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 withhold

ing 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 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 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

April 13, 1998 12 1998–15 I.R.B.

ber 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, 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 “final 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 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 re

quirement 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 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.