SECTION 3. BACKGROUND

.01 Withholding and Reporting on Payments 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 generally must 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 also must report the payments on Forms 1042-S. See Treas. Reg. § 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 sale 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 generally must backup withhold 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 a Form W-8 or other documentation that establishes that the person is the foreign beneficial owner of the income or a foreign payee. See Treas. Reg. §§ 1.1441–1, 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 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.

to provide statements to each U.S. beneficiary or owner. If WT makes a distribution to a U.S. person, WT must provide an information statement to that U.S. person pursuant to section 6048(c) of the Code.

Audit . Unless WP or WT has elected to report on Form 1042-S on a pooled basis, it will be subject to audit only if selected for audit by the IRS. In that case, WP or WT will be subject to audit by an external auditor unless WP or WT requests an IRS audit. If WP or WT elects pooled reporting it must agree to have the external auditor conduct an audit after the close of every other calendar year, which will examine the two previous calendar years.

Term of the agreement . The WP or WT agreement will continue in force indefinitely unless WP or WT has elected to report on Form 1042-S on a pooled basis. In that case, the agreement will expire after a term of six years.

Automatic termination . If WP or WT fails to document any partner, beneficiary or owner with Form W-8 or W-9 by the time withholding is required under the agreement, then, unless WP or WT cures its failure, the agreement will automatically terminate effective December 31st of the year in which the failure is discovered.