New Standards in Reviewing W-8 Forms; Monitoring Red Flags; Curing Defects; and Applying Presumption Standards 1

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1 New Standards in Reviewing W-8 Forms; Monitoring Red Flags; Curing Defects; and Applying Presumption Standards 1 Our business today is a global one and everyone involved in making withholdable payments to others needs to be well acquainted with the new withholding regulations that start with how to determine whether your payee holds U.S. or foreign status through the use of one of the new W-8 and W-9 forms. These forms have been recently redesigned to add the requirements under new Chapter 4 of the Internal Revenue Code (the FATCA provisions) and to address the universal rules now found in the harmonization regulations written to conform the older Chapter 3 requirements to the new FATCA ones. The new forms are designed to sort payees into the proper withholding regimes and where missing new presumption standards will apply to determine U.S. or foreign status and the withholding required. Pointer: Take care in what you read. The IRS has confused us a bit in the instructions to the new forms and in new IRS Publication 515, by using a new terminology and changing the meanings of old terminology, making it hard for even the most experienced advisers to glean accountabilities. For example, generalizing in favor of FATCA, when the IRS now speaks of a withholdable payment without modifiers, they only mean a FATCA withholdable payment. When giving instructions for Chapter 3 withholding, the type of withholding mostly addressed by AP, the instructions will say payment subject to chapter 3 withholding. A good place to start will be reading the section on definitions found at the beginning of each set of instructions to the forms discussed in this article. The steps you need to take include: First, distinguish the types of withholdable income you might be paying. Second, make a clear determination as to your beneficial owner. Third, make sure you are making the proper form solicitation from your vendor. Fourth, keep up with required due diligence for the duration of the vendor relationship and timely cure the conflicts. Fifth, apply the presumption standards if no W-8 or W-9 is on file before payment. 1 This Memorandum looks for authority to Treasury and the IRS published temporary regulations under chapter 4 of the Internal Revenue Code (known as the FATCA regulations TD 9657) and temporary regulations under chapter 3, chapter 61, and section 3406 of the Internal Revenue Code (known as the temporary harmonization regulations TD 9658) first published and for the most part made effective on March 6, 2014, but later corrected with an effective date for the most part of July 1, The harmonization regulations were intended to coordinate the older compliance obligations for withholding of tax on U.S. source income paid to foreign persons under chapter 3, and for information reporting and backup withholding on payments to U.S. persons with the new positions in the FATCA regulations related to withholding on certain payments to FFIs and other foreign entities. This Memorandum also considers Treasury and IRS Notice (released October 10, 2014) that modified effective dates of certain of the temporary regulations in line with FATCA modifications promised on May 19, 2014, in Notice as well as the terms contained in recently revised Instructions for the Requester of Forms W 8BEN, W 8BEN E, W 8ECI,W 8EXP, and W 8IMY (Rev. July 2014) (referred to as Requestor Instructions ), the current official instructions to forms in the W-8 series and to Forms 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, as well as Form 1042-S, Foreign Person's U.S. Source Income Subject to Withholding, in effect as of the date of this Memorandum. 1

2 Under the harmonization regulations, a new order of accountability has been established, requiring of U.S. withholding agents: Timely solicitation of the right certifications (Form W-9 from a U.S. vendor or one of the W-8 forms from a foreign vendor); Performance of due diligence on account documentation and in business records, including searching for the red flags that give reason to void a provided certification on an ongoing basis (a checklist for reviewing certifications is included in REVIEWING W-8 FORMS and a list of red flags are included in RED FLAGS GIVE REASON TO DOUBT THE VALIDITY OF FOREIGN STATUS ON W-8 FORMS below); Curing of deficient certifications (requirements are found below in CURING STANDARDS ); Application of the required regulatory presumptions when forms are missing or voided and uncured (outlined below in PRESUMPTION STANDARDS FOR DETERMINING STATUS ); and Identification of U.S. source taxable income subject to 30 percent withholding that allows distinguishing a subset of FATCA withholdable income requiring special treatment when paying entities. The last matter covered addresses identification of undocumented prima facie FFIs in pre-existing payee obligations (prior to 2015) that become subject to FATCA withholding in 2015 and the related documentation requirements that need to be met to avoid withholding. Reviewing W-8 Forms This section addresses the new versions of Forms W-8 released in Where review of the older 2006 version of Form W-8 is necessary, much of what is covered for the new forms will apply to the older versions of the forms, but line translation will be required. IRS regulations require payers to perform ongoing due diligence on the tax certifications that they receive from payees, and regulations list the requisites for this task. Each form must be reviewed for sufficiency and then compared on an ongoing basis to other information that a payer has about the payee. The following checklist for reviewing Forms W-8BEN, W-8BEN-E, and W-8ECI should help you in this process. If you receive a Form 8233 (the only form that allows a reduction of withholding on fees for a contracted nonresident alien s personal services) from an individual claiming reduced, or elimination of, withholding on fees for personal services, or a Form W-8EXP from a foreign government, international organization or foreign non-profit, note that such forms require legal sufficiency reviews and a checklist is not available from Cokala; please contact us for further information on how to handle. Information on reviewing Form W-8IMY is available from Cokala in a separate memo. General checklist for W-8BEN for individuals, W-8BEN-E for entities, and W-8ECI: 2

