Treaty-Based Return Positions; Additional Waivers of Reporting Granted -- Final Regs Under Sections 6114 and 6712

 [4830-01]

 ACTION: Final regulations.

 SUMMARY: This document contains final Income Tax Regulations relating to the requirement that any taxpayer who takes a position that a treaty of the United States overrules, or otherwise modifies, an internal revenue law of the United States shall disclose such position. These final regulations are necessary to provide guidance needed to implement sections 6114 end 6712 of the Internal Revenue Code of 1986 as added by the Technical end Miscellaneous Revenue Act of 1988 (TAMRA).

 DATES: These regulations are effective for taxable years of the taxpayer for which the due date for filing returns (without extensions) occurs after December 31, 1988. However, if the due date for filing the return (with extensions) occurs on or before April 13, 1990, the taxpayer may choose to apply the provisions of the temporary regulations sections 301.6114-1T and 301.6712-1T.

 FOR FURTHER INFORMATION CONTACT: David Bergkuist of the Office of Associate Chief Counsel (International), within the Office of Chief Counsel, Internal Revenue Service, 1111 Constitution Avenue, N.W., Washington, DC 20224 (Attention: CC:CORP:T:R (INTL-361-89)) (202-566-6442, not a toll-free call).

SUPPLEMENTARY INFORMATION:

PAPERWORK REDUCTION ACT

The collection of information contained in this final regulation has been reviewed and approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act (44 U.S.C. 3504(h)) under the control number 1545-1126. The estimated annual burden per respondent varies from 1/2 hour to 3 hours depending on individual circumstances, with an average estimate of one hour.

 These estimates are an approximation of the average time expected to be necessary for a collection of information. They are based on such information as is available to the Internal Revenue Service. Individual respondents may require greater or less time, depending on their particular circumstances.

 Comments concerning the accuracy of this burden estimate and suggestions for reducing this burden should be directed to the Internal Revenue Service, Attn: IRS Reports Clearance Officer, T:FP, Washington, DC 20224, and to the Office of Management and Budget, Attention: Desk Officer for the Department of Treasury, Office of Information and Regulatory Affairs, Washington, DC 20503.

BACKGROUND

 On September 11, 1989, the Federal Register published proposed amendments (54 FR 37451) to the Income Tax Regulations (26 CFR Part 301) under sections 6114 and 6712 of the Internal Revenue Code. These amendments implement and provide guidance with respect to section 6114, which was added to the Code by section 1012(aa)(5)(A) of TAMRA, and section 6712, which was added to the Code by section 1012 (aa)(5)(B) of TAMRA. Written comments responding to this notice were received. No public hearing was requested end none was held. After consideration of all comments regarding the proposed amendments, the amendments are adopted by this Treasury Decision with revisions in response to those comments. The significant comments and revisions are described below.

EXPLANATION OF PROVISIONS

 Example (2) of section 301.6114-1(a)(3) has been removed as unnecessary.

 Several comments were received suggesting that the exception in section 301.6114-1(c)(1) to the waiver of the reporting requirement concerning the reporting of fixed or determinable annual or periodical income subject to withholding under section 1441 or 1442 and received by a foreign person from a U.S. person when either person controls, within the meaning of section 6038 or 6038A, the other person would result in burdensome reporting duplicative of other reporting requirements. In response to these comments, the language of section 301.6114-1(b)(4)(ii) has been modified to exclude from the disclosure requirement of section 6114 and section 301.6114-1(a)(1) positions taken by a taxpayer that a treaty reduces the rate of tax on fixed or determinable annual or periodical income subject to withholding received by a controlled foreign corporation. In addition, this reporting is no longer required on payments between related parties (as defined) when the payment has been properly reported to the Service on Form 1042S. The language of section 301.6114-1(b)(4)(ii) has been revised, effective for tax years beginning after July 10, 1989, to apply to shareholders of a domestic corporation (or a foreign corporation engaged in a trade or business in the United States) that is 25-percent foreign-owned within the meaning of section 6038A, to conform with the revision to section 6038A made by section 7403 of the Revenue Reconciliation Act of 1989.

