Compliance with the Foreign Account Tax Compliance Act (“FATCA”) enacted 8 years ago, has resulted in a plethora of new US tax reporting requirements, forms and rules. Unfortunately, all of these continue to evolve and become more and more complex with the passage of time. The year 2014 marked a significant year for the Form W-8BEN, a perfect example of complexity. In that year, the form was split into two separate and distinct tax forms, commonly called “beneficial owner withholding certificates”: Form W-8BEN and Form W-8BEN-E. These forms remain with the withholding agent and are not sent to the US Internal Revenue Service (IRS).
The revised Form W-8BEN is now used exclusively by individuals. Form W-8BEN-E is used only by entities (e.g., a foreign corporation or partnership). The forms now cover what is called “Chapter 3” income tax withholding (e.g., the individual or entity certifies “foreign” status and/or right to claim treaty benefits) and, specifically for entities, “Chapter 4” FATCA classification and compliance.
Most recently, confusion surrounds the development requiring withholding agents to obtain dates of birth and/or foreign taxpayer identification numbers (FTINs) for nonresident alien individuals or foreign entities on the Form W-8BEN or W-8BEN-E.
Disregarded Entity Creates Further Confusion
As if all of this is not confusing enough, obfuscation really increases when a so-called “disregarded entity” is involved (e.g., the account is in the name of, or payment from the US made to, the disregarded entity, such as a single-owner US LLC).
For example, assume a non-US corporation (say, a BVI company) is the sole owner of a US LLC, and the LLC has an account in a US financial institution. This “single owner” US LLC is treated for US tax purposes as a “disregarded entity”. Assume further that many of the LLC clients are non-US persons and the LLC services and activity for them takes place outside the USA. Clients who are well-advised are being very careful before making payment to the US LLC and will request a Form W-8BEN-E. Which company should complete the Form W-8BEN-E? The US LLC, which is a disregarded entity, or the BVI company, its owner? The tax rules provide generally, that the “disregarded entity” does not submit a Form W-8BEN-E to the withholding agent or financial institution; this is to be submitted by the beneficial owner (here the BVI company). The BVI governing authorities, however, do not issue FTINs. What should the BVI company do if it is required to file the Form W-8BEN-E? How is the Form to be completed? What is to be done if the entity has no FTIN since the BVI does not issue these? These are some of the vexing questions faced in the real world.
Foreign Taxpayer Identification Number/Date of Birth
Temporary Treasury Regulations published in the Federal Register on January 6, 2017, provided generally, that with respect to accounts maintained at a US branch or office of a financial institution, in order to be valid, a beneficial owner withholding certificate must contain a FTIN and, in the case of an individual, a date of birth. For withholding certificates associated with payments made on or after January 1, 2018, if an account holder does not have a FTIN, the form will not be valid unless the account holder provides a “reasonable explanation” for its absence (e.g., the country of residence does not provide TINs). Under the regulations, a withholding certificate associated with payments made on or after January 1, 2018 that does not contain the individual account holder’s date of birth will not be considered valid; but importantly validity can be preserved if the withholding agent has the account holder’s date of birth information in its files.
Not a Financial Institution? No Worries!
Please note that the FTIN/date of birth requirements apply to withholding certificates relating to accounts maintained at a US branch or office of a financial institution. Pursuant to IRS Notice 2017-46 a financial institution is a depository institution or custodial institution, investment entity or specified insurance company as defined in relevant Treasury Regulations. So, for example, if you are a US company (not a financial institution) paying US source FDAP to a foreign person, then the Form W-8BEN or W-8BEN-E provided to you by the payee need not contain a FTIN or date of birth in order to be valid.
Let’s take the example one step further, assume that an individual foreign independent contractor performs services in a foreign country for a US person. Under the US tax rules, because the services are carried out in a foreign country, the contractor is not subject to US income tax withholding or income tax liability when paid by the US person. However, the issue often arises whether the foreign contractor must file a form with the US person notifying that no withholding is required. I am seeing many US persons requesting that such a form be completed by the foreign contractor before making payment. This is a result of the maxim “better safe than sorry” and the foreign person should be advised to complete Form W-8BEN (or W-8BEN-E), as appropriate. In today’s FATCA world, any doubt should be resolved in favor of filing.