3 Payee must indicate a name on the form and it needs to equate to your master or other file records. You need to compare this entry to what is currently in your payee master file to assure it is the same as the legal name you are carrying for this payee. Take care that all payee records for this payee carry the same name as indicated on the form. Where the name varies, you will need to explore your records and contracts, and contact the payee to resolve. If your master files are wrong, you will need to change them. If there is no name on the W-8 then the form is invalid and should be rejected. When you carry multiple names, which can happen in some enterprise platforms where multiple address screens can be carried for the master payee, you may have more than one legal payee and you will need to receive documentation from each separate payee. Make sure you know who your contract is with and who has earned the right to be paid. Many foreign companies invoice through their U.S. affiliates to ease currency and other difficulties; however, you are still subject to compliance responsibilities as to the party in your contract and not to the party invoicing for them. Tax requirements look to a single legal entity as the beneficial owner and do not accept carrying multiple subsidiaries as the same payee under the same parent payee account. Remember that each subsidiary is a separate legal entity and as such is a separate payee. You are required to set up separate payees for tax purposes where you have contractual payment responsibilities to different legal entities even if you have been instructed to pay only one of them and even if the payees are all affiliated. You may, however, carry multiple divisions or branches of the same legal entity as a single payee, but you will need to tax report under the correct legal name for the entity and receive the correct certification under the name you carry for reporting purposes. Make sure you have received the right form for the business relationship. If the contractor is an individual, he or she should provide a W-8BEN. If an entity, a W-8BEN-E form should be provided. Other acceptable forms include a W-8ECI if the entity has a U.S. EIN and files and pays taxes in the U.S. If the entity acts as an agent or intermediary, or is a foreign partnership or Limited Liability Company or other flow-through entity, then a W-8IMY is required. If the name you hold on an account is a financial institution and you receive a W-8BEN-E, the IRS may question why there is no Form W-8IMY since there is a presumption that foreign financial institutions (FFIs) act as intermediaries for other beneficial owners. Form W-8BEN-E is allowed where the FFI enters into a proprietary business agreement, for example to directly lend your organization funds. But a W-8IMY is required where, for example, the FFI services a syndicate of several different lenders that lend you funds. New chapter 4 (FATCA) withholding provisions will require special certifications from foreign financial institutions. Form W-8BEN-E instructs that if chapter 3 status indicates a disregarded entity (DE), partnership, simple trust, or grantor trust, the W-8BEN-E is the correct form if the entity is 3

4 a hybrid and a treaty claim involved. Otherwise for DEs, the owner must submit the form, and for the other entities in this list, a W-8IMY is required. For reviewing Form W-8BEN-E provided by entities: Alert: For purposes of Chapter 3 withholding, a Form W-8BEN (revision date February 2006) may be provided to a withholding agent by an entity through December 31, 2014, and will remain valid until it expires. Starting in 2015, provision of a Form W-8BEN-E is mandatory from beneficial owners of new accounts and in addressing expired older forms or for handling changes in circumstances. A 2006 version will not suffice to document FATCA status when needed in 2015, such when paying FATCA withholdable income to a prima facie FFI that is a pre-existing account. You will need to supplement the 2006 form with documentary evidence and the account holder s GIIN. Where FATCA status becomes important, Cokala suggests you use the newer W-8BEN-E form. For an entity, in all cases the W-8BEN-E needs to indicate country of incorporation or organization, fully written out and not abbreviated. If the name of the country is omitted, the form is considered invalid. If abbreviated, you will need other documentary evidence that supports place of incorporation or organization. The entity s foreign tax ID may be required if you are a financial institution. Every entity needs to indicate its type of chapter 3 status (check one box only). The form is considered invalid if a box is not checked. See Requestor Instructions. Review to ensure the status is correct based on what you know about the payee. For example, if partnership is checked, W- 8BEN-E may not be the correct form unless the partnership is a hybrid entity, and the form has a treaty claim. If a disregarded entity (DE), partnership, simple trust, or grantor trust, the entity must be a hybrid and a treaty claim involved if the entity provides a W-8BEN-E. Usually the DE owner must submit the form in the owner s name. If so, be sure to remember to set up the DE owner as the tax payee so your 1042-S is completed correctly. For the other flow-through entities, a W-8IMY may be required. Review the box that is checked in line 3 to ensure that the status is correct based on what you know about the owner. For example, if a partnership is checked, the form may not be the correct form unless the partnership is a hybrid entity, and a treaty claim is made and then you will need to explore whether the type of entity is in fact respected as a taxpayer in that country. You are not required to obtain a legal determination from the payee of specific application to the entity unless there is reason to doubt the form in this regard. If paying FATCA withholdable income in 2015 and later, make sure the FATCA status is provided by a checkmark in a single box in line 5 and where another part of the form is designated to be completed, check to see that it is completed and all supplemental information required for that section has been provided. See the section below on FATCA claims for additional items. A failure to establish an FATCA type or make a required certification is not inconsequential. For example, if an entity beneficial owner receiving a FATCA withholdable payment selects a certified deemedcompliant FFI status on line 5 of Form W-8BEN-E but does not complete the corresponding required certifications in Part V, the form is invalid for chapter 4 purposes. 4

