n-98-16.pdf

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Part III
Administrative, Procedural, and Miscellaneous
Effective Date of Regulations Under Section 1441 and Qualified
Intermediary Procedures.
Notice 98-16
Section 1. Scope
This notice announces that the Department of Treasury
("Treasury") and the Internal Revenue Service (the "IRS") will
extend the effective date of the section 1441 withholding
regulations. As extended, those regulations will apply to
certain payments made to foreign persons after December 31, 1999.
This notice also provides new transition rules for satisfying the
withholding certificate or statement requirements under the
withholding regulations. Finally, this notice describes the
general procedure the IRS will follow in entering into qualified
intermediary withholding agreements in order to expedite the
process of making such agreements as widely available as
possible.
Section 2. Background
On October 14, 1997, final Income Tax Regulations (the
"final withholding regulations") substantially revising and
replacing existing regulations regarding the withholding of tax

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under chapter 3 (sections 1441-1464) of the Internal Revenue Code
(the "Code") were published in the Federal Register as T.D. 8734.
Those regulations also significantly revise existing information
reporting and backup withholding regulations under chapter 61 and
section 3406 of the Code. As promulgated, the final withholding
regulations will apply to all payments made after December 31,
1998.
Section 3. Extended Effective Date
Treasury and the IRS will amend the final withholding
regulations to extend the date of applicability of those
regulations to payments made after December 31, 1999. Treasury
and the IRS recognize that the final withholding regulations
contain substantial changes to existing rules and will likely
require significant changes to business practices and information
systems for many U.S. and foreign withholding agents. These
changes come at a time when many of these entities are also
attempting to make significant changes to business practices and
information systems to conform to the Year 2000 date change and
the European Monetary Union currency conversion.
Treasury and the IRS also must ensure that qualified
intermediary withholding agreements are available to as many
financial intermediaries as possible for the final withholding
regulations to be effectively implemented. As described more

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fully below, Treasury and the IRS expect that the process for
making qualified intermediary withholding agreements widely
available will take several months from the date the process
begins.
Accordingly, Treasury and the IRS believe it is in the best
interest of tax administration to extend the date of
applicability of the final withholding regulations to ensure that
both taxpayers and the government can complete the changes
necessary to implement the new withholding regime. As extended
by this notice, the final withholding regulations will apply to
payments made after December 31, 1999.
In addition, the IRS will regard the 1999 calendar year as a
transition period for the administration of the withholding tax
system. Accordingly, in enforcing compliance with current
withholding rules for calendar year 1999, the IRS will take into
account the extent to which a withholding agent makes a good
faith effort during that period 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 to modify its account opening practices to conform to
the new documentation requirements, obtain new documentation on
existing accounts when new withholding certificates become
available, and make appropriate systems changes to comply with

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the final withholding regulations and, if appropriate, Rev. Proc.
98-27 (relating to qualified intermediary withholding
agreements). For foreign withholding agents, the IRS will also
take into account whether or not the withholding agent makes an
effort to seek qualified intermediary status. The IRS will also
take into account whether or not a withholding agent (whether
U.S. or foreign) effectively implements the final withholding
regulations beginning on January 1, 2000.
Section 4. Modified Transition Rules
The final withholding regulations provide transition rules
for obtaining new withholding certificates and statements
containing the necessary information and representations required
by those regulations. The IRS released and requested public
comments on draft new withholding certificates in Announcement
98-15, published in 1998-10 I.R.B. 36. The new withholding
certificates would replace current Forms W-8, 1001, 4224, 8709,
and 1078, and statements described in §1.1441-5 of the
regulations in effect before January 1, 1999 (the "existing
certificates or statements").
Generally, under the transition rules contained in the final
withholding regulations, a withholding agent holding a valid
existing certificate or statement on December 31, 1998, may treat
that certificate or statement as valid until the earlier of its

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expiration or December 31, 1999. In addition, the transition
rules provide that any existing withholding certificate or
statement that is valid on January 1, 1998, and that expires
during 1998, remains valid until December 31, 1998. (These rules
cannot operate together, however, to extend beyond December 31,
1998, the validity of a certificate that, without the transition
rule, would expire in 1998.)
The IRS intends to modify the withholding certificate and
statement transition rules of the final withholding regulations
to provide that a withholding agent holding a valid existing
certificate or statement on December 31, 1999, may treat that
certificate or statement as valid until the earlier of its
expiration or December 31, 2000. No existing certificates or
statements will be effective after December 31, 2000. As under
the final regulations, existing certificates and statements that
expire in 1999 will not be effective after expiration. The
existing transition rule providing that any existing withholding
certificate or statement that is valid on January 1, 1998, and
that expires during 1998 remains valid until December 31, 1998,
will be retained. This rule should ensure that withholding
agents will be able to replace existing withholding certificates
or statements that expire in 1998 with new certificates that will
be valid under the final withholding regulations when those
regulations take effect. The IRS anticipates that new
withholding certificates will be available before December 31,

