The new W-8IMY: An Accounts Payable Perspective

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1 The new W-8IMY: An Accounts Payable Perspective (and for those who just need an introduction to the form) On June 19, the IRS finally released instructions to the new W-8IMY. The form had been released without instructionson April 30. Form W-8IMY, Certificate of Foreign Intermediary, Foreign Flow- Through Entity, or Certain U.S. Branches for United States Tax Withholding and Reporting,has been extensively revamped to handle the new FATCA status classifications in addition to certification of status for purposes of IRC chapter 3. As we have learned under the chapter 3 requirements and now for purposes of chapter 4 (FATCA), only beneficial owners can sign a W-8BEN, W-8BEN-E, W-8ECI or W-8EXP. Form W-8IMY is the form designed to address payments to payees who are not considered to be beneficial owners of income we pay. TIP Complex terms require a glossary and, thank goodness, the new W-8IMY instructions provide one. As you read this short paper, having the form and the instructions handy will help. Use the glossary in the IRS instructions to help you understand terms you find confusing. For the most part, Form W-8IMY is to be furnished to payers of U.S.-source withholdable payments made to intermediaries and to flow-through entities. This is not a new requirement and in fact, accounts payable processors have been handling receipt of Form W-8IMY for many years under the requirements of IRC chapter 3. In an AP setting, Form W-8IMY usually has been provided by foreign persons to establish that they were: Nonqualified intermediaries (NQIs) acting as agents for the beneficial owners. Non-withholding flow-through foreign partnerships (NWPs)usually under contract to provide services. W-8IMYis provided by partnerships that do not have effectively connected income (ECI) to a U.S. business. If there were ECI, a W-8ECI would be required from the partnership. Non-withholding foreign simple or grantor trusts (NWTs) or NWPs that are legal owners but not beneficial owners of passive income such as U.S.-source royalties or rentals. Foreign limited liability companies and other foreign entities that are regarded entities (not considered disregarded entities), but not respected as corporations for U.S. tax purposes, fall into this listing (usually as NWPs) as long as they are not considered tax residents under terms of a U.S. tax treaty as a hybrid entities. Under chapter 3 requirements, AP professionals need to be acquainted with Form W-8IMY, and courses of action necessary when the form is received, for the most part from flow-through entities such as partnerships and certain limited liability companies, but also from foreign agents of beneficial owners such as contingent service organizations that find, hire and pay your contractors; literary agents; theatrical agents; agents handling royalties for nonresident copyright holders; and other nominees/payees who are not the beneficial owners of the income. For tax purposes, a foreign agent falls under the category of a Nonqualified Intermediary or NQI and is required to use Form W-8IMY, completing Part IV, with attachments to relay reporting and withholding information to you about the beneficial owners.

2 Foreign intermediaries include foreign persons who act as agent, custodian, broker, nominee, or otherwise for another person in collecting payments on their behalf. Foreign intermediaries are further classified as Qualified Intermediaries or QIs and Nonqualified Intermediaries or NQIs. QIs are financial entities such as banks, brokerage firms, or securities clearing facilities including foreign branches of U.S. institutions, acting in an intermediary capacity, that are parties to a withholding agreement with the IRS in which they sometimes accept responsibilities for certain 1042 withholding and in some cases 1099 compliance. Prior to FATCA, it was rare for AP professionals to have payees that are QIs unless they were part of a large financial institution, but many AP processes have payees that are NQIs. Think of the Form W-8IMY as a relay document between the payer and the beneficial owner of the income. Foreign persons required to execute Form W-8IMY fall into two categories: those who actually act as agents or intermediaries for beneficial owners, and those who are considered flow-through or fiscally transparent entities (like an intermediary) where the partners, members, owners, grantors or beneficiaries of the entity are considered the beneficial owners. A payment is considered to have been made to a beneficial owner whether it is made directly to the owner or to another person (such as an intermediary, agent, trustee, executor, or partnership) for the benefit of the beneficial owner. The W-8IMY is used in these settings to transmit the withholding certificates of the beneficial owners (including partners, beneficiaries and members)and to provide a withholding statement regarding the apportionment of beneficial ownership of the payments. From this information, a withholding agent withholds tax from payments and reports (on Form 1042-S or 1099) appropriately to the beneficial owners of the income on their share of the payments. An example: A foreign partnership is not a withholding foreign partnership and has three partners: a nonresident alien individual, a foreign corporation, and a U.S. citizen. You make a payment of U.S. source royalties to the partnership. Royalties are not FATCA withholdable income. The partnership gives you a Form W-8IMY with which it associates Form W-8BEN from the nonresident alien, Form W-8BEN-E from the foreign corporation and a Form W-9 from the U.S. citizen. The partnership also gives you a complete withholding statement that enables you to associate a portion of the royalties to each partner. You must treat all three partners as the payees of the royalty payment as if their portion of the payment were made directly to them. Report their portion to the nonresident alien and the foreign corporation on Forms 1042-S. Report the U.S. citizen s portion of the payment on Form MISC. There are exceptions to the required pass-through of beneficial owner information, but until now the exceptions have mostly affected financial institutions since they apply to a foreign bank or broker or other entity acting as a qualified intermediary (QI) or on a very rare occasion as a withholding foreign partnership (WP) or a withholding foreign trust (WT) that had entered into an agreement with the IRS to withhold and report to the IRS directly. There are many processing elections available to a QI, and to a lesser extent to a WP or a WT, making for fairly complex disclosures on the W-8IMY. The W-8IMY is used to make the certification of these exceptions and to relay pooled account information where needed to facilitate the arrangement. Accounts Payable should expect to see more of these certifications regarding income it pays, as FATCA takes effect and QIs, WPs and WTs are on the rise in