5 As of April 20, 2015 Every payee in all cases needs to provide their permanent address in the country in which resident. In-care-of or hold mail addresses are not permanent addresses. Missing a permanent address in a foreign country is a fatal flaw to relying on any W-8 form. For payees claiming treaty benefits, their address should be in the same country as entered in the treaty claim portion of the form. This is the address you should use to complete the Form 1042-S. Addresses in the United States (50 U.S. states and DC) are disallowed in these lines. See the sections below about red flags and curing as to actions that are necessary to rebut a reason to doubt the validity of the form where U.S. addresses or conflicting treaty addresses are entered. See the treaty section below for discussion of the additional items needed to be checked for treaty claims. Mailing address may be blank if the mailing address is also the permanent address, but where a separate address is entered and treaty benefits are claimed the address should be in the same country through which the benefits are claimed in the treaty section of the form. U.S. addresses are also disallowed in this line. See below for actions that are necessary to rebut a reason to doubt the validity of the form where a U.S. address or conflicting treaty address is entered. Make sure the form is signed and the status-to-sign box is checked. The box on Form W-8BEN-E must be checked to indicate that the signer has the capacity to sign for an entity. Absent the check in the box, the form is invalid. Proper signing parties are the same as apply for Form W-9. Forms W-8BEN and W-8BEN-E must be signed and dated by the beneficial owner of the income, or if the beneficial owner is not an individual, by an authorized representative or officer of the beneficial owner: For an individual, the individual who beneficially owns the income you are paying. For a sole proprietorship The individual who owns the business. For a corporation The president, vice president, or other principal officer. For a partnership (including an LLC treated as partnership) or unincorporated organization A responsible and duly authorized partner, member, or officer having knowledge of its affairs. For a single member limited liability company (SMLLC) treated as a disregarded entity The owner (parent) of the LLC. For a trust or estate The fiduciary. With the new check box on status you are not required to make a determination of whether the signer had proper status, but if you know the signer is not one of the above-listed persons, this must be addressed to obtain a properly signed form. If an agent signed, see the instructions below for Form W-8BEN as to the need for power of attorney. A Form W-8 is still valid even if the person providing the form has not dated the form. You may date the form from the day you receive it and measure the validity period from that date. See Requestor Instructions. For additional items, see the section below about reviewing all W-8 forms. For reviewing Form W-8BEN (Rev. Feb. 2014) provided by individuals: Alert: Provision of new Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals) (Rev. Feb., 2104) became mandatory on Sept 3, 2014, the end of the 6-month waiting period provided in the FATCA regulations. After September 2, 2014, the older 2006 version may no longer be provided by individuals. 5

6 For individuals, Form W-8BEN now carries a box for entering country of citizenship and instructions say do not abbreviate. If the country is abbreviated, you must have other documentary evidence on file that supports country of citizenship. The individual s foreign tax ID may be required, and/or in certain cases the individual s date of birth, but final instructions to Form W-8BEN need to be consulted to validate whether these requirements attach to your organization as a financial institution. Make sure the signer both prints his or her name and signs the form and if she or he is not the beneficial owner, provides the capacity in which acting. If the individual signing the form fails to also print their name, the withholding agent need not treat the form as void if the withholding agent has documentation or information supporting the identity of the person signing the form, such as foreign passport or foreign driver s license. The IRS considers the failure to print a name an inconsequential error where there is supporting evidence of the identity of the person. Forms W-8 may also be signed by a duly authorized agent of the taxpayer if the agent holds a valid power of attorney (IRS Form 2848, Power of Attorney and Declaration of Representative). Form 2848 is required to be filed with the IRS and a copy should be attached to the executed Form. For signers of Form W-8BEN for individuals, if they are not the individual listed as the beneficial owner in Part I, they must disclose capacity in which acting in the line provided. In all cases, every payee needs to provide their permanent address in the country in which resident. In-care-of or hold mail addresses are not permanent addresses. Missing a permanent address in a foreign country is a fatal flaw to relying on any W-8 form. For payees claiming treaty benefits, their address should be in the same country as entered in the treaty claim portion of the form. This is the address you should use to complete the Form 1042-S. Addresses in the United States (50 U.S. states and DC) are disallowed in these lines. See the section below on red flags and curing as to actions that are necessary to rebut a reason to doubt the validity of the form where U.S. addresses or conflicting treaty addresses are entered. See the section on treaty claims below for information on validations for treaty claims. Mailing address may be blank if the mailing address is also the permanent address, but where a separate address is entered and treaty benefits are claimed the address should be in the same country through which the benefits are claimed in the treaty section of the form. U.S. addresses are also disallowed in this line. See below for actions that are necessary to rebut a reason to doubt the validity of the form where U.S. addresses or conflicting treaty addresses are entered. A Form W-8 is still valid even if the person providing the form has not dated the form. You may date the form from the day you receive it and measure the validity period from that date. See Requestor Instructions. For reviewing Forms W-8BEN-E and W-8BEN: 6

