[Five Rings]

"This" means withhold on the interest amount.

[AtlantaTaxExpert]

Five Rings contention that the foreign bank would NOT tolerate the withholding is my point on this matter.

That is why I HOPE the IRS will state that withholding is NOT required if the amount withhled is not expected to exceed a set amount, say $10,000.

[IntlTax]

One of the reasons that you cannot rely on IRS advice and IRS publications is that the IRS does not make the law. Therefore, even if you could get someone at the IRS to state that you don't need to withhold or file, if the law requires withholding and filing, then you must withhold and file.

With regard to withholding, if you pay interest of $1,000 to a foreign bank and are required to withhold $300 (30%) of the payment, I would think that making the full payment of $1,000 to the foreign bank and also making a payment of $300 to the U.S. government to cover the withholding would likely meet your U.S. tax withholding obligation, and the foreign bank should be fine with this.

[The Texas Tax Expert]

Agree with IntlTax.

Technically speaking, the payment of the tax by the withholding agent may require gross-up (in essence, the payment of the tax constitutes income to the recipient). See 1.1441-3.

[Five Rings]

Yeah well, I don't think the foreign bank would consider 30% or the treaty rate of their income paid to a foreign government as payment in full of their mortgage contract; what planet are you guys coming from?

As to my request from the IRS I am not contacting the hot line; I have gone somewhat higher up the food chain than that. I have requested authority. So far nothing from that end.

[IntlTax]

Five Rings, I think you need to re-read my post. "if you pay interest of $1,000 to a foreign bank and.. . [make] the full payment of $1,000 to the foreign bank.. . " Why would the bank be upset about getting its full payment?

[Five Rings]

You are so right, I misread the post.

Now, you have this person paying say, $500/month. Now he adds an additional $1,800 a year. Depending on his financial circumstances this may be intolerable. What to do, what to do?
I have a general idea of what he will do.

[kradeso]

Five Rings... any news from your contacts in the IRS?

I am still undecided w/ regards to my original question whether to amend '06 and '07 returns. I am still torn as to the spirit and letter of the regs/law. Though it looks like the majority of you appear to be favoring the withholding (10% as per the US-India tax treaty) on my end as well as claiming the deduction.

Thanks to all (IntlTax, AtlantaTaxExpert, TexasTaxExpert and FiveRings) for your rigor in debating this issue.

[Five Rings]

Kradeso,
The silence is deafening from the IRS; most unusual.

We all appreciate your circumstances and the difficulty this situation presents as well as your thoughtfulness for the efforts made on your behalf.

Give us a little more time to resolve this.

I wish you and my colleagues here a very happy Thanksgiving.

[kradeso]

Hi... just wanted to check back in to see if there was any additional clarity from the IRS (Five Rings?) or any of the other experts involved in this string.

Thanks,

[AtlantaTaxExpert]

In my opinion, the IRS is in "holiday" mode and we will hear nothing from them prior to next month.

[bhasi]

Thoughtful discussion, I would like to see what IRS has to say on this issue.

[AtlantaTaxExpert]

We are still waiting.

[bhasi]

ATE do you handle clients outside Georgia? I'm in Portland, OR.

[AtlantaTaxExpert]

Absolutely. I have prepared returns for clients in every state of the United States plus multiple foreign countries.

Contact me at [email protected].

[mps1979]

Kradeso,
The silence is deafening from the IRS; most unusual.

We all appreciate your circumstances and the difficulty this situation presents as well as your thoughtfulness for the efforts made on your behalf.

Give us a little more time to resolve this.

I wish you and my colleagues here a very happy Thanksgiving.

Me too sailing in the same boat.. Any news yet experts! Five Rings, ATE. INTLTAX... others...

[AtlantaTaxExpert]

Still no answer; I will email Five Rings to see if he has heard anything and urge him to post if he has!

[IntlTax]

U.S. tax law and IRS publications clearly require that 30% must be withheld on interest paid by U.S. resident individuals to foreign banks unless a treaty applies and the individual has received a Form W-8BEN from the foreign bank prior to the payment. Form 1042 is used to report the interest payment and the tax withheld.

I believe that both Five Rings and Texas Tax Expert agree with this. I am not sure if ATE agrees. The only item outstanding seems to be an inquiry by Five Rings to an IRS official as to whether they also agree.

Since there has been no response, if you are a U.S. resident individual that has paid interest to a foreign bank, unless you have received a Form W-8BEN from the recipient bank prior to payment of the interest, or you have received specific advice from a tax professional hired by you that indicates that you do not need to file Form 1042 and withhold, I recommend that you file Form 1042 and withhold.

[maheshksp]

Hi Kradeso,
I am also looking for an answer for the query you have posted in this thread. Please could you share your findings or any information which would be useful in this regards.

Appreciate your help !

Thanks,

[Five Rings]

I support IntlTax on his position.

That notwithstanding, it is extremely important to consult the treaty on this. For example, in the Hungarian treaty Art. 10,
1. Interest arising in a Contracting State and paid to a resident of the other Contracting State shall
Be taxable only in that other State.

Thus withholding is entirely contingent on the treaty provision governing interest.

No treaty or a treaty provision giving the US the right to tax and it looks like 30% or a lesser treaty rate.