SECTION 4. OVERVIEW OF

PROPOSED AGREEMENTS

.01 Comparison with QI Agreement . The IRS recognizes that foreign partnerships and foreign simple and grantor trusts differ significantly from each other as well as from foreign financial institutions that act as intermediaries for their account holders. For instance, foreign partnerships and trusts generally (1) have unique governing provisions and allocations, (2) are not subject to any extensive government regulation and oversight (including know-your-customer laws), and (3) do not have staffing and systems comparable to financial institutions that are intermediaries. Thus, certain provisions in the QI agreement become problematic in the context of foreign partnerships and trusts, such as: the treatment of indirect account holders, collection and examination of documentary evidence, application of the presumption rules, and Form 1099 reporting. In addition, such entities often have special allocations that generally are not an issue with account holders of financial institutions.

.02 Simplified Requirements and Pro- cedures . The proposed agreements

2002–24 I.R.B. 1155 June 17, 2002

to rely on the regulators in that jurisdiction to ensure that a WP or WT is properly documenting its partners, beneficiaries, or owners. The IRS believes that this requirement should not unduly burden a WP or WT because, unlike a QI, which may have had large percentages of its account base already documented with KYC-type documentation for other regulatory purposes, a WP or WT generally will not.

(iii) Automatic termination . The agreements provide that, if on audit the IRS or external auditor discovers that the WP or WT was not in possession of a valid Form W-8 or W-9, as applicable, for any direct partner, beneficiary, or owner, the agreement will automatically terminate unless cured. This provision operates in conjunction with the documentation provisions described above to eliminate completely the application of the presumption rules by WP or WT. The extended date for withholding on undistributed income under the WP or WT agreements, as noted below, provides the WP or WT with more time to obtain documentation. Thus, it is expected that WP or WT will have ample time to comply with the documentation requirements to avoid automatic termination.

(iv) Withholding . Because information regarding special allocations among partners, beneficiaries, or owners often is unavailable at the time withholding is required, a WP or WT may find it difficult to determine the correct amount of withholding at the time a payment is received by WP or WT. To address this concern, the agreements provide that, where an actual distribution has not been made, a WP or WT is not required to withhold until the earlier of the date that the statements required under section 6031 (for partnerships) or section 6048 (for simple and grantor trusts) are mailed or otherwise provided to the partner, beneficiary or owner, or the due date for furnishing such statements (whether or not WP or WT is required to prepare and furnish such statements). With this delay in the time for withholding on undistributed income, the foreign partnership or trust who enters into the WP or WT agreement should be able to withhold accurately, thereby avoiding the need to correct withholding errors. This provision also will ease the audit burden by eliminating the

need for the auditor to review numerous setoffs or reimbursements.

(v) Pooled reporting . Under the regulations, a foreign partnership or trust is required to provide the U.S. withholding agent with sufficient information so that it can properly report on Form 1042-S for each foreign partner, beneficiary, or owner. Under the agreements, the WP or WT assumes the Form 1042-S reporting requirement for each direct foreign partner, beneficiary, or owner. The IRS understands, however, that reporting on a beneficial owner basis is a concern for some foreign partnerships and trusts. To accommodate this concern, the agreements allow a WP or WT to elect pooled-basis reporting for those amounts distributed to, or includible in the income of, its direct foreign partners, beneficiaries, or owners. If a WP or WT makes the pooled reporting election, the term of the agreement will be limited and the WP or WT will be subject to external audit every other year.

(vi) Elimination of Form 1099 report- ing . To avoid duplication of reporting to a WP’s or WT’s direct U.S. partners, beneficiaries, or owners, ( e.g., a Form 1099 and K-1 issued to the same U.S. partner of a foreign partnership for the same income), the agreements eliminate the requirement that a WP or WT file Form(s) 1099 for its direct U.S. partners, beneficiaries, or owners. The WP or WT must file the necessary forms, schedules, and statements required by sections 6031 and 6048, as applicable. (vii) Amendment and Termination of Agreement . The agreements may be amended by the IRS if the IRS determines that such amendment is needed for the sound administration of the applicable laws or regulations. For example, the IRS may amend the agreement as needed to address changes in law or administrative practice. The agreement also may be modified by mutual agreement of the parties. Either party can terminate the agreement prior to the end of its term by delivering a notice of termination. However, the IRS will terminate the agreement only in certain specified circumstances involving a “significant change in circumstances” or an “event of default” (as defined in the agreement).