7 Track the validity period to make sure the form has not expired. The validity period for most W- 8 forms is three calendar years after the year acquired. But there is a transitional rule extending forms that would have expired at the end of 2013 to the end of Effective July 1, 2014, all forms that were allowed an indefinite period of validity because they contained a U.S. TIN under the older version of the regulations are now void and must be re-solicited unless they would still be valid looking at the three year rule because that period has not expired or was extended under the transitional rule to the end of Make sure the form is signed under penalties of perjury by the beneficial owner. Signatures are necessary. If the signature is absent, then the form is invalid for all purposes and the payee is presumed a noncertified person subject to the presumption standards discussed below. The signature must be an original and made by the beneficial owner, but under Reg T(e)(4)(iv)(C) on and after March 6, 2014, the payer may now rely on forms electronically transmitted by fax or by being scanned and imbedded in an or attached to an , unless the withholding agent knows that the person transmitting the form or documentary evidence is not authorized to do so. (This new rule covers electronic transmittal of W-8 forms. The older rule permitting an electronic W-8 created in an electronic system for which the IRS has issued a Memorandum of Understanding also remains in effect.) The IRS is holding tight on the March 6, 2014, effective date for allowing faxes or s with scanned attachments so if you have a curing issue for retroactive application on payments made before March 6, 2014, even if acquiring the W-8 form, affidavit and other documentation after March 6, 2014, it is recommended that originals be obtained. Reg T(e)(4)(iv)(C) expressly says: Notwithstanding the effective date of this section [July 1, 2014], the provisions of this paragraph apply for payments made on or after March 6, For checking treaty claims: A U.S. TIN, or starting on March 6, 2014, a foreign tax ID, will be necessary if treaty benefits are requested. Whether the U.S. TIN supplied is an ITIN or SSN makes no difference for individuals if claims are not related to personal services where Form 8233 is required, but if an entity is designated as payee and a U.S. TIN is provided, it must be an EIN. In general, for AP payments, treaty claims are invalid if no U.S. TIN, or beginning on March 6, 2014, no foreign tax ID, has been provided. TINs are not required on Forms W-8BEN for treaty benefits only if relating to earnings on actively traded securities. The new regulations affecting tax treaty benefit claims, including the allowance of a foreign tax ID instead of a U.S. TIN, were made effective for payments made on or after March 6, Reg T(c)(1) expressly says: Notwithstanding the effective date of this section [July 1, 2014], the provisions of this paragraph apply for payments made on or after March 6, Also required for sufficiency of an accounts payable treaty claim: For entities, W-8BEN-E Part III lines 14a and b and 15 checked and include the resident country, the tax treaty article, percentage of withholding, type of income, articulation of the reason the beneficial owner meets the terms of the tax treaty article, including representation 7

8 of no permanent establishment, and checked the representation that the beneficial owner qualifies under the treaty article dealing with limitation on benefits. For individuals, W-8BEN, Part II, lines 9 and 10, as instructed for the same information described above for entities. W-8BEN may not be used for a treaty claim relating to personal services where a Form 8233 is required. For most AP payments and for all qualified retirement plan distributions, specific treaty information is required on the W-8 form for the form to be effective. Where completed, the form needs to be reviewed and confirmed that the treaty rate claimed is correct and treaty terms are satisfied to the best of the payer s knowledge. Payers are considered to know details that are public knowledge and that include the terms of the specific treaty. Payers are also considered to know the facts and circumstances of their payments, such as the type of payment and its source, and any specific corporate knowledge of the payee. The disclosures in line 15 of Form W-8BEN-E and in line 10 of Form W-8BEN need to speak to the unique qualifications outlined in the particular article being claimed in the treaty. For example where a business profits clause is claimed, since most treaties restrict application of this clause if income is earned through a permanent establishment (PE) in the United States, then the line should include a statement that there is no PE. IRS Publication 515, available in Forms and Publications on the IRS website, has tables at the end of the publication that present tax treaty information by country and income type. These tables are a great resource for meeting your requirements for this line. IRS Publication 515 is revised every year usually early in the Spring, but treaties come into play midyear missing the publication date so you will also need to keep abreast of any changes that occur throughout the year. Pub. 515 for TY 2014 has not yet been released. Permanent and mailing addresses should be in the treaty country and country of incorporation or organization, or if the claim is for an individual, country of citizenship should be the same as the treaty country; otherwise you will have reason to doubt the treaty claim and it must be cured. In the July IRS corrections to the regulations, a list was provided of just what is necessary to lock in treaty benefits: Unless the income is related to a publicly traded security or mutual fund, the beneficial owner is to provide its U.S. TIN or its foreign tax ID issued by its country of residence if such country has with the United States an income tax treaty or information exchange agreement in effect. Representations need to be made that the beneficial owner derives the income under IRC 894 and related regulations, if required, and meets the limitation on benefits provisions of the treaty, if any (now included in Form W-8BEN-E and Form W-8BEN through checkboxes and certifications). The withholding certificate must also contain any other representations required in the regulation or by the form or accompanying instructions. 8

