W-8 and W-9 Payments & Payees

·     Who (is may payee)

·     What (is the payment for)

·     Where (Sourcing means everything - Has to be U.S. sourced to create a reportable transaction)

W-8BEN

Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals)

W-8BEN-E

Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting (Entities)

(Do not double withhold - 30% under Chapter 3 & Chapter 4 if overlapping)

W-8ECI

Certificate of Foreign Person's Claim That Income Is Effectively Connected With the Conduct of a Trade or Business in the United States

W-8 IMY

Certificate of Foreign Intermediary, Foreign Flow-Through Entity, or Certain U.S. Branches for United States Tax Withholding and Reporting

W-9/W-8 Validation For 1042/1042-S Filing

§  U.S. Persons provide the Form W-9

§  Non-US Persons provide one of the Forms W-8 or 8233 (the forms analogous to the Form W-9 for US Person payees):

·       W-8BEN-E (beneficial owner for entities)

·       W-8BEN (beneficial owner for individuals)

- The two W-8BEN are expected to continue to be the most commonly used forms

·       W-8ECI (effectively connected income)
- Foreign businesses with presence in U.S.

·       W-8IMY (intermediary)

- Foreign agent of foreign person (US partner of a foreign partnership should provide W-9)

·       W-8EXP (exempt)

- Limited Application

- Foreign Governments

Who is My Payee Non-U.S. Status Red Flags

Red Flags for Non-U.S. Payees

§  Foreign address

§  Indications of foreign “per se” corporate status

·     PLC, Ag, SA, etc...

·     See IRC 301.7701

·     Irrefutable presumption of foreign status and must treat as Non U.S. For withholding and reporting purposes

§  ITIN

·     9xx-7/8x-xxxx

·     Assigned to individuals who do not have work authorization but who have a tax reason for needing number – for instance US tax return reporting US investment income

·     Watch out with your ITIN’s

§  “98” EIN

·     Reg. § 1.1441-1(b)(3)(iii)(A)(1) provides that an EIN beginning with “98” is a presumption the payee is not U.S.

·     It does not mean the payee is, for a fact, foreign

·     Foreign payees can have an EIN that does not begin with “98”

·     If payee is a U.S. Person with a “98” EIN, signature on W-9 under penalty of perjury is required

§  Payers must obtain additional documentation supporting U.S. Status

Payee – U.S. or Non-U.S.?

U.S. or Non-U.S. Person?

§  U.S. Person:

·     Entity organized under U.S. law, including laws of the 50 states and District of Columbia

·     Individual:

─ U.S. citizen

─ U.S. tax resident

§  “Green Card” test/visa’s

§  Substantial presence test

Resident Alien Visas

Determining Payee Tax Status:

§  Tests for Tax Residency

·       “Green Card” Test

─ “Green Cards” (Alien Registration Receipt Card or I-551) are immigrant visas issued to foreign nationals entering U.S. as lawful permanent residents

─ Visas in general

Exemptions from FICA Withholding When Making Payments to Foreign Students and Scholars

Resident Aliens and Counting Days

Determining Payee Tax Status:

§  Substantial Presence Test (SPT)

·     Yearly Test – Two Parts:

─ Was the payee physically present in the U.S. 31 days during the current year; and

─ Physically present in the U.S. for a total of 183 or more during a 3-year period.

─ Don’t forget to revisit a SPT payee yearly

Special Entity Rules

Special Rules for:

§  Foreign Corporations and Partnerships:

·     A foreign corporation engaged in a trade or business in the U.S. is known as a “resident foreign corporation” and it files U.S. tax returns [Reg. § 301.7701-5]

·     Certain foreign partnerships with:

- “Effectively connected income” (ECI), or

- U.S. source income and U.S. partners, or

- By election under IRC § 703 are required to file U.S. partnership returns [Reg. § 1.603(a)-1(b)]

·     Subject to W-8 documentation, not W-9

§ Trusts and Estates:

·     A trust is domiciled in the U.S. if:

- A court in the U.S. can exercise primary supervision over its administration, and

- At least one U.S. person has authority to control all substantial decisions of the trust

·     If these conditions are not met, the trust is a foreign trust

·     See Reg. § 301.7701-7 and IRS Pub. 515

W-9 vs. W-9 Basic Rules

U.S. Persons are subject to U.S. tax on their worldwide income

Non U.S. Persons are also subject to U.S. tax, but only on their U.S. source income

·       Non U.S. Persons are not subject to U.S. tax on their non U.S. source income

·       Unless you are dealing with a U.S. citizen, determining which tax rule to apply (worldwide or U.S. source) is based on residency

·       Special Issue - Dual Resident Individuals: Form 1099 Reportable or Form 1042-S?