No TIN List
Withholding agents that qualify as financial institutions still have some reprieve from the FTIN requirement. They will not be required to obtain a FTIN (or provide a reasonable explanation as to why an account holder has not been issued a FTIN) for an account held by a resident of a jurisdiction that has been listed by the IRS as a jurisdiction that does not issue FTINs to their residents (the so-called “No TIN List”). Notice 2017-46 identified three such jurisdictions, and stated that a list of all such jurisdictions would be made available and updated at www.irs.gov/FATCA.
In December 2017, the No TIN List was posted by the IRS. To date, it currently lists Bermuda (IGA Model 2), British Virgin Islands (IGA Model 1) and Cayman Islands (IGA Model 1). As more fully discussed below, Australia will now be added to the No TIN List.
Some jurisdictions have laws that restrict the collection or disclosure of the FTINs of their residents. Some have requested that their residents not be required to provide FTINs to withholding agents. In response to these requests, the Treasury Department and the IRS just decided to expand the No TIN List to include jurisdictions that request to be on the No TIN list, even if the jurisdictions issue FTINs to individuals or entities resident in such jurisdictions. On March 5th, IRS issued IRS Notice 2018-20 announcing these developments and adding Australia to the No TIN List. The relevant Treasury Regulations (§1.1441-1T(e)(2)(ii)(B)) will be amended to reflect this new guidance.
The IRS issued three FAQs in April 2017 specifically addressing the issue of including in the withholding certificate FTINs and date of birth for beneficial owners. The relevant FAQs (FAQ #20-22) are very helpful. For example, FAQ #22 clarifies that if a beneficial owner provides an otherwise valid withholding certificate that fails to include its FTIN, the beneficial owner may provide the foreign TIN to the withholding agent in a written statement (an email is permitted) that includes the FTIN as well as a statement indicating that the FTIN is to be associated with the beneficial owner withholding certificate previously provided. If the beneficial owner does not have a FTIN, the beneficial owner may provide the reasonable explanation required after January 1, 2018, in a similar written statement.
While helpful, the FAQs are only informal guidance and are not binding authority. It’s a sad situation when taxpayers cannot rely on information supplied by the IRS in the most commonly accessed and user-friendly formats – such as IRS Publications, “Frequently Asked Questions” (FAQs), news releases, videos and the like. On May 18, 2017 IRS issued a memorandum to all of its examiners reminding them that FAQs and other items posted on the IRS website that have not been published in the Internal Revenue Bulletin are not legal authority. If you rely on such informal IRS information, you generally do so at your peril.
We Can Help
Since this area is fraught with complexity and uncertainty, professional tax guidance is often desirable when completing a form in the W8-BEN series (Forms W-8BEN, W-8BEN-E, W-8ECI, W-8EXP, and W-8IMY). We can solve your income tax withholding and FATCA classification issues as well as prepare the required Forms W-8BEN, W-8BEN-E and other Forms in the W-8BEN family. Form W-8 BEN can generally be prepared fairly quickly but can take longer if a US taxpayer identification number is requested (having a US TIN extends the validity of the Form, so it is useful and prudent to have such an ITIN).
With regard to Form W-8BEN-E, this is a more complicated matter. We have prepared a questionnaire to assist in analyzing each particular case and coming to a conclusion on the US tax classification. We will review the questionnaire free of charge and then provide an estimate of cost for the analysis. Sometimes the facts can lend themselves to support 2 classifications, in which case, we will discuss the matter with you to determine the most appropriate and tax-efficient classification.
Costing for other forms in the W8-BEN series will be done on a case by case basis.
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This communication is for general informational purposes only which may or may not reflect the most current developments. It is not intended to constitute tax advice or a recommended course of action. Professional tax advice should be sought as the information here is not intended to be, and should not be, relied upon by the recipient in making a decision.