9 Caution when paying foreign partnerships, certain non-public limited liability companies, disregarded entities, or grantor or simple trusts as they may not be beneficial owners of the income for treaty claim purposes and may not submit a W-8BEN-E. See line 4 of W-8BEN-E that says If you entered disregarded entity, partnership, simple trust, or grantor trust above, is the entity a hybrid making a treaty claim? If "Yes" complete Part III [supporting a treaty claim]. If not, then the partners, members or owners of the entity will need to qualify for treaty benefits. These entities are considered to be fiscally transparent where the owners of the entity reside in a jurisdiction that taxes the owners and not the entity on the item of income you are paying. These entities as flow-through entities require a W-8IMY with the W- 8BEN or W-9 of each owner of the entity attached as well as a withholding statement so that you can allocate the portion of the payment to each partner, member, or owner. Withhold based on the owner s status and report the owners on Forms 1042-S. Where this information is missing, withhold 30% and report following requirements for unknown recipients. If payments are jointly owned by more than one person, a Form W-8BEN or W-8BEN-E that properly claims the treaty benefit must be provided by each of the owners before a reduction in withholding is allowed S reporting may be required for each owner. For checking FATCA claims: FATCA status must be indicated for entities if paying FATCA withholdable income, and the appropriate section of the W-8BEN-E completed for the type of FATCA status checked. Beginning in 2015, if paying FATCA withholdable income to newly on boarded accounts, FATCA status is required on the W-8BEN-E form. A reporting IGA FFI resident in, or established under the laws of, a jurisdiction covered by a Model 1 IGA should check Reporting Model 1 FFI. A reporting FFI resident in, or established under the laws of, a jurisdiction covered by a Model 2 IGA should check Reporting Model 2 FFI. If the payee is treated as a registered deemed-compliant FFI under an applicable IGA, it should check Nonreporting IGA FFI rather than registered deemed-compliant FFI and provide its GIIN in Part XII, line 26. FATCA withholding is only required: Where new W-8BEN-E or W-8IMY form has been provided by a non-participating FFI (box marked), or For undocumented FATCA payment relationships on-boarded starting in 2015 where presumption standards when applied result in a withholdable category, or For new accounts starting in 2015 with a participating FFI, registered deemed compliant FFI, reporting or sponsored passive non-financial foreign entity (NFFE) that require a GIIN for their status and the entity fails to provide the GIIN, or the GIIN has been provided but does not match in IRS list within 90 days. Special GIIN rules apply to reporting or sponsored NFFEs. 9

10 As of April 20, 2015 For new accounts starting in 2015 with passive non-financial foreign entities that have failed to provide their U.S. ownership information or a certification that there are no U.S. owners; these will be subject to FATCA withholding on FATCA withholdable income. For a registered participating FFI, registered deemed compliant FFI, and IGA Model 1 Reporting FFI, the GIIN must be provided on the form and validated on the IRS website within 90 days of receipt. If the payee is a reporting Model 1 FFI, the GIIN is not required to be provided for matching until 2015, but the address of the payee must be in an IGA Model 1 country. Note: For pre-existing payees (those on your books through December 31, 2014) FATCA withholding begins in 2015 for undocumented Prima Facie FFIs without GIINs or with GIINS unmatched in the IRS list after 90 days, and for all others withholding does not begin until July 1, New FATCA versions of the W-8 forms must be on file for all accounts by See how to identify prima facie FFIs below and related curing requirements. Instructions to the W-8BEN-E on pre-existing accounts limit completion of line 5 in FATCA status. Payees are told that they are not required to provide a chapter 4 status if: Providing the form with respect to a preexisting entity account prior to July 1, 2016 (or, if they are an entity that is treated as a prima facie FFI prior to January 1, 2015), or Providing W-8BEN-E in the context of receiving a FATCA withholdable payment. By checking a box in line 5, the payee is representing that they qualify for this classification their country of residence. Regarding what to look for to be assured that a beneficial owner has signed the form, it is critical that the name on the W-8 be your contract party who has earned the right to the payment, and the signatory on the W-8 be an authorized representative of that contract party. Where this is otherwise, consider whether the designated payee is acting as an agent or in another capacity. This conflict needs to be resolved in your process to assure correct withholding and reporting and to avoid risk. The July 1, 2014, IRS corrections to the regulations added a listing of validity checks for Forms W-8BEN and W-8BEN-E, all of which are covered in detail above, but more importantly the regulations clarified that missing data unless considered an inconsequential omission meant the form was invalid and that an expired form is also invalid. Included in the express listing for a form to be valid are: Validity period has not expired, Signed under penalties of perjury by the beneficial owner, Contains all of the following information required on the form: Beneficial owner's name, Permanent residence address, TIN (if required), A certification that the person is not a U.S. citizen (if the person is an individual) or a certification of the country under the laws of which the beneficial owner is created, incorporated, or governed (if a person other than an individual), 10

