Forms, later. Purpose of Form NRA 2012gettechnical inc 98

99 Use Form 1042-S to report income described under Amounts Subject to Reporting on Form 1042-S, later, and to report amounts withheld under Chapter 3 of the Internal Revenue Code. Also use Form 1042-S to report distributions of effectively connected income by a publicly traded partnership or nominee. See Publicly Traded Partnerships (Section 1446 Withholding Tax), later. Every person required to deduct and withhold any tax under Chapter 3 of the Code is liable for such tax. Every person required to deduct and withhold any tax on payments made to expatriates is liable for such tax. Do not use Form 1042-S to report an item required to be reported on any of the following forms. Form W-2 (wages and other compensation made to employees (other than compensation for dependent personal services for which the beneficial owner is claiming treaty benefits), including wages in the form of group-term life insurance). Form Form 8288-A, Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests, or Form 8805, Foreign Partner's Information Statement of Section 1446 Withholding Tax. Withholding agents otherwise required to report a distribution partly on a Form 8288-A or Form 8805 and partly on a Form 1042-S may instead report the entire amount on Form 8288-A or Form Who Must File Every withholding agent (defined in Definitions, later) must file an information return on Form 1042-S to report amounts paid during the preceding calendar year that are described under Amounts Subject to Reporting on Form 1042-S, later. However, withholding agents who are individuals are not required to report a payment on Form 1042-S if they are not making the payment as part of their trade or business and no withholding is required to be made on the payment. For example, an individual making a payment of interest that qualifies for the portfolio interest exception from withholding is not required to report the payment if the portfolio interest is paid on a loan that is not connected to the individual's trade or business. However, an individual paying an amount that actually has been subject to withholding is required to report the payment. Also, an individual paying an amount on which withholding is required must report the payment, whether or not the individual actually withholds. See Multiple Withholding Agent Rule, later, for exceptions to reporting when another person has reported the same payment to the recipient. Also see Publicly Traded Partnerships (Section 1446 Withholding Tax), later. You must file a Form 1042-S even if you did not withhold tax because the income was exempt from tax under a U.S. tax treaty or the Code, including the exemption for income NRA 2012gettechnical inc 99

100 that is effectively connected with the conduct of a trade or business in the United States, or you released the tax withheld to the recipient. For exceptions, see Amounts That Are Not Subject to Reporting on Form 1042-S, later. Amounts paid to bona fide residents of U.S. possessions and territories are not subject to reporting on Form 1042-S if the beneficial owner of the income is a U.S. citizen, national, or resident alien. If you are required to file Form 1042-S, you also must file Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons. See Form 1042 for more information. Where, When, and How To File Forms 1042-S, whether filed on paper or electronically, must be filed with the Internal Revenue Service by March 15, You also are required to furnish Form 1042-S to the recipient of the income by March 15, Copy A is filed with the Internal Revenue Service. Send all paper Forms 1042-S with Form 1042-T, Annual Summary and Transmittal of Forms 1042-S, to the address in the Form 1042-T instructions. You must use Form 1042-T to transmit paper Forms 1042-S. Use a separate Form 1042-T to transmit each type of Form 1042-S. See Payments by U.S. Withholding Agents, later, and the Form 1042-T instructions for more information. If you have 250 or more Forms 1042-S to file, follow the instructions under Electronic Reporting, later. Attach only Copy A to Form 1042-T. Copies B, C, and D should be provided to the recipient of the income. Copy E should be retained by the withholding agent. Extension of time to file. To request an extension of time to file Forms 1042-S, file Form 8809, Application for Extension of Time To File Information Returns. See the Form 8809 instructions for where to file that form. You should request an extension as soon as you are aware that an extension is necessary, but no later than the due date for filing Form 1042-S. By filing Form 8809, you will get an automatic 30-day extension to file Form 1042-S. If you need more time, a second Form 8809 may be submitted before the end of the initial extended due date. See Form 8809 for more information. If you are requesting extensions of time to file for 2 or more withholding agents or payers, you must submit the extension requests electronically. See Pub. 1187, Specifications for Filing Form 1042-S, Foreign Person's U.S. Source Income Subject to Withholding, Electronically, for more information. Recipient copies. You may request an extension of time to provide the statements to recipients by sending a letter to: NRA 2012gettechnical inc 100

101 Internal Revenue Service Information Returns Branch Attn: Extension of Time Coordinator 240 Murall Drive Mail Stop 4360 Kearneysville, WV See Extension to provide statements to recipients in Pub. 515, Withholding of Tax on Nonresident Aliens and Foreign Entities. If you are requesting an extension of time to file for recipients of more than 10 withholding agents, you must submit the extension requests electronically. See Pub. 1187, Part D, Section 4, for more information. Electronic Reporting If you file 250 or more Forms 1042-S, you are required to submit them electronically. Electronic submissions are filed using the Filing Information Returns Electronically (FIRE) System. The FIRE System operates 24 hours a day, 7 days a week, at For more information, see Pub The electronic filing requirement applies separately to original and amended returns. Any person, including a corporation, partnership, individual, estate, or trust, that is required to file 250 or more Forms 1042-S must file such returns electronically. The filing requirement applies individually to each reporting entity as defined by its separate taxpayer identification number (TIN). This requirement applies separately to original and amended returns. For example, if you have 300 original Forms 1042-S, they must be filed electronically. However, if 200 of those forms contained erroneous information, the amended returns may be filed on paper forms because the number of amended Forms 1042-S is less than the 250-or-more filing requirement. If you file electronically, do not file the same returns on paper. Duplicate filing may cause penalty notices to be generated. Note. Even though as many as 249 Forms 1042-S may be submitted on paper to the IRS, the IRS encourages filers to transmit forms electronically. Hardship waiver. To receive a hardship waiver from the required filing of Forms 1042-S electronically, submit Form 8508, Request for Waiver From Filing Information Returns Electronically. Waiver requests should be filed at least 45 days before the due date of the returns. See Form 8508 for more information. Need assistance? For additional information and instructions on filing Forms 1042-S electronically, extensions of time to file (Form 8809), and hardship waivers (Form 8508), see Pub You also can call the Information Reporting Program at (toll free) or (not a toll-free number). Do not call the Information NRA 2012gettechnical inc 101

102 Reporting Program to answer tax law questions. See Caution below for additional information. The Information Reporting Program also can be reached by fax at (toll free) and international fax at (not a toll-free number). This call site does not answer tax law questions concerning the requirements for withholding of tax on payments of U.S. source income to foreign persons under Chapter 3 of the Code. If you need such assistance, you can call (not a toll-free number) from 6:00 a.m. to 11:00 p.m. Eastern time or write to: Internal Revenue Service International Section Philadelphia, PA Additional Information For more information on the withholding of tax, see Pub To order this publication and other publications and forms, call TAX-FORM ( ). You also can download forms and publications from IRS.gov. Record Retention Withholding agents should retain a copy of the information returns filed with the IRS, or have the ability to reconstruct the data, for at least 3 years after the reporting due date. Substitute Forms The official Form 1042-S is the standard for substitute forms. Because a substitute form is a variation from the official form, you should know the requirements of the official form for the year of use before you modify it to meet your needs. The IRS provides several means of obtaining the most frequently used tax forms. These include the Internet and DVD. For details on the requirements of substitute forms, see Pub You are permitted to use substitute payee copies of Form 1042-S (that is, copies B, C, and D) that contain more than one type of income. This will reduce the number of Forms 1042-S you send to the recipient. Under no circumstances, however, may the copy of the form filed with the IRS (copy A) contain more than one type of income. Penalty for filing incorrect substitute form. Privately printed substitute Forms 1042-S must be exact copies of both the format and content of the official Form 1042-S. If you file a substitute for Form 1042-S, Copy A, with the IRS that is not an exact copy of the official Form 1042-S, Copy A, you may be subject to a penalty for failure to file a correct return. See Penalties, later. Deposit Requirements For information and rules concerning federal tax deposits, see Depositing Withheld Taxes in Pub. 515 or Deposit Requirements in the Instructions for Form NRA 2012gettechnical inc 102

103 Definitions Withholding agent. A withholding agent is any person, U.S. or foreign, that has control, receipt, or custody of an amount subject to withholding or who can disburse or make payments of an amount subject to withholding. The withholding agent may be an individual, corporation, partnership, trust, association, or any other entity. The term withholding agent also includes, but is not limited to, a qualified intermediary (QI), a nonqualified intermediary (NQI), a withholding foreign partnership (WP), a withholding foreign trust (WT), a flow-through entity, a U.S. branch of a foreign insurance company or foreign bank that is treated as a U.S. person, a nominee under section 1446, and an authorized foreign agent. A person may be a withholding agent even if there is no requirement to withhold from a payment or even if another person has already withheld the required amount from a payment. In most cases, the U.S. person who pays (or causes to be paid) the item of U.S. source income to a foreign person (or to its agent) must withhold. However, other persons may be required to withhold. For example, if a payment is made by a QI (whether or not it assumes primary withholding responsibility) that knows that withholding was not done by the person from which it received the payment, then that QI is required to do the appropriate withholding. In addition, withholding must be done by any QI that assumes primary withholding responsibility under Chapter 3 of the Code, a WP, a WT, a U.S. branch of a foreign insurance company or foreign bank that agrees to be treated as a U.S. person, or an authorized foreign agent. Finally, if a payment is made by an NQI or a flow-through entity that knows, or has reason to know, that withholding was not done, that NQI or flow-through entity is required to withhold since it also falls within the definition of a withholding agent. Authorized foreign agent. An agent is an authorized foreign agent only if all four of the following apply. There is a written agreement between the withholding agent and the foreign person acting as agent. The IRS International Section has been notified of the appointment of the agent before the first payment for which the authorized agent acts on behalf of the withholding agent. This notification must be sent to the following address: Internal Revenue Service International Section Philadelphia, PA The books and records and relevant personnel of the foreign agent are available to the IRS so that the IRS can evaluate the withholding agent's compliance with its withholding and reporting obligations. The U.S. withholding agent remains fully liable for the acts of its agent and does not assert any of the defenses that otherwise may be available. For further details, see Regulations section (c). NRA 2012gettechnical inc 103

104 Beneficial owner. For payments other than those for which a reduced rate of withholding is claimed under an income tax treaty, the beneficial owner of income in most cases is the person who is required under U.S. tax principles to include the income in gross income on a tax return. A person is not a beneficial owner of income, however, to the extent that person is receiving the income as a nominee, agent, or custodian, or to the extent the person is a conduit whose participation in a transaction is disregarded. In the case of amounts paid that do not constitute income, beneficial ownership is determined as if the payment were income. Foreign partnerships, foreign simple trusts, and foreign grantor trusts are not the beneficial owners of income paid to the partnership or trust. The beneficial owners of income paid to a foreign partnership in most cases are the partners in the partnership, provided that the partner is not itself a partnership, foreign simple or grantor trust, nominee, or other agent. The beneficial owner of income paid to a foreign simple trust (a foreign trust that is described in section 651(a)) in most cases is the beneficiary of the trust, if the beneficiary is not a foreign partnership, foreign simple or grantor trust, nominee, or other agent. The beneficial owner of a foreign grantor trust (a foreign trust to the extent that all or a part of the income of the trust is treated as owned by the grantor or another person under sections 671 through 679) is the person treated as the owner of the trust. The beneficial owner of income paid to a foreign complex trust (a foreign trust that is not a foreign simple trust or foreign grantor trust) is the trust itself. The beneficial owner of income paid to a foreign estate is the estate itself. A payment to a U.S. partnership, U.S. trust, or U.S. estate is not subject to 30% foreignperson withholding. A U.S. partnership, trust, or estate should provide the withholding agent with a Form W-9, Request for Taxpayer Identification Number and Certification. In most cases, these beneficial owner rules apply for purposes of section 1446; however, there are exceptions. Disregarded entity. A business entity that has a single owner and is not a corporation under Regulations section (b) is disregarded as an entity separate from its owner. Dividend equivalent. Under section 871(m), a dividend equivalent is a payment that, directly or indirectly, is contingent on, or determined by reference to, the payment of a dividend from U.S. sources. Dividend equivalent payments include the following payments. A substitute dividend made under a securities lending or sale-repurchase transaction involving a U.S. stock, A payment made under a specified notional principal contract, and Any payment determined by the IRS to be substantially similar to a payment in (1) or (2). Exempt recipient. In most cases, an exempt recipient is any payee that is not required to provide Form W-9 and is exempt from the Form 1099 reporting requirements. See the Instructions for the Requester of Form W-9 for a list of exempt recipients. NRA 2012gettechnical inc 104

105 Expatriate. A person is considered an expatriate if he or she relinquishes U.S. citizenship or, in the case of a long-term resident of the United States, ceases to be a lawful permanent resident as defined in section 7701(b)(6). Fiscally transparent entity. An entity is treated as fiscally transparent with respect to an item of income for which treaty benefits are claimed to the extent that the interest holders in the entity must, on a current basis, take into account separately their shares of an item of income paid to the entity, whether or not distributed, and must determine the character of the items of income as if they were realized directly from the sources from which realized by the entity. For example, partnerships, common trust funds, and simple trusts or grantor trusts in most cases are considered to be fiscally transparent with respect to items of income received by them. Flow-through entity. A flow-through entity is a foreign partnership (other than a withholding foreign partnership), a foreign simple or grantor trust (other than a withholding foreign trust), or, for any payments for which a reduced rate of withholding under an income tax treaty is claimed, any entity to the extent the entity is considered to be fiscally transparent under section 894 with respect to the payment by an interest holder's jurisdiction. Foreign person. A foreign person includes a nonresident alien individual, a foreign corporation, a foreign partnership, a foreign trust, a foreign estate, and any other person that is not a U.S. person. The term also includes a foreign branch or office of a U.S. financial institution or U.S. clearing organization if the foreign branch is a QI. In most cases, a payment to a U.S. branch of a foreign person is a payment to a foreign person. Intermediary. An intermediary is a person that acts as a custodian, broker, nominee, or otherwise as an agent for another person, regardless of whether that other person is the beneficial owner of the amount paid, a flow-through entity, or another intermediary. Qualified intermediary (QI). A QI is an intermediary that is a party to a withholding agreement with the IRS. An entity must indicate its status as a QI on a Form W-8IMY submitted to a withholding agent. For information on a QI withholding agreement, see Rev. Proc , which is on page 387 of Internal Revenue Bulletin (IRB) at Also see the following documents. Notice , which is on page 267 of Internal Revenue Bulletin at Rev. Proc , Appendix 3, I.R.B. 306, available at Rev. Proc , I.R.B. 702, available at NRA 2012gettechnical inc 105

106 Rev. Proc , I.R.B. 1176, available at A branch of a financial institution may not act as a QI in a country that does not have approved know-your-customer (KYC) rules. Countries having approved KYC rules are listed on IRS.gov. Branches that operate in non-kyc approved jurisdictions are required to act as nonqualified intermediaries. Nonqualified intermediary (NQI). An NQI is any intermediary that is not a U.S. person and that is not a QI. Private arrangement intermediary (PAI). A QI may enter into a private arrangement with another intermediary under which the other intermediary generally agrees to perform all of the obligations of the QI. See Section 4 of the sample withholding agreement in Rev. Proc for details. Non-exempt recipient. A non-exempt recipient is any person who is not an exempt recipient. Nonresident alien individual. Any individual who is not a citizen or resident of the United States is a nonresident alien individual. An alien individual meeting either the green card test or the substantial presence test for the calendar year is a resident alien. Any person not meeting either test is a nonresident alien individual. Additionally, an alien individual who is a resident of a foreign country under the residence article of an income tax treaty, or an alien individual who is a bona fide resident of Puerto Rico, Guam, the Commonwealth of the Northern Mariana Islands, the U.S. Virgin Islands, or American Samoa, is a nonresident alien individual. See Pub. 519, U.S. Tax Guide for Aliens, for more information on resident and nonresident alien status. Even though a nonresident alien individual married to a U.S. citizen or resident alien may choose to be treated as a resident alien for certain purposes (for example, filing a joint income tax return), such individual is still treated as a nonresident alien for withholding tax purposes. Payer. A payer is the person for whom the withholding agent acts as a paying agent pursuant to an agreement whereby the withholding agent agrees to withhold and report a payment. Presumption rules. The presumption rules are those rules prescribed under Chapter 3 and Chapter 61 of the Code that a withholding agent must follow to determine the status of a beneficial owner (for example, as a U.S. person or a foreign person) when it cannot reliably associate a payment with valid documentation. See, for example, Regulations sections (b)(3), (a), (d) and (e), (b)(3), (c)(3), and (d). Also see Pub NRA 2012gettechnical inc 106

107 Publicly traded partnership (PTP). A PTP is any partnership in which interests are regularly traded on an established securities market (regardless of the number of its partners). However, it does not include a PTP treated as a corporation under section Qualified securities lender (QSL). A QSL is a foreign financial institution that satisfies all of the following. It is a bank, custodian, broker-dealer, or clearing organization that is regulated by the government in its home jurisdiction and that regularly borrows and lends the securities of U.S. corporations to unrelated customers. It is subject to audit by the IRS under section 7602 or by an external auditor if it is a QI. It provides to the withholding agent an annual certification of its QSL status. It meets the requirements to qualify as a QSL provided in Notice for the transition period and until additional published guidance is issued. See Notice , I.R.B. 757, available at Recipient. A recipient is any of the following. A beneficial owner of income. A QI. A WP or WT. An authorized foreign agent. A U.S. branch of certain foreign banks or insurance companies that is treated as a U.S. person. A foreign partnership or a foreign trust (other than a WP or WT), but only to the extent the income is effectively connected with its conduct of a trade or business in the United States. A payee who is not known to be the beneficial owner, but who is presumed to be a foreign person under the presumption rules. A PAI. A partner receiving a distribution of effectively connected income from a PTP or nominee. A QSL. A recipient does not include any of the following. An NQI. A nonwithholding foreign partnership, if the income is not effectively connected with its conduct of a trade or business in the United States. A disregarded entity. NRA 2012gettechnical inc 107

108 A foreign trust that is described in section 651(a) (a foreign simple trust) if the income is not effectively connected with the conduct of a trade or business in the United States. A foreign trust to the extent that all or a part of the trust is treated as owned by the grantor or other person under sections 671 through 679 (a foreign grantor trust). A U.S. branch that is not treated as a U.S. person unless the income is, or is treated as, effectively connected with the conduct of a trade or business in the United States. Specified notional principal contract (SNPC). An SNPC is any notional principal contract that satisfies one or more of the following. In connection with entering into the contract, any long party to the contract transfers the underlying security to any short party to the contract. In connection with the termination of the contract, any short party to the contract transfers the underlying security to any long party to the contract. The underlying security is not readily tradable on an established securities market. In connection with entering into the contract, the underlying security is posted as collateral by any short party to the contract with any long party to the contract. The IRS identifies the contract as an SNPC. U.S. branch treated as a U.S. person. The following types of U.S. branches (of foreign entities) may reach an agreement with the withholding agent to treat the branch as a U.S. person: (a) a U.S. branch of a foreign bank subject to regulatory supervision by the Federal Reserve Board or (b) a U.S. branch of a foreign insurance company required to file an annual statement on a form approved by the National Association of Insurance Commissioners with the Insurance Department of a State, Territory, or the District of Columbia. The U.S. branch must provide a Form W-8IMY evidencing the agreement with the withholding agent. A U.S. branch that is treated as a U.S. person is treated as such solely for purposes of determining whether a payment is subject to withholding. The branch is, for purposes of information reporting, a foreign person, and payments to such a branch must be reported on Form 1042-S. Withholding certificate. The term withholding certificate refers to Form W-8 or Form W-9 in most cases. Note. Throughout these instructions, a reference to or mention of Form W-8 is a reference to Forms W-8BEN, W-8ECI, W-8EXP, and/or W-8IMY. Withholding foreign partnership (WP) or withholding foreign trust (WT). A WP or WT is a foreign partnership or trust that has entered into a withholding agreement with the IRS NRA 2012gettechnical inc 108

