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FREEPORT MCMORAN OPPOSES REQUIREMENT THAT WITHHOLDING AGENTS OBTAIN STATEMENTS FROM FOREIGN GOVERNMENTS TO AVOID WITHHOLDING.

AUG. 26, 1988

FREEPORT MCMORAN OPPOSES REQUIREMENT THAT WITHHOLDING AGENTS OBTAIN STATEMENTS FROM FOREIGN GOVERNMENTS TO AVOID WITHHOLDING.

DATED AUG. 26, 1988
DOCUMENT ATTRIBUTES
  • Authors
    Walworth, Deborah
  • Institutional Authors
    Freeport McMoRan Inc.
  • Code Sections
  • Subject Area/Tax Topics
  • Index Terms
    source rules
    foreign government-related individual
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 88-7517
  • Tax Analysts Electronic Citation
    88 TNT 184-34

 

=============== SUMMARY ===============

 

Deborah Walworth of Freeport McMoRan Inc., New Orleans, Louisiana has commented regarding the proposed regulations under sections 892 and 1441. Walworth supports deleting the requirement that a withholding agent obtain a statement from a foreign government to avoid withholding when the source of the income paid to the foreign government is in the form of dividends from a U.S. corporation. Alternatively, Walworth favors that the statement only be required to provide a safe harbor for the withholding agent. Walworth writes that, as a foreign policy matter, foreign governments may be reluctant to provide statements to agencies of the U.S. government. Moreover, if the government refuses to sign, the U.S. withholding agent will be required to withhold at 30 percent, which could cause serious difficulties between the U.S. company and the foreign host government.

 

=============== FULL TEXT ===============

 

August 26, 1988

 

 

Mr. Lawrence B. Gibbs

 

Commissioner of Internal Revenue

 

Attention: CC:LR:T, INTL-285-88

 

Washington, D.C. 20224

 

 

Re: Comments and Request for Public Hearing on Proposed and Temporary

 

Regulation Section 1.1441-8T(b)

 

 

Dear Mr. Gibbs:

The following written comments and request for public hearing are submitted concerning Proposed and Temporary Regulation section 1.1441-8T(b) of the Internal Revenue Code of 1986.

Freeport Indonesia Incorporated (hereinafter referred to as FII) is a U.S. corporation, incorporated under the laws of the State of Delaware, primarily engaged in copper mining in the Republic of Indonesia. The Republic of Indonesia is the listed owner of record of 8.9% of the stock of FII.

FII has paid, and expects to continue to declare and pay quarterly dividends to its shareholders. Dividend distributions from FII to the Republic of Indonesia are exempt from taxation under Internal Revenue Code section 892(a)(1)(A)(i).

As a result of changes in the law brought about by the Tax Reform Act of 1986, FII must withhold on the portion of dividends which constitute U.S. source income under Internal Revenue Code Sections 871(i) and 881(d). For 1988, only 1.2% of FII's dividends are deemed to be U.S. source and subject to withholding.

As explained below, FII, as withholding agent, believes that there are compelling reasons to delete the requirement under Temporary Regulation section 1.1441-8T(b) that a withholding agent obtain a sworn statement from a foreign government, or integral part of a foreign government, to avoid withholding of tax at source with regard to dividends received by the foreign government from a domestic corporation which is not a controlled entity of the foreign government nor a U.S. real property holding corporation as defined in I.R.C. section 897(c)(2). The potential difficulties and embarrassment of requiring a U.S. company to obtain such a statement from a foreign soverign, [sic] as well as potential costs and burdens of compliance for the withholding agent of such domestic corporation far out-weigh any tax revenues which might be obtained in the unlikely situation where the dividends paid to a foreign government, do not fall within Internal Revenue Code section 892(a)(1)(A)(i).

If the requirement that a withholding agent of such a domestic corporation obtain a sworn statement from a foreign government in order not to withhold on dividends is not deleted from the Proposed and Temporary Regulation section 1.1441(b), we believe, at a minimum, that the requirement of a sworn statement be provided as a "safe harbor" for the withholding agent who, without such statement, will have the burden of establishing on audit that the dividend is excluded from gross income of the foreign government and exempt from taxation under Section 892. If this burden is not met, the withholding agent would then be liable for the amount of withholding.