11 Classification of the entity, When required a foreign TIN, When required an individual's date of birth, Chapter 4 status of a beneficial owner when required for chapter 4 purposes, and Such other information as may be required by the regulations under section 1441 or by the form or accompanying instructions. [Reg T(e)(2)(ii)] For checking Form W-8ECI. Form W-8ECI requires review of the items listed above, apart from FATCA since ECI is exempt from FATCA withholding, and apart from treaty claims that cannot be made on the Form W-8ECI. The W-8ECI also requires review of the following items: Form W-8ECI does not apply to personal services and may not be used to eliminate withholding on fees for personal services paid to an individual who is a nonresident alien (NRA) whether as an independent contractor or as an employee. Only a Form 8233 treaty claim may reduce withholding on an individual s personal services. Form W-8ECI also may not be used to eliminate withholding on pay for services to a personal holding company. W-8ECI does not apply to personal holding companies with income from personal service contracts. Foreign corporations that are personal holding companies receiving compensation from personal service contracts are precluded from claiming effectively connected income and cannot provide a W-8ECI with respect to that income. Explained in a different way, personal service contracts prohibited from this benefit are contracts for personal services where some person other than the corporation has the right to designate (by name or by description) the individual who is to perform the services, or if the individual who is to perform the services is designated (by name or by description) in the contract; and at some time during the tax year, 25% or more in value of the outstanding stock of the corporation is owned, directly or indirectly, by or for the individual who has performed, is to perform, or may be designated (by name or by description) to perform the services. Traditionally, the personal service contracts subject to these rules provide for artists, actors, engineers, salespersons, or other highly paid specialists for whom the corporation has been organized. See your tax counsel should questions about this restriction arise. A partnership can execute W-8ECI even though not technically a beneficial owner and otherwise required to execute a W-8IMY. Since withholding is required under I.R.C on a foreign partner s share of ECI to the partnership, an exception to the beneficial owner rule allows a flow-through foreign partnership in a U.S. trade or business to execute the W-8ECI as an entity. Payees need to specify each item of income that is effectively connected with the conduct of their trade or business in the U.S. with enough details that a reader can identify the income. Make sure that the payee accounts for every item of income with enough detail that you can 11

12 identify it and if any item is missing or unclear be sure to follow up with the payee. Withholdable items not clearly covered will be subject to 30% Form 1042 withholding. A U.S. TIN must also be provided in the appropriate line. A foreign tax ID will not suffice for this purpose. The form is invalid if the payee does not provide a U.S. TIN (probably an EIN beginning with 98 ). Make sure that the payee s U.S. TIN is included and that the payee indicates whether the TIN is an SSN or ITIN or EIN. The TIN is also to be reported on Form 1042-S. The IRS matches each item reported as ECI on Form 1042-S to the payee s tax return using the payee name and TIN provided on the 1042-S. Form W-8ECI requires payees to be registered as U.S. taxpayers, and to certify that they are meeting U.S. tax obligations on their own U.S. tax returns as to the income received. On receipt of a valid W-8ECI, payers are not required to withhold but will still need to report the ECI on Form 1042-S so the IRS can match reported ECI against the payee s U.S. tax return to verify tax obligations are being met. Red Flags Give Reason to Doubt the Validity of Foreign Status on W-8 Forms. Forms Must be Monitored for Red Flags and, if Found, Cured. Within the harmonization regulations published March 6, 2014, are requirements for maintaining ongoing due diligence of a payee s withholding status for purposes of chapter 3 and FATCA as well as 1099 reporting and backup withholding under chapter 61. The review for inconsistencies with tax certifications requires integration of all knowledge within your organization about a payee, not just the items acquired for tax purposes and on tax certifications, and includes review of non-tax regulatory knowledge learned in, for example, an OFAC search, and other business information such as found in credit reports and in marketing information. If you classify business type for other regulatory purposes (not a tax purpose) and you are required to monitor that classification, a reason to know of conflict with the tax status arises only if what you record is inconsistent with the status claimed. For information gathered for regulatory purposes, you have 30 days from account opening (loosely, this might mean your contract date or date your master file first indicates a viable vendor if no contract). Regulations give the following example: You have reason to know that a claim of excepted FATCA status based on a claim of not being a financial institution is unreliable if you have a financial statement or credit report indicating the payee is engaged in business as a foreign financial institution. A W-8 is deemed unreliable on date of discovery of a red flag. Although there are references to a 90-day grace period to obtain the cure, withholding is required if a payment is made in the meantime. There are specific curing requirements that are covered in the next section. If not cured pursuant to the requirements, you are required to apply prescribed presumptions established in the tax regulations (outlined further below) that apply if you have no document or an uncured voided certification, to 12