109 in which it agrees to assume primary withholding responsibility for all payments that are made to it for its partners, beneficiaries, or owners. For information on these withholding agreements, see Rev. Proc Also see Rev. Proc and Rev. Proc Amounts Subject to Reporting on Form 1042-S Amounts subject to reporting on Form 1042-S are amounts paid to foreign persons (including persons presumed to be foreign) that are subject to withholding, even if no amount is deducted and withheld from the payment because of a treaty or Code exception to taxation or if any amount withheld was repaid to the payee. Amounts subject to withholding are amounts from sources within the United States that constitute (a) fixed or determinable annual or periodical (FDAP) income; (b) certain gains from the disposal of timber, coal, or domestic iron ore with a retained economic interest; and (c) gains relating to contingent payments received from the sale or exchange of patents, copyrights, and similar intangible property. Amounts subject to withholding also include distributions of effectively connected income by a publicly traded partnership. Amounts subject to reporting include, but are not limited to, the following U.S. source items. Corporate distributions. The entire amount of a corporate distribution (whether actual or deemed) must be reported, regardless of any estimate of the part of the distribution that represents a taxable dividend. Any distribution, however, that is treated as gain from the redemption of stock is not an amount subject to withholding. For information on dividends paid by a qualified investment entity (QIE), see Pub Interest. This includes the part of a notional principal contract payment that is characterized as interest. Rents. Royalties. Compensation for independent personal services performed in the United States. Compensation for dependent personal services performed in the United States (but only if the beneficial owner is claiming treaty benefits). Annuities. Pension distributions and other deferred income. Most gambling winnings. However, proceeds from a wager placed in blackjack, baccarat, craps, roulette, or big-6 wheel are not amounts subject to reporting. Cancellation of indebtedness. Income from the cancellation of indebtedness must be reported unless the withholding agent is unrelated to the debtor and does not have knowledge of the facts that give rise to the payment. NRA 2012gettechnical inc 109

110 Effectively connected income (ECI). ECI includes amounts that are (or are presumed to be) effectively connected with the conduct of a trade or business in the United States even if no withholding certificate is required, as, for example, with income on notional principal contracts. Note that bank deposit interest, which is not subject to Form 1042-S reporting in most cases, is subject to Form 1042-S reporting if it is effectively connected income. ECI of a PTP distributed to a foreign partner must be reported on Form 1042-S. Notional principal contract income. Income from notional principal contracts that the payer knows, or must presume, is effectively connected with the conduct of a U.S. trade or business is subject to reporting using income code 32. The amount to be reported is the amount of cash paid on the contract during the calendar year. Any amount of interest determined under the provisions of Regulations section (g)(4) (dealing with interest in the case of a significant non-periodic payment) is reportable as interest and not as notional principal contract income. See, however, the separate reporting for other U.S.- source dividend equivalent payments. REMIC excess inclusions. Excess inclusions from REMICs (income code 02) and withheld tax must be reported on Form 1042-S. A domestic partnership must separately state a partner's allocable share of REMIC taxable income or net loss and the excess inclusion amount on Schedule K-1 (Form 1065). If the partnership allocates all or some part of its allocable share of REMIC taxable income to a foreign partner, the partner must include the partner's allocated amount in income as if that amount was received on the earliest to occur of (1) the date of distribution by the partnership; (2) the date the foreign partner disposes of its indirect interest in the REMIC residual interest; or (3) the last day of the partnership's tax year. The partnership must withhold tax on the part of the REMIC amount that is an excess inclusion. An excess inclusion allocated to the following foreign persons must be included in that person's income at the same time as other income from the entity is included in income. Shareholder of a real estate investment trust. Shareholder of a regulated investment company. Participant in a common trust fund. Patron of a subchapter T cooperative organization. Students, teachers, and researchers. Amounts paid to foreign students, trainees, teachers, or researchers as scholarship or fellowship income, and compensation for personal services (whether or not exempt from tax under an income tax treaty), must be reported. However, amounts that are exempt from tax under section 117 are not subject to reporting. NRA 2012gettechnical inc 110

111 Amounts paid to foreign governments, foreign controlled banks of issue, and international organizations. These amounts are subject to reporting even if they are exempt under section 892 or 895. Foreign targeted registered obligations. Interest paid on registered obligations targeted to foreign markets paid to a foreign person other than a financial institution or a member of a clearing organization is an amount subject to reporting. Original issue discount (OID) from the redemption of an OID obligation. The amount subject to reporting is the amount of OID actually includible in the gross income of the foreign beneficial owner of the income, if known. Otherwise, the withholding agent should report the entire amount of OID as if the recipient held the instrument from the date of original issuance. See Pub. 1212, Guide to Original Issue Discount (OID) Instruments. Certain dispositions of U.S. real property interests. See Withholding on Dispositions of U.S. Real Property Interests by Publicly Traded Trusts and Qualified Investment Entities (QIEs), later. Other U.S.-source dividend equivalent payments. Other U.S.-source dividend equivalent payments are payments other than substitute dividends that qualify as U.S.-source dividends under section 871(m). Report these amounts using income code 40. Guarantee of indebtedness. This includes amounts paid, directly or indirectly, for the provision of a guarantee of indebtedness issued after September 27, They must be paid by a non-corporate resident or U.S. corporation or by any foreign person if the amounts are effectively connected with the conduct of a U.S. trade or business. Report these amounts using income code 41. Amounts That Are Not Subject to Reportingon Form 1042-S Interest on deposits. In most cases, no withholding (or reporting) is required on interest paid to foreign persons on deposits if such interest is not effectively connected with the conduct of a trade or business in the United States. For this purpose, the term deposits means amounts that are on deposit with a U.S. bank, savings and loan association, credit union, or similar institution, and from certain deposits with an insurance company. Exception for interest payments to Canadian residents who are not U.S. citizens. If you pay $10 or more of U.S. source bank deposit interest to a nonresident alien who is a resident of Canada, in most cases you must report the interest on Form 1042-S. This reporting requirement applies to interest on a deposit maintained at a bank's office in the United States. However, this reporting requirement does not apply to interest paid on certain bearer certificates of deposit issued before March 19, 2012, if paid outside the United States. Although you only have to report payments you make to residents of Canada, you can comply by reporting bank deposit interest to all foreign persons if that is easier. NRA 2012gettechnical inc 111

112 When completing Form 1042-S, use income code 29 in box 1 and exemption code 02 in box 6. On the statements furnished to the Canadian recipients, you must include an information contact phone number in addition to the name in box 12a on Form 1042-S. You also must include a statement that the information on the form is being furnished to the United States Internal Revenue Service and may be provided to the government of Canada. Interest and OID from short-term obligations. Interest and OID from any obligation payable 183 days or less from the date of original issue should not be reported on Form 1042-S. Registered obligations targeted to foreign markets. Interest on a registered obligation that is targeted to foreign markets and qualifies as portfolio interest is not subject to reporting if it is paid to a registered owner that is a financial institution or member of a clearing organization and you have received the required certifications. Bearer obligations targeted to foreign markets. Do not file Form 1042-S to report interest not subject to withholding on bearer obligations if a Form W-8 is not required. Withholding is required on interest paid on any bearer obligations targeted to foreign markets if the obligation is issued after March 18, You must file Form 1042-S to report this interest. Notional principal contract payments that are not ECI. Amounts paid on a notional principal contract other than a specified notional principal contract (SNPC) that are not effectively connected with the conduct of a trade or business in the United States should not be reported on Form 1042-S. All amounts paid on an SNPC that are treated as dividend equivalent payments should be reported on Form 1042-S. Accrued interest and OID. Interest paid on obligations sold between interest payment dates and the part of the purchase price of an OID obligation that is sold or exchanged in a transaction other than a redemption is not subject to reporting unless the sale or exchange is part of a plan, the principal purpose of which is to avoid tax, and the withholding agent has actual knowledge or reason to know of such plan. Exception for amounts previously withheld upon. A withholding agent should report on Form 1042-S any amounts, whether or not subject to withholding, that are paid to a foreign payee and that have been withheld upon, including backup withholding, by another withholding agent under the presumption rules. Example. A withholding agent (WA) makes a payment of bank deposit interest to a foreign intermediary that is a nonqualified intermediary (NQI-B). NQI-B failed to provide any information regarding the beneficial owners to whom the payment was attributable. Under the presumption rules, WA must presume that the amounts are paid to a U.S. nonexempt recipient. WA withholds 28% of the payment under the backup withholding NRA 2012gettechnical inc 112

113 provisions of the Code and files a Form 1099-INT reporting the interest as paid to an unknown recipient. A copy of Form 1099-INT is sent to NQI-B. The beneficial owners of the bank deposit interest are two customers of NQI-B, X and Y. Both X and Y have provided NQI-B with documentary evidence establishing that they are foreign persons and therefore not subject to backup withholding. NQI-B must file a Form 1042-S reporting the amount of bank deposit interest paid to each of X and Y and the proportionate amount of withholding that occurred. Withholding on Dispositions of U.S. Real Property Interests by Publicly Traded Trustsand Qualified Investment Entities (QIEs) In general, when a publicly traded trust makes a distribution to a foreign person attributable to the disposition of a U.S. real property interest, it must withhold tax under section However, this withholding liability is shifted to the person who pays the distribution to a foreign person (or to the account of the foreign person) if the special notice requirement of Regulations section (f) and other requirements of Regulations section (b)(1) are satisfied. The amount subject to withholding for a distribution by a publicly traded trust is determined under the large trust rules of Regulations section (c)(3). The rate of withholding is as follows: Distribution by a publicly traded trust that makes recurring sales of growing crops and timber 10%. Distribution by a publicly traded trust not described in (1) above 35%. Special rules apply to qualified investment entities (QIEs). A QIE is one of the following. A real estate investment trust (REIT). A regulated investment company (RIC) that is a U.S. real property holding corporation. The special rule for a RIC applies only for distributions by the RIC that are directly or indirectly attributable to distributions the RIC received from a REIT. In most cases, any distribution from a QIE attributable to gain from the sale or exchange of a U.S. real property interest is treated as such gain by the nonresident alien, foreign corporation, or other QIE receiving the distribution. A distribution by a QIE to a nonresident alien or foreign corporation that is treated as gain from the sale or exchange of a U.S. real property interest by the shareholder is subject to withholding at 35%. Any distribution by a QIE on stock regularly traded on a securities market in the United States is not treated as gain from the sale or exchange of a U.S. real property interest if the shareholder did not own more than 5% of that stock at any time during the 1-year period ending on the date of the distribution. These distributions are included in the NRA 2012gettechnical inc 113

114 shareholder's gross income as a dividend (income code 06) from the QIE, not as longterm capital gain. Use Forms 1042-S and 1042 to report and pay over the withheld amounts. All other withholding required under section 1445 is reported and paid over using Form 8288, U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests, and Form 8288-A, Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests. For more information on reporting income from real property interests, see U.S. Real Property Interest in Pub Publicly Traded Partnerships (Section1446 Withholding Tax) A publicly traded partnership (PTP) (defined earlier in Definitions) that has effectively connected income, gain, or loss must pay a withholding tax on distributions of that income made to its foreign partners and file Form 1042-S using income code 27. A nominee that receives a distribution of effectively connected income from a PTP is treated as the withholding agent to the extent of the amount specified in the qualified notice received by the nominee. For this purpose, a nominee is a domestic person that holds an interest in a PTP on behalf of a foreign person. See Regulations section and Pub. 515 for details. If you are a nominee that is the withholding agent under section 1446, enter the PTP's name and other required information in boxes 17 through 20 on Form 1042-S. Other partnerships that have effectively connected gross income allocable to foreign partners must pay a withholding tax under section These amounts are reported on Form 8804, Annual Return for Partnership Withholding Tax (Section 1446), and Form 8805, Foreign Partner's Information Statement of Section 1446 Withholding Tax. Payments by U.S. Withholding Agents In general. U.S. withholding agents making payments described under Amounts Subject to Reporting on Form 1042-S, earlier, must file a separate Form 1042-S for each recipient who receives the income. Furthermore, withholding agents filing paper Forms 1042-S are not permitted to report multiple types of income on copy A filed with the IRS. These filers must use a separate Form 1042-S for information reportable on a single type of income. These filers cannot use a single Form 1042-S to report income if that income is reportable under different income, recipient, or exemption codes, or is subject to different rates of withholding. A withholding agent may be permitted to use substitute payee copies of Form 1042-S (copies B, C, and D) that contain more than one type of income. See Substitute Forms, earlier, for details. NRA 2012gettechnical inc 114

115 See Payments Made to Persons Who Are Not Recipients, later, if the payment is made to a foreign person that is not a recipient. Payments to Recipients Payments directly to beneficial owners. A U.S. withholding agent making a payment directly to a beneficial owner must complete Form 1042-S and treat the beneficial owner as the recipient. Boxes 17 through 20 should be left blank. A U.S. withholding agent should complete box 21 only if it is completing Form 1042-S as a paying agent acting pursuant to an agreement. Under a grace period rule, a U.S. withholding agent may, under certain circumstances, treat a payee as a foreign person while the withholding agent waits for a valid withholding certificate. A U.S. withholding agent who relies on the grace period rule to treat a payee as a foreign person must file Form 1042-S to report all payments during the period that person was presumed to be foreign even if that person is later determined to be a U.S. person based on appropriate documentation or is presumed to be a U.S. person after the grace period ends. In the case of foreign joint owners, you may provide a single Form 1042-S made out to the owner whose status you relied upon to determine the applicable rate of withholding (the owner subject to the highest rate of withholding). If, however, any one of the owners requests its own Form 1042-S, you must furnish a Form 1042-S to the person who requests it. If more than one Form 1042-S is issued for a single payment, the aggregate amount paid and tax withheld that is reported on all Forms 1042-S cannot exceed the total amounts paid to joint owners and the tax withheld on those payments. Payments to a qualified intermediary, withholding foreign partnership, or withholding foreign trust. A U.S. withholding agent that makes payments to a QI (whether or not the QI assumes primary withholding responsibility), a withholding foreign partnership (WP), or a withholding foreign trust (WT) should complete Forms 1042-S in most cases, treating the QI, WP, or WT as the recipient. However, see Payments allocated, or presumed made, to U.S. non-exempt recipients, later, for exceptions. The U.S. withholding agent must complete a separate Form 1042-S for each withholding rate pool of the QI, WP, or WT. For this purpose, a withholding rate pool is a payment of a single type of income, determined in accordance with the income codes used to file Form S, that is subject to a single rate of withholding. A QI that does not assume primary withholding responsibility provides information regarding the proportions of income subject to a particular withholding rate to the withholding agent on a withholding statement associated with Form W-8IMY. A U.S. withholding agent making a payment to a QI, WP, or WT must use recipient code 12 (qualified intermediary) or 04 (withholding foreign partnership or withholding foreign trust). A U.S. withholding agent must not use recipient code 13 (private arrangement intermediary withholding rate pool general), 14 (private arrangement intermediary withholding rate pool exempt organizations), 15 (qualified intermediary withholding rate pool general), or 16 (qualified intermediary withholding rate pool exempt organizations). Use of an inappropriate recipient code may cause a notice to be generated. NRA 2012gettechnical inc 115

116 A QI, WP, or WT is required to act in such capacity only for designated accounts. Therefore, such an entity also may provide a Form W-8IMY in which it certifies that it is acting as an NQI or flow-through entity for other accounts. A U.S. withholding agent that receives a Form W-8IMY on which the foreign person providing the form indicates that it is not acting as a QI, WP, or WT may not treat the foreign person as a recipient. A withholding agent must not use the EIN that a QI, WP, or WT provides in its capacity as such to report payments that are treated as made to an entity in its capacity as an NQI or flow-through entity. In that case, use the EIN, if any, that is provided by the entity on its Form W-8IMY in which it claims that it is acting as an NQI or flow-through entity. Payments allocated, or presumed made, to U.S. non-exempt recipients. You may be given Forms W-9 or other information regarding U.S. non-exempt recipients from a QI together with information allocating all or a part of the payment to U.S. nonexempt recipients. You must report income allocable to a U.S. non-exempt recipient on the appropriate Form 1099 and not on Form 1042-S, even though you are paying that income to a QI. You also may be required under the presumption rules to treat a payment made to a QI as made to a payee that is a U.S. non-exempt recipient from which you must withhold 28% of the payment under the backup withholding provisions of the Code. In this case, you must report the payment on the appropriate Form See the General Instructions for Certain Information Returns. Example 1. WA, a U.S. withholding agent, makes a payment of U.S. source dividends to QI, a qualified intermediary. QI provides WA with a valid Form W-8IMY with which it associates a withholding statement that allocates 95% of the payment to a 15% withholding rate pool and 5% of the payment to C, a U.S. individual. QI provides WA with C's Form W-9. WA must complete a Form 1042-S, showing QI as the recipient in box 13a and recipient code 12 (qualified intermediary) in box 13b, for the dividends allocated to the 15% withholding rate pool. WA also must complete a Form 1099-DIV reporting the part of the dividend allocated to C. Example 2. WA, a withholding agent, makes a payment of U.S. source dividends to QI, a qualified intermediary. QI provides WA with a valid Form W-8IMY with which it associates a withholding statement that allocates 40% of the payment to a 15% withholding rate pool and 40% to a 30% withholding rate pool. QI does not provide any withholding rate pool information regarding the remaining 20% of the payment. WA must apply the presumption rules to the part of the payment (20%) that has not been allocated. Under the presumption rules, that part of the payment is treated as paid to an unknown foreign payee. WA must complete three Forms 1042-S: one for dividends subject to 15% withholding, showing QI as the recipient in box 13a and recipient code 12 (qualified intermediary) in box 13b; one for dividends subject to 30% withholding, showing QI as NRA 2012gettechnical inc 116

117 the recipient in box 13a and recipient code 12 (qualified intermediary) in box 13b; and one for dividends subject to 30% withholding, showing QI as the recipient in box 13a and recipient code 20 (unknown recipient) in box 13b. Amounts paid to qualified securities lenders. A withholding agent that makes payments of substitute dividends to a qualified securities lender (QSL) should complete Form S treating the QSL as the recipient. Use income code 34. Use recipient code 21 or 22. The withholding agent is not required to withhold on a substitute dividend payment that is part of a series of dividend equivalent payments if it receives, at least annually, a certificate from the QSL that includes a statement with the following information. The recipient of the substitute dividend is a QSL, and With respect to the substitute dividend it receives from the withholding agent, the QSL states that it will withhold and remit or pay the proper amount of U.S. gross-basis tax. Use exemption code 10. If the QSL is also a QI with primary withholding responsibility, use exemption code 10 and not exemption code 06. Amounts paid to certain U.S. branches. A U.S. withholding agent making a payment to a U.S. branch treated as a U.S. person (defined in Definitions, earlier) completes Form 1042-S as follows: If a withholding agent makes a payment to a U.S. branch that has provided the withholding agent with a Form W-8IMY that evidences its agreement with the withholding agent to be treated as a U.S. person, the U.S. withholding agent treats the U.S. branch as the recipient. If a withholding agent makes a payment to a U.S. branch that has provided a Form W- 8IMY to transmit information regarding recipients, the U.S. withholding agent must complete a separate Form 1042-S for each recipient whose documentation is associated with the U.S. branch's Form W-8IMY. If a payment cannot be reliably associated with recipient documentation, the U.S. withholding agent must complete Form 1042-S in accordance with the presumption rules. If a withholding agent cannot reliably associate a payment with a Form W-8IMY from a U.S. branch, the payment must be reported on a single Form 1042-S treating the U.S. branch as the recipient and reporting the income as effectively connected income. The rules above apply only to U.S. branches treated as U.S. persons (defined in Definitions, earlier). In all other cases, payments to a U.S. branch of a foreign person are treated as payments to the foreign person. Amounts paid to authorized foreign agents. If a U.S. withholding agent makes a payment to an authorized foreign agent (defined in Definitions, earlier), the withholding agent files Forms 1042-S for each type of income (determined by reference to the income codes used to complete Form 1042-S) treating the authorized foreign agent as the recipient, provided that the authorized foreign agent reports the payments on Forms 1042-S to each recipient to which it makes payments. If the authorized foreign agent fails to report the NRA 2012gettechnical inc 117