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1998.
New withholding certificates that are valid under the final
withholding regulations will be deemed to satisfy the
requirements under the regulations in effect before January 1,
2000, to obtain Forms W-8, 1001, 4224, 8709, or a statement under
section 1.1441-5. Therefore, in situations where existing
certificates and statements are not outstanding, or new
certificates or statements must be obtained because of a change
in circumstances, a withholding agent may obtain new withholding
certificates. New withholding certificates will be valid for the
period specified in section 1.1441-1(e)(4)(ii) of the final
withholding regulations, regardless of when they are obtained.
Notice 97-66 (1997-48 I.R.B. 1) provides a related
transition rule that is affected by the extended effective date
of the final withholding regulations. Notice 97-66 relates to
final Income Tax Regulations on the source and character of
substitute interest and dividend payments published in the
Federal Register on October 14, 1997 as T.D. 8735 (the Afinal
substitute payment regulations@). The notice provides guidance
on complying with the statement requirement of section 871(h)(5)
for substitute interest payments made after November 13, 1997,
or, if an election is made under section 6 of the notice, for
substitute interest payments made after December 31, 1998.
Substitute interest payments made by a foreign person that are

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U.S. source interest must satisfy the statement requirement of
section 871(h)(5) to qualify as portfolio interest.
The final substitute payment regulations referred taxpayers
to §1.871-14(c) of the final withholding regulations for guidance
on the statement requirement of section 871(h)(5). Because
§1.871-14(c) of the final withholding regulations was not to be
effective before January 1, 1999, however, Notice 97-66 provides
a transition rule providing that the statement requirement of
section 871(h)(5) will 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.
Because the IRS intends to make §1.871-14(c) of the final
withholding regulations effective for payments made after
December 31, 1999, 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, 2000. The remainder of Notice 97-
66 remains unchanged.
On January 26, 1998, a notice of proposed rulemaking (REG-
209322-82) was published in the Federal Register that would amend

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regulations under sections 6031 and 6063 regarding the filing of
returns of partnership income (a "partnership return"). Under
§1.6031(a)-1(b)(2) of the proposed regulations, a partnership
return is not required of a foreign partnership if it meets
certain conditions and Forms 1042 and 1042-S are filed under
§1.1461-1(b) and (c), as amended by the final withholding
regulations, either by the partnership or by another withholding
agent (or agents). The proposed date of applicability for the
exception is taxable years of a partnership that begin on or
after January 1, 1999. If §1.6031(a)-1(b)(2) is finalized,
Treasury and IRS intend to amend the date of applicability for
that section to reflect the extended date of applicability of
§1.1461-1(b) and (c) of the final withholding regulations.
Section 5. Qualified Intermediary Procedures
As indicated above, for the final withholding regulations to
be most effectively implemented, it is desirable for qualified
intermediary withholding agreements to be available to as many
foreign financial intermediaries as possible. A qualified
intermediary is a foreign person, or a foreign branch of a U.S.
person, that agrees with the IRS in a qualified intermediary
withholding agreement to collect information regarding its
account holders and to make that information available as may be
required under the agreement. It is anticipated that the
qualified intermediary regime will reduce the collection of

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information and reporting required of withholding agents under
the current rules.
Simultaneously with this notice, Treasury and the IRS are
releasing Revenue Procedure 98-27, which provides guidance on
entering into a qualified intermediary withholding agreement with
the IRS. Although the revenue procedure is designed to provide
specific guidance on the application process for persons
described in §1.1441-1(e)(5)(ii)(A) and (B) (i.e., foreign
financial institutions, foreign clearing organizations, and
foreign branches of U.S. financial institutions and U.S. clearing
organizations), any person desiring a qualified intermediary
withholding agreement may submit a draft agreement in the general
manner described in the revenue procedure.
This notice announces that, although any person is permitted
to apply for and negotiate an individual qualified intermediary
withholding agreement with the IRS, the IRS intends to issue a
series of model agreements of broad applicability to make
qualified withholding agreements as widely available as possible.
It is contemplated that, upon release of one of these model
agreements, any person falling within the class of persons
covered by the model agreement would be able to accept, sign, and
submit the agreement to the IRS, without the need for individual
negotiations. The IRS currently contemplates that each model
agreement will be specific to a particular country, or group of

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countries with similar laws and practices, and will be specific
to a class of persons conducting similar intermediary businesses
in a similar manner. Such an approach enables each model
agreement to cover as broad a class of persons as possible, while
allowing uniform application of all material provisions among all
persons in the identified class.
Because of its intent to issue a series of model agreements
of broad applicability, the IRS invites submissions of proposed
model agreements by groups or associations of potential qualified
intermediaries. As part of the submission, the IRS requests a
description of the class of persons the proposed model agreement
is intended to cover and why that class of persons could operate
under a single model agreement.
In the interest of ensuring that as many financial
intermediaries as possible can become qualified intermediaries
well in advance of the effective date of the final withholding
regulations, the IRS intends to give submissions of proposed
model agreements of broad applicability first consideration.
Consequently, except in unusual circumstances, proposed
agreements by individual intermediaries, while also invited, will
not likely lead to negotiations with the IRS until sufficient
progress has been made in the process of issuing model
agreements. Moreover, persons who are clearly within a class of
persons covered by an existing model agreement will not be

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permitted to negotiate an individual agreement absent unusual
circumstances.
The IRS currently contemplates releasing a group of model
agreements simultaneously, rather than issuing them one-by-one,
and expects that this release will occur before December 31,
1998. Additional model agreements and individual agreements may
be issued after that first release of model agreements. Due to
time constraints, however, groups or associations of
intermediaries desiring to submit a proposed model agreement on
behalf of a class of persons should make such a submission on or
before July 3, 1998, to ensure that such model agreement can be
released and individual agreements can be concluded prior to
December 31, 1998.
Persons submitting proposed model agreements are advised
that these submissions will be made available to the public.
Section 6. Contact Information
The principal author of this Notice is Carl Cooper 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 Mr. Cooper at 202-622-
3870 (not a toll-free call).