 The Service expects to consider revising applicable information reporting forms (such as Forms 1042S, 5471 and 5472) to require disclosure of additional information, such as the provision(s) of any limitation of benefits article which the taxpayer relies upon to prevent the application of that article.

 Although no change has been made to section 301.6114-1(c)(1), the Service recognizes that this provision does not relate to fixed or determinable annual or periodical income attributable to a permanent establishment that is subject to tax on a net basis (see also section 301.6114-1(b)(5)(i)).

 The language of section 301.6114-1(c)(2) should not be read to relax or modify any reporting requirement of any other provision of the Code or regulations. Thus, for example, any reporting requirement under section 7701(b) would not be affected by this provision.

 In response to a comment, a new section 301.6114-1(c)(4) has been added to waive reporting under section 6114 and section 301.6114-1(a) with respect to income of an individual that is resourced (for purposes of applying the foreign tax credit limitation) under a treaty provision relating to elimination of double taxation. Examples of types of income that would be subject to this provision would be income subject to paragraph 3 or paragraph 6 of Article XXIV of the United States-Canada Income Tax Treaty. Sections 301.6114-1 (c)(4) and (5) have been renumbered, and a cross reference in section 301.6114-1(b)(6) has been added.

 In response to comments, a new section 301.6114-1(c)(7) has been added to waive reporting with respect to the excise tax imposed by section 4371 if reporting that would otherwise be required on a quarterly basis is made on an annual basis; or if a person, other than the taxpayer, who is liable under section 4374 for such excise tax on the same premium properly reports the information required by section 301.6114-1(d)(4); or if a closing agreement has been entered into with the Service by the foreign insurance company that is the beneficial recipient of the premium subject to the excise tax.

 Language has been added to section 301.6114-1(c) to indicate that reporting under section 6114 is not required with respect to income items the tax treatment of which is mandated by the terms of a closing agreement with the Service.

 Language has been added to section 301.6114-1(d)(4) to indicate that, for purposes of paragraph (d)(4)(i), a taxpayer not having a permanent establishment or fixed base in the United States (and properly disclosing that position) need not report its payment of actual or deemed dividends or interest exempt from tax by reason of a treaty (or any liability for tax under section 884(a)).

 In addition, section 301.6114-1(d)(4)(i) has been clarified to indicate that it is the nature and amount (or a reasonable estimate thereof) of each separate gross payment or separate gross income item for which the treaty benefit is claimed that is to be reported.

 Comments were received stating that certain foreign corporations engaged in trade or business in the United States are, pursuant to specific treaty provisions, subject to U.S. tax solely on income from sources inside the United States (and not on otherwise effectively connected foreign source income). To provide a separate disclosure statement for each item of excluded foreign source income would be unduly burdensome. Language has been added to section 301.6114-1 (d)(4) to permit the treatment of these payments or income items of the same type as a single payment or income item. This provision is relevant only to claims under certain older treaties that restrict the right of the United States to tax effectively connected foreign source income.

 Comments were also received stating that sales in the United States by an agent on behalf of a foreign corporation not having a permanent establishment in the United States are often exempt from U.S. tax under an article of a treaty relating to business profits. To provide a separate disclosure for each such sale would be unduly burdensome. Language has been added to section 301.6114-1(d) to permit the treatment of income from separate sales or services, whether or not made by an agent, as a single payment or income item.

 In addition, in response to comments, it should be observed that an exchange of notes (such as an exchange confirming reciprocal exemptions from certain taxes on transportation income), by itself and not under a treaty, is not considered to be a treaty and, thus, would not be considered to overrule or otherwise modify a provision of the Code so that reporting would be required under section 6114. However, if an exchange of notes operates in conjunction with a treaty to overrule or otherwise modify a provision of the Code, reporting would be required if a position is taken under that exchange of notes.

 One commenter has suggested that disclosure under section 6661 should be viewed as adequate disclosure for purposes of section 6114 as well. Disclosure for section 6661 is not disclosure for purposes of section 6114 and section 301.6114-1(a) unless such disclosure is clearly labeled as also applying to section 6114 and contains all of the information required by, and otherwise meets the requirements of, section 301.6114-1(d). In addition, section 6114 and section 301.6114-1 do not change or otherwise modify the filing requirements of section 6012.