118 amounts paid on Forms 1042-S for each recipient, the U.S. withholding agent remains responsible for such reporting. In box 13b, use recipient code 17 (authorized foreign agent). Amounts paid to a complex trust or an estate. If a U.S. withholding agent makes a payment to a foreign complex trust or a foreign estate, a Form 1042-S must be completed showing the complex trust or estate as the recipient. Use recipient code 05 (trust) or 10 (estate). See Payments Made to Persons Who Are Not Recipients, later, for the treatment of payments made to foreign simple trusts and foreign grantor trusts. Dual claims. A U.S. withholding agent may make a payment to a foreign entity (for example, a hybrid entity) that is simultaneously claiming a reduced rate of tax on its own behalf for a part of the payment and a reduced rate on behalf of persons in their capacity as interest holders in that entity on the remaining part. If the claims are consistent and the withholding agent has accepted the multiple claims, a separate Form 1042-S must be filed for the entity for those payments for which the entity is treated as claiming a reduced rate of withholding and separate Forms 1042-S must be filed for each of the interest holders for those payments for which the interest holders are claiming a reduced rate of withholding. If the claims are consistent but the withholding agent has not chosen to accept the multiple claims, or if the claims are inconsistent, a separate Form 1042-S must be filed for the person(s) being treated as the recipient(s). Special instructions for U.S. trusts and estates. Report the entire amount of income subject to reporting, regardless of estimates of distributable net income. Payments Made to Persons Who Are Not Recipients Disregarded entities. If a U.S. withholding agent makes a payment to a disregarded entity but receives a valid Form W-8BEN or W-8ECI from a foreign person that is the single owner of the disregarded entity, the withholding agent must file a Form 1042-S in the name of the foreign single owner. The taxpayer identifying number (TIN) on the Form 1042-S, if required, must be the foreign single owner's TIN. Example. A withholding agent (WA) makes a payment of interest to LLC, a foreign limited liability company. LLC is wholly-owned by FC, a foreign corporation. LLC is treated as a disregarded entity. WA has a Form W-8BEN from FC on which it states that it is the beneficial owner of the income paid to LLC. WA reports the interest payment on Form 1042-S showing FC as the recipient. The result would be the same if LLC was a domestic entity. A disregarded entity can claim to be the beneficial owner of a payment if it is a hybrid entity claiming treaty benefits. See Form W-8BEN and its instructions for more information. If a disregarded entity claims on a valid Form W-8BEN to be the beneficial owner, the U.S. withholding agent must complete a Form 1042-S treating the disregarded entity as a recipient and use recipient code 02 (corporation). NRA 2012gettechnical inc 118

119 Amounts paid to a nonqualified intermediary or flow-through entity. If a U.S. withholding agent makes a payment to an NQI or a flow-through entity, it must complete a separate Form 1042-S for each recipient on whose behalf the NQI or flow-through entity acts as indicated by its withholding statement and the documentation associated with its Form W-8IMY. If a payment is made through tiers of NQIs or flow-through entities, the withholding agent must nevertheless complete Form 1042-S for the recipients to which the payments are remitted. A withholding agent completing Form 1042-S for a recipient that receives a payment through an NQI or a flow-through entity must include in boxes 17 through 20 of Form 1042-S the name, country code, address, and TIN, if any, of the NQI or flow-through entity from whom the recipient directly receives the payment. A copy of the Form 1042-S need not be provided to the NQI or flow-through entity unless the withholding agent must report the payment to an unknown recipient. See Example 4, later. If a U.S. withholding agent makes payments to an NQI or flow-through entity and cannot reliably associate the payment, or any part of the payment, with a valid withholding certificate (Forms W-8 or W-9) or other valid appropriate documentation from a recipient (either because a recipient withholding certificate has not been provided or because the NQI or flow-through entity has failed to provide the information required on a withholding statement), the withholding agent must follow the appropriate presumption rules for that payment. If, under the presumption rules, an unknown recipient of the income is presumed to be foreign, the withholding agent must withhold 30% of the payment and report the payment on Form 1042-S. For this purpose, if the allocation information provided to the withholding agent indicates an allocation of more than 100% of the payment, then no part of the payment should be considered to be associated with a Form W-8, Form W-9, or other appropriate documentation. The Form 1042-S should be completed by entering Unknown Recipient in box 13a and recipient code 20 in box 13b. Pro-rata reporting. If the withholding agent has agreed that an NQI may provide information allocating a payment to its account holders under the alternative procedure of Regulations section (e)(3)(iv)(D) (no later than February 14, 2013) and the NQI fails to allocate more than 10% of the payment in a withholding rate pool to the specific recipients in the pool, the withholding agent must file Forms 1042-S for each recipient in the pool on a pro-rata basis. If, however, the NQI fails to timely allocate 10% or less of the payment in a withholding rate pool to the specific recipients in the pool, the withholding agent must file Forms 1042-S for each recipient for which it has allocation information and report the unallocated part of the payment on a Form 1042-S issued to Unknown Recipient. In either case, the withholding agent must include the NQI information in boxes 17 through 20 on that form. See Example 6 and Example 7, later. The following examples illustrate Form 1042-S reporting for payments made to NQIs and flow-through entities. Example 1. NRA 2012gettechnical inc 119

120 NQI, a nonqualified intermediary, has three account holders, A, B, and QI. All three account holders invest in U.S. securities that produce interest and dividends. A and B are foreign individuals and have provided NQI with Forms W-8BEN. QI is a qualified intermediary and has provided NQI with a Form W-8IMY and the withholding statement required from a qualified intermediary. QI's withholding statement states that QI has two withholding rate pools: one for interest described by income code 01 (interest paid by U.S. obligors general) and one for dividends described by income code 06 (dividends paid by U.S. corporations general). NQI provides WA, a U.S. withholding agent, with its own Form W-8IMY, with which it associates the Forms W-8BEN of A and B and the Form W-8IMY of QI. In addition, NQI provides WA with a complete withholding statement that allocates the payments of interest and dividends WA makes to NQI among A, B, and QI. All of the interest and dividends paid by WA to NQI are described by income code 01 (interest paid by U.S. obligors general) and income code 06 (dividends paid by U.S. corporations general). WA must file a total of six Forms 1042-S: two Forms 1042-S (one for interest and one for dividends) showing A as the recipient, two Forms 1042-S (one for interest and one for dividends) showing B as the recipient, and two Forms 1042-S (one for interest and one for dividends) showing QI as the recipient. WA must show information relating to NQI in boxes 17 through 20 on all six Forms 1042-S. Example 2. The facts are the same as in Example 1, except that A and B are account holders of NQI2, which is an account holder of NQI. NQI2 provides NQI with a Form W-8IMY with which it associates the Forms W-8BEN of A and B and a complete withholding statement that allocates the interest and dividend payments it receives from NQI to A and B. NQI provides WA with its Form W-8IMY and the Forms W-8IMY of NQI2 and QI and the Forms W-8BEN of A and B. In addition, NQI associates a complete withholding statement with its Form W-8IMY that allocates the payments of interest and dividends to A, B, and QI. WA must file six Forms 1042-S: two Forms 1042-S (one for interest and one for dividends) showing A as the recipient, two Forms 1042-S (one for interest and one for dividends) showing B as the recipient, and two Forms 1042-S (one for interest and one for dividends) showing QI as the recipient. The Forms 1042-S issued to A and B must show information relating to NQI2 in boxes 17 through 20 because A and B receive their payments directly from NQI2, not NQI. The Forms 1042-S issued to QI must show information relating to NQI in boxes 17 through 20. Example 3. FP is a nonwithholding foreign partnership and therefore a flow-through entity. FP establishes an account with WA, a U.S. withholding agent, from which FP receives interest described by income code 01 (interest paid by U.S. obligors general). FP has three partners, A, B, and C, all of whom are individuals. FP provides WA with a Form W-8IMY with which it associates the Forms W-8BEN from each of A, B, and C. In addition, FP provides a complete withholding statement with its Form W-8IMY that allocates the interest payments among A, B, and C. WA must file three Forms 1042-S, NRA 2012gettechnical inc 120

121 one each for A, B, and C. The Forms 1042-S must show information relating to FP in boxes 17 through 20. Example 4. NQI is a nonqualified intermediary. It has four customers: A, B, C, and D. NQI receives Forms W-8BEN from each of A, B, C, and D. NQI establishes an account with WA, a U.S. withholding agent, in which it holds securities on behalf of A, B, C, and D. The securities pay interest that is described by income code 01 (interest paid by U.S. obligors general) and that may qualify for the portfolio interest exemption from withholding if all of the requirements for that exception are met. NQI provides WA with a Form W-8IMY with which it associates the Forms W-8BEN of A, B, C, and D. However, NQI does not provide WA with a complete withholding statement in association with its Form W-8IMY. Because NQI has not provided WA with a complete withholding statement, WA cannot reliably associate the payments of interest with the documentation of A, B, C, and D, and must apply the presumption rules. Under the presumption rules, WA must treat the interest as paid to an unknown recipient that is a foreign person. The payments of interest are subject to 30% withholding. WA must complete one Form 1042-S, entering Unknown Recipient in box 13a and recipient code 20 in box 13b. WA must include information relating to NQI in boxes 17 through 20 and must provide the recipient copies of the form to NQI. Because NQI has failed to provide all the information necessary for WA to accurately report the payments of interest to A, B, C, and D, NQI must report the payments on Form 1042-S. See Amounts Paid by Nonqualified Intermediaries and Flow-Through Entities, later. The results would be the same if WA's account holder was a flow-through entity instead of a nonqualified intermediary. Example 5. The facts are the same as in Example 4, except that NQI provides the Forms W-8BEN of A and B, but not the Forms W-8BEN of C and D. NQI also provides a withholding statement that allocates a part of the interest payment to A and B but does not allocate the remaining part of the payment. WA must file three Forms 1042-S: one showing A as the recipient in box 13a, one showing B as the recipient in box 13a, and one showing Unknown Recipient in box 13a (and recipient code 20 in box 13b) for the unallocated part of the payment that cannot be associated with valid documentation from a recipient. In addition, WA must send the Form 1042-S for the unknown recipient to NQI. All Forms 1042-S must contain information relating to NQI in boxes 17 through 20. The results would be the same if WA's account holder was a flow-through entity instead of a nonqualified intermediary. Example 6. NQI is a nonqualified intermediary. It has four customers: A, B, C, and D. NQI receives Forms W-8BEN from each of A, B, C, and D. NQI establishes an account with WA, a U.S. withholding agent, in which it holds securities on behalf of A, B, C, and D. The securities pay interest that is described by income code 01 (interest paid by U.S. NRA 2012gettechnical inc 121

122 obligors general) and that may qualify for the portfolio interest exemption from withholding if all of the requirements for that exception are met. NQI provides WA with a Form W-8IMY with which it associates the Forms W-8BEN of A, B, C, and D. WA and NQI agree that they will apply the alternative procedures of Regulations section (e)(3)(iv)(D). Accordingly, NQI provides a complete withholding statement that indicates that it has one 0% withholding rate pool. WA pays $100 of interest to NQI. NQI fails to provide WA with the allocation information by February 14, Therefore, WA must report 25% of the payment to each of A, B, C, and D using pro-rata basis reporting. Accordingly, for each of the Forms 1042-S, WA must enter $25 in box 2 (gross income), in box 5 (tax rate), $0 in box 7 (federal tax withheld), and $0 in box 9 (total withholding credit). In addition, WA must check the PRO-RATA BASIS REPORTING box at the top of the form and include NQI's name, address, country code, and TIN, if any, in boxes 17 through 20. WA must enter in box 5 (tax rate) because without allocation information, WA cannot reliably associate the payment of interest with documentation from a foreign beneficial owner and therefore may not apply the portfolio interest exception. See the instructions for box 6 (exemption code), later, for information on completing that box. Example 7. The facts are the same as in Example 6, except that NQI timely provides WA with information allocating 70% of the payment to A, 10% of the payment to B, and 10% of the payment to C. NQI fails to allocate any of the payment to D. Because NQI has allocated 90% of the payment made to the 0% withholding rate pool, WA is not required to report to NQI's account holders on a pro-rata basis. Instead, WA must file Forms S for A, B, and C, entering $70, $10, and $10, respectively, in box 2 (gross income), in box 5 (tax rate), exemption code 05 (portfolio interest) in box 6, $0 in box 7 (federal tax withheld), and $0 in box 9 (total withholding credit). WA must apply the presumption rules to the $10 that NQI has not allocated and file a Form 1042-S showing Unknown Recipient in box 13a and recipient code 20 in box 13b. On that Form S, WA also must enter in box 5 (tax rate) because the portfolio interest exemption is unavailable and $0 in box 7 (federal tax withheld) and in box 9 (total withholding credit) because no amounts actually were withheld from the interest. In addition, WA must send the Form 1042-S for the unknown recipient to NQI. All Forms 1042-S must contain information relating to NQI in boxes 17 through 20. Payments allocated, or presumed made, to U.S. non-exempt recipients. You may be given Forms W-9 or other information regarding U.S. non-exempt recipients from an NQI or flow-through entity together with information allocating all or a part of the payment to U.S. non-exempt recipients. You must report income allocable to a U.S. non-exempt recipient on the appropriate Form 1099 and not on Form 1042-S, even though you are paying that income to an NQI or a flow-through entity. You also may be required under the presumption rules to treat a payment made to an NQI or flow-through entity as made to a payee that is a U.S. non-exempt recipient from which you must withhold 28% of the payment under the backup withholding provisions of the NRA 2012gettechnical inc 122

123 Code. In this case, you must report the payment on the appropriate Form See the General Instructions for Certain Information Returns. Example 1. FP is a nonwithholding foreign partnership and therefore a flow-through entity. FP establishes an account with WA, a U.S. withholding agent, from which FP receives interest described by income code 01 (interest paid by U.S. obligors general). FP has three partners, A, B, and C, all of whom are individuals. FP provides WA with a Form W-8IMY with which it associates Forms W-8BEN from A and B and a Form W-9 from C, a U.S. person. In addition, FP provides a complete withholding statement in association with its Form W-8IMY that allocates the interest payments among A, B, and C. WA must file two Forms 1042-S, one each for A and B, and a Form 1099-INT for C. Example 2. The facts are the same as in Example 1, except that FP does not provide any documentation from its partners. Because WA cannot reliably associate the interest with documentation from a payee, it must apply the presumption rules. Under the presumption rules, the interest is deemed paid to an unknown U.S. non-exempt recipient. WA must, therefore, apply backup withholding at 28% to the payment of interest and report the payment on Form 1099-INT. WA must file a Form 1099-INT and send a copy to FP. Amounts Paid byqualified Intermediaries In general. A QI reports payments on Form 1042-S in the same manner as a U.S. withholding agent. However, payments that are made by the QI directly to foreign beneficial owners (or that are treated as paid directly to beneficial owners) may be reported on the basis of reporting pools in most cases. A reporting pool consists of income that falls within a particular withholding rate and within a particular income code, exemption code, or recipient code as determined on Form 1042-S. A QI may not report on the basis of reporting pools in the circumstances described in Recipient-by-Recipient Reporting, later. A QI may use a single recipient code 15 (qualified intermediary withholding rate pool general) for all reporting pools, except for amounts paid to foreign tax-exempt recipients for which recipient code 16 should be used. Note, however, that a QI should use recipient code 16 only for pooled account holders that have claimed an exemption based on their tax-exempt status and not some other exemption (tax treaty or other Code exception). See Amounts Paid to Private Arrangement Intermediaries, later, if a QI is reporting payments to a PAI. Example 1. QI, a qualified intermediary, has four direct account holders, A and B, foreign individuals, and X and Y, foreign corporations. A and X are residents of a country with which the United States has an income tax treaty and have provided documentation that establishes that they are entitled to a lower treaty rate of 15% on withholding of dividends from U.S. sources. B and Y are not residents of a treaty country and are subject to 30% withholding on dividends. QI receives U.S. source dividends on behalf of its four customers. QI must file one Form 1042-S for the 15% withholding rate pool. This Form NRA 2012gettechnical inc 123

124 1042-S must show income code 06 (dividends paid by U.S. corporations general) in box 1, in box 5 (tax rate), Withholding rate pool in box 13a (recipient's name), and recipient code 15 (qualified intermediary withholding rate pool general) in box 13b. QI also must file one Form 1042-S for the 30% withholding rate pool that contains the same information as the Form 1042-S filed for the 15% withholding rate pool, except that it will show in box 5 (tax rate). Example 2. The facts are the same as in Example 1, except that Y is an organization that has taxexempt status in the United States and in the country in which it is located. QI must file three Forms 1042-S. Two of the Forms 1042-S will contain the same information as in Example 1. The third Form 1042-S will contain information for the withholding rate pool consisting of the amounts paid to Y. This Form 1042-S will show income code 06 (dividends paid by U.S. corporations general) in box 1, in box 5 (tax rate), exemption code 02 (exempt under an Internal Revenue Code section (income other than portfolio interest)) in box 6, Zero rate withholding pool exempt organizations, or similar designation, in box 13a (recipient's name), and recipient code 16 (qualified intermediary withholding rate pool exempt organizations) in box 13b. Under the terms of its withholding agreement with the IRS, the QI may be required to report the amounts paid to U.S. non-exempt recipients on Form 1099 using the name, address, and TIN of the payee to the extent those items of information are known. These amounts must not be reported on Form 1042-S. In addition, amounts paid to U.S. exempt recipients are not subject to reporting on Form 1042-S or Form Amounts Paid to Private Arrangement Intermediaries In most cases, a QI must report payments made to each private arrangement intermediary (PAI) (defined earlier in Definitions) as if the PAI's direct account holders were its own. Therefore, if the payment is made directly by the PAI to the recipient, the QI may report the payment on a pooled basis. A separate Form 1042-S is required for each withholding rate pool of each PAI. However, the QI must include the name and address of the PAI and use recipient code 13 or 14 in boxes 13a through 13e. If the PAI is providing recipient information from an NQI or flow-through entity, the QI may not report the payments on a pooled basis. Instead, it must follow the same procedures as a U.S. withholding agent making a payment to an NQI or flow-through entity. Example. QI, a qualified intermediary, pays U.S. source dividends to direct account holders that are foreign persons and beneficial owners. It also pays a part of the U.S. source dividends to two private arrangement intermediaries, PAI1 and PAI2. The private arrangement intermediaries pay the dividends they receive from QI to foreign persons that are beneficial owners and direct account holders in PAI1 and PAI2. All of the dividends paid are subject to a 15% rate of withholding. QI must file a Form 1042-S for the dividends paid to its own direct account holders that are beneficial owners. QI also must file two NRA 2012gettechnical inc 124