3 numbers. Special rules and elections apply to U.S. branches of foreign banks, insurance companies and territory financial institutions that are also covered on the W-8IMY. FATCA ALERT AP professionals pay FATCA withholdable income to foreign financial institutions and foreign flowthrough entities. These entities usually will provide a W-8IMY unless the payment you make is on a proprietary basis to an institution that is not a flow-through entity. AP will need to learn about the W-8IMY as it relates to foreign financial institutions. The new Form W-8IMYprovides for certification of status under chapter 3 as an NQI, QI, NWP, WP, NWT, WT, or U.S. branch or territory financial institution. In general, these entities have always been required to provide both their chapter 3 status as an entity and the chapter 3 status of persons for whom they are receiving payments. The new W-8IMY functions similarly to the old form for this purpose. But now the form also applies when the payee is receiving FATCA withholdable income, to certify the payee status under chapter 4 (FATCA) and to address special provisions that apply if the entity is a foreign financial institution (FFI). An intermediary or flow-through entity receiving a FATCA withholdable payment will be required to provide its chapter 4 status and the chapter 4 status of beneficial owners for whom it receives a withholdable payment, when required for chapter 4 purposes. There are exceptions for passing through a beneficial owner s FATCA status when the entity is a QI, WP, or WT under certain elections pursuant to the entity s agreement with the IRS, and there are exceptions for passing through a beneficial owner s FATCA status under certain elections made on the W-8IMY for a U.S. branch of a FFI or foreign insurance company or for a territory financial institution. New categories of entities must provide W-8IMY, and new rules cover pools for existing entities that provide a W-8IMY. Under the FATCA requirements, there are new categories of entities that must now provide a W-8IMY or, if in the past they have provided a W-8IMY, there are now new forms of FATCAbased pooled accounts possibly requiring a new W-8IMY to help to establish the pools and related processing. For example, a nonparticipating FFI will be subject to FATCA withholding even if it is acting as an intermediary (NQI) in collecting the payments for others. Similar treatment is given to a flowthrough entity that is a non-participating FFI. If these entities collect payments for beneficial owners that are exempt FATCA entities, the non-participating FFI may now use the W-8IMY to transmit a withholding statement and withholding certificates or other documentation for the FATCA exempt beneficial owners described in Reg (a long list) to avoid FATCA withholding on their portions of the payments. See Parts IV and IX of the Form W-8IMY and related instructions. Participating FFIs and registered deemed compliant FFIs that are QIs are allowed to submit U.S. payee pooled account information. See Part III of the Form W-8IMY and related instructions. A pool of U.S. persons included in a U.S. payee pool that includes 1099-exempt recipients may be established by a participating FFI (including a reporting Model 2 FFI), a registered deemed-compliant FFI (including a reporting Model 1 FFI), or a QI that will require special treatment. However, a chapter 4 withholding rate pool identified on a withholding statement provided by an intermediary or flow-through entity with respect to a FATCA withholdable payment that is allocated to payees that are nonparticipating FFIs will require FATCA withholding. The complexities of these elections are covered mostly in Parts III and IV of the form and related instructions.

4 Hybrid entities. Some entities will need to provide both a W-8BEN-E and a W-8IMY for the same payment stream. Where the entity is a hybrid entity (respected for tax purposes by its resident country, but treated as a partnership for U.S. tax purposes) it is to use the W-8BEN-E to claim treaty benefits on its own behalf for chapter 3 purposes. But if payments are FATCA withholdable, it must provide Form W-8IMY to establish its chapter 4 status (unless also a disregarded entity) and the chapter 4 status of each of its owners. Disregarded foreign entities. A foreign disregarded entity (DE) does not provide a Form W-8. A DE is a business entity that has a single owner and is not a corporation for U.S. tax purposes so is disregarded as an entity separate from its owner. Instead, the single owner (if a foreign person) should provide the appropriate Form W-8 based on the single owner's status. This rule is much the same for both FATCA and chapter 3 purposes unless the DE is either a branch of a participating FFI or a foreign QI branch of a U.S. financial institution where it has its own GIIN and must provide its own W-8IMY. Failure to provide details on either the FATCA status of the entity or, when required, for the entity s beneficial owners may subject the intermediary or flow-through entity to FATCA withholding at a 30% rate on all or a portion of the FATCA withholdable payments. NEW LINES and INSTRUCTIONS to NOTE Line 5 covers the FATCA classifications. There are 25 different FATCA classifications in line 5 of the new W-8IMY, but only 1 box is to be checked by the submitter. Most classifications require additional certifications and disclosures in other parts of the form. The part of the form requiring completion is indicated after each listed classification. NewParts IX through XXVII relate to FATCA disclosures, starting on page 3 and ending on page 8. The majority of payments made through AP will not be FATCA withholdable income, so many of the changes in the new form will not affect AP. However, AP needs to recognize FATCA status (indicated in line 5) when paying income that is FATCA withholdable. If you need help in determining just what income is FATCA withholdable, contact Cokala and we will help you. Details on line 5 in IRS instructions: Under the new instructions, like the new instructions to the W-8BEN-E, if a payee is a pre-existing entity it is not required to provide a FATCA status in Line 5 until after a certain specified time period. IRS Notice extended the determination period for preexisting status from July 1, 2014, to cover payees on your books through December 31, New instructions to Line 5 now say that a payee that is a pre-existing entity is not required to provide its FATCA status prior to July 1, 2016, the date when FATCA withholding begins, unless the pre-existing payee is a prima facie FFI. For prima facie FFIs, withholding begins on January 1, