SECTION 2. BACKGROUND

.01 Withholding and reporting on pay- ments to foreign persons. Under sections 1441 and 1442 of the Internal Revenue Code (Code), a person that makes a payment of U.S. source interest, dividends, royalties, and certain other types of income to a foreign person must generally deduct and withhold 30 percent from the payment. A lower rate of withholding may apply under the Code (e.g., section 1443), the regulations, or an income tax treaty. Generally, a payor of these types of income must also report the payments on Forms 1042–S. See §1.1461–1(c).

Under sections 6041, 6042, 6045, 6049, and 6050N of the Code (the Form 1099 reporting provisions), payors of interest, dividends, royalties, gross proceeds from the sales of securities, and other fixed or determinable income must report payments on Form 1099 unless an exception applies. If a payment is reportable on Form 1099, a payor must generally obtain a Form W-9 from the payee. If the payor does not receive the Form W-9, it must generally backup withhold at a 31 percent rate under section 3406 of the Code and report the payment on Form 1099. An exception to the Form 1099 reporting provisions applies if the payee is a foreign person. A payor can treat a person as foreign if the payor can reliably associate the payment with documentation that establishes that the person is the beneficial owner of the income or a foreign payee. See §§1.6041–4(a), 1.6042–3(b)(1)(iii); 1.6045–1(g)(1)(i); 1.6049–5(b)(12); and 1.6050N–1(c)(1)(i). Moreover, a payor does not have to backup withhold on payments to foreign beneficial owners or foreign payees because backup withholding applies only to amounts that the payor must report on Form 1099.

.02 Responsibilities of intermediaries that enter into the QI withholding agree- ment. When the IRS enters into a QI

2000–4 I.R.B. 387 January 24, 2000

(4) A list of the position titles of those persons who will be the responsible parties for performance under the Agreement and the names, addresses, and telephone numbers of those persons as of the date the application is submitted.

(5) An explanation and sample of the account opening agreements and other documents used to open and maintain the accounts at each location covered by the Agreement.

(6) A list describing the type of account holders (e.g., U.S., foreign, treaty benefit claimant, or intermediary), the approximate number of account holders within each type, and the estimated value of U.S. investments that the QI agreement will cover.

(7) A general description of U.S. assets by type (e.g., U.S. securities, U.S. real estate), including assets held by U.S. custodians, and their approximate aggregate value by type. The applicant should provide separate information for assets beneficially owned by the applicant and for assets it holds for others.

(8) A completed Form SS-4 (Application for Employer Identification Number) to apply for a QI Employer Identification Number (QI-EIN) to be used solely for QI reporting and filing purposes. An applicant must apply for a QI-EIN even if it already has another EIN. Each legal entity governed by the QI withholding agreement must complete a Form SS-4.

(9) Completed appendices and attachments that appear at the end of the QI agreement set forth in section 4.

The IRS will not enter into a QI withholding agreement that provides for the use of documentary evidence obtained under a country’s know-your-customer rules if it has not received the “knowyour-customer” practices and procedures for opening accounts and responses to the 18 specific items presented below. If the information has already been provided to the IRS, it is not necessary for a particular prospective QI to submit the information. The IRS may publish lists of countries for which it has received know-your-customer information and for which the know-your-customer rules are acceptable. A prospective QI applicant may also contact the IRS at the address or telephone number provided in section 3.01 to obtain information. The 18 items are as follows:

1. An English translation of the laws

and regulations (“know-your-customer” rules) governing the requirements of a QI to obtain documentation confirming the identity of QI’s account holders. The translation must include the name of the law, and the appropriate citations to the law and regulations. 2. The name of the organization (whether a governmental entity or private association) responsible for enforcing the know-your-customer rules. Specify how those rules are enforced (e.g., through audit) and the frequency of compliance checks. 3. The penalties that apply for failure to obtain, or evaluate, documentation under the know-your-customer rules. 4. The definition of customer or account holder that is used under the knowyour- customer rules. Specify whether the definition encompasses direct and indirect beneficiaries of an account if the activity in the account involves the receipt or disbursal of funds. Specify whether the definition of customer or account holder includes a trust beneficiary, a company whose assets are managed by an asset manager, a controlling shareholder of a closely held corporation or the grantor of a trust. 5. A statement regarding whether the documentation required under the know-your- customer rules requires a financial institution to determine if its account holder is acting as an intermediary for another person. 6. A statement regarding whether the documentation required under the know-your- customer rules requires a financial institution to identify the account holder as a beneficial owner of income credited to an account. 7. A list of the specific documentation required to be used under the knowyour- customer rules, or if those rules do not require use of specific documentation, the documentation that is generally accepted by the authorities responsible for enforcing those rules. 8. A statement regarding whether the know-your-customer rules require that an account holder provide a permanent residence address. 9. A summary of the rules that apply if an account is not opened in person (e.g., correspondence, telephone,

Internet). 10. Whether an account holder’s identity may be established, in whole or in part, by introductions or referrals. 11. The circumstances under which new documentation must be obtained, or existing documentation verified, under the know-your-customer rules. 12. A list of all the exceptions, if any, to the documentation requirements under the know-your-customer rules. 13. A statement regarding whether the know-your-customer rules do not require documentation from an account holder if a payment to or from that account holder is cleared by another financial institution. ²

14. A statement regarding how long the documentation remains valid under the know- your-customer rules.
15. A statement regarding how long the documentation obtained under the know-your- customer rules must be retained and the manner for maintaining that documentation.
16. Specify whether the rules require the maintenance of wire transfer records, the form of the wire transfer records and how long those records must be maintained. State whether the wire transfer records require information as to both the original source of the funds and the final destination of the funds.
17. A list of any payments or types of accounts that are not subject to the know-your- customer rules.
18. Specify whether there are special rules that apply for purposes of private banking activities.