125 Forms 1042-S, one for the dividends paid to the direct account holders of each of PAI1 and PAI2. Each of the Forms 1042-S that QI files for payments made to PAI1 and PAI2 must contain the name and address of PAI1 or PAI2 and recipient code 13 (private arrangement intermediary withholding rate pool general) in boxes 13a through 13e. Amounts Paid tocertain Related Partnershipsand Trusts A QI that is applying the rules of Section 4A.02 of the QI agreement in Rev. Proc to a partnership or trust must file separate Forms 1042-S reflecting reporting pools for each partnership or trust that has provided reporting pool information in its withholding statement. However, the QI must file separate Forms 1042-S for partners, beneficiaries, or owners of such partnership or trust that are indirect partners, beneficiaries, or owners, and for direct partners, beneficiaries, or owners of such partnership or trust that are intermediaries or flow-through entities. Recipient-by-Recipient Reporting If a QI is not permitted to report on the basis of reporting pools, it must follow the same rules that apply to a U.S. withholding agent. A QI may not report the following payments on a reporting pool basis, but rather must complete Form 1042-S for each appropriate recipient. Payments made to another QI, QSL, WP, or WT. The QI must complete a Form 1042-S treating the other QI, QSL, WP, or WT as the recipient. Payments made to an NQI (including an NQI that is an account holder of a PAI). The QI must complete a Form 1042-S for each recipient who receives the payment from the NQI. A QI that is completing Form 1042-S for a recipient that receives a payment through an NQI must include in boxes 17 through 20 the name, country code, address, and TIN, if any, of the NQI from whom the recipient directly receives the payment. Example. QI, a qualified intermediary, has NQI, a nonqualified intermediary, as an account holder. NQI has two account holders, A and B, both foreign persons who receive U.S. source dividends from QI. NQI provides QI with a valid Form W-8IMY, with which it associates Forms W-8BEN from A and B and a complete withholding statement that allocates the dividends paid to NQI between A and B. QI must complete two Forms 1042-S, one for A and one for B, and include information relating to NQI in boxes 17 through 20. Payments made to a flow-through entity. The QI must complete a Form 1042-S for each recipient who receives the payment from the flow-through entity. A QI that is completing a Form 1042-S for a recipient that receives a payment through a flow-through entity must include in boxes 17 through 20 the name, country code, address, and TIN, if any, of the flow-through entity from which the recipient directly receives the payment. Example. QI, a qualified intermediary, has FP, a nonwithholding foreign partnership, as an account holder. QI pays interest described by income code 01 (interest paid by U.S. obligors general) to FP. FP has three partners, A, B, and C, all of whom are individuals. FP NRA 2012gettechnical inc 125

126 provides QI with a Form W-8IMY with which it associates the Forms W-8BEN from each of A, B, and C. In addition, FP provides a complete withholding statement in association with its Form W-8IMY that allocates the interest payments among A, B, and C. QI must file three Forms 1042-S, one each for A, B, and C. The Forms 1042-S must show information relating to FP in boxes 17 through 20. Amounts Paid by Withholding ForeignPartnerships and Trusts In general. In most cases, a withholding foreign partnership (WP) or withholding foreign trust (WT) must file a separate Form 1042-S for each direct partner, beneficiary, or owner to whom the WP or WT distributes, or in whose distributive share is included, an amount subject to withholding under Chapter 3 of the Code, in the same manner as a U.S. withholding agent. However, if the WP or WT has made a pooled reporting election in its WP or WT agreement, the WP or WT may instead report payments to such direct partners, beneficiaries, or owners on the basis of reporting pools and file a separate Form 1042-S for each reporting pool. A reporting pool consists of income that falls within a particular withholding rate and within a particular income code, exemption code, and recipient code, as determined on Form 1042-S. A WP or WT may use a single recipient code 15 (qualified intermediary withholding rate pool general) for all reporting pools, except for amounts paid to foreign tax-exempt recipients for which a separate recipient code 16 must be used. For this purpose, a foreign tax-exempt recipient includes any organization that is not subject to withholding and is not liable to tax in its country of residence because it is a charitable organization, pension fund, or foreign government. Amounts paid to certain related partnerships and trusts. A WP or WT that is applying the rules of Section of the WP or WT agreement in Rev. Proc to a partnership or trust must file separate Forms 1042-S reflecting reporting pools for each partnership or trust that has provided reporting pool information in its withholding statement. However, the WP or WT must apply the provisions of Regulations sections and to partners, beneficiaries, or owners of such partnership or trust that are indirect partners, beneficiaries, or owners, and to direct partners, beneficiaries, or owners of such partnership or trust that are intermediaries or flow-through entities. Amounts Paid by Nonqualified Intermediaries and Flow-Through Entities An NQI and a flow-through entity are withholding agents and must file Forms 1042-S for amounts paid to recipients. However, an NQI or flow-through entity is not required to file Form 1042-S if it is not required to file Form 1042-S under the Multiple Withholding Agent Rule, later. An NQI or flow-through entity must report payments made to recipients to the extent it has failed to provide to another withholding agent the appropriate documentation and complete withholding statement, including information allocating the payment to each recipient. If another withholding agent withheld tax but did not report the payment on Form 1042-S to the recipient, even if the recipient should have been exempt from taxation, the NQI or flow-through entity must file Form 1042-S. Failure to file Forms 1042-S may not only NRA 2012gettechnical inc 126

127 result in penalties for the NQI or flow-through entity, but may result in the denial of any refund claim made by a recipient. If another withholding agent has withheld tax on an amount that should have been exempt (for example, where the withholding agent applied the presumption rules because it did not receive proper documentation or other required information from the NQI or flow-through entity), the NQI or flow-through entity should report the correct tax rate and the combined amount of U.S. federal tax withheld by the NQI or flow-through entity and any other withholding agent and should enter the applicable exemption code using the instructions for box 6, later. If another withholding agent underwithholds, even though it received proper documentation from the NQI or flow-through entity, the NQI or flow-through entity must withhold additional amounts to bring the total withholding to the correct amount. Furthermore, the NQI or flow-through entity must complete Form 1042-S and must include the correct tax rate and the combined amount of U.S. federal tax withheld by the NQI or flow-through entity. Example 1. A foreign bank acts as a nonqualified intermediary (NQI) for four different foreign persons (A, B, C, and D) who own securities from which they receive interest. The interest is paid by a U.S. withholding agent (WA) as custodian of the securities for NQI. A, B, C, and D each own a 25% interest in the securities. NQI has furnished WA a Form W-8IMY to which it has attached Forms W-8BEN from A and B. NQI's Form W-8IMY contains an attachment stating that 25% of the securities are allocable to each of A and B, and 50% to undocumented owners. WA pays $100 of interest during the calendar year. WA treats the $25 of interest allocable to A and the $25 of interest allocable to B as portfolio interest and completes a Form 1042-S for A and for B as the recipients. WA includes information relating to NQI in boxes 17 through 20 on the Forms 1042-S for A and B. WA subjects the remaining $50 of interest to 30% withholding under the presumption rules and reports the interest on a Form 1042-S by entering Unknown Recipient in box 13a (and recipient code 20 in box 13b), in box 5 (tax rate), and $15 as the amount withheld in box 7 and box 9. WA also includes information relating to NQI in boxes 17 through 20 of the Form 1042-S and sends a copy of the form to NQI. Because NQI has not provided WA with beneficial owner information for C and D, NQI must report the interest paid to C and D on Forms 1042-S. (Note that under the multiple withholding agent rule, NQI is not required to file a Form 1042-S for A or B.) The Forms 1042-S for C and D should show $25 in box 2 (gross income) and $7.50 in boxes 7 and 9. The rate of tax NQI includes on the Form 1042-S for C and D depends on the rate of withholding to which they should be subject. Thus, if C and D provided NQI with documentation prior to the payment of interest that would qualify the interest as portfolio interest, the rate entered in box 5 should be If they do not qualify for a reduced rate of withholding, NQI should enter in box 5. In any event, NQI also must enter 99 in box 6 (exemption code) of the Forms 1042-S it prepares for C and D. See the instructions for box 6, later. NRA 2012gettechnical inc 127

128 Example 2. A U.S. withholding agent (WA) makes a $100 dividend payment to a foreign bank (NQI) that acts as a nonqualified intermediary. NQI receives the payment on behalf of A, a resident of a treaty country who is entitled to a 15% rate of withholding, and B, a resident of a country that does not have a tax treaty with the United States and who is subject to 30% withholding. NQI provides WA with its Form W-8IMY to which it associates the Forms W-8BEN from both A and B and a complete withholding statement that allocates 50% of the dividend to A and 50% to B. A's Form W-8BEN claims a 15% treaty rate of withholding. B's Form W-8BEN does not claim a reduced rate of withholding. WA, however, mistakenly withholds only 15%, $15, from the entire $100 payment. WA completes a Form 1042-S for each A and B as the recipients, showing on each form $50 of dividends in box 2, a withholding rate of in box 5 (tax rate), and $7.50 as the amount withheld in boxes 7 and 9. Under the multiple withholding agent rule, NQI is not required to file a Form 1042-S for A. However, because NQI knows (or should know) that B is subject to a 30% rate of withholding, and assuming it knows that WA only withheld 15%, the multiple withholding agent rule does not apply to the dividend paid to B, and NQI must withhold an additional 15% from the payment to B. NQI then must file a Form 1042-S for B showing $50 of dividends in box 2, in box 5 (the correct tax rate), and $7.50 withheld by NQI in box 7, $7.50 withheld by WA in box 8, and $15 in box 9 (the combined amount withheld). NQI also must enter 00 in box 6 (exemption code). See the instructions for box 6, later. Example 3. A withholding agent (WA) receives a Form W-8IMY from a nonqualified intermediary (NQI). NQI's Form W-8IMY relates to payments of bank deposit interest. NQI collects the bank deposit interest on behalf of A, B, C, and D, but does not associate Forms W-8, W-9, or other documentary evidence with the Form W-8IMY that NQI provides WA. A, B, and C are foreign persons for whom NQI has valid documentation establishing their foreign status. D is a U.S. person and has provided NQI with a Form W-9. Under the presumption rules, WA must treat the bank deposit interest as being paid to an unknown U.S. person and apply backup withholding at 28%. WA must complete one Form 1099 for an unknown payee showing 28% backup withholding. A copy of the form must be sent to NQI. Because NQI failed to provide the requisite documentation to WA and because the amounts have been subject to withholding, NQI must report the amounts paid to A, B, C, and D. Accordingly, NQI must file a Form 1042-S for each A, B, and C showing deposit interest (income code 29) as the type of payment in box 1; in box 5 (the correct tax rate); 0 in box 7 (the amount withheld by NQI); the actual amount withheld by WA that is allocable to A, B, and C in box 8; the total withheld (box 7 plus box 8) in box 9; and exemption code 99 in box 6. (See the instructions for box 6, later.) NQI also must file a Form 1099 for D to report the actual amounts paid and withheld. Multiple Withholding Agent Rule NRA 2012gettechnical inc 128

129 A withholding agent is not required to file Form 1042-S if a return is filed by another withholding agent reporting the same amount to the same recipient (the multiple withholding agent rule). If an NQI or flow-through entity has provided another withholding agent with the appropriate documentation and complete withholding statement, including information allocating the payment to each recipient, the NQI or flow-through entity may presume that the other withholding agent filed the required Forms 1042-S unless the NQI or flow-through entity knows, or has reason to know, that the required Form 1042-S reporting has not been done. The multiple withholding agent rule does not relieve withholding agents from Form 1042-S reporting responsibility in the following circumstances. Any withholding agent making a payment to a QI, QSL, WP, or WT must report that payment as made to the QI, QSL, WP, or WT. Any U.S. withholding agent making a payment to an authorized foreign agent must report that payment to the authorized foreign agent. Any withholding agent making a payment to a U.S. branch treated as a U.S. person must report the payment as made to that branch. Any withholding agent making a payment to a flow-through entity must report the payment as made to a beneficial owner, QI, WP, or WT that has a direct or indirect interest in that entity. Any withholding agent that withholds an amount from a payment under Chapter 3 of the Code must report that amount to the recipient from whom it was withheld, unless the payment is reportable on another IRS form. Furthermore, the multiple withholding agent rule does not relieve the following from Form 1042-S reporting responsibility. Any QI, WP, or WT required to report an amount to a withholding rate pool. An NQI or flow-through entity that has not transmitted a valid Form W-8 or other valid documentation to another withholding agent together with the required withholding statement. Penalties The following penalties apply to the person required to file Form 1042-S. The penalties apply to both paper filers and electronic filers. Late filing of correct Form 1042-S. A penalty may be imposed for failure to file each correct and complete Form 1042-S when due (including extensions), unless you can show that the failure was due to reasonable cause and not willful neglect. The penalty, based on when you file a correct Form 1042-S, is: $30 per Form 1042-S if you correctly file within 30 days after the required filing date; the maximum penalty is $250,000 per year NRA 2012gettechnical inc 129

130 ($75,000 for a small business). A small business, for this purpose, is defined as having average annual gross receipts of $5 million or less for the 3 most recent tax years (or for the period of its existence, if shorter) ending before the calendar year in which the Forms 1042-S are due. $60 per Form 1042-S if you correctly file more than 30 days after the due date but by August 1; the maximum penalty is $500,000 per year ($200,000 for a small business). $100 per Form 1042-S if you file after August 1 or you do not file correct Forms 1042-S; the maximum penalty is $1,500,000 per year ($500,000 for a small business). If you intentionally disregard the requirement to report correct information, the penalty per Form 1042-S is increased to the greater of $250 or 10% of the total amount of items required to be reported, with no maximum penalty. Failure to furnish correct Form 1042-S to recipient. If you fail to provide statements to recipients and cannot show reasonable cause, a penalty of up to $100 may be imposed for each failure to furnish Form 1042-S to the recipient when due. The penalty also may be imposed for failure to include all required information or for furnishing incorrect information on Form 1042-S. The maximum penalty is $1,500,000 for all failures to furnish correct recipient statements during a calendar year. If you provide the correct statement on or before August 1, reduced penalties similar to those for failing to file a correct Form 1042-S with the IRS may be imposed. See Late filing of correct Form S, earlier. If you intentionally disregard the requirement to report correct information, each $100 penalty is increased to the greater of $250 or 10% of the total amount of items required to be reported, with no maximum penalty. Failure to file electronically. If you are required to file electronically but fail to do so, and you do not have an approved waiver on record, you may be subject to a $50 penalty per return unless you establish reasonable cause. The penalty applies separately to original returns and amended returns. The maximum penalty is $100,000. Avoid Common Errors To ensure that your Forms 1042-S can be correctly processed, be sure that you: Carefully read the information provided in Pub. 515 and these instructions. Comply with the requirements in Pub if you are an electronic filer. Complete all required fields. At a minimum, you must enter information in boxes 1, 2, 5, 6, 7, 9, 11, 12a through 12d, 13a, 13b, and 16. Other boxes must be completed if the nature of the payment requires it. Note. You may leave box 5 blank if you are reporting a payment to an artist or athlete and there is a central withholding agreement. See Exception for central withholding agreements in NRA 2012gettechnical inc 130

131 the instructions for box 5. You may leave box 6 blank if you are applying backup withholding to the payment being reported. Use only income, recipient, exemption, and country codes specifically listed in these instructions. Use only tax rates that are allowed by statute, regulation, or treaty. Do not attempt to blend rates. Instead, if necessary, submit multiple Forms 1042-S to show changes in tax rate. See the Valid Tax Rate Table, later. All information you enter when reporting the payment must correctly reflect the intent of the statute and regulations. In most cases, you should rely on the withholding documentation you have collected (Form W-8 series, Form 8233, etc.) to complete your Form 1042-S submissions. Income Codes, Exemption Codes, and Recipient Codes Box 1, Income Code All filers must enter the appropriate 2-digit income code from the list, earlier. Use the income code that is the most specific. See Pub. 515 for further explanation of the income codes. Below are examples on how to use some of the income codes. 1. Use code 09 for the following types of capital gain: a. Gains on disposal of timber, coal, or domestic iron ore with a retained economic interest, unless an election is made to treat those gains as income effectively connected with a U.S. trade or business; b. Gains on contingent payments received from the sale or exchange after October 4, 1966, of patents, copyrights, secret processes and formulas, goodwill, trademarks, trade brands, franchises, and other like property; c. Gains on certain transfers of all substantial rights to, or an undivided interest in, patents if the transfers were made before October 5, 1966; and d. Certain gains from the sale or exchange of original issue discount obligations issued after March 31, Use code 16 for payments for personal services performed by an independent contractor as contrasted with those performed by an employee. This includes payments that are subject to the business profits article of a treaty. 3. Use code 29 if you are paying bank deposit interest, not code 01 (interest paid by U.S. obligors general). 4. Use code 24 for distributions of capital gains from a real estate investment trust (REIT). Use code 36 for capital gain distributions (dividends) paid or credited by mutual funds (or other regulated investment companies). Include short-term capital gain dividends (use exemption code 02 in box 6). NRA 2012gettechnical inc 131

132 Note. Exempt-interest dividends should be reported under income code 01 (use exemption code 02 in box 6). 5. Use code 28 for gambling winnings. These are proceeds from a game other than blackjack, baccarat, craps, roulette, or big-6 wheel. For more information, see Pub Use code 33, 34, or 35 for all substitute payment transactions. For more information, see Regulations sections (a)(7) and (a)(6) and Notice Use code 37 for a nondividend distribution (return of capital). This is a distribution that is not paid out of the earnings and profits of a corporation. It represents a distribution in part or full payment in exchange for stock. 8. Use code 40 for other U.S.-source dividend equivalents. These are dividend equivalent payments under section 871(m) that are not substitute dividend payments identified with income code Use code 41 for certain guarantee of indebtedness payments. These are amounts paid for the provision of a guarantee of indebtedness that was issued after September 27, Use either code 42 (earnings as an artist or athlete no central withholding agreement) or 43 (earnings as an artist or athlete central withholding agreement) for payments to an artist or athlete. A central withholding agreement is Form 13930, Application for Central Withholding Agreement, plus additional information specified in the instructions, that is entered into by the artist or athlete, a designated withholding agent, and the IRS. For more details, see Pub If you paid more than one type of income to or on behalf of the same recipient, you must complete a separate Form 1042-S, Copy A, for each income type. Note. (This will change in next year s instructions) Although income codes are provided for deposit interest, short-term OID, and notional principal contract income, those items are not always subject to reporting on Form 1042-S. For example, bank deposit interest is reportable if it is effectively connected with the conduct of a U.S. trade or business or is paid to a resident of Canada. Short-term OID or bank deposit interest may need to be reported by an NQI or flow-through entity if those amounts are paid to foreign persons and another withholding agent backup withheld on those amounts under the presumption rules. (See Example 3 in Amounts Paid by Nonqualified Intermediaries and Flow-Through Entities, earlier.) Notional principal contract income is reportable if it is effectively connected with the conduct of a trade or business in the United States or results in the payment of interest under Regulations section (g)(4) or a dividend equivalent under section 871(m). For more information, see the regulations under Chapter 3 of the Code and Pub Box 2, Gross Income For each income type, enter the gross amount you paid to or on behalf of the recipient during calendar year 2012, including withheld tax. The following special procedures apply to the reporting of gross income. NRA 2012gettechnical inc 132