 The language of section 301.6712-1 has been expended to state more clearly that the penalties imposed by section 6712 are imposed on each separate payment or income item and that, for purposes of section 6712 and section 301.6712-1, aggregation of separate payments or income items of the same type or received from the same ultimate payor is not permitted. However, for purposes of determining the number of separate penalties to be imposed under section 301.6712-1(a), the District Director will have discretion to aggregate separate payments or income items, in whole or in part, in accordance with the rules for the aggregation of such payments or income items for purposes of reporting, as described in section 301.6114-1(d).

SPECIAL ANALYSES

 It has been determined that these rules are not major rules as defined in Executive Order 12291. Therefore, a Regulatory Impact Analysis is not required. It has also been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. Chapter 5) and the Regulatory Flexibility Act (5 U.S.C. Chapter 6) do not apply to these regulations, and, therefore, a final Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Code, the notice of proposed rulemaking for the regulations was submitted to the Administrator of the Small Business Administration for comment on their impact on small business.

DRAFTING INFORMATION

 The principal author of these regulations is David Bergkuist of the Office of Associate Chief Counsel (International), within the Office of Chief Counsel, Internal Revenue Service. Other personnel from the Internal Revenue Service and Treasury Department participated in developing these regulations.

LIST OF SUBJECTS IN 26 CFR PART 301

 Administrative practice and procedure, Bankruptcy, Courts, Crime, Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income taxes, Investigations, Law enforcement, Penalties, Pensions, Statistics, Taxes, Disclosure of information, Filing requirements.

LIST OF SUBJECTS IN 26 CFR PART 602

 Reporting and recordkeeping requirements.

Treasury Decision 8292

ADOPTION OF AMENDMENTS TO THE REGULATIONS

Accordingly, 26 CFR Parts 301 and 602 are amended as follows:

Part 301 -- REGULATIONS ON PROCEDURE AND ADMINISTRATION

Paragraph 1. The authority for Part 301 is amended by removing the citation for section 391.6114-1T and adding the following citation for section 301.6114-1:

Authority: 26 U.S.C. 7805. * * * Section 301.6114-1 also issued under 26 U.S.C. 6114. * * *

Par. 2. Sections 301.6114-1T and 301.6712-1T are removed.

Par. 3. New sections 301.6114-1 and 301.6712-1 are added in the appropriate places to read as follows:

SECTION 301.6114-1 TREATY-BASED RETURN POSITIONS.

(a) REPORTING REQUIREMENT -- (1) GENERAL RULE. (i) Except as provided in paragraph (c) of this section, if a taxpayer takes a return position that any treaty of the United States (including, but not limited to, an income tax treaty, estate and gift tax treaty, or friendship, commerce and navigation treaty) overrules or modifies any provision of the Internal Revenue Code and thereby effects (or potentially effects) a reduction of any tax incurred at any time, the taxpayer shall disclose such return position on a statement (in the form required in paragraph (d) of this section) attached to such return.

(ii) If a return of tax would not otherwise be required to be filed, a return must, nevertheless, be filed for purposes of making the disclosure required by this section. For this purpose, such return need include only the taxpayer's name, address, Taxpayer Identification Number (if any), and be signed under the penalties of perjury (as well as the subject disclosure). Also, the taxpayer's taxable year shall be deemed to be the calendar year (unless the taxpayer has previously established, or timely chooses for this purpose to establish, a different taxable year).

(2) APPLICATION. (i) A taxpayer is considered to adopt a "return position" when the taxpayer determines its tax liability with respect to a particular item of income, deduction or credit. A taxpayer may be considered to adopt a return position whether or not a return is actually filed. To determine whether a return position is a "treaty- based return position" so that reporting is required under this paragraph (a), the taxpayer must compare:

(A) The tax liability (including credits, carrybacks, carryovers, and other tax consequences or attributes for the current year as well as for any other affected tax years) to be reported on a return of the taxpayer, and

(B) The tax liability (including such credits, carrybacks, carryovers, and other tax consequences or attributes) that would be reported if the relevant treaty provision did not exist.

