International Tax

Payments Directed Outside the United States — Withholding and Reporting (Portfolio 6560)

  • This Portfolio addresses the withholding of U.S. federal income tax under §§1441-1443 of the Internal Revenue Code from payments of certain U.S. source income made to foreign persons.

Description

Bloomberg Tax Portfolio, Payments Directed Outside the United States — Withholding and Reporting, lays the foundation with a discussion of withholding agents — i.e., when a payment that requires withholding is made, which party is responsible for withholding the tax and depositing it with the U.S. government. The Portfolio also discusses which party is the one liable for the tax, and the interaction between the obligations of the withholding agent and the beneficial owner of the payment. The Portfolio discusses various arrangements that have been entered into by taxpayers and the government where there are intermediaries in the chain of payment, such as the qualified intermediary regime, and the rules related to withholding foreign partnerships and withholding foreign trusts. The Portfolio also discusses certain exclusions from chapter 3 withholding, e.g., certain income paid to U.S. branches of foreign banks.

The Portfolio also includes a discussion of the types of payments that are considered to be withholdable payments under chapter 3, which include certain payments of U.S.-source fixed or determinable annual or periodical (FDAP) income, payments made (or deemed to be made) in connection dispositions by non-U.S. persons of U.S. real property interests, and income of partners in a partnership that have U.S. effectively connected income as a result of the partnership being engaged in a U.S. trade or business or having a permanent establishment in the United States.

The Portfolio discusses the determination of payee and beneficial owner status, documentary evidence and the presumption rules applicable in the absence of documentary evidence. The Portfolio covers determining who is the payee, and what is the payee’s status, and the rules related to associating a payment with documentation. It addresses situations where the withholding agent does not withhold according to the documentation and presumption rules, and what are the consequences. Similarly, the Portfolio discusses how to determine the beneficial owner’s status, for example, as either a U.S. or non-U.S. person, and as one that is eligible for the benefits of a U.S. income tax treaty to reduce the tax otherwise owed, in certain cases. A key element of these rules is those surrounding withholding certificates, and we describe those rules and how they apply.

The Portfolio discusses the practical considerations related to the timing of payments, deposits, and reporting, and the procedural rules surrounding these considerations. Such procedural rules include those surrounding electronic furnishing of certain forms, extensions, and the information that is required to be included for information reporting purposes. We also describe the procedures that exist with respect to underwithholding and overwithholding, and how taxpayers may request refunds or credits with respect to amounts that have been overwithheld.

The Portfolio addresses the civil and criminal penalties that may apply if a taxpayer fails to meet its withholding and reporting obligations under the rules discussed in this Portfolio, including those related to a failure to file informational forms, and a failure to pay tax, and a failure to deposit tax timely. The relevant statutes of limitations are also discussed.

The Portfolio also discusses the rules related to the withholding of tax on dispositions (or deemed dispositions) of U.S. real property interests by non-U.S. persons, and what exceptions may exist in this area. The overlap with these rules and those related to withholding of tax on foreign partners’ share of effectively connected income is also discussed.

The Portfolio has a section related to the withholding considerations surrounding certain “unique payments,” such as loan fees, guarantee fees, and virtual currency. The Portfolio contains a glossary in its worksheets containing some of the key terminology relevant to the chapter 3 withholding rules.

Table of Contents

I. Background and History of Chapter 3

  • Introduction
  • Historical Background

II. General Overview

  • U.S. Taxation and Withholding on Nonresident Aliens and Foreign Corporations
  • Structure of Chapter 3
  • Relationship of Chapter 3 to Other Chapters

III. Withholding Agent

  • General Definition
  • U.S. Branches of Foreign Entities
  • Qualified Intermediaries
  • Qualified Securities Lenders
  • Qualified Derivatives Dealers
  • Withholding Foreign Partnerships and Trusts
  • Authorized Agents
  • Withholding Agent Responsibilities

IV. Determination of Payee and Beneficial Owner’s Status

  • Introduction
  • Who Is a Payee
  • How to Determine Payee’s Status
  • How to Determine Beneficial Owner’s Status
  • Standards of Knowledge
  • Athletes and Entertainers — Central Withholding Agreements
  • Exemption From Withholding on Exempt Income of a Foreign Tax-Exempt Organization, Including Foreign Private Foundations

V. Payment Types

  • General Sourcing Rules
  • FDAP and Certain Other Amounts Subject to Withholding
  • Exclusions From Chapter 3 Withholding
  • Exceptions to Withholding on Corporate Distributions With Respect to Stock
  • Coordination with §1445
  • Coordination with §1446
  • Determination of Amounts To Be Withheld

VI. Claim of Reduced Withholding Under an Income Tax Treaty

  • General Requirements

VII. Timing of Payments, Deposits, and Reporting

  • Reporting
  • Special Reporting Situations
  • Depositing Withheld Tax
  • Adjustments for Overwithheld and Underwithheld Amounts
  • Refunds / Credits

VIII. Penalties

  • Penalties
  • Statute of Limitations

IX. Withholding of Tax on Dispositions of U.S. Real Property Interests

  • General Duty to Withhold
  • Transactions Specifically Requiring Withholding Under §1445(e)
  • Exceptions to the Duty to Withhold
  • Reporting and Paying Over Withheld Amounts
  • Withholding Certificates
  • Failure to Withhold (Transferee Liability)
  • Credit or Refund

X. Withholding Tax on Foreign Partners’ Share of Effectively Connected Income

  • Identifying the Foreign Partner
  • Determination of Partnership’s ECTI Allocable to Foreign Partners
  • Partner’s Certification of Deductions and Losses
  • Paying and Reporting the §1446(a) Tax
  • Publicly Traded Partnerships
  • Tiered Partnership Structures
  • Withholding on a Foreign Partner’s Share of ECI Deemed to Arise on the Sale or Disposition of a Partnership Interest

XI. Unique Payments

  • Insurance Premiums
  • Loan Fees
  • Guarantee Fees
  • Qualified Fails Charges
  • Virtual Currency
ewell-candace-2015
Candace Ewell
Principal
PricewaterhouseCoopers LLP
nauheim_stephen_2015
Stephen Nauheim
Managing Director
PricewaterhouseCoopers LLP
Robert_Limerick
Robert Limerick
Managing Director, Global Information Reporting
PricewaterhouseCoopers LLP
lakritz-john-2015
Jon Lakritz
Managing Director
PwC
Eileen Scott
Director
PricewaterhouseCoopers LLP
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