133 You must report the entire amount of a corporate distribution made with respect to stock even if you elect to reduce the amount of withholding on the distribution because all or a part of the distribution is nontaxable or represents a capital gain dividend. You must report the entire amount of a payment if you do not know at the time of payment the amount that is subject to withholding because the determination of the source of the income or the calculation of the amount of income subject to tax depends upon facts that are not known at the time of payment. You must report the entire amount of gains relating to the disposal of timber, coal, or domestic iron ore with a retained economic interest and gains relating to contingent payments received from the sale or exchange of patents, copyrights, and similar intangible property. You must report only the amount of cash paid on notional principal contracts. Box 3, Withholding Allowances This box should be completed only if the income code reported in box 1 is 15 (scholarship or fellowship grants), 16 (compensation for independent personal services), 17 (compensation for dependent personal services), 18 (compensation for teaching), 19 (compensation during studying and training), or 42 (earnings as an artist or athlete no central withholding agreement). See Pub. 515 for more information. Box 4, Net Income Complete this box only if you entered an amount in box 3. Otherwise, leave it blank. Box 5, Tax Rate Enter the correct rate of withholding that applies to the income in box 2 (gross income) or box 4 (net income), as appropriate. (See Valid Tax Rate Table, later.) The correct tax rate should be included even if you withheld at a different rate. For example, if an NQI is reporting dividends paid to a beneficial owner who is a resident of a country with which the United States does not have a tax treaty and a U.S. withholding agent paid the dividend and withheld only 15% (rather than the required 30%) and the NQI withholds an additional 15%, the NQI should report in box 5. See Example 2 in Amounts Paid by Nonqualified Intermediaries and Flow-Through Entities, earlier. The tax rate on dividends paid to a corporation created or organized in, or under the law of, the Commonwealth of Puerto Rico may be 10%, rather than 30%. See Pub. 515 for more information. Enter the tax rate using the following format: two digits, a decimal, and two digits (for example, for 30%). However, if the income is exempt from tax under a U.S. tax treaty or the Code, enter If the tax rate is less than 10%, enter a zero before the tax rate (for example, for 4%). NRA 2012gettechnical inc 133

134 If you withheld at more than one tax rate for a specific type of income that you paid to the same recipient, you must file a separate Form 1042-S, Copy A, for each amount to which a separate rate was applied. Valid Tax Rate Table Exception for central withholding agreements. If you are the designated withholding agent who has entered into a central withholding agreement and you report an amount in box 2 using income code 43, you do not have to enter a tax rate in box 5. Box 6, Exemption Code Note. If you are filing a Form 1042-S to correct certain information already provided to you by another withholding agent on a Form 1099 or Form 1042-S (for example, as required under Amounts Paid by Nonqualified Intermediaries and Flow-Through Entities, earlier), see item 5 under this heading. In most cases, if the tax rate you entered in box 5 is 00.00, you should enter the appropriate exemption code (01 through 10) from Income Codes, Exemption Codes, and Recipient Codes, earlier. If an amount was withheld under Chapter 3 of the Code (the tax rate you entered in box 5 is greater than zero and is not due to backup withholding), enter 00 in box 6. If the tax rate you entered in box 5 is due to backup withholding, leave box 6 blank. 1. If exemption code 01 (income effectively connected with a U.S. trade or business) may apply, you must enter the recipient's U.S. TIN in box 14. If the recipient's U.S. TIN is unknown or unavailable, you must withhold tax at the foreign-person rate of 30% (30.00) and enter 00 in box A withholding agent should use exemption code 06 (qualified intermediary that assumes primary withholding responsibility) only if it is making a payment to a QI that has represented on its Form W-8IMY that it is assuming primary withholding responsibility under Chapter 3 of the Code. NRA 2012gettechnical inc 134

135 3. A withholding agent should use exemption code 07 (withholding foreign partnership or withholding foreign trust) only if it is making a payment to a foreign partnership or trust that has represented that it is a withholding foreign partnership or trust. 4. A withholding agent should use exemption code 09 (qualified intermediary represents income is exempt) only if it makes a payment to a QI that has not assumed primary withholding responsibility under Chapter 3 of the Code or primary backup withholding responsibility, but has represented on a withholding statement associated with its Form W-8IMY that the income is exempt from withholding. 5. A withholding agent should use exemption code 10 (qualified securities lender that assumes primary withholding responsibility for substitute dividends) only if the withholding agent makes a substitute dividend payment to a financial institution that is a QSL. 6. If you have failed to provide another withholding agent with appropriate information regarding the status of the person to whom you are making a payment, the other withholding agent may be required to withhold on the payment based on the presumption rules. If the income is in fact exempt from withholding, you must submit a Form 1042-S providing the correct information. In this situation, you must: a. Indicate the correct rate at which the income should have been subject to withholding in box 5 (usually 00.00), b. Enter 99 in box 6, and c. Enter the actual amount of U.S. federal tax withheld by the other withholding agent in box 8. You also must provide the correct recipient code and the name and address of the actual recipient in boxes 13a through e. Boxes 7 Through 9, Federal Tax Withheld Box 7. Enter the total amount of U.S. federal tax you actually withheld in box 7. If you did not withhold any tax, enter -0-. Box 8. If you are a withholding agent filing a Form 1042-S to report income that has already been subject to withholding by another withholding agent, enter the amount actually withheld by the other agent(s) in box 8. Further, report in box 8 any credit forward of prior withholding as determined under Notice with respect to substitute dividend payments. Box 9. Enter the total amount of tax withheld by you and any other withholding agent in box 9. Boxes 7 and 9 must be completed in all cases, even if no tax has actually been withheld. Box 10, Amount Repaid to Recipient This box should be completed only if: You repaid a recipient an amount that was over withheld; and NRA 2012gettechnical inc 135

136 You are going to reimburse yourself by reducing, by the amount of tax actually repaid, the amount of any deposit made for a payment period in the calendar year following the calendar year of withholding. In most cases, a QI should not enter an amount in box 10 unless it is a QI that has represented on its Form W-8IMY that it is assuming primary withholding responsibility under Chapter 3 of the Code. You also must state on a timely filed Form 1042 for the calendar year of overwithholding that the filing of the Form 1042 constitutes a claim for refund. The adjustment for amounts overwithheld does not apply to partnerships or nominees required to withhold under section Box 11, Withholding Agent's Employer Identification Number (EIN) In most cases, you are required to enter your EIN. However, if you are filing Form 1042-S as a QI, withholding foreign partnership, or withholding foreign trust, enter your QI-EIN, WP-EIN, or WT-EIN and check the QI-EIN box. If you do not have an EIN, you can apply for one online at or by telephone at Also, you can apply for an EIN by filing Form SS-4, Application for Employer Identification Number. File amended Forms 1042-S when you receive your EIN. To get a QI-EIN, WP-EIN, or WT-EIN, submit Form SS-4 with your application for that status. (See the definitions for Qualified intermediary (QI) and Withholding foreign partnership (WP) or withholding foreign trust (WT) in Definitions, earlier, for more information.) Box 12, Withholding Agent's Nameand Address Enter your name and address in the appropriate boxes. If your post office does not deliver mail to the street address and you have a P.O. box, show the box number instead of the street address. If you are a nominee that is the withholding agent under section 1446, enter the PTP's name and other information in boxes 17 through 20. Note. On statements furnished to Canadian recipients of U.S. source deposit interest, in addition to your name and address, you must include the telephone number of a person to contact. This number must provide direct access to an individual who can answer questions about the statement. The telephone number is not required on Copy A of paper forms or on electronically filed forms. You also must include a statement that the information on the form is being furnished to the United States Internal Revenue Service and may be furnished to Canada. NRA 2012gettechnical inc 136

137 Box 13, Recipient'sName, Recipient Code, and Address Name. Enter the complete name of the recipient in box 13a. If you do not know the name of the recipient, enter Unknown Recipient. If Form 1042-S is being completed by a QI, WP, or WT for a withholding rate pool, enter Withholding rate pool in box 13a. No address is necessary. A QI reporting payments made to a PAI on a withholding rate pool basis must include the name and address of the PAI in boxes 13a through 13e. Recipient code. Enter the recipient code from Income Codes, Exemption Codes, and Recipient Codes, earlier, in box 13b. The following special instructions apply. If applicable, use recipient code 09 (artist or athlete) instead of recipient code 01 (individual), 02 (corporation), or 03 (partnership other than a withholding foreign partnership). Use recipient code 12 if you are making a payment to a QI and 04 if you are making a payment to a WP or a WT. If you are making a payment to an NQI or flow-through entity, in most cases you must use the recipient code that applies to the type of recipient who receives the income from the NQI or flow-through entity. Use recipient code 03 (partnership other than withholding foreign partnership) only if you are reporting a payment of income that is effectively connected with the conduct of a trade or business of a nonwithholding foreign partnership in the United States. Otherwise, follow the rules that apply to payments to flow-through entities. Use recipient code 20 (unknown recipient) only if you have not received a withholding certificate or other documentation for a recipient or you cannot determine how much of a payment is reliably associated with a specific recipient. Do not use this code because you cannot determine the recipient's status as an individual, corporation, etc. The regulations under Chapter 3 of the Code provide rules on how to determine a recipient's status when a withholding agent does not have the necessary information. Use recipient code 21 (qualified securities lender qualified intermediary) or 22 (qualified securities lender other) if you make a payment to a QSL. Only QIs may use recipient codes 13 (private arrangement intermediary withholding rate pool general), 14 (private arrangement intermediary withholding rate pool exempt organizations), 15 (qualified intermediary withholding rate pool general), and 16 (qualified intermediary withholding rate pool exempt organizations). A QI should use recipient code 14 or 16 only for pooled account holders that have claimed an exemption based on their tax-exempt status and not some other exemption (for example, treaty or other Code exception). A U.S. withholding agent making a payment to a QI should use recipient code 12. Address. In most cases, you must enter a foreign address in boxes 13c through 13e. However, there are limited exceptions. For example, you may enter a U.S. address when reporting payments of scholarship or fellowship grants (income code 15). For addresses outside the United States or its commonwealths and possessions, follow the foreign country's practice for entering the postal code. NRA 2012gettechnical inc 137

138 For addresses within the United States, use the U.S. Postal Service 2-letter abbreviation for the state name. Do not enter United States or U.S. If you want to enter the recipient's account number, use box 22. Box 14, Recipient's U.S. Taxpayer Identification Number (TIN) You must obtain and enter a U.S. taxpayer identification number (TIN) for any of the following recipients. Any recipient whose income is effectively connected with the conduct of a trade or business in the United States. Note. For these recipients, enter exemption code 01 in box 6. Any foreign person claiming a reduced rate of, or exemption from, tax under a tax treaty between a foreign country and the United States, unless the income is an unexpected payment (as described in Regulations section (g)) or consists of dividends and interest from stocks and debt obligations that are actively traded; dividends from any redeemable security issued by an investment company registered under the Investment Company Act of 1940 (mutual fund); dividends, interest, or royalties from units of beneficial interest in a unit investment trust that are (or were, upon issuance) publicly offered and are registered with the Securities and Exchange Commission under the Securities Act of 1933; and amounts paid with respect to loans of any of the above securities. Any nonresident alien individual claiming exemption from tax under section 871(f) for certain annuities received under qualified plans. A foreign organization claiming an exemption from tax solely because of its status as a tax-exempt organization under section 501(c) or as a private foundation. Any QI. Any WP or WT. Any nonresident alien individual claiming exemption from withholding on compensation for independent personal services. Any U.S. branch of a foreign bank or foreign insurance company that is treated as a U.S. person. Any QSL that was paid a substitute dividend. In all other cases, if you know the recipient's TIN or if a foreign person provides a TIN on a Form W-8, but is not required to do so, you must include the TIN on Form 1042-S. Box 15, Recipient's Foreign Tax Identifying Number Enter the recipient's identifying number used in the country of residence for tax purposes (optional). NRA 2012gettechnical inc 138

139 Box 16, Recipient's Country Code You must enter the code (from Country Codes, later) for the country of which the recipient claims residency under that country's tax laws. Enter OC (other country) only when the country of residence does not appear on the list or the payment is made to an international organization (for example, the United Nations). Enter UC (unknown country) only if the payment is to an unknown recipient. If you are making a payment to a QI, QSL, WP, or WT, or if you are a QI, QSL, WP, or WT and are making a payment to a QI, WP, or WT withholding rate pool, enter the country code of the QI, WP, or WT. If exemption code 04 (exempt under tax treaty) appears in box 6 or if a reduced rate of withholding based on a tax treaty is entered in box 5, the country code entered in box 16 must be a country with which the United States has entered into an income tax treaty. Boxes 17 Through 20, NQI's/Flow-Through Entity's Name, Country Code, Address, and TIN If you are reporting amounts paid to a recipient whose withholding certificates or other documentation has been submitted to you with a Form W-8IMY provided by an NQI or flowthrough entity, you must include the name, address, and TIN, if any, of the NQI or flow-through entity with whose Form W-8IMY the recipient's Form W-8 or other documentation is associated. You also must provide this information about the NQI or flow-through entity when the NQI or flow-through entity provided a Form W-8IMY but you cannot associate part or all of the payment with valid documentation for a specific recipient or you cannot determine how much of the payment should be associated with a specific recipient. Note. An NQI or flow-through entity will leave these boxes blank unless it is making the payment to an NQI or flow-through entity. For box 18, you must enter the country code from Country Codes, later, for the country where the NQI or flow-through entity is located. If you are a nominee that is the withholding agent under section 1446, enter the PTP's name and other information in these boxes. Box 21, Payer's Name and Taxpayer Identification Number (TIN) See the definition of a payer in Definitions, earlier. Include the payer's name and TIN if different from that in boxes 11 and 12. NRA 2012gettechnical inc 139

140 Box 22, Recipient's Account Number You may use this box to enter the account number assigned by you to the recipient. Boxes 23 Through 25, State Income Tax Withheld and Related Information Include in these boxes information relating to any state income tax withheld. Amended Returns If you filed a Form 1042-S with the IRS and later discover you made an error on it, you must correct it as soon as possible. To correct a previously filed Form 1042-S, you will need to file an amended Form 1042-S. You may be required to submit amended Forms 1042-S electronically. See Electronic Reporting, earlier, and Pub If any information you correct on Form(s) 1042-S changes the information you previously reported on Form 1042, you also must correct the Form 1042 by filing an amended return. To do this, see the Form 1042 instructions. If you are filing electronically, see Amended Returns in Pub If you are not filing electronically, follow these steps to amend a previously filed Form 1042-S. Step 1. Prepare a paper Form 1042-S. Enter all the correct information on the form, including the recipient name and address, money amounts, and codes. Enter an X in the AMENDED box at the top of the form. AMENDED checkbox. Enter an X in the AMENDED checkbox of Copy A only if you are amending a Form 1042-S you previously filed with the IRS. Enter an X in the AMENDED checkbox on the copy you give to the recipient only if you are correcting a Form 1042-S previously furnished to the recipient. You must provide statements to recipients showing the corrections as soon as possible. Step 2. File the amended paper Form 1042-S with a Form 1042-T. See the Form 1042-T instructions for information on filing these forms. If you fail to correct Form(s) 1042-S, you may be subject to a penalty. See Penalties, earlier. NRA 2012gettechnical inc 140

141 CUSTOMER IDENTIFICATION PROGRAM AND BSA EXAM ISSUES NRA 2012gettechnical inc 141

142 CIP COMPLIANCE: NEW ACCOUNT INTERVIEW COMPONENTS We will be working towards a Big Picture on how to open accounts and be in compliance. In the regulation, information is required before you open the account. You may verify your customer through documents and nondocuments in a reasonable time after you open the account. Some banks allow a period of time to the customer to bring in all the paperwork. This can be 10, 20, or 30 days or so depending on your policy. You still have to get the information before the account is opened. At this time there is no 326 Government List but it is still in the regulation. We currently run customers through Office of Foreign Assets and Control list. All of this data is retained under our recordkeeping requirements and a notice if put in the lobby of the bank. We will then add to this big picture for CIP, OFAC, FACT Act, BSA, and other regulatory issues. Information Required (Prior to opening an account) + Verification through Documents (Reasonable time after opening account*) + Non-Documentary Verification (Reasonable time after opening account*) Government List Check + Recordkeeping + Customer Notice CIP COMPLIANCE *Some banks require documents and non-document verification before account is opened. You must follow your CIP NRA 2012gettechnical inc 142

143 IS IT AN ACCOUNT OR A CUSTOMER AS DEFINED IN CIP? CIP DEFINITIONS ACCOUNT Is it a deposit account or safekeeping account where the customer signed a contract? Make sure you count Certificates of Deposit CUSTOMER Does this customer have an existing account with the bank? If no, then needs CIP. If yes, still have to do Customer Due Diligence Remember that customer can mean different things on different kinds of accounts. Phase I CTR Exemptions are exempt from CIP but not from Customer Due Diligence NRA 2012gettechnical inc 143

144 IN THE LAW: ACCOUNT 1. Account Account means a formal banking relationship established to provide or engage in services, dealings, or other financial transactions including a deposit account, a transaction or asset account, a credit account, or other extension of credit. Account also includes a relationship established to provide a safety deposit box or other safekeeping services, or cash management, custodian, and trust services. Account does not include: a. A product or service where a formal banking relationship is not established with a person, such as check-cashing, wire transfer, or sale of a check or money order; b. An account that the bank acquires through an acquisition, merger, purchase of assets, or assumption of liabilities; or c. An account opened for the purpose of participating in an employee benefit plan established under the Employee Retirement Income Security Act of Key points: Business relationship was deleted from the final definition to exclude the bank s own business dealings in the operation of the bank. The new revised definition now has a list of what is included. The new definition also has a list of what is excluded such as sales of money orders, wires, etc. These already have recordkeeping requirements. Also, the new definition excludes any accounts acquired through merger, acquisition, purchase of assets, or assumption of liabilities from any third party. These transfers are not initiated by the customer and therefore do not constitute an account. The new definition excluded accounts of employee benefit plans since these come generally from payroll deductions and are not high risk for money laundering and terrorism. NRA 2012gettechnical inc 144

145 IN THE LAW: BANK Bank means: a. A bank, as that term is defined in Section (c), that is subject to regulation by a Federal functional regulator; and b. A credit union, private bank, and trust company, as set forth in Section (c), that does not have a Federal functional regulator. Commentary Key points: Foreign branches of US banks are not covered in the final rule. CIP must be a part of a bank s BSA compliance program. Therefore it will apply through such a bank s U.S. operations (including subsidiaries) in the same way as the BSA compliance program requirement. However, all subsidiaries that are in compliance with a separately applicable, industry specific rule implementing section 326 will be deemed to be in compliance with this final rule NRA 2012gettechnical inc 145

