n-99-25.pdf

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Part III
Administrative, Procedural, and Miscellaneous
Effective Date of Regulations Under Section 1441 and Qualified Intermediary
Procedures.
Notice 99-25
The Department of the Treasury (Treasury) and the Internal Revenue Service
(IRS) intend to extend the date of applicability of the regulations under section 1441
and related provisions to payments made after December 31, 2000. The reasons for
this delay and its consequences are explained in this notice.
Section 1. Background
In Treasury Decision 8734 (62 FR 53387), as modified by T.D. 8804 (63 FR
72183) (the “new withholding regulations”) the Department of the Treasury and the
Internal Revenue Service issued comprehensive regulations under chapter 3 (sections
1441-1464) and subpart G of subchapter A of chapter 61 (sections 6041-6050S) of the
Internal Revenue Code (the “Code”). Qualified intermediaries are a key component of
those regulations. A qualified intermediary is a foreign entity, or foreign branch of a
U.S. entity, that obtains the benefit of establishing the foreign status of its account
holders, and their entitlement to reduced rates of withholding, by using a single
withholding certificate rather than having to provide documentation for each customer
to a U.S. withholding agent. In addition, the qualified intermediary can report most of

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its payments to the IRS on a pooled basis, rather than having to provide a Form 1042-S
for each of its foreign account holders or investors. In exchange for these benefits, the
qualified intermediary assumes certain compliance and information reporting
responsibilities.
To be a qualified intermediary, an entity must enter an agreement with the IRS.
The IRS has provided information on qualified intermediary agreements first in Rev.
Proc. 98-27, 1998-15 I.R.B. 30, and Notice 98-16, 1998-15 I.R.B. 12, and subsequently
in Notice 99-8, 1999-5 I.R.B. 26. The final provisions of qualified intermediary
agreements have not yet been determined. Notice 99-8 also announced certain
changes that Treasury and IRS are proposing to make to T.D. 8734.
Section 2. Delayed Effective Date
Commentators to Notice 99-8 stated that financial institutions are involved in
substantial information systems changes that are required for their systems to become
year 2000 compliant. To meet their objectives, financial institutions are imposing
restrictions on systems changes to ensure a smooth year 2000 transition.
Commentators also indicated that certain aspects of the qualified intermediary regime
were not apparent to some financial institutions when the new withholding regulations
were first issued and that implementation of the regulations would require more time
and effort from many institutions than had initially been expected. Further, because the
terms of the qualified intermediary agreements have not been finalized, potential
qualified intermediaries are not yet certain of all of their documentation, withholding,
and reporting obligations. Therefore, commentators have stated that full compliance

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with the regulations cannot be achieved if the 1441 regulations become effective on
January 1, 2000.
Treasury and the IRS have concluded that it is in the best interest of tax
administration to extend the date of applicability of the final withholding regulations to
permit taxpayers to make the computer system modifications necessary to comply with
the new withholding regulations without the impediments caused by year 2000
concerns. Therefore, T.D. 8734, as modified by T.D. 8804, will be amended to apply
to payments made after December 31, 2000.
In Notice 98-16, the IRS stated that it would regard the 1999 calendar year as a
transition period in enforcing compliance for the administration of the withholding tax
system. The year 2000 will similarly be regarded as a transition period. Accordingly,
in enforcing compliance with current withholding rules for calendar years 1999 and
2000, the IRS will take into account the extent to which a withholding agent makes a
good faith effort to transform its business practices and information systems to comply
with the final withholding regulations. For example, the IRS will take into account
whether a U.S. withholding agent makes reasonable efforts during 1999 and 2000 to
modify its account opening practices to conform to the new documentation
requirements, obtain new withholding certificates on existing accounts, and make
appropriate systems changes to comply with the final withholding regulations. For
foreign withholding agents, the IRS will take into account whether or not the withholding
agent makes a good faith effort to seek qualified intermediary status. The IRS will also
take into account whether or not a withholding agent (whether U.S. or foreign)

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effectively implements the final withholding regulations beginning on January 1, 2001.
Section 3. Documentation Transition Rules
The new withholding regulations contain transition rules affecting the
documentation that must be obtained under the new withholding regulations. See, for
example, §§1.1441-1(f)(2)(i), 1.1441-4(g), 1.1441-5(g), and 1.1441-6(g). Those
documentation transition rules generally permit the use of Forms W-8, 1001, 1078 ,
4224, and 8709, or a statement under current regulation §1.1441-5 (“old
documentation”) until December 31, 2000. The new withholding regulations will not
extend the use of old documentation beyond December 31, 2000. An extension is not
necessary because Forms W-8BEN, W-8ECI, and W-8EXP (“new withholding
certificates”) which replace the old documentation, and which comply with the new
withholding regulations, have been available since the end of 1998. Therefore,
withholding agents will have had over two years to replace old documentation with new
withholding certificates. The regulations incorporating the effective date change will
continue to treat new withholding certificates as satisfying the documentation
requirements of the regulations in effect prior to January 1, 2001.
The final regulations concerning certain payments made pursuant to a securities
lending or sale-repurchase transaction provide that substitute interest payments made
with respect to securities that give rise to U.S. source interest income may be
characterized as portfolio interest if the transferor of the security complies with the
documentation requirements of §1.871-14(c) of the final withholding regulations.
Because §1.871-14(c) of the final withholding regulations was not to be effective before

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January 1, 1999, Notice 97-66 contained a transition rule providing that the statement
requirement of section 871(h)(5) would be satisfied with respect to substitute interest
payments made after November 13, 1997, and before January 1, 1999, if any written,
electronic, or oral statement that reasonably establishes that the payee is a foreign
person is given or made to the payor before, or within a reasonable period after, the
payment. In Notice 98-16, the IRS extended the transition rule of Notice 97-66 to
apply to substitute interest payments made after November 13, 1997 (or after
December 31, 1998 if elected) and before January 1, 2000. Because the IRS intends
to make §1.871-14(c) of the new withholding regulations effective for payments made
after December 31, 2000, as announced herein, the transition rule in Notice 97-66 is
extended to apply to substitute interest payments made after November 13, 1997 (or
after December 31, 1998, if elected) and before January 1, 2001. Without this
extension, withholding agents would be limited to using Form W-8 or Form W-8BEN to
apply the portfolio interest exemption. The remainder of Notice 97-66 remains
unchanged.
Finally, in Announcement 99-24, 1999-14 I.R.B. 12, the IRS asked for comments
on proposed changes to Form 1042-S that would be effective for forms to be filed in
2001. Because of the delay in the effective date of T.D. 8734, the suggested changes
set forth in Announcement 99-24 are now proposed to apply to Forms 1042-S filed in
2002. The 2000 Form 1042-S will remain the same size and format as the 1999 forms.
The 1999 form may, however, be revised to reflect changes in the law.

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Section 4. Contact Information
The principal author of this Notice is Laurie Hatten-Boyd of the Office of the Associate
Chief Counsel (International) within the Office of the Chief Counsel, Internal Revenue
Service, 1111 Constitution Avenue, N.W., Washington, D.C. 20224. For further
information regarding this Notice contact Ms. Hatten-Boyd at 202-622-3840 (not a toll-
free call).