IRS issues instructions for requester of Forms W-8BEN, W-8BEN-E, W-8ECI, W-8EXP, and W-8IMY

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1 28 July 2014 International Tax Alert EY Global Tax Alert Library Access both online and pdf versions of all EY Global Tax Alerts. Copy into your web browser: Services/Tax/International- Tax/Tax-alert-library#date IRS issues instructions for requester of Forms W-8BEN, W-8BEN-E, W-8ECI, W-8EXP, and W-8IMY The IRS has issued the long-awaited Instructions for the Requester of Forms W-8BEN, W-8BEN-E, W-8ECI, W-8EXP, and W-8IMY. These instructions are critical to the withholding agents that must obtain Forms W-8 from foreign payees for information reporting and withholding purposes, including FATCA. The instructions contain some due diligence standards for Form W-8 validation, clarify provisions in the regulations and other guidance issued by the government on FATCA implementation and the conforming regulations under chapter 3 (NRA withholding and reporting) and chapter 61 (Form 1099 reporting and backup withholding), and document some of the statements made by public officials over the past few months about the forms. Implications: While the instructions do not answer all of the questions foreign persons and withholding agents have about the 2014 revisions to the Forms W-8, at least we now know which questions are answered in the instructions and which questions withholding agents and their advisors will need to resolve on their own. Specific items to note in the Instructions for the Requester of Forms W-8BEN, W-8BEN-E, W-8ECI, W-8EXP, and W-8IMY include the following. Collection of new forms As anticipated, withholding agents may continue to collect the February 2006 version of the Form W-8BEN from foreign ENTITY payees through the end of Under the applicable regulations, a withholding agent can only collect a prior version of a withholding certificate for six months after a new version is released. Notwithstanding the regulations, however, for purposes of both chapter 3 and chapter 4 (FATCA),

2 a withholding agent making or documenting a payment to an entity payee or account holder can request the prior version of a Form W-8 until 1 January 2015, and rely on it for chapter 3 purposes for its entire validity period; for chapter 4 purposes, the withholding agent may rely on the prior version to the extent permitted by the regulations for pre-fatca Forms W-8, so long as the form is provided to the withholding agent before 1 January Implications: Since the exception provided in the instructions applies only to Forms W-8 received from entities, withholding agents can only accept the prior version of the Form W-8BEN from individuals until 1 September The significant differences between the old Form W-8BEN as it applied to individuals and the new form are the requirements around obtaining an individual s foreign TIN and his date of birth. Foreign TIN/Date of birth The specific instructions to requesters of a Form W-8BEN provide that a withholding agent should request an individual s foreign TIN if the account is held in the US office of a financial institution. If a foreign TIN is not provided, the form must be treated as invalid if the withholding agent knows the payee has a foreign TIN that he has not provided, unless the withholding agent has a record of the TIN in its account files that it can report on a Form 1042-S. A similar instruction is given to requesters of a Form W-8BEN-E. Absent a foreign TIN, a withholding agent must obtain an individual payee s date of birth to treat the form as valid, unless the withholding agent has a record of the payee s date of birth in its account files that it can report on a Form 1042-S. Implications: It is difficult to imagine when a withholding agent would know a payee has a foreign TIN if it is neither on the form nor in the withholding agent s files, such that it can be reported on a Form S. There is, however, no obligation on the part of a withholding agent to determine whether the foreign TIN provided is correct in terms of format and length. The instructions are silent as to the obligation of a payor that is not a US office of a financial institution to collect either a foreign TIN or a date of birth from a foreign individual. IGA classifications The instructions provide that withholding agents may rely on an alternative certification under an IGA unless they know or have reason to know the certification is incorrect. Additionally, the instructions provide the requester can ask the account holder to provide the form in accordance with the requirements and definitions applicable to the IGA of the requester. Implications: It is possible that the same account holder could have multiple FATCA statuses based on the entity to which she presents the form if the applicable IGAs definitions do not align. Chapter 4 status not required Consistent with the payee instructions to the Form W-8BEN-E, the requester instructions provide that payees are only required to provide their chapter 4 status if they receive withholdable payments for FATCA purposes. Therefore, payees receiving interest on a grandfathered obligation or a non-financial payment do not need to provide their chapter 4 status. Likewise, for a preexisting entity s obligation, chapter 4 status is not required until the end of the applicable due diligence period. Implications: This creates operational and system challenges for many withholding agents. While a form received without a chapter 4 status during a preexisting account s due diligence period is valid, chapter 4 withholding is required as soon as the due diligence period expires. For those preexisting accounts whose due diligence period expires 30 June 2016, that are receiving withholdable payments, this rule creates, in effect, a mid-year 2016 form expiration and an early 2016 tax form solicitation requirement. For withholding agents that are not making withholdable payments, however, the instructions also allow the withholding agent to develop a substitute form that omits chapter 4 certifications. Therefore, for example, an accounts payable group may want to develop a simplified form for vendors to whom they will pay US-source FDAP income that is not subject to potential FATCA withholding or reporting. 2 International Tax Alert