146 IN THE LAW: CUSTOMER Customer means: i) A person that opens a new account; and ii) An individual who opens a new account for: a. An individual who lacks legal capacity, such as a minor; or b. An entity that is not a legal person, such as a civic club. Customer does not include: i) A financial institution regulated by a Federal functional regulator or a bank regulated by a state bank regulator; ii) A person described in Section (d)(2)(ii)-(iv); or These are Phase I Exemptions iii) A person that has an existing account with the bank, provided that the bank has a reasonable belief that it knows the true identity of the person. (To do this you had to grandfather existing customers in your policy). Commentary: Verification of identification will not be required for existing customers of a bank if the bank has a reasonable belief that it knows the identity of the customer. The new definition does not include Phase I exemptions government entities, business traded on the stock exchanges, their subsidiaries, financial institutions The new definition a person that opens a new account would not require the bank to look through trust, escrow, or similar accounts to verify the identities of beneficiaries and instead would only require the bank to identify the named accountholder. In the case of brokered deposits, the customer will be the broker that opens the deposit account. The final rule provides that customer means an individual who opens a new account for (1) an individual who lacks legal capacity, such as a minor; or (2) an entity that is not a legal person, such as a civic club. The final rule took out signatories as customers but stated on risk based assessment of a new account, a bank may need to take additional steps to verify the identity of the customer by seeking information about individuals with ownership or control over the account in order to identify the customer. You will have to address situations when you will take additional steps to verify the identity of the customer. CIP has many exemptions on businesses but this only applies to their domestic operations NRA 2012gettechnical inc 146

147 In the Law: Other Definitions 1. Federal Functional regulator Defined at Section (a) (2). 2. Financial institution Defined at 31 U.S.C. 531(a)(2) and (c)(1). 3. Taxpayer identification number: Defined by section 6109 of the Internal Revenue code of 1986 (26 U.S. C. 6109) and the Internal Revenue Service regulations implementing that section (e.g., social security or employer identification number). 4. U.S. Person means: A U.S. citizen; or a person other than an individual (such as a corporation, partnership, or trust), that is established or organized under the laws of a State or the United States. 5. A Non-U.S. person: The bank will have to ask each customer for a U.S. taxpayer identification number (Social Security Number, Employer Identification Number, or Individual Taxpayer Identification Number). If a customer cannot provide one, the bank may then accept alternative forms of identification. NRA 2012gettechnical inc 147

148 THE INFORMATION Summary: Information Required Name (As it appears on Primary Identification) Date of birth, if individual Residential or business address of customer or next of kin or contact individual Identification Number (US Person versus Non Us Person*) *To open an account for a nonresident alien, CIP says ITIN, Passport or other such number. W-8BEN instructions require an ITIN on an interest-bearing account. NRA 2012gettechnical inc 148

149 IN THE LAW: INFORMATION REQUIRED BY CIP Customer Identification Programs for banks, savings associations, credit unions, and certain non-federally regulated banks. (b) Customer information required. (A) In general. The CIP must contain procedures for opening an account that specify the identifying information that will be obtained from each customer. Except as permitted by paragraphs (b)(2)(i)(b) and (C) of this section, the bank must obtain, at a minimum, the following information from the customer prior to opening an account: (1) Name; (2) Date of birth, for an individual; (3) Address, which shall be: i. For an individual, a residential or business street address; ii. For an individual who does not have a residential or business street address, an Army Post Office (APO) or Fleet Post Office (FPO) box number, or the residential or business street address of next of kin or of another contact individual; or iii. For a person other than an individual (such as a corporation, partnership, or trust), a principal place of business, local office, or other physical location; and (4) Identification number, which shall be: i) For a U.S. person, a taxpayer identification number; or ii) For a non-u.s. person, one or more of the following: a taxpayer identification number; passport number and country of issuance; alien identification card number; or number and country of issuance of any other government-issued document evidencing nationality or residence and bearing a photograph or similar safeguard. Note to paragraph (b)(2)(i)(a)(4)(ii): When opening an account for a foreign business or enterprise that does not have an identification number, the bank must request alternative government-issued documentation certifying the existence of the business or enterprise. (B) Exception for persons applying for a taxpayer identification number. Instead of obtaining a taxpayer identification number from a customer prior to opening the account, the CIP may include procedures for opening an account for a customer that has applied for, but has not received, a taxpayer identification number. In the case, the CIP must include procedures to confirm that the application was filed before the customer opens the account and to obtain the taxpayer NRA 2012gettechnical inc 149

150 identification number within a reasonable period of time after the account is opened. NRA 2012gettechnical inc 150

151 THE DOCUMENTS Verification through Documents Within a reasonable time after opening the account, we need to get the required documents for opening the account. Many banks get documents before we open the account but some give a 10, 20, or 30 day grace period. If your bank does this, then you will have to make sure to have a good follow-up system in place. If the customer does not bring in the documents, then you will have to close the accounts. This will be discussed in more detail in the following sections. On personal accounts, most banks get two forms of identification: a primary ID and a secondary ID that backs up the primary form of ID. Primary identification includes most of these components and is issued by the government: 1. Picture 2. Description 3. Address 4. Signature A secondary identification backs up the primary and it will be missing some of these components. These would be things like birth certificates, voter s registration cards, social security cards, and many more. The bank will establish the types of identification that are acceptable and how many forms of identification are required. Once this is established then you will have to follow your acceptable list for identifying the customer. NRA 2012gettechnical inc 151

152 It has always been due diligence to require two forms of identification such as one primary and a secondary piece of identification to prevent fraud and money laundering at new accounts. It would seem prudent to identify in your policy what types of identification your bank will accept. Here are some suggestions: SUMMARY OF TYPES OF IDENTIFICATION GENERALLY, RECOMMENDED THAT YOU GET ONE PRIMARY AND A SECONDARY PIECE OF IDENTIFICATION PRIMARY SECONDARY UNACCEPTABLE EASILY STOLEN, EASILY HAS SOME BUT NOT ALL REPRODUCED NOT OF THE COMPONENTS OF ACCEPTED AS ID PRIMARY ID GENERALLY SHOULD INCLUDE PICTURE, DESCRIPTION AND SIGNATURE Driver s License/ non driver s identification card Passport US Government US Military Alien registration card Primary identification Includes picture, description of person, and signature. Should be accompanied with a second piece of identification. Use bar books to verify primary identification. See Social Security card Voter s registration Birth Certificate Credit cards Bank cards State government Local government Company identification Police identification Insurance Cards Secondary identification has components of primary but not considered as primary. Acceptable as a second piece of identification. Never acceptable to open an account alone. Hunting license Marriage license Rotary club card Library card Blockbuster video card Sam s club card Panty hose card Country club card Never acceptable as identification. This is a short list. There are many, many forms of identification which are unacceptable. NRA 2012gettechnical inc 152

153 EXPANDED IDENTIFICATION FOR NONRESIDENT ALIENS (NRA) You can keep to a very narrow Customer Identification Program (CIP). You can say no passport no account. This makes things very simple for the bank. However, depending on your market, you may want to write into your BSA/CIP policy a specific policy for non resident aliens. PRIMARY SHOULD INCLUDE PICTURE, DESCRIPTION AND SIGNATURE State issued non driver s identification card Passport Primary identification Should include a picture, description of person, and signature. Should be accompanied with a second piece of identification. Use bar books to verify primary identification. See SECONDARY HAS SOME BUT NOT ALL OF THE COMPONENTS OF PRIMARY ID Social Security card With ITIN number that starts with a 9 Secondary identification has components of primary, but not considered as primary. Acceptable as a second piece of identification. Never acceptable alone to open an account. CIP is your bank s decision based on your risk profile. Your market may dictate a more liberal approach to non resident aliens. You might just list all of the forms of identification you will accept and require two with one of them with picture, description and signature. NRA 2012gettechnical inc 153

154 Use the ID Checking Guide to help with these types of identification. There is also an international version for Mexico Driver s Licenses and other countries. PRIMARY SHOULD INCLUDE PICTURE, DESCRIPTION AND SIGNATURE Driver s License/ non driver s identification card Passport National identification card (must show photo, name, current address, date of birth, and expiration date) Temporary Resident Card Form I- 688 Employment Authorization Card Form I-688A, I-688B, I-766 Nonimmigrant Visa & Border Crossing Card Refugee Travel Document Form I- 571 US Department of State Driver s Licenses VISA Consular ID Cards Mexico Driver s License (32) Canada Driver s License Primary identification Should include a picture, description of person, and signature. Should be accompanied with a second piece of identification. Use bar books to verify primary identification. See SECONDARY HAS SOME BUT NOT ALL OF THE COMPONENTS OF PRIMARY ID Social Security card Voter s registration Birth Certificate Credit cards Civil birth certificate Foreign driver's license U.S. state identification card Foreign voter's registration card Foreign military identification card Visa U.S. Citizenship and Immigration Services (USCIS) photo identification Medical records (dependents - under 14 years old - only) School records (dependents and/or students - under 25 years old - only) Secondary identification Has components of primary but not considered as primary. Acceptable as a second piece of identification. Never acceptable to open an account alone. NRA 2012gettechnical inc 154

155 VERIFYING THE CUSTOMER THROUGH NONDOCUMENTS UNDER CIP NONDOCUMENTARY VERIFICATION Your bank will also require some nondocumentary verification. This can range from third party vendors who run the names and check for SSN match and bad check records, to simple things such as sending a thank you note which verifies signature. Recognizing that some accounts are opened by telephone, by mail, and over the Internet, the final rules asked that you take that into consideration when writing your policy. You must address the situation where you will open an account for someone not appearing at your bank. Types of non-documentary verification include: Check systems, Telecheck, credit reports Customer telephone call Letter of welcome Site visit Previous bank reference Verification of employment whitepages.com google.com Secretary of State - online at NRA 2012gettechnical inc 155

156 LAW: CUSTOMER VERIFICATION Customer Verification. The CIP must contain procedures for verifying the identity of the customer, using information obtained in accordance with paragraph (b)(2)(i) of this section, within a reasonable time after the account is opened. The procedures must enable the bank to form a reasonable belief that it knows the true identity of each customer. These procedures must be based on the bank s assessment of the relevant risks, including those presented by the various types of accounts maintained by the bank, the various methods of opening accounts provided by the bank, the various types of identifying information available, and the bank s size, location, and customer base. At a minimum, these procedures must contain the elements described in this paragraph (b)(2). A. Verification through documents. For a bank relying on documents, the Customer Identification Program must contain procedures that set forth the documents that the bank will use. These documents may include: i) For an individual, unexpired government-issued identification evidencing nationality or residence and bearing a photograph or similar safeguard, such as a driver s license or passport; and ii) For a person other than an individual (such as corporations, partnerships, or trust), documents showing the existence of the entity, such as certified articles of incorporation, a government-issued business license, partnership agreement, or trust instrument. B. Verification through nondocumentary methods. For a bank relying on nondocumentary methods, the CIP must contain procedures that describe the nondocumentary methods the bank will. i) These methods may include contacting a customer; independently verifying the customer s identity through the comparison of information provided by the customer with information obtained from a consumer reporting agency, public database, or other source; checking references with other financial institutions; and obtaining a financial statement. ii) The bank s nondocumentary procedures must address situations where an individual is unable to present an unexpired government-issued identification document that bears a photograph or similar safeguard; the bank is not familiar with the documents presented; the account is opened without obtaining documents; the customer opens the account without appearing in person at the bank; and where the bank is otherwise presented with circumstances that increase the risk that the bank will be unable to verify the true identity of a customer through documents. NRA 2012gettechnical inc 156

157 C. Additional verification for certain customers. The CIP must address situations where, based on the bank s risk assessment of a new account opened by a customer that is not an individual, the bank will obtain information about the individuals with authority or control over such account, including signatories, in order to verify the customer s identity. This verification method applies only when the bank cannot verify the customer s true identity using the verification methods described in paragraphs (b)(2)(ii)(a) and (B) of this section. NRA 2012gettechnical inc 157

158 WHAT TO DO IF WE CANNOT VERIFY IDENTITY CLOSING AN ACCOUNT: SOME SUGGESTIONS 1. Stick to your policy It is generally much easier to get information before the account is opened than after. If you stick to your policy on identification prior to opening account then it is easier on your financial institution in the long run. If you cannot verify the customer you will have to close the account, freeze the account or other action under your policy. Also you will have to look at your procedures for Identity Theft. 2. Closing an account If you took a risk-based approach and allowed the customer a time frame to get all the information to you, and he or she failed to meet the time frame then you should notify them in writing preferable certified mail that within a stated time period the account will be closed. This varies depending on your bank and location. You probably want to notify them twice before the account is actually closed. NRA 2012gettechnical inc 158

159 LAW: LACK OF VERIFICATION CIP PROCEDURES Lack of Verification The CIP must include procedures for responding to circumstances in which the bank cannot form a reasonable belief that it knows the true identity of a customer. These procedures should describe: 1. When the bank should not open an account; 2. The terms under which a customer may use an account while the bank attempts to verify the customer s identity; 3. When the bank should close an account, after attempts to verify a customer s identity have failed; and 4. When the bank should file a Suspicious Activity Report in accordance with applicable law and regulation. NRA 2012gettechnical inc 159

160 CIP RECORDKEEPING RECORDKEEPING CIP has specific recordkeeping requirements and there are basically two types: a. The first is the worksheets, documents and other items obtained at account opening. These must be retained for five years after the account is opened. b. The second is the information name, address, date of birth and social security number or name, address and EIN for business accounts. This information must be kept for five years after the account is closed. NRA 2012gettechnical inc 160

161 LAW: CIP RECORDKEEPING Recordkeeping The CIP must include procedures for making and maintaining a record of all information obtained under the procedures implementing paragraph (b) of this section. (i) Required records. At a minimum, the record must include: A) All identifying information about a customer obtained under paragraphs (b)(2)(i) of this section: B) A description of any document that was relied on under paragraph (b)(2)(ii)(a) of this section noting the type of document, any identification number contained in the document, the place of issuance and, if any, the date of issuance and expiration date; C) A description of the methods and the results of any measures undertaken to verify the identity of the customer under paragraph (b)(2)(ii)(b) or (C) of this section; and D) A description of the resolution of any substantive discrepancy discovered when verifying the identifying information obtained. (ii) Retention of records. The bank must retain all the information in paragraph (b)(3)(i)(a) of this section for five years after the date the account is closed or, in the case of credit card accounts, five years after the account is closed or becomes dormant. The bank must retain the information in paragraphs (b)(3)(i)(b), (C) or (D) of this section for five years after the record is made. NRA 2012gettechnical inc 161

162 LAW: GOVERNMENT LISTS Comparisons with government lists. The CIP must include procedures for determining whether the customer appears on any list of known or suspected terrorists or terrorist organizations issued by any Federal government agency and designated as such by Treasury in consultation with the Federal functional regulators. The procedures must require the bank to make such a determination within a reasonable period of time after the account is opened, or earlier, if required by another Federal law or regulation or Federal directive issued in connection with the applicable list. The procedures must also require the bank to follow all Federal directives issued in connection with such lists. NRA 2012gettechnical inc 162

163 CIP CUSTOMER NOTICE IN LOBBY CUSTOMER NOTICE FOR CIP 5 Customer notice i) The CIP must include procedures for providing bank customers with adequate notice that the bank is requesting information to verify their identities. ii) Adequate notice. Notice is adequate if the bank generally describes the identification requirements of this section and provides the notice in a manner reasonably designed to ensure that a customer is able to view the notice, or is otherwise given notice, before opening an account. For example, depending upon the manner in which the account is opened, a bank may post a notice in the lobby or on its website, include the notice on its account applications, or use any other form of written or oral notice. iii) Sample notice. If appropriate, a bank may use the following sample language to provide notice to its customers: IMPORTANT INFORMATION ABOUT PROCEDURES FOR OPENING A NEW ACCOUNT To help the government fight the funding of terrorism and money laundering activities, Federal law requires all financial institutions to obtain, verify, and record information that identifies each person who opens an account. What this means for you: When you open an account, we will ask for your name, address, date of birth, and other information that will allow us to identify you. We may also ask to see your driver s license or other identifying documents. NRA 2012gettechnical inc 163

164 RELIANCE ON ANOTHER FINANCIAL INSTITUTION AND THIRD PARTIES UNDER CIP If you rely on another institution then they run the CIP on new customers. Sometimes the other financial institutions run their own CIP and sometimes like in car dealerships, the dealership runs our CIP. RELIANCE ON ANOTHER FINANCIAL INSTITUTION AND THIRD PARTIES Reliance on another financial institution. The CIP may include procedures specifying when a bank will rely on the performance by another financial institution (including an affiliate) of any procedures of the bank s CIP, with respect to any customer of the bank that is opening, or has opened, an account or has established a similar formal banking or business relationship with the other financial institution to provide or engage in services, dealings, or other financial transactions, provided that: i. Such reliance is reasonable under the circumstances; ii. The other financial institution is subject to a rule implementing 31 U.S.C.5318(h) and is regulated by a Federal functional regulator; and iii. The other financial institution enters into a contract requiring it to certify annually to the bank that is has implemented its anti-money laundering program, and that it will perform (or its agent will perform) the specified requirements of the bank s CIP. NRA 2012gettechnical inc 164

165 CUSTOMER DUE DILIGENCE UNDER BSA BSA EXAM ISSUES ON CUSTOMER DUE DILIGENCE Overview The cornerstone of a strong BSA/AML compliance program is the adoption and implementation of comprehensive CDD policies, procedures, and processes for all customers, particularly those that present a high risk for money laundering and terrorist financing. The objective of CDD procedures should be to enable the bank to predict with relative certainty the types of transactions in which a customer is likely to engage. These procedures assist the bank in determining when transactions are potentially suspicious. The concept of CDD begins with verifying the customer s identity and assessing the risks associated with that customer. Procedures should also include enhanced CDD for high risk customers and ongoing due diligence of the customer base. Effective CDD policies, procedures, and processes provide the critical framework that enables the bank to comply with regulatory requirements and to report suspicious activity. CDD policies, procedures, and processes are critical to the bank because they can aid in: Customer Risk Management should have a thorough understanding of the money laundering or terrorist financing risks of the bank s customer base. Under this approach, the bank will obtain information at account opening sufficient to develop an understanding of normal and expected activity for the customer s occupation or business operations. Much of the CDD information can be confirmed through an information-reporting agency, banking references (for larger accounts), correspondence and telephone conversations with the customer, and visits to the customer s place of business. Additional steps may include obtaining third-party references or researching public information (e.g., on the Internet or commercial databases). CDD procedures should include periodic monitoring of the customer relationship to determine whether there are substantive changes to the original CDD information (e.g., change in employment or business operations). Enhanced Due Diligence for High-Risk Customers Customers that pose high money laundering or terrorist financing risks present increased exposure to banks and due diligence policies, procedures, and processes should be enhanced as a result. Enhanced due diligence for high-risk customers is especially critical in understanding their anticipated transactions and implementing a suspicious activity monitoring system that reduces the bank s reputation, compliance, and transaction risks. High-risk customers and their transactions should be reviewed more closely at account opening and more frequently throughout the term of their relationship with the bank. NRA 2012gettechnical inc 165

166 Guidance to identify high-risk customers may be found in the core overview section Scoping and Planning. The bank may determine that a customer poses a high risk because of the customer s business activity, ownership structure, anticipated or actual volume and types of transactions, including those transactions involving high-risk jurisdictions. If so, the bank should consider obtaining, both at account opening and throughout the relationship, the following information on the customer: Purpose of the account. Source of funds and wealth. Beneficial owners of the accounts, if applicable. Customer s (or beneficial owner s) occupation or type of business. Financial statements. Banking references. Domicile (where the business is incorporated). Proximity of the customer s residence, place of employment, or place of business to the bank. Description of the customer s primary trade area and whether international transactions are expected to be routine. Description of the business operations, the anticipated volume of currency and total sales, and a list of major customers and suppliers. Explanations for changes in account activity. NRA 2012gettechnical inc 166

