Under the Internal Revenue Code, payments of interest or dividends to foreign persons may be subject to a 30% withholding tax. The person paying out the interest or dividend (the "withholding agent") is required to withhold the tax from the payment absent the receipt of proper documentation showing a reduced or eliminated obligation to withhold tax.
If the withholding agent does not withhold the tax, it will be responsible for the tax, as well as applicable penalties and interest. The Treasury Regulations provide that if the withholding agent should have withheld but doesn't, and then it is LATER determined that no tax (or a reduced tax) was due, the withholding agent is still responsible for interest on the tax he should have withheld based on the information and documentation available to him on the date the withholding tax was due. That is, the withholding agent is liable for interest on tax, even if it turns out no tax was even due!
Well, that used to be the case. On April 11, 2007 the IRS did the right thing and issued T.D. 9323 which revokes the above interest due from withholding agents when it is determined that no tax was actually due.
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