US Inbound: IRS issues portfolio interest payment clarification

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US Inbound: IRS issues portfolio interest payment clarification

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Jim Fuller


David Forst

A recent IRS Chief Counsel Advice Memorandum (CCA 201434021) addressed a situation where a US payor of interest to non-US, non-resident alien individuals sought, after the payments, to obtain the required documentation to qualify the payments as portfolio interest, and thus as exempt from US withholding tax. The US payor had not withheld any amounts on the original interest payments. Treasury Regulation § 1.1441-1(b)(7)(ii) provides that proof of a reduced rate of withholding may be established after the date of payment on the basis of a valid withholding certificate or documentary evidence furnished after that date, but states that additional proof may be required "if it is determined that the delays in obtaining the withholding certificate affect its reliability".

Treas. Reg. § 1.1441-1(b)(4)(i) states that portfolio interest is exempt from US withholding provided that documentation establishing foreign status is furnished for interest on an obligation in registered form. Treas. Reg. § 1.871-14(c)(3)(i) states that interest on a registered obligation qualifies as portfolio interest if the withholding certificate or documentary evidence that must be provided is furnished before expiration of the beneficial owner's period of limitation for claiming a refund of tax with respect to the interest.

Two fact patterns were considered in the CCA: (1) the non-resident alien individual did not file a US tax return or pay any US tax for the year in which the payments were made; and (2) the non-resident alien individual filed a US tax return and paid tax unrelated to the interest payments for the year in which the payments were made.

The Chief Counsel Advice held that the withholding agent was not barred from obtaining the documentation in situations in which the non-resident alien individual had not filed a US tax return and had not paid any tax for the year in which the interest payments were made. The non-resident alien's statute of limitations for seeking a refund was still open. However, the withholding agent may be required to provide additional proof of entitlement to a reduced rate of withholding under Treas. Reg. § 1.441-1(b)(7)(ii) to the extent that the reliability of the documentation is affected by the delay in obtaining it.

In situations where the non-resident alien filed a US tax return and paid tax for the year in which the interest payments were made, the Chief Counsel Advice stated that the withholding agent may be barred under Treas. Reg. § 1.871-14(c)(3)(i) from obtaining the documentation. The filing of a return and the payment of tax both cause a non-resident individual's period of limitations under § 6511(a) to begin. The withholding agent, according to the CCA, has until the expiration of that period to obtain the required documentation.

The solution presented in the Chief Counsel Advice was messy at best, requiring the US payor of interest to ascertain tax return information of the payee(s). Any US person who does not make necessary withholdings of interest is liable under § 1461 for the tax owing. Thus, the payor of the interest will have to pursue the required documentation.

Jim Fuller (jpfuller@fenwick.com) and David Forst (dforst@fenwick.com)

Fenwick & West

Tel: +1 650 335 7205; +1 650 335 7274

Website: www.fenwick.com

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