Defining 'withholding agent': when 'everyone' is both too much and not enough.

• Author: Young, Jason

In the more than 100 years that U.S. withholding tax has been imposed on payments of U.S.-source income to foreign persons, the definition of a "withholding agent" has remained virtually unchanged. The current definitions (located in Secs. 1441(a) and 1473(4)) are the continuation of a definition that first appeared in the Revenue Act of 1913, ch. 16, 38 Stat. 114, and they generally include "all persons, in whatever capacity acting, having the control, receipt, custody, disposal, or payment" of an item of income subject to withholding (Sec. 1473(4)).The key phrasing--"control, receipt, custody, disposal, or payment"--has remained fixed even as new principles have been incorporated into the Internal Revenue Code, and the global banking landscape has evolved dramatically. More than 100 years after the definition was introduced, application of that key phrasing produces results that might best be described as predictably complex, particularly in relation to common transactions such as modern debt issuances.

Example: Issuer, a U.S.-based firm engaged in the global services business, plans to issue obligations with a fixed interest rate exclusively to foreign customers. The obligations will be represented by a global note (Global Note) deposited with Clearing Organization, a foreign (non-U.S.) limited trust company that operates an electronic book-entry securities clearing and settlement system. Global Note will be serviced by Paying Agent, a U.S. bank that also is Issuer's banking service provider.

Economic and other rights in Global Note will be conferred exclusively on registered owners recorded in Clearing Organizations electronic book-entry system (Holders). Paying Agent will service the Global Note under the following terms:

One business day before the due date of the principal, premium, if any, and interest on the Global Note, Issuer shall deposit with Paying Agent U.S. dollars sufficient to pay the amounts becoming due. Paying Agent shall make available the payment in a timely manner to Holders via Clearing Organization on the relevant due date for payment. In the example, Issuer is not independently keeping track of Holders, is not positioned to determine if withholding applies or the appropriate rate at which to withhold, and cannot perform reporting obligations without requesting details that Issuer may hope could be left to Clearing Organization and Paying Agent. The question arises whether, if Issuer remits cash only to Paying...