13 determine type of payee (individual, trust, estate, corporation, other exempt recipient, or intermediary or flow-through entity), U.S. or foreign status, and withholding consequences under chapter 3, FATCA, or backup withholding rules. Under these regulations (and the prior versions) you generally ignore a U.S. intermediary (an agent) if you know the payee is acting for a foreign person unless that agent is a U.S. financial institution (or U.S. insurance broker if paying a premium) and you have no reason to know that the institution will not comply with its withholding responsibilities. IRS corrections made to the final regulations on July 1, 2014, added new instructions on due diligence and use of red flag reasons to doubt certification validity, including: For accounts on-boarded after 2014, a withholding agent will have reason to know that a chapter 3 claim is unreliable or incorrect if any information contained in its account opening files or other files pertaining to the account information, including documentation collected for purposes of AML due diligence, conflicts with the account holder's claim. A withholding agent will not, however, be considered to have reason to know that a person's chapter 3 claim is unreliable or incorrect based on documentation collected for AML due diligence until the date that is 30 days after the obligation is executed (or the account is opened for an obligation that is an account with a financial institution). Red Flags for U.S. or Foreign Status. Regulations require looking for the following red flags on an ongoing basis from the beginning of the payee relationship forward to the very last payment you make, and sometimes beyond that point if filings are still to be made. You are to catch any changes whenever they occur in account information that would raise any of the listed red flags. The following red flags must be identified on any submitted W-8 form or whenever conflicts arise between information on the submitted form and information in your business files. Red flags in this listing require curing with additional documentation and often also certified written statements before you may continue to honor the claim on the W-8 form (see the discussion of curing below). Although the regulations make reacquiring certifications on a new W-8 form optional, Cokala advises that getting new W-8 forms as part of the curing process is the best strategy to apply. Reg T(e)(4)(ii)(D) considers a change in circumstances. Under this regulation, a certificate or documentation becomes invalid from the date of a change in circumstances affecting the correctness of the certificate or documentation. Thus, for example, a change of address is not a change in circumstances with respect to a claim of only foreign status if the change is to another address outside the U.S., but is a change in circumstances if the change is to an address in the U.S. Red flags that will give reason to consider the W-8 unreliable include: A current U.S. permanent or mailing address exists on the W-8 certification or in your records even if the U.S. address becomes known after the account is opened and the W-8 has been received. In-care-of or hold mail addresses are not permanent addresses. Missing a permanent address in a foreign country is a fatal flaw to relying on any W-8 form. The payee is classified as a U.S. person in any of your customer files. 13

14 As of April 20, 2015 Under Notice , the customer file classification red flag must be applied to all accounts with entities opened after 2014 (prior effective date was July 1, 2014); but continues to apply to individual accounts held in the U.S. if opened on and after July 1, For pre-existing entity accounts opened prior to 2015, a withholding agent is not required to take into account this U.S. indicia unless the withholding agent is notified of a change in circumstances (see explanation above) with respect to the account or payment obligation. For pre-existing individual accounts opened prior to July 1, 2014, a withholding agent is not required to take into account this U.S. indicia unless the withholding agent is notified of a change in circumstances. Notice appears to have only pushed out the time frame for accounts held in the U.S. by entities, and not to have changed the July 1, 2014, effective date for individual accounts. You have a U.S. telephone number on file anywhere if it is the only phone number you have and you have no other phone number outside of the U.S. Under Notice , the U.S. telephone number red flag must be applied to all accounts with entities opened after 2014 (prior effective date was July 1, 2014); but continues to apply to individual accounts held in the U.S. if opened on and after July 1, For pre-existing entity accounts opened prior to 2015, a withholding agent is not required to take into account this U.S. indicia unless the withholding agent is notified of a change in circumstances (see explanation above) with respect to the account or payment obligation. For pre-existing individual accounts opened prior to July 1, 2014, a withholding agent is not required to take into account this U.S. indicia unless the withholding agent is notified of a change in circumstances. Notice appears to have only pushed out the time frame for accounts held in the U.S. by entities, and not to have changed the July 1, 2014, effective date for individual accounts. There is a known U.S. place of birth of an individual payee that is an unambiguous indication of the U.S. as place of birth, such as seen on a reviewed passport. Under Notice , the U.S. place of birth red flag continues to apply to individual accounts opened on and after July 1, 2014, unless related to an offshore obligation. However, for preexisting accounts opened prior to July 1, 2014, Reg T(b)(3)(ii) does not require a withholding agent to take into account this U.S. indicia unless the withholding agent is notified of a change in circumstances (see explanation above) with respect to the account or payment obligation or reviews documentation that contains a U.S. place of birth. Notice appears to have only pushed out the time frame for accounts held in the U.S. by entities, and not to have changed the July 1, 2014, effective date for individual accounts. Incomplete forms that are missing signatures, dates, permanent foreign address, incomplete treaty claims. These are all fatal flaws in forms. See review instructions above. Although the IRS does not considered an expired form a red flag, expiration dates need to be monitored. A Form W-8 will generally remain valid until the earlier of the last day of the third calendar year following the year in which the withholding certificate is signed or the day that a change in circumstances occurs that makes any information on the certificate incorrect. Effective July 1, 2014, W-8 forms with TINs are no longer considered valid indefinitely even if you file a 1042-S each year. It is unclear whether extended validity to 2015 will cover older forms that would have expired in previous years but for this provision. 14

