December 29, 1994
TO: OPERATIONS COMMITTEE No. 38-94
TAX COMMITTEE No. 40-94
TRANSFER AGENT ADVISORY COMMITTEE No. 52-94
TASK FORCE ON NONRESIDENT ALIEN WITHHOLDING
RE: INSTITUTE COMMENT LETTER ON NONRESIDENT ALIEN WITHHOLDING
______________________________________________________________________________
As you know, the Internal Revenue Service ("IRS") is considering making extensive changes to
the rules governing withholding tax on payments to nonresident alien ("NRA") investors. The proposal
under consideration would require all NRA investors receiving U.S. source income to obtain a U.S.
Taxpayer Identification Number ("TIN"). Backup withholding would apply to any payments made to
foreign investors who do not supply a TIN to the payor. NRA investors could obtain TINs directly
from the IRS or by submitting an application to a foreign or domestic financial institution that has
entered into an agreement with the IRS to act as an agent for the IRS in receiving and processing TIN
applications. U.S. mutual funds or broker-dealers would be eligible to process TIN applications for
NRA investors.
The Institute submitted the attached comment letter regarding the proposal and its potential
impact on U.S. mutual funds. The letter expresses the Institute's concern that the proposal will
discourage foreign investment in U.S. mutual funds and would create substantial administrative burdens
for U.S. mutual funds with NRA investors. The letter also makes the following suggestions that are
designed to reduce the burden on NRA investors and U.S. mutual funds if, despite the potential adverse
impact, the IRS moves forward with the new rules.
1. Transition period. There should be a substantial transition period, of least one year after
final regulations are adopted, before the rules take effect
2. Documents acceptable to prove identity and residence. The IRS should develop a broad list of
supporting documents that may be submitted with TIN applications to prove identity
and residence. An NRA investor submitting a TIN application should be able to
submit a duplicate copy of a passport, birth certificate or other acceptable document to
prove identity and residence.
3. Reliance by financial institution processing TIN applications. Financial institutions should be
entitled to reasonably rely on certifications made in the application, particularly regarding
the authenticity of any supporting documents.
4. Awaiting TIN grace period. NRA investors should have a reasonable period, of at least six
months, during which to obtain a TIN before backup withholding will apply.
5. Special Rules for Nominees. Payors should be permitted to rely on a nominee's
determination of the appropriate rate of withholding for the beneficial owners it
represents. Nominees acting on behalf of both beneficial owners that qualify for treaty
rate withholding, and others that do not, should be required to establish multiple
accounts with a payor, one for each applicable rate of withholding.
6. Special rules for Forms W-8 that include a TIN. A Form W-8 that provides an NRA Investor's
TIN should not have an automatic expiration date.
7. Reliance on broker supplied NRA TINS. Payors should be able to rely on NRA TINs
furnished by brokers that have obtained TIN certifications from their customers, just as
they currently are able to rely on TINs brokers provide for domestic investors.
We will keep you informed of further developments.
Peter Cinquegrani
Assistant Counsel - Tax
Attachment