Purchase Invoices

·             Payments for parts, materials, merchandise, telephone, and freight, storage and similar charges that are part of the material pricing are not subject to NRA withholding

·             Review invoice to insure that a portion was not for personnel services, i.e., training of your employees, installation of equipment

§  Subject to 1042 withholding if purchase is incidental to payments for services unless invoice breaks out

·             Interest charges are subject to 1042 withholding rules

·             Warranty payments = services and are subject to 1042 withholding

1042-S Reportable Income

·                  How Income is Taxed:

§  You must determine the type of income in order to apply the correct tax rules

§  Substance of the surrounding facts and circumstances is key – meaning your analysis matters (and regardless of the payee tells you)!

§  The name given to the payment is not controlling – again it is your analysis that matters!

·                  The source of income – U.S. or foreign – depends on the type of income

§  Remember: Foreign-source income paid to a foreign person is not subject to U.S. tax regardless of the payer (but U.S. source income is)

W-8 Payment Sourcing

·             Sourcing Rules

·             Income must be classified in order to determine source

·             Difficult in transactions involving digitized information, such as computer programs, books, music, or images

·             Distinction gets blurred between royalty income, proceeds from sales of goods, or service fees

·             What about scholarships or annuities?

·             This leads to other issues – like figuring out how to apply treaty benefits.

W-8’s & Treaty Benefits

·       Treaty Benefits - Start with Publication 901 (Rev. September 2016) (irs.gov)

·       Documentation validation discrepancy between W-8BEN related payments/sourcing/claimed treaty benefits vs. those via the Form 8233

·       This is a problem created by recent changes in the law

·       Be careful

·       Knowing your payee and payment is key

Filing Form 1042/1042-S

·                  Form 1042-S & 1042

·                  Form 1042

§  Income Tax Return – Aggregate Return of all US income paid to foreign persons (the form you use to report the actual withholding)

·                  Form 1042-S

§  Information Return

§  Reporting required even when no withholding

§  Payee gets copy of 1042-S

§  Must reconcile with Form 1042 Tax Return

Filing Fundamentals

·             Go Get Those Extensions!

·             E-Filing Dates

·             Filing Requirements

·             File only one Form 1042 per EIN (Either Chapter 3 or Chapter 4)

§  Consolidate all Form 1042-S information regardless of the number of different clients, branches, divisions, business units or types of income being paid

§  Error Alert: Do not allow multiple 1042s to be filed under your company’s EIN.

§  IRS will treat second 1042 filed under same EIN as an amendment to the first and more than likely will not consolidate the numbers.

Recent Changes to Form 1042-S Information Returns

·             Box changes

·             Withholding changes

·             LOB code changes

·             Financial industry specific changes

·             Newest Sections

§  Requirement to withhold

·             Newest due diligence/compliance requirements

§  Four steps

Form 1042-S Information Returns

·             Complete the Form and Remember to Get Those Extensions!

·             Your Name and EIN

·             Substitute Forms

·             Account-by-Account-Reporting for U.S. Financial Institutions

·             Insurance Premiums

·             Don’t Make Silly Mistakes and Know Your Codes:

§  Exemption Codes

§  Recipient Codes

§  Income Codes

§  Country Codes

File on Time and Try to Avoid Those Penalties

·             1042/1042-S Penalty Rates – Similar to 1099 World

·             Time Dependent Based on When You File

·             The More Time That Goes By the Worse the Penalty

·             Apply to Statements and Filing –Twice the Fun!

·             Rates Are Up for This Year!

·             Watch out for latest IRS crack-down on payments to foreign corporations!

Circular 230 Disclosure: Any tax advice included in this written or electronic communication was not intended or written to be used, and it cannot be used by the taxpayer, for the purpose of avoiding any penalties that may be imposed on the taxpayer by any governmental taxing authority or agency.