Rev. Rul. 76-224

Rev. Rul. 76-224

Advice has been requested regarding the liability of the taxpayer, a domestic corporation, to withhold Federal income tax on interest and commitment commissions paid to several foreign banks, under the circumstances described below.

The taxpayer has entered into loan agreements with several foreign banks. The agreements were executed and are governed by and construed in accordance with the law of the countries involved. Under the agreements, interest will be paid by the taxpayer on any amounts borrowed.

The banks provided the taxpayer with a copy of Form 1001, Ownership, Exemption, or Reduced Rate Certificate, with respect to payments of interest by the taxpayer. Each Form 1001 contains a statement by the particular bank that it has complied with all the requirements for a reduced rate of, or exemption from, tax pursuant to the income tax convention between the United States and a specific foreign country. Within a period of 6 months thereafter, the situation changed as to several of the banks and such banks were no longer in compliance with the statements originally set forth in the Forms 1001. However, the taxpayer did not know or have any reason to know of this noncompliance.

Section 861(a)(1) of the Internal Revenue Code of 1954 provides, in part, that interest on bonds, notes, or other interest-bearing obligations of residents, corporate or otherwise, is treated as income from sources within the United States.

Section 881(a)(1) of the Code imposes a tax of 30 percent on amounts received as interest from United States sources by foreign corporations to the extent that the amounts received are not effectively connected with the conduct of a trade or business within the United States.

Sections 1441 and 1442 of the Code, in part, require the withholding of tax at the source on payments of interest to foreign corporations subject to taxation. Section 1461 provides, in part, that every person required to deduct and withhold tax under chapter 3 of subtitle A of the Code is made liable for such tax.

Section 894(a) of the Code provides, however, that income of any kind, to the extent required by any treaty obligation of the United States, shall not be included in gross income and shall be exempt from taxation under subtitle A of the Code.

Section 1.1441-6(a) of the Income Tax Regulations provides, in part, that the 30 percent withholding rate shall be reduced as provided by a treaty. In the case of interest paid on or after January 1, 1972, the requirements of section 1.1441-6(c) apply instead of the various certificates required by regulations under the various treaties.

Section 1.1441-6(c)(1) of the regulations provides, in part, that to secure a reduced rate of, or exemption from, withholding on payments of interest other than coupon bond interest, the recipient shall file Form 1001 with the withholding agent if the recipient is entitled to such treatment pursuant to a tax convention. If, after filing such Form 1001 the owner ceases to be eligible for the benefits of the tax convention for such income, the owner shall promptly notify the withholding agent by letter.

Section 1.1441-6(c)(2) of the regulations provides, in part, that if any change occurs in the ownership of income subject to Form 1001 recorded on the books of the withholding agent, the Form 1001 shall no longer be effective.

Rev. Rul. 70-175, 1970-1 C.B. 183, involves a domestic bank which acted as the paying agent for a number of corporations with regard to their bond obligations. Several of the bond owners were nonresident aliens. Due to misstatements by some of these bond owners on their ownership certificates, required to be filed by section 1.1461-1 of the regulations, the tax on interest payments made to those nonresident alien bond owners was not withheld by the bank as required by section 1441 of the Code. The Revenue Ruling holds that the bank, as withholding agent, is responsible for the proper execution of, and complete data on, an ownership certificate, but is not liable or responsible for misstatements made by the bond owners.

The intent of section 1.1441-6 of the regulations is to provide for a uniform certificate for withholding on items of income subject to a reduced rate of, or an exemption from, tax pursuant to an income tax convention. Although Rev. Rul. 70-175 was issued prior to section 1.1441-6, its holding is also applicable to situations falling under section 1.1441-6.

It is implicit in section 1.1441-6(c)(1) of the regulations that the responsibility of the withholding agent to withhold in a proper case, and the agent's liability therefor, is not diminished by a failure of the owner of income to notify the agent by letter that the owner is no longer eligible for a treaty benefit. When a withholding agent has reason to know that an owner is no longer eligible, a previously filed Form 1001 will no longer be effective whether or not the withholding agent has been notified by letter. However, prior to the time when a withholding agent has reason to have such knowledge, the agent is not responsible for misstatements made on a Form 1001 by an owner of income.

Accordingly, the taxpayer will not be liable for failure to withhold tax on payments of interest to foreign banks that provide the taxpayer with completed Forms 1001 since the taxpayer did not have any reason to know of "any change" in circumstances of the owners of the income which rendered the Forms ineffective.