If there is a difference (or potential difference) in these two amounts, the position taken on a return is a treaty-based return position that must be reported.

(ii) In the event a taxpayer's return position is based on a conclusion that a treaty provision is consistent with a Code provision, but the effect of the treaty provision is to alter the scope of the Code provision from the scope that it would have in the absence of the treaty, then the return position is a treaty-based return position that must be reported.

(iii) A return position is a treaty-based return position unless the taxpayer's conclusion that no reporting is required under paragraphs (a)(2)(i) and (ii) of this section has a substantial probability of successful defense if challenged.

(3) EXAMPLES. The application of section 6114 and paragraph (a)(2) of this section may be illustrated by the following examples:

EXAMPLE (1). X, a Country A corporation, claims the benefit of a provision of the income tax treaty between the United States and Country A that modifies a provision of the Code. This position does not result in a change of X's U.S. tax liability for the current tax year but does give rise to, or increases, a net operating loss which may be carried back (or forward) such that X's tax liability in the carryback (or forward) year may be affected by the position taken by X in the current year. X must disclose this treaty-based return position with its tax return for the current tax year.

EXAMPLE (2). Z, a domestic corporation, is engaged in a trade or business in Country B. Country B imposes a tax on the income from certain of Z's petroleum activities at a rate significantly greater than the rate applicable to income from other activities. Z claims a foreign tax credit for this tax on its tax return. The tax imposed on Z is specifically listed as a creditable tax in the income tax treaty between the United States and Country B; however, there is no specific authority that such tax would otherwise be a creditable tax for U.S. purposes under sections 901 or 903 of the Code. Therefore, in the absence of the treaty, the creditability of this petroleum tax would lack a substantial probability of successful defense if challenged, and Z must disclose this treaty-based return position (see also paragraph (b)(7) of this section).

(b) REPORTING SPECIFICALLY REQUIRED. Reporting is required under this section except as expressly waived under paragraph (c) of this section. The following list is not list of all positions for which reporting is required under this section but is a list of particular positions for which reporting is specifically required. These positions are as follows:

(1) That a nondiscrimination provision of a treaty precludes the application of any otherwise applicable Code provision, other than with respect to the making of or the effect of an election under section 897(i);

(2) That a treaty reduces or modifies the taxation of gain or loss from the disposition of a United States real property interest;

(3) That a treaty exempts a foreign corporation from (or reduces the amount of tax with respect to) the branch profits tax (section 884(a)) or the tax on excess interest (section 884(f)(1)(B));

(4) That, notwithstanding paragraph (c)(1) of this section,

(i) A treaty exempts from tax, or reduces the rate of tax on, interest or dividends paid by a foreign corporation that are from sources within the United States by reason of section 861(a)(2)(B) or section 884(f)(1)(A); or

(ii) A treaty reduces the rate of tax on fixed or determinable annual or periodical income subject to withholding under sections 1441 or 1442 that a foreign person receives from a U.S. person, but only if --

(A) The payment is not properly reported to the Service on a Form 1042S; and

(B) The foreign person is not any of the following:

(1) A controlled foreign corporation (as defined in section 957);

(2) A foreign corporation that is controlled within the meaning of section 6038 by a U.S. person; or

(3) In the case of tax years beginning on or before July 10, 1989, the shareholder of a domestic corporation (or a foreign corporation engaged in a trade or business in the United States) that is controlled within the meaning of section 6035A by a foreign person, or, in the case of tax years beginning after July 10, 1989, is 25-percent foreign-owned within the meaning of section 6038A; or

(5) That, under a treaty --

(i) Income that is effectively connected with a U.S. trade or business of a foreign corporation or a nonresident alien is not attributable to a permanent establishment or a fixed base of operations in the United States and, thus, is not subject to taxation on a net basis, or that

(ii) Expenses are allowable in determining net business income so attributable, notwithstanding an inconsistent provision of the Code;

(6) Except as provided in paragraph (c)(4) of this section, that a treaty alters the source of any item of income or deduction; or

(7) That a treaty grants a credit for a specific foreign tax for which a foreign tax credit would not be allowed by the Code.