167 ENHANCED DUE DILIGENCE UNDER BSA BSA EXAM MANUAL: NONRESIDENT ALIENS AND FOREIGN INDIVIDUALS OVERVIEW Objective. Assess the adequacy of the bank s systems to manage the risks associated with transactions involving accounts held by nonresident aliens (NRA) and foreign individuals, and management s ability to implement effective due diligence, monitoring, and reporting systems. Foreign individuals maintaining relationships with U.S. banks can be divided into two categories: resident aliens and nonresident aliens. For definitional purposes, an NRA is a non- U.S. citizen who: (i) is not a lawful permanent resident of the United States during the calendar year and who does not meet the substantial presence test, 1 or (ii) has not been issued an alien registration receipt card, also known as a green card. The IRS determines the tax liabilities of a foreign person and officially defines the person as a resident or nonresident. Although NRAs are not permanent residents, they may have a legitimate need to establish an account relationship with a U.S. bank. NRAs use bank products and services for asset preservation (e.g., mitigating losses due to exchange rates), business expansion, and investments. The amount of NRA deposits in the U.S. banking system has been estimated to range from hundreds of billions of dollars to about $1 trillion. Even at the low end of the range, the magnitude is substantial, both in terms of the U.S. banking system and the economy. Risk Factors Banks may find it more difficult to verify and authenticate an NRA accountholder s identification, source of funds, and source of wealth, which may result in BSA/AML risks. The NRA s home country may also heighten the account risk, depending on the secrecy laws of that country. Because the NRA is expected to reside outside of the United States, funds transfers or the use of foreign automated teller machines (ATM) may be more frequent. The BSA/AML risk may be further heightened if the NRA is a politically exposed person (PEP). Refer to the expanded examination procedures, Politically Exposed Persons, pages 301 to 302, for further information. Risk Mitigation 1 A foreign national is a resident alien if the individual is physically present in the United States for at least 31 days in the current calendar year and present 183 days or more based on counting: all days present during the current year, plus one-third of the days present in the preceding year, plus one-sixth of the days present in the second preceding year. Certain days of presence are disregarded, such as (i) days spent in the United States for a medical condition that developed while the foreign national was present in the United States and unable to leave, (ii) days regular commuters spend traveling to or from Canada or Mexico, (iii) a day of less than 24 hours spent while in transit between two locations outside the United States., and (iv) days when the foreign national was an exempt individual. The individual is considered a resident alien for federal income and employment tax purposes from the first day of physical presence in the United States in the year that the test is satisfied. Refer to the Internal Revenue Service Web site: NRA 2012gettechnical inc 167

168 Banks should establish policies, procedures, and processes that provide for sound due diligence and verification practices, adequate risk assessment of NRA accounts, and ongoing monitoring and reporting of unusual or suspicious activities. The following factors are to be considered when determining the risk level of an NRA account: Accountholder s home country. Types of products and services used. Forms of identification. Source of wealth and funds. Unusual account activity. NRA customers may request W-8 status for U.S. tax withholding. In such cases, the NRA customer completes a W-8 form, which attests to the customer s foreign and U.S. tax-exempt status. While it is an IRS form, a W-8 is not sent to the IRS, but is maintained on file at the bank to support the lack of any tax withholding from earnings. 2 The bank s CIP should detail the identification requirements for opening an account for a non- U.S. person, including an NRA. The program should include the use of documentary and nondocumentary methods to verify a customer. In addition, banks must maintain due diligence procedures for private banking accounts for non-u.s. persons, including those held for PEPs or senior foreign political figures. Refer to the core overview and examination procedures, Private Banking Due Diligence Program (Non-U.S. Persons), pages 130 to 137, and the expanded overview and examination procedures, Politically Exposed Persons, pages 297 to Additional information can be found at Also refer to IRS Bulletin 515 Withholding of Tax on Nonresident Aliens and Foreign Entities. NRA 2012gettechnical inc 168

169 EXAMINATION PROCEDURES Nonresident Aliens and Foreign Individuals Objective. Assess the adequacy of the bank s systems to manage the risks associated with transactions involving accounts held by nonresident aliens (NRA) and foreign individuals, and management s ability to implement effective due diligence, monitoring, and reporting systems. 1. Review the bank s policies, procedures, and processes related to NRA and foreign individual accounts. Evaluate the adequacy of the policies, procedures, and processes given the bank s nonresident alien and foreign individual activities and the risks they represent. Assess whether the controls are adequate to reasonably protect the bank from money laundering and terrorist financing. 2. From a review of MIS and internal risk rating factors, determine whether the bank effectively identifies and monitors higher-risk NRA and foreign individual accounts. 3. Determine whether the bank s system of monitoring NRA and foreign individual accounts for suspicious activities, and for reporting of suspicious activities, is adequate based on the complexity of the bank s NRA and foreign individual relationships, the types of products used by NRAs and foreign individuals, the home countries of the NRAs, and the source of funds and wealth for NRAs and foreign individuals. 4. If appropriate, refer to core examination procedures, Office of Foreign Assets Control, pages 157 to 159, for further guidance. Transaction Testing 5. On the basis of the bank s risk assessment of its NRA and foreign individual accounts, as well as prior examination and audit reports, select a sample of higher -risk NRA accounts. Include the following risk factors: Account for resident or citizen of a higher -risk jurisdiction. Account activity is substantially currency based. NRA or foreign individual who uses a wide range of bank services, particularly correspondent services. NRA or foreign individual for whom the bank has filed a SAR. 6. From the sample selected, perform the following examination procedures: Review the customer due diligence information, including CIP information, if applicable. NRA 2012gettechnical inc 169

170 Review account statements and, as necessary, transaction details to determine whether actual account activity is consistent with expected activity. Assess whether transactions appear unusual or suspicious. For W-8 accounts, verify that appropriate forms have been completed and updated, as necessary. Review transaction activity and identify patterns that indicate U.S. resident status or indicate other unusual and suspicious activity. 7. On the basis of examination procedures completed, including transaction testing, form a conclusion about the adequacy of policies, procedures, and processes associated with NRA accounts. NRA 2012gettechnical inc 170

171 EXAMPLE: NONRESIDENT ALIENS ENHANCED DUE DILIGENCE NONRESIDENT ALIENS ENHANCED DUE DILIGENCE Nonresident aliens are considered high risk. In the Bank Secrecy Exam manual here are some things that we should consider when we open accounts. Job #1 Job #2 Job #3 Job #4 Job #5 Job #6 Job #7 Opening Accounts for Non Resident Aliens Resident or non resident alien If the customer is a resident alien, then he or she is treated as a US Person and can sign a W-9 Purpose NRA is opening account: Asset preservation, business expansion and investments. Identify the accountholder Identify the sources of the funds and the wealth Identify the country and determine the risk with that particular country Is the individual a Politically Exposed Person (PEP) See BSA Exam manual for Enhanced Due Diligence Determine the kinds of products and services the nonresident alien plans to use and evaluate for risk. NRA 2012gettechnical inc 171

172 OFAC You must run OFAC on new and existing customers. You will also check beneficiaries and signers against OFAC. On nonresident aliens there is a greater risk of a match. CHECK OFFICE OF FOREIGN ASSETS CONTROL (OFAC) 1. Overview The Office of Foreign Assets Control (OFAC) is a division of the U.S. Treasury. OFAC s purpose is to enforce sanctions against foreign countries, their agents, terrorists or other threats against the United States national security. It is not just the countries but also individuals called Specially Designated Nationals also called a Blocked Person. We are required to block or freeze any accounts for these individuals or countries within 10 days from the occurrence of the activity. Your institution can be fined and penalized for failure to comply with OFAC. We check the names of our customer, their beneficiaries and any signers on accounts. 2. The List The OFAC list is updated frequently and should be kept up to date at your financial institution. Before we open an account, it is a good idea to check the list to make sure that the person or entity opening the account is not on the list. That way we can prevent subsequent action of blocking and freezing assets. Your financial institution should have established procedures to continually audit and check for compliance with OFAC guidelines. Since the list is updated often, an account that you opened up last year may now be on this list. This is not something that you can prevent at the new accounts desk. NRA 2012gettechnical inc 172

173 OFAC FREQUENTLY ASKED QUESTIONS AND ANSWERS General Questions What is OFAC and what does it do? The Office of Foreign Assets Control administers and enforces economic sanctions programs primarily against countries and groups of individuals, such as terrorists and narcotics traffickers. The sanctions can be either comprehensive or selective, using the blocking of assets and trade restrictions to accomplish foreign policy and national security goals. [ ] How long has OFAC been around? The Treasury Department has a long history of dealing with sanctions. Dating back prior to the War of 1812, Secretary of the Treasury Gallatin administered sanctions imposed against Great Britain for the harassment of American sailors. During the Civil War, Congress approved a law which prohibited transactions with the Confederacy, called for the forfeiture of goods involved in such transactions, and provided a licensing regime under rules and regulations administered by Treasury. OFAC is the successor to the Office of Foreign Funds Control (the ``FFC''), which was established at the advent of World War II following the German invasion of Norway in The FFC program was administered by the Secretary of the Treasury throughout the war. The FFC's initial purpose was to prevent Nazi use of the occupied countries' holdings of foreign exchange and securities and to prevent forced repatriation of funds belonging to nationals of those countries. These controls were later extended to protect assets of other invaded countries. After the United States formally entered World War II, the FFC played a leading role in economic warfare against the Axis powers by blocking enemy assets and prohibiting foreign trade and financial transactions. OFAC itself was formally created in December 1950, following the entry of China into the Korean War, when President Truman declared a national emergency and blocked all Chinese and North Korean assets subject to U.S. jurisdiction. [ ] What does one mean by the term "prohibited transactions? Prohibited transactions are trade or financial transactions and other dealings in which U.S. persons may not engage unless authorized by OFAC or expressly exempted by statute. Because each program is based on different foreign policy and national security goals, prohibitions may vary between programs.[ ] NRA 2012gettechnical inc 173

174 Are there exceptions to the prohibitions? Yes. OFAC regulations often provide general licenses authorizing the performance of certain categories of transactions. OFAC also issues specific licenses on a case-by-case basis under certain limited situations and conditions. Guidance on how to request a specific license is found below and at 31 C.F.R [ ] When should I call OFAC s compliance hotline? Only after you ve taken the following due diligence steps. If you are calling about a wire transfer or other live transaction: 1. Is the hit or match against OFAC s SDN list or targeted countries, or is it hitting for some other reason (i.e., Control List or PEP, CIA, Non-Cooperative Countries and Territories, Canadian Consolidated List (OSFI), World Bank Debarred Parties, Blocked Officials File, or government official of a designated country ), or can you not tell what the hit is? If it s hitting against OFAC s SDN list or targeted countries, continue to 2 below. If it s hitting for some other reason, you should contact the keeper of whichever other list the match is hitting against. For questions about: The Denied Persons List and the Entities List, please contact the Bureau of Industry and Security at the U.S. Department of Commerce at The FBI s Most Wanted List or any other FBI-issued watch list, please contact the Federal Bureau of Investigation ( The Debarred Parties list, please contact the Office of Defense Trade Controls at the U.S. Department of State, The Bank Secrecy Act and the USA PATRIOT Act, please contact the Financial Crimes Enforcement Network (FinCEN), If you are unsure whom to contact, please contact your interdict software provider which told you there was a hit. If you can t tell what the hit is, you should contact your interdict software provider which told you there was a hit. 2. Now that you ve established that the hit is against OFAC s SDN list or targeted countries, you must evaluate the quality of the hit. Compare the name in your transactions with the name on the SDN list. Is the name in your transaction an individual while the name on the SDN list is a vessel, organization or company (or vice-versa)? If yes, you do not have a valid match.* If no, please continue to 3 below. NRA 2012gettechnical inc 174

175 3. How much of the SDN s name is matching against the name in your transaction? Is just one of two or more names matching (i.e., just the last name)? If yes, you do not have a valid match.* If no, please continue to 4 below. 4. Compare the complete SDN entry with all of the information you have on the matching name in your transaction. An SDN entry often will have, for example, a full name, address, nationality, passport, tax ID or cedula number, place of birth, date of birth, former names and aliases. Are you missing a lot of this information for the name in your transaction? If yes, go back and get more information and then compare your complete information against the SDN entry. If no, please continue to 5 below. 5. Are there a number of similarities or exact matches? If yes, please call the hotline at If no, you do not have a valid match.* If you are calling about an account: 1. Is the hit or match against OFAC s SDN list or targeted countries, or is it hitting for some other reason (i.e., Control List or PEP, CIA, Non-Cooperative Countries and Territories, Canadian Consolidated List (OSFI), World Bank Debarred Parties, or government official of a designated country ), or can you not tell what the hit is? If it s hitting against OFAC s SDN list or targeted countries, continue to 2 below. If it s hitting for some other reason, you should contact the keeper of whichever other list the match is hitting against. For questions about: The Denied Persons List and the Entities List, please contact the Bureau of Industry and Security at the U.S. Department of Commerce at The FBI s Most Wanted List or any other FBI-issued watch list, please contact the Federal Bureau of Investigation ( The Debarred Parties list, please contact the Office of Defense Trade Controls at the U.S. Department of State, The Bank Secrecy Act and the USA PATRIOT Act, please contact the Financial Crimes Enforcement Network (FinCEN), If you are unsure whom to contact, you should contact your interdict software provider which told you there was a hit. If you can t tell what the hit is, you should contact your interdict software provider which told you there was a hit. NRA 2012gettechnical inc 175

176 2. Now that you ve established that the hit is against OFAC s SDN list or targeted countries, you must evaluate the quality of the hit. Compare the name of your accountholder with the name on the SDN list. Is the name of your accountholder an individual while the name on the SDN list is a vessel, organization or company (or vice-versa)? If yes, you do not have a valid match.* If no, please continue to 3 below. 3. How much of the SDN s name is matching against the name of your accountholder? Is just one of two or more names matching (i.e., just the last name)? If yes, you do not have a valid match.* If no, please continue to 4 below. 4. Compare the complete SDN entry with all of the information you have on the matching name of your accountholder. An SDN entry often will have, for example, a full name, address, nationality, passport, tax ID or cedula number, place of birth, date of birth, former names and aliases. Are you missing a lot of this information for the name of your accountholder? If yes, go back and get more information and then compare your complete information against the SDN entry. If no, please continue to 5 below. 5. Are there a number of similarities or exact matches? If yes, please call the hotline at If no, you do not have a valid match.* * If you have reason to know or believe that processing this transfer or operating this account would violate any of the Regulations, you must call the hotline and explain this knowledge or belief. [ ] What do you mean by "blocking?" Another word for it is "freezing." It is simply a way of controlling targeted property. Title to the blocked property remains with the target, but the exercise of powers and privileges normally associated with ownership is prohibited without authorization from OFAC. Blocking immediately imposes an across-the-board prohibition against transfers or dealings of any kind with regard to the property. [ ] What countries do I need to worry about in terms of U.S. sanctions? OFAC administers a number of U.S. economic sanctions and embargoes that target geographic regions and governments (such as Cuba, Cote d'ivoire, Iran, Iraq, Libya, North Korea, Sudan, Liberia, Zimbabwe, Sierra Leone, the UNITA faction in Angola, Syria and Burma [Myanmar]) as well as other programs targeting individuals or entities that could be anywhere, currently, programs relating to foreign narcotics traffickers, foreign terrorists, WMD proliferators, persons in the Western Balkans (included within these are, e.g., Foreign Terrorist Organizations, designated foreign persons who have engaged in activities related to the proliferation of weapons of mass destruction, and designated foreign persons associated with Slobodan Milosevic or who NRA 2012gettechnical inc 176

177 threaten international stabilization efforts in the Western Balkans). In addition to targeted countries, it is very important to note that OFAC publishes a list of Specially Designated Nationals and Blocked Persons ("SDN list") which includes over 3,500 names of companies and individuals who are connected with the sanctions targets and are located throughout the world (with addresses listed in 112 countries as of 09/2002). A number of the named individuals and entities are known to move from country to country and may end up in locations where they would be least expect. U.S. persons are prohibited from dealing with SDNs wherever they are located and all SDN assets are blocked. Because OFAC's programs are dynamic and constantly changing, it is very important to check OFAC's website on a regular basis to ensure that your SDN list is current and you have complete information regarding current restrictions affecting countries and parties with which you plan to do business. [ ] Who must comply with OFAC regulations? All U.S. persons must comply with OFAC regulations, including all U.S. citizens and permanent resident aliens regardless of where they are located, all persons and entities within the United States, all U.S. incorporated entities and their foreign branches. In the cases of certain programs, such as those regarding Cuba and North Korea, all foreign subsidiaries owned or controlled by U.S. companies also must comply. Certain programs also require foreign persons in possession of U.S. origin goods to comply. [ ] How much are the fines for violating these regulations? The fines for violations can be substantial. Depending on the program, criminal penalties can include fines ranging from $50,000 to $10,000,000 and imprisonment ranging from 10 to 30 years for willful violations. Depending on the program, civil penalties range from $11,000 to $1,000,000 for each violation. [ ] What is an SDN? As part of its enforcement efforts, OFAC publishes a list of individuals and companies owned or controlled by, or acting for or on behalf of, targeted countries. It also lists individuals, groups, and entities, such as terrorists and narcotics traffickers designated under programs that are not country-specific. Collectively, such individuals and companies are called "Specially Designated Nationals" or "SDNs." Their assets are blocked and U.S. persons are generally prohibited from dealing with them. [ ] How do I get a copy of this list? The best way to get the list is from OFAC's website. The list is disseminated in a number of different formats, including fixed field/delimited files that can be integrated into databases. [ ] How often is the SDN list updated? The SDN list is frequently updated. There is no predetermined timetable, but rather names are added or removed as necessary and appropriate. [ ] How do I know what specific changes have been made to OFAC's SDN list? All changes for the current calendar year are cumulatively available in a.pdf file and in an ASCII version. Cumulative changes for prior years back to 1994 are also available in ASCII format by following this link. The same link will take you to a *.PDF version of the file for NRA 2012gettechnical inc 177

178 calendar year The calendar year 2002 *.PDF file and future calendar year *.PDF files will be archived at that link. [ ] Does OFAC maintain or can it create a country-by-country list of SDNs? OFAC has long maintained such a list. The file is available for downloading by clicking on the DOS or Windows Delimited SDN List links on OFAC's Website. The file is contained within those self-extracting archives and is called ctry_list.txt. It is important to understand that many SDN individuals and entities may operate in countries other than those in which they are based. The relevant regulations prohibit transactions with and/or block the property of SDNs wherever they are located. [ ] What do I do if I have a match to the SDN list? If you have checked a name manually or by using software and find a match, you should do a little more research. Is it exact names matches, or very close? Is your customer located in the same general area as the SDN? If not, it may be a "false hit." If there are many similarities, contact OFAC's "hotline" at for verification. If you re "hit" concerns an inprocess wire transfer, you may prefer to your question to OFAC. Unless a transaction involves an exact match, it is recommended that you contact OFAC Compliance before actually blocking assets. [ ] What is the Control list? Who do I call about the Control list? What is the difference between the Control list and OFAC's SDN list? The Control List was developed by the law enforcement community in response to the events of September 11. It is separate from the OFAC's SDN list and is not disseminated by OFAC. If you have received a copy of this list, you should follow the instructions received with it. [ ] What do I do if a person tries to open an account and the person's name is on OFAC's SDN list? Do I open the account and then block the funds? A U.S. bank cannot open an account for a person named on the SDN list. This is a prohibited service. However, you should pay careful attention to be sure the person trying to open the account is the same person as the one named on OFAC's list. In many cases you may get a "false positive," where the name is similar to a target's name, but the rest of the information provided by the applicant does not match the descriptor information on OFAC's SDN list. If the bank does come into the possession or control of any property in which a blocked person has an interest, it is obligated to block that property. In other words, if you receive an application to open an account from a person who matches the information on the SDN list, together with an opening deposit, you are obligated to block the funds. The same is true for other banking transactions. If, for example, a customer asks if he or she is allowed to send money to a relative's account with Bank of Khartoum in Sudan, the bank can say "no, that's illegal." If, on the other hand, a bank receives instructions from its customer to debit his or her account and send the funds to Bank of Khartoum, the bank must act on the instructions by blocking the funds which contain a future interest of the Sudanese SDN bank. You might think of the analogy of a bouncing ball. Once the ball starts moving, you must stop it if it comes into your possession. NRA 2012gettechnical inc 178