3 Inconsequential errors According to the instructions, if a Form W-8 is otherwise valid but the form was not dated, the withholding agent may date the form from the day it is received. (Note there is no similar authority in the regulations to date stamp a Form W-9 if the form is not dated by the signer.) A withholding agent may treat a Form W-8 as valid if it contains an error or omission that is inconsequential and the withholding agent has sufficient documentation on file to supplement the missing information. A failure to establish an entity type or make a required certification, however, is never inconsequential. If the person signing the form does not also print her name when required to do so on the form, withholding agents may still treat the form as valid if they have documentation or information supporting the identity of the person signing the form. (Note: on page 6 of the instructions, a typographical error states that new documentation is required for pre-existing obligations by 1 January This date should be 1 July 2016.) Substitute forms The instructions address the use of substitute Forms W-8, but do not clarify certain issues. For example, it is not clear who must agree that a selfcertification under an applicable Model 1 IGA is appropriate. Likewise, the information required to be included on a substitute Form W-8BEN is not clear. The instructions state that a substitute form must contain all the information required in Part 1, lines 1 7 and 8, but then appear to allow a non-irs form requiring additional information, e.g., all countries in which the individual is resident for tax purposes and the individual s city of birth, but not date of birth, which is inconsistent with both the actual form and the requirements in the regulations for a substitute form that may be used by a FFI. Simplified forms The substitute Form W-8 instructions allow withholding agents to choose not to include all 33 chapter 4 statuses provided on the official form on their substitute form, but require the substitute form to include any chapter 4 status for which withholding may apply, such as the categories for a nonparticipating FFI or a passive NFFE. Implications: Presumably many withholding agents will want to simplify their substitute Forms W-8BEN-E by eliminating those categories of payees to which they do not expect to make payments. Fax/pdf forms The instructions do not provide an explanation of when a withholding agent can rely on electronically transmitted forms (e.g., sent via fax or ), even though the regulations clearly allow for them, effective for payments made as of 6 March GIINs The instructions detail when foreign entities must furnish their Global Intermediary Identification Number, and the responsibility of withholding agents to verify the GIIN against the published IRS list. Presumably, given the relatively small box on the Form W-8BEN-E provided for a GIIN, the instructions allow a withholding agent to accept a GIIN that is indicated and clearly identified on the form as being furnished with respect to the appropriate box, even though it is not in the actual box required. Written statements The instructions confirm that a reasonable explanation supporting an individual s claim of foreign status on a Form W-8 can be provided as a written statement prepared by the individual or in the alternative, a checklist provided by the withholding agent and completed by the individual stating that the individual meets one of the requirements listed in the [applicable] regulations. Qualified Securities Lenders (QSLs) The instructions to the Forms W-8BEN-E and W-8IMY state that a QSL must furnish a Form W-8IMY to withholding agents. The Requesters Instructions, however, provide that a withholding agent is only required to get a Form W-8IMY from a QSL when the withholding agent must determine the QSL s chapter 4 status. Therefore, for pre-existing counterparties, a withholding agent is not required to collect a Form W-8IMY until the end of the applicable due diligence period. Implications: A withholding agent can continue to rely on valid documentation currently on file from QSLs, but will eventually need to perform remediation for their QSL accounts. International Tax Alert 3

4 Payment card and third-party organizations The instructions allow Payment Settlement Entities to use a Form W-8BEN, W-8BEN-E or W-8ECI (as applicable) to establish their foreign status and avoid Form 1099-K reporting. Presumably, a foreign partnership can provide a Form W-8BEN-E to a payment settlement entity as the instructions do not refer to the Form W-8IMY. Exempt recipient codes on Forms W-9 Quizzically, the instructions provide the following reference to a Form W-9 requirement that the Form W-9 instructions do not contain: If you receive a Form W-9, you must generally make an information return on a Form 1099 (unless the payee has provided a valid code on the form to indicate it is an exempt recipient). Implications: While the current version of the Form W-9 released in August 2013 contains a request for Exempt payee code (if any), there is no suggestion in the instructions to the Form W-9 that payors cannot treat payees as exempt recipients if they do not furnish a code, although that is the result that the Form W-8 Requester Instructions suggest. With the issuance of these instructions, withholding agents can finally begin to validate the 2014 versions of the Forms W-8. 4 International Tax Alert

5 For additional information with respect to this Alert, please contact the following: Ernst & Young LLP, Financial Services Debbie Pflieger, Washington, DC Tim Morin, Denver Maria Murphy, Washington, DC Justin O Brien, New York justin.obrien@ey.com Terence Cardew, New York terence.cardew@ey.com George Fox, Washington, DC george.fox@ey.com Doug Sawyer, New York douglas.sawyer@ey.com Todd Larsen, Philadelphia todd.larsen@ey.com Dawn McGuire, Boston dawn.mcguire@ey.com Ernst & Young LLP, National Tax John McMahon, Minneapolis john.mcmahon@ey.com International Tax Services Global ITS, Alex Postma, London ITS Director, Americas, Jeffrey Michalak, Detroit National Director of ITS Technical Services, Jose Murillo, Washington Member Firm Contacts, Ernst & Young LLP (US) Northeast Jonny Lindroos, McLean, VA Financial Services Phil Green, New York Central Mark Muktar, Detroit Southeast Scott Shell, Charlotte, NC Southwest Amy Ritchie, Austin West Frederick Round, San Jose, CA Canada - Ernst & Young LLP (Canada) Albert Anelli, Montreal Kost Forer Gabbay & Kasierer (Israel) Sharon Shulman, Tel Aviv Mancera, S.C. (Mexico) Koen Van t Hek, Mexico City South America Alberto Lopez, New York International Tax Alert 5

6 EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. International Tax Services About Ernst & Young s International Tax Services practices Our dedicated international tax professionals assist our clients with their cross-border tax structuring, planning, reporting and risk management. We work with you to build proactive and truly integrated global tax strategies that address the tax risks of today s businesses and achieve sustainable growth. It s how Ernst & Young makes a difference EYGM Limited. All Rights Reserved. EYG No. CM4616 This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. ey.com