15 New rules apply indefinite validity periods for individuals if you also have documentary evidence of foreign status, such as a copy of a passport on file, as long as there is no current U.S. residence or mailing address or other U.S. indicia; but, if a treaty claim is involved, the form will expire for treaty purposes. Red flags for treaty status: All of the above red flags apply and in addition, the following red flags in this listing require curing before you may continue to honor the treaty claim on the W-8 form (see the discussion of curing below): The permanent residence address is not in the treaty country As a withholding agent, you are notified of a new permanent residence address that is not in the treaty country. The mailing address is not in the treaty country or the withholding agent has a mailing address that is not in the treaty country as part of its account information. The account holder has standing instructions for the withholding agent to pay amounts from its account to an address outside, or an account maintained outside, the treaty country. Critical parts of the treaty claim are missing in the treaty sections of Form W-8BEN (Individual) or W-8BEN-E (entity), such as a missing TIN (U.S. or foreign) where one is required for the type of treaty claim. For an entity s claim, completion of lines 14a, 14b and where required details in line 15 of the W-8BEN-E. For an individual s claim, line 9 and details in line 10 where required for the type of treaty claim Red flags for FATCA. Almost every FATCA status has other unique red flags that could cause challenge to the FATCA status and are required items to look for. Specific requirements also attach to documentary evidence when required as part of the status claim and this covers a very broad range of information. Once you have identified payees receiving FATCA withholdable income from your organization, Cokala can assist you in identifying relevant red flags. GIINs, however, pose numerous red flag concerns worth raising in this paper since every traditional foreign bank or brokerage firm will be assigned a GIIN. A critical red flag for FFIs and registered deemed compliant FFIs is a missing GIIN, or where you fail to match the GIIN with the entity on the IRS website within 90 days of receipt of the GIIN. New categories for non-financial foreign entities (NFFEs) will also be issued GIINs and require matching within 90 days. Direct Reporting and Sponsored Passive NFFEs will be given GIINs and will report their U.S. owners directly to the IRS. See comments on when GIINs are required above. Matching is now mandated for GIINs. Begin FATCA withholding in 2015 for new payment relationships and pre-existing Prima Facie FFIs (see further below) if the GIIN is not validated on the IRS GIIN website by the 91st day. If later the GIIN shows up on the IRS website, then you can use reimbursement or set-off procedures to refund. If you are presented with GIINs in 2014, please contact Cokala for assistance. However, if the payee is a reporting Model 1 FFI, GIINs are not required to be provided for matching until 2015, but until then the address of payee must be in an IGA Model 1 country. Due diligence points to watch for when matching GIINs: 15

16 Branches outside FFI country of residence must have separate GIIN (even if a disregarded entity). Must consider whether it is a withholdable limited branch or limited FFI if directed to make payment to an address other than the address for the Participating FFI or registered deemed-compliant FFI on the IRS website. Need to check to see if later removed from the IRS list. You are deemed to know one year from date removed. No longer required to look for U.S. address as a red flag once the FFI s GIIN is confirmed on the current published IRS FFI list within 90 days of receipt of the withholding certificate. Application of red flags to multiple obligations of single payee: if you have reason to know there is a red flag on one account, it has application to other accounts and payment relationships with the same payee to the extent that you have computerized systems linking those accounts by reference to a data element or where the withholding agent is treating the obligations as consolidated obligations. The term consolidated obligations means multiple obligations that a withholding agent has chosen to treat as a single obligation in order to treat the obligations as pre-existing obligations (accounts) to allow sharing of documentation between the accounts. Where the withholding agent opts to treat multiple obligations as consolidated accounts the withholding agent must also treat the obligations as a single obligation for purposes of satisfying the standards of knowledge ( reasons to doubt due diligence requirements). For example, with respect to consolidated obligations, if a withholding agent has reason to know that the FATCA status assigned to the account holder is inaccurate, then it has reason to know that the FATCA status assigned for all other consolidated accounts of the account holder is inaccurate. Curing Standards New regulations allow inconsequential errors on forms if you have evidence in your files, e.g., a copy of a government-issued ID that clarifies country of residence for the form fault of abbreviating the country on the W-8, or an individual s failure to print out their name on the W-8BEN (Individuals). But, the regulations make clear that missing mandated information is not inconsequential so if the form fails to provide the country of incorporation or forgets to sign the form, for example, these would be a fatal flaws. W-8 forms may be received after you make payment and fail to withhold. However, to cure the failure, you will need to acquire a signed affidavit stating that certifications on the newly provided form were accurate as of the first payment unless the W-8 was received within 30 days of the first payment. If more than a year has passed, you will need both the affidavit and documentary evidence of foreign and FATCA statuses to accompany the new W-8 to honor it retroactively. IRS corrections made to the final regulations on July 1, 2014, added new instructions for the curing mandates. In the new instructions it was clarified that if a direct account holder has provided documentation that is unreliable or incorrect, the withholding agent may either require new 16