179 CUSTOMER NAME: YOUR CUSTOMER S RISK RATING SAMPLE FOR PERSONAL ACCOUNTS CIP/CDD New (20) Existing (10) RISK (HIGH, MEDIUM OR LOW) LOW 10 POINTS MEDIUM 20 POINTS HIGH RISK 30 POINTS US Person or resident alien (10) Non resident alien (30) What nationality if nonresident alien? Is customer in a high risk geographic area? HIDTA or HIFCA Opened in person all parties present (10) Opened by mail (20) Opened on internet (3) Opened with: Cash (10) Cashier s Check (30) Payroll check (10) Other monetary instruments (2) TOTAL SCORE NRA 2012gettechnical inc 179

180 CUSTOMER NAME: YOUR CUSTOMER S RISK RATING SAMPLE FOR PERSONAL ACCOUNTS CIP/CDD New (20) Existing (10) RISK (HIGH, MEDIUM OR LOW) LOW 10 POINTS MEDIUM 20 POINTS HIGH RISK 30 POINTS US Person or resident alien (10) Non resident alien (30) What nationality if nonresident alien? Is customer in a high risk geographic area? HIDTA or HIFCA Opened in person all parties present (10) Opened by mail (20) Opened on internet (3) Opened with: Cash (10) Cashier s Check (30) Payroll check (10) Other monetary instruments (2) TOTAL SCORE NRA 2012gettechnical inc 180

181 PUTTING TOGETHER CIP & CDD PUTTING IT ALL TOGETHER WORKSHEETS Personal Account Business Account Personal Account Questionnaire Sections I-IV Business Account Questionnaire Sections I-IV Example Section V: Add Non-Resident Alien Questionnaire Example Section V: Add MSB Questionnaire for High Risk To do enhanced Due Diligence on High Risk Accounts, you have to go farther. NRA 2012gettechnical inc 181

182 WORKSHEET ON PERSONAL ACCOUNTS You might use worksheets or your computer to record many of the compliance tasks. Worksheets such as these are used in many financial institutions. New Existing CIP PROFILE PERSONAL ACCOUNTS COMPLETE CIP PROFILE FOR EACH OWNER OR FIDUCIARY ON ACCOUNT (SOME BANKS MAY REQUIRE ONE ON EVERY SIGNER) SECTION ONE: INFORMATION CUSTOMER NAME (AS IT APPEARS ON PRIMARY IDENTIFICATION) PHYSICAL ADDRESS ADDRESS LINE 2 APT/STE DATE OF BIRTH / / SSN OR ITIN (IF NO SSN OR ITIN, PASSPORT NUMBER OR OTHER IDENTIFICATION NUMBER) NRA 2012gettechnical inc 182

183 SECTION TWO: DOCUMENTS PRIMARY DOCUMENTS ACCEPTED BY FINANCIAL INSTITUTION Driver s License State Exp Nondriver s ID Card State Exp Passport Country Issued Exp Alien Registration Card Number Exp US Military Type Exp SECONDARY DOCUMENTS ACCEPTED BY FINANCIAL INSTITUTIONS Social security card Voter s registration Birth certificates Insurance cards Gun permits Company issued identification Credit Cards Birth certificates Student identification Tax return Pay stub Number if any Expiration date if any * There are many types of secondary identification. You make a list that your institution can justify to examiners based on your risk. Expanded Primary Identification for Nonresident aliens Mexico Matricular Card National Identification Card Driver s License from their country Visas (See above notes about bank s decisions on identification for nonresident aliens) Does document verify residence or nationality? If so which one? If not, how did the financial institution resolve the discrepancy? Expanded Secondary identification for Nonresident aliens ITIN Cards Any of the primary if have another primary (Mexico Matricular Cards, Visa, National Identification Cards etc) Birth certificates Voter s registration Tax return Additional Comments: NRA 2012gettechnical inc 183

184 SECTION THREE: DOCUMENTS Nondocument verification Regulation CC Hold OFAC Check Check systems, telecheck, credit reports Customer telephone call Letter of welcome Site visit Previous financial institution reference Verification of employment whitepages.com google.com Secretary of State- online at Yes/No Circle One Yes/No Circle One If match, false positive or complete match Results: Resolve conflict in documents: Additional Comments: NRA 2012gettechnical inc 184

185 Type of customer: New Existing customer adding new service Type of person: US Person Non US person Location of customer: HIDT Parish/County Non HIDT Parish/County Do you have any deposits come in automatically? Social Security Pay Roll Investment Other SECTION FOUR: QUESTIONS Account opening method: In person all parties present In person, less than all parties present Mail Telephone , website Type of deposit: Cash On us transfer or check Payroll check Government Check Cashier s check Wire Foreign funds What brought you to our bank? Product Relationship with banker Location Dissatisfied with current bank Other Do you use automatic withdrawals? Utilities House note Other Do you plan to use the following: Internet banking ATM Other branches? If so where Wire services? If so where Lending Over Draft Protection Safe Deposit Boxes Do you know how many deposits you will make a month? or more Do you know how many checks or withdrawals you plan to make a month? or more NRA 2012gettechnical inc 185

186 New Customer Existing Customer US Person (See US Person Worksheet) Non US Person (Attach W-8) Business Account (Complete Business Worksheet) Personal Account SECTION FIVE NONRESIDENT ALIEN ALTERNATE WORKSHEET Name (As it appears on Primary Identification) Nationality Residential/Street Address SSN/ITIN Date of Birth Home phone Work phone Employment/Student Contact Individual Type of Identification: Select Two and one form of identification must have picture, description and signature Type of None documentary Verification Documentary Verification Passport Temporary Resident Card Form I-688 Employment Authorization Card Form I-688A, I-688B, I-766 Nonimmigrant Visa & Border Crossing Card Refugee Travel Document Form I-571 US Department of State Driver s Licenses VISA Consular ID Cards Social Security Card Mexico Driver s License (32) Canada Card Expiration Nationality Number Card Expiration Nationality Number Nondocumentary Verification Letter of Welcome Third party verification: Type Check Systems, Credit report OFAC Other Resolution of Discrepancies NRA 2012gettechnical inc 186

187 Type of customer: New Existing customer adding new service Risk Assessment: Account opening method: In person all parties present In person, less than all parties present Mail Telephone , website Location of customer: Nationality Do you use automatic withdrawals? Utilities House note Other Type of person: US Person Non US person Source of funds: Are the funds coming from home? Where are the funds coming from to open this account? Bank where the funds are currently located Do you plan to use the following: Internet banking ATM Other branches? If so where Wire services? If so where Lending Over Draft Protection Safe Deposit Boxes Purpose of the account: Safety of US Banking System Family in the US Travel Frequently in the US Type of deposit: Cash On us transfer or check Payroll check Government Check Cashier s check Wire Foreign funds Do you know how many deposits you will make a month? or more What brought you to our bank? Product Relationship with banker Location Dissatisfied with current bank Other Do you have any deposits come in automatically? Social Security Pay Roll Investment Other Do you know how many checks or withdrawals you plan to make a month? or more NRA 2012gettechnical inc 187

188 WORKSHEET ON BUSINESS ACCOUNTS New Existing Exempt CIP PROFILE BUSINESS ACCOUNTS COMPLETE CIP PROFILE IF YOUR BANK REQUIRES INFORMATION ON ALL SIGNERS THEN USE PERSONAL SHEET ABOVE SECTION ONE: INFORMATION BUSINESS NAME OR DBA NAME (As it appears on government issued document) PHYSICAL ADDRESS ADDRESS LINE 2 APT/STE SSN OR EIN Sole Proprietors and Single member LLCs may use SSN of the owner NRA 2012gettechnical inc 188

189 SECTION TWO: DOCUMENTS Sole Proprietor Assumed Name/Trade Name/Occupational License Circle One General Partnership Partnership Agreement, if any Partnership Registration, if any Limited Partnership Partnership Agreement Partnership Registration Corporation Minutes of the Board Meeting Certificate of Incorporation or Articles Stamped Filed Agent, Escrow, Iolta, Public funds or other type of entity Document as required by state or bank Otherwise have to identify all signers Nonprofit organization or club Charter, By-laws, minutes Otherwise have to identify all signers Formal Trusts Trust Documents Other NRA 2012gettechnical inc 189

190 SECTION THREE: DOCUMENTS Nondocument verification Check systems, telecheck, credit reports Customer telephone call Letter of welcome Site visit Previous financial institution reference Verification of employment whitepages.com google.com Secretary of State- online at Regulation CC Hold Yes/No Circle One OFAC Check Yes/No Circle One If match, false positive or complete match Results: Resolve conflict in documents: Additional Comments: NRA 2012gettechnical inc 190

191 Type of customer: New Existing customer adding new service Type of person: US Person Non US person Type of deposit: Cash On us transfer or check Payroll check Location of customer: HIDT Parish/County Non HIDT Parish/County What brought you to our bank? Product Relationship with banker Location Dissatisfied with current bank Other SECTION FOUR: QUESTIONS Government Check Cashier s check Wire Foreign Fund Do you have any deposits come in automatically? Pay Roll Operating Account Other Do you have any deposits come in automatically? YES NO Do you plan to use the following: Internet banking ATM, Debit Cards Other branches? If so where Wire services? If so where Lending Safe Deposit Boxes ACH Lockbox Do you have any cash needs for our branch? YES If yes, how much. Account opening method: In person all parties present In person, less than all parties present Mail Telephone , website Type of business: Money Service Business (check cashing, wires, issuer or redeemer of cashier s checks, etc--fill out MSB questionnaire) Buying or selling motor vehicles of any kind, vessels, aircraft, farm equipment, or mobile homes Practicing law Accounting Practicing medicine Auctioning goods Chartering or operating ships, buses, or aircraft Gaming of any kind (other than licensed pari-mutuel betting at race tracks) Real estate brokerage Pawn brokerage Title insurance and real estate closing Trade union activities Other How close is your office? 1-5 miles 6-10 miles 11+ miles Do you use automatic withdrawals? Sweep Accounts Utilities Other Do you know how many deposits you will make a month? or more Do you know how many checks or withdrawals you plan to make a month? or more NRA 2012gettechnical inc 191

192 In your money service business, which of the following activities does your business engage in? Dealer in foreign exchange Check casher Issuers or sellers of traveler s checks or money orders Providers of prepaid access (not a prepaid program if it provides closed loop prepaid access to funds not to exceed $2,000 maximum value that can be associated with a prepaid access device or vehicle on any day) Money transmitters U.S. Postal Service Seller of prepaid access (activities in excess of $10,000 in any one business day) If you checked any of the above are these activities $1000 or more for any one customer in any one business day (except where noted)? Yes No Do you only do business In the United States International Both What will be the primary purpose of this account? What is your anticipated volume in this account? SECTION FIVE Are you engaged in the business of wire transfers? Yes No In your money service business identify yourself as one of the following: Principal Agent (Attach documentation proving agency status) Is your business: New business Date Formed: Existing business Years in business: Are the money service business activities Primary source of income Secondary source of income What percentage of income is derived from the money service side of your business? % If your business is in the United States, is it Local in your state Out of state Both NRA 2012gettechnical inc 192

193 SECTION SIX What is the purpose of the organization? Civic Benefit or Tragedy Political Campaign Public Fund Other How is your organization structured? Officers with regular meetings Board Steering Committee Other What geographic locations are served? County/Parish State United States International Who is the volunteer base? Local individuals in county Statewide volunteers National volunteers International volunteers Where does the funding come from? Local donations Statewide donations National donations International donations NRA 2012gettechnical inc 193

194 NRAS & SETTING UP INTEREST BEARING ACCOUNTS NRA 2012gettechnical inc 194

195 OVERVIEW: SSN, EIN OR ITIN When your customer uses an SSN, EIN or ITIN Social Security Number (SSN) Employer Identification Number (EIN) Individual Taxpayer Identification Number (ITIN) U.S. Citizen Resident Alien Nonresident Alien with Employment Authorization Business Account Nonprofit Organization Irrevocable Trust Estate Customer is not eligible for a social security number but has a tax purpose for needing a tax identification number. Applies for SSN with SS-5 Form U.S. Citizen or Resident Alien customer Signs W-9 Nonresident Alien customer signs W-8 BEN Applies for EIN using SS- 4 Form Customer signs W-9 Customer applies for ITIN with W-7 Form To get an ITIN the customer may have to be turned down for a SSN first and then apply for the ITIN. To get an account for banking purposes, the customer may have to prove the tax purpose. See letter to give customer to get ITIN. ITINs start with a 9. W-8 BEN required on every owner or you must withhold. Expires every three years NRA 2012gettechnical inc 195

196 OVERVIEW: TAXPAYER IDENTIFICATION NUMBERS 1. CIP Requirements For U.S. persons a bank must obtain a U.S. taxpayer identification number (e.g., social security number, individual taxpayer identification number, or employer identification number). For non U.S persons a bank must obtain one or more of the following: a taxpayer identification number; passport number and country of issuance; alien identification card number; or number and country of issuance of any other government-issued document evidencing nationality or residence and bearing a photograph or similar safeguard. 2. W-9 (Usually on signature card) Use a Form W-9 when the customer is a U.S. person (including a resident alien). The customer must certify that: He or she is giving you the correct TIN He or she is not subject to backup withholding Has a exemption Name: If the customer is an individual, the customer must generally enter the name shown on his/her social security card. However, if the customer has changed his/her last name, for instance, due to marriage without informing the Social Security Administration of the name change, enter the first name, the last name shown on the social security card, and her new last name. If the account is in joint names, list first and then circle the name of the person or entity whose number the customer enters in Part I of the form. Sole proprietor: Enter the customer s individual name as shown on the social security card on the Name line. The customer may enter the business, trade, or doing business as (DBA) name on the Business name line. Limited liability company (LLC): If the customer is a single-member LLC (including a foreign LLC with a domestic owner) that is disregarded as an entity separate from its owner under Treasure regulations section , enter the owner s name on the Name line. Enter the LLCs name on the Business name line. Other entities: Enter the customer s business name as shown on required Federal tax documents on the Name line. This name should match the name shown on the charter or other legal document creating the entity. The customer may enter any business, trade, or DBA name on the Business name line. NRA 2012gettechnical inc 196

197 Exempt form backup withholding: If the customer is exempt, enter his/her name as described above, then check the Exempt from backup withholding box in the line following the business name, sign and date the form. Individuals (including sole proprietors) are not exempt from backup withholding. Corporations are exempt from backup withholding for certain payments, such as interest and dividends. For more information on exempt payees, see the instructions for the Requester of Form W-9. If the customer is a nonresident alien or a foreign entity not subject to backup withholding, give the requester the appropriate completed Form W-8. Note: If the customer is exempt from backup withholding, the customer should still complete this form to avoid possible erroneous backup withholding. 3. W-8 BEN If the customer receives certain types of income, the customer must provide Form W-8BEN to: Establish that the customer is a foreign person; Claim that the customer is the beneficial owner of the income for which Form W- 8BEN is being provided; and If applicable, claim a reduced rate of, or exemption from, withholding as a resident of a foreign country with which the United States has an income tax treaty. Expiration of Form W-8BEN. Generally, a Form W-8BEN provided without a U.S. taxpayer identification number (TIN) will remain in effect for a period starting on the date the form is signed and ending on the last day of the third succeeding calendar year, unless a change in circumstances makes any information on the form incorrect. For example, a Form W-8BEN signed on September 30, 2001, remains valid through December 31, A Form W-8BEN furnished with a U.S. TIN will remain in effect until a change in circumstances makes any information on the form incorrect, provided that the withholding agent reports on Form 1042-S at least one payment annually to the beneficial owner who provided the Form W-8BEN. See Line 6 on page 3 for circumstances under which the customer must provide a U.S. TIN. Definitions Beneficial owner. For payments other than those for which a reduced rate of withholding is claimed under an income tax treaty, the beneficial owner of income is generally the person who is required under U.S. tax principles to include the income in gross income on a tax return. A person is not a beneficial owner of income, however, to the extent that person is receiving the income as a nominee, agent, or custodian, or to the extent the person is a conduit whose participation in a transaction is disregarded. In the case of amounts paid that do not constitute income beneficial ownership is determined as if the payment were income. Foreign partnerships, foreign simple trusts, and foreign grantor trusts are not the beneficial owners of income paid to the partnership or trust. The beneficial owners of income paid to a foreign partnership are generally the partners in the partnership, provided that the partner is not itself a partnership, foreign simple or grantor trust, nominee or other agent. The beneficial owners of income paid to a foreign simple trust [i.e., a foreign trust that is described in section 651(a)] are generally the beneficiaries of the trust, if the beneficiary is not a foreign partnership, NRA 2012gettechnical inc 197

198 foreign simple or grantor trust, nominee or other agent. The beneficial owners of income paid to a foreign grantor trust (i.e., a foreign trust to the extent that all or a portion of the income of the trust is treated as owned by the grantor or another person under sections 671 through 679) are the persons treated as the owners of the trust. The beneficial owner of income paid to a foreign complex trust (i.e., a foreign trust that is not a foreign simple trust or foreign grantor trust) is the trust itself. The beneficial owner of income paid to a foreign estate is the estate itself. Nonresident alien individual. Any individual who is not a citizen or resident of the United States is a nonresident alien individual. An alien individual meeting either the green card test or the substantial presence test for the calendar year is a resident alien. Any person not meeting either test is a nonresident alien individual. Additionally, an alien individual who is a resident of a foreign country under the residence article of an income tax treaty, or an alien individual who is a resident or Puerto Rice, Guam, the Commonwealth of the Northern Mariana Islands, the U.S. Virgin Islands, or American Samoa is a nonresident alien individual. See Pub. 519, U.S. Tax Guide for Aliens, for more information on resident and nonresident alien status. 4. W-7 Use Form W-7 to apply for an IRS individual taxpayer identification number (ITIN). An ITIN is a nine-digit number issued by the U.S. Internal Revenue Service (IRS) to individuals who are required to have a U.S. taxpayer identification number but who do not have and are not eligible to obtain, a social security number (SSN). The ITIN is for tax purposes only. It does not entitle you to social security benefits, and creates no inference regarding your immigration status or your right to work in the United States. Any individual who is eligible to be legally employed in the United States must have an SSN. Note: Individuals filing tax returns using an ITIN are not eligible for the earned income credit (EIC). NRA 2012gettechnical inc 198

199 REQUEST FOR TAXPAYER IDENTIFICATION NUMBER AND CERTIFICATION (FORM W-9) (DEC 2011) NRA 2012gettechnical inc 199

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204 INSTRUCTIONS FOR W-9 (JAN 2011) NRA 2012 gettechnical inc 204

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