(c) REPORTING REQUIREMENT WAIVED. Pursuant to the authority contained in section 6114(b), reporting is waived under this section with respect to any of the following return positions taken by the taxpayer:

(1) Except as provided in paragraph (b)(4) of this section, that a treaty has reduced the rate of withholding tax otherwise applicable to a particular type of fixed or determinable annual or periodical income subject to withholding under section 1441 or 1442, such as dividends, interest, rents, or royalties;

(2) That residency of an individual is determined under a treaty and apart from the Code;

(3) That a treaty reduces or modifies the taxation of income derived from dependent personal services, pensions, annuities, social security and other public pensions, or income derived by artistes, athletes, students, trainees or teachers;

(4) That income of an individual is resourced (for purposes of applying the foreign tax credit limitation) under a treaty provision relating to elimination of double taxation;

(5) That a nondiscrimination provision of a treaty allows the making of an election under section 897(i);

(6) That a Social Security Totalization Agreement or a Diplomatic or Consular Agreement reduces or modifies the taxation of income derived by the taxpayer; or

(7) That a treaty exempts the taxpayer from the excise tax imposed by section 4371, but only if:

(i) Reporting under this section that otherwise would be required to be made on a quarterly basis with a Form 720 is made on an annual basis on the Form 720 for the last quarter of the taxpayer's taxable year,

(ii) A person, other than the taxpayer, who is liable under section 4374 for such excise tax on the same premium properly reports the information required by paragraph (d)(4) of this section, or

(iii) A closing agreement relating to entitlement to the exemption from the excise tax has been entered into with the Service by the foreign insurance company that is the beneficial recipient of the premium that is subject to the excise tax.

Reporting with respect to payments or income items the treatment of which is mandated by the terms of a closing agreement with the Service, and that would otherwise be subject to the reporting requirements of this section, is also waived. In addition, if a partnership, trust, or estate that has the taxpayer as a partner or beneficiary discloses on its information return a position for which reporting is otherwise required by the taxpayer, the taxpayer (partner or beneficiary) is then excused from disclosing that position on a return. Also, this section does not apply to a withholding agent with respect to the performance of its withholding functions.

(d) INFORMATION TO BE REPORTED. If reporting is required under this section, the following information must be furnished in accordance with paragraph (a) of this section as an attachment to the return and set forth with the indicated heading and with paragraphs labeled to correspond with the numbers set forth below:

TREATY-BASED RETURN POSITION DISCLOSURE UNDER SECTION 1114

(1) Taxpayer's name, T.I.N. (if any), and address both in the country of residence and in the United States;

(2) Name, T.I.N. (if available to the taxpayer), and address in the United States of the payor of the income (if fixed, determinable, annual, or periodical); (3) A statement whether the taxpayer (if an individual) is a U.S. citizen or resident or (if a corporation) is incorporated in the United States;

(4) A separate statement of facts relied upon to support each separate position taken, including for each position:

(i) The nature and amount (or a reasonable estimate thereof) of gross receipts, each separate gross payment, each separate gross income item, or other item (as applicable) for which the treaty benefit is claimed,

(ii) An explanation of the position taken with a brief summary of the facts on which it is based,

(iii) The specific treaty provision relied upon,

(iv) The Code provision(s) overruled or modified, and

(v) The provision(s) of the limitation on benefits article (if any) in the treaty which the taxpayer relies upon to prevent application of that article.

For purposes of paragraph (d)(4)(i) of this section, if a taxpayer takes a position that it does not have a permanent establishment or fixed base in the United States and properly discloses that position, it need not separately report its payment of actual or deemed dividends or interest exempt from tax by reason of a treaty (or any liability for tax imposed by reason of section 884). Also, for purposes of paragraph (d)(4)(i) of this section, a taxpayer may treat payments or income items of the same type (e.g., interest items) received from the same ultimate payor (e.g., the obligor on a note) as a single separate payment or income item. For purposes of paragraph (d)(4), if a taxpayer takes the return position that, under a treaty, income that is effectively connected with a U.S. trade or business is not subject to U.S. taxation because it is derived from sources outside of the United States, the taxpayer may treat payments or income items of the same type (e.g., interest items) as a single separate payment or income item. In addition, income from separate sales or services, whether or not made by an agent (independent or dependent), to different U.S. customers on behalf of a foreign corporation not having a permanent establishment in the United States may be treated as a single payment or income item.

(e) EFFECTIVE DATE. This section is effective for taxable years of the taxpayer for which the due date for filing returns (without extensions) occurs after December 31, 1988. However, if --

(1) A taxpayer has filed a return for such a taxable year, without complying with the reporting requirement of this section, before November 13, 1989, or

(2) A taxpayer is not otherwise than by paragraph (a) of this section required to file a return for a taxable year before November 13, 1989,

such taxpayer must file (apart from any earlier filed return) the statement required by paragraph (d) of this section before June 12, 1990, by mailing the required statement to the Internal Revenue Service, P.O. Box 21086, Philadelphia, PA 19114. Any such statement filed apart from a return must be dated, signed and sworn to by the taxpayer under the penalties of perjury. In addition, with respect to any return due (without extensions) on or before March 10, 1990, the reporting required by paragraph (a) of this section must be made no later than June 12, 1990. If a taxpayer files or has filed a return on or before November 13, 1989, that provides substantially the same information required by paragraph (d) of this section, no additional submission will be required.

(f) CROSS REFERENCE. For the provisions concerning penalties for failure to disclose a treaty-based return position, see section 6712 and section 301.6712-1.

SECTION 301.6712-1 FAILURE TO DISCLOSE TREATY-BASED RETURN POSITIONS.

(a) PENALTY IMPOSED. A taxpayer who fails in a material way to disclose one or more positions taken for a taxable year, as required by section 6114 and the regulations thereunder, is subject to a separate penalty for each failure to disclose a position taken with respect to each separate-payment or separate income item in the amount of --

(1) For a corporation taxable as such under the Code, $10,000; or

2) For all other taxpayers, $1,000.

The penalty imposed by this section may be imposed more than once for a single taxable year if a taxpayer has failed to disclose one or more positions taken with respect to more than one separate payment or separate income item and may be imposed in addition to any other penalty imposed by law. For this purpose, separate payments or income items of the same type (e.g., interest payments) received from the same ultimate payor (e.g., the obligor on the note) will be treated as separate payments or income items (and not aggregated). However, for purposes of determining the number of separate penalties to be imposed under this section, the District Director shall have the discretion to aggregate separate payments or income items, in whole or in part, in accordance with the rules for aggregation of such items for purposes of reporting, as described in section 301.6114-1 (d).

(b) PENALTY WAIVED. Pursuant to the authority contained in section 6712(b) of the Code, the penalty imposed by paragraph (a) of this section may be waived, in whole or in part, if it is established to the satisfaction of the Assistant Commissioner (International), the district director or the director of the Internal Revenue Service Center that the taxpayer's failure to disclose the required information was not due to willful neglect. An affirmative showing of lack of willful neglect must be made in the form of a written statement that sets forth all the facts alleged to show lack of willful neglect and contains a declaration by such person that the statement is made under the penalties of perjury.

(c) MANNER OF PAYMENT. The penalty set forth in paragraph (a) of this section shall be paid in the same manner as tax upon the issuance of a notice and demand thereof.

(d) EFFECTIVE DATE. This section is effective for taxable years of the taxpayer for which the due date for filing returns (without extension) occurs after December 31, 1988.

Part 602 -- OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

Par. 4. The authority for Part 602 continues to read as follows:

Authority: 26 U.S.C. 7805.

Par. 5. Section 602.101 (c) is amended by removing from the table "section 301.6114-1T . . . 1545-1126 and section 301.6712-1T . . . 1545-1126" and by inserting in the respective appropriate places in the table:

"Section 301.6114-1 . . . 1545-1126."

"Section 301.6712-1 . . . 1545-1126."