On Friday, December 30, 2016, the IRS and Treasury Department released over 600 pages of new final, temporary and proposed regulations under Chapter 4 (FATCA), Chapter 3, and Chapter 61 (see earlier coverage). The four packages finalize the temporary regulations issued in 2014 and make additional changes based on comments received by the IRS. One issue addressed by the temporary FATCA coordination regulations issues under Chapter 3 addresses the outstanding question of whether withholding agents must document the foreign payees of U.S. source gross transportation income (USSGTI) and withhold under Chapter 3. The temporary regulations amend the regulations under Section 1441 to specifically exempt USSGTI from amounts subject to withholding.
Although it informally suggested that withholding agents were not required to document or withhold 30% on payments of USSGTI, the IRS has been reluctant to issue formal guidance. To this end, IRS Publication 515 provides that such amounts are not subject to Chapter 3 withholding under Section 1441 or 1442. However, Sections 1441 and 1442 generally require withholding agents to withhold 30% on payments subject to the tax imposed by Sections 871 and 881 (i.e., FDAP income). However, payments of gross transportation income that is U.S. source because the transportation begin or ends (not both) in the United States are subject to a 4% excise tax under Section 887 that is self-imposed by the payee, unless an exception applies. Section 887(c) provides that the 30% gross tax applicable to most U.S. source income of foreign persons (other than income effectively connected with a U.S. trade or business) does not apply to transportation income.
Continue Reading Temporary FATCA Coordination Regulations Bring U.S. Source Gross Transportation Income Saga to a Close