ADMINISTRATIVE BURDEN

FII, in establishing copper mining activities in Indonesia, has had to work with and obtain permission from the Republic of Indonesia in order to operate its mine in Indonesia. The mine is operated under a contract of work which was signed in April 1967, with subsequent amendments and modifications which sets forth the specific rights of the parties. The Indonesian government owns 8.9% of the Company which operates solely within its borders. It is reasonable to believe that the situation of FII is similar to the situation of many other U.S. companies with overseas operations where the foreign government would own a portion of the company.

As a foreign policy matter, foreign governments may be reluctant to provide statements required by the IRS or other agencies of the U.S. government in order to re-obtain recognition of their status as a sovereign government and may view such requirement as an implied challenge to such status. If a foreign government refuses to sign, the United States company withholding agent must withhold at thirty percent (30%). This could cause serious difficulties between the U.S. company and the foreign host government. The requirement of additional paperwork by the foreign government may well result in the foreign government taking the position in future negotiations that the company formed be re-organized as a local entity rather than as a U.S. corporation which would not be in the best interests of the U.S. government. Or, in the worst scenario, this could cause the foreign government to terminate the contract of work or production sharing arrangement. The only alternative would be for the U.S. company to pay taxes on income which is clearly exempt under Section 892.

Section 892 of the Code excludes from gross income and exempts from taxation, income derived from investments in U.S. stocks owned by the foreign government unless the income is derived from conduct of commercial activity or received from or by a controlled commercial entity. Temporary Regulations Section 1.892-4T(c) specifically excludes investment in stock from commercial activity.

The withholding agent is in a position to know that the dividends are not being paid from a controlled commercial entity of a foreign government. The withholding agent should be able to rely on the title of the owner of record to determine if the owner is a foreign government and to determine the percentage of stock which is owned by the foreign government. If the owner of record is a named foreign government, or integral part of a foreign government, as defined in Temp. Reg. section 1.892-2T(a)(2), there should be no issue as to whether or not the payment is being made to a foreign government. This may not be as clear where payment is made to a controlled commercial entity, and we do not address the question of whether or not a statement may be appropriate in those instances.

If the purpose of the statement is to determine whether or not the dividends are being paid to a foreign government or an integral part of a foreign government, we would propose that the withholding agent be allowed to obtain a statement on the sovereign status as a "safe harbor" but not require the withholding statement. In this way, the withholding agent would have discretion to determine whether or not there was an issue as to the status of the owner as a foreign government. In the situation of FII, there is no question that stock issued to and in the name of the Republic of Indonesia is stock issued to a sovereign foreign government. For FII to ask the government of the Republic of Indonesia to sign a attachment to this effect is totally unnecessary, and in essence questions the recognition of that government extended by the President of the United States on December, 1949.

This can be analogized to the filing requirements for Form 1001, "Ownership, Exemption, or Reduced Rates Certificate", which is not required where the owner only receives the dividends. The form states that in such a situation: "The withholding agent may generally rely on an owner's address of record as the basis for allowing the benefit of any income tax treaty to the dividends being paid to the owner."

SUMMARY

For the above reasons we respectfully request consideration that the requirement that a withholding agent obtain a statement from a foreign government, or integral part of a foreign government, in order not to withhold be deleted when the source of the income paid to the foreign government is in the form of dividends from a U.S. corporation. Alternatively if this requirement cannot be deleted, we request that the statement only be required to provide a "safe harbor" for the withholding agent.

If you have any questions please do not hesitate to contact me. We appreciate your consideration of these comments and, if necessary to further consider these comments, we request a public hearing.

Very truly yours,

 

 

Deborah R. Walworth

 

Freeport-McMoRan, Inc.

 

New Orleans, Louisiana
DOCUMENT ATTRIBUTES
  • Authors
    Walworth, Deborah
  • Institutional Authors
    Freeport McMoRan Inc.
  • Code Sections
  • Subject Area/Tax Topics
  • Index Terms
    source rules
    foreign government-related individual
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 88-7517
  • Tax Analysts Electronic Citation
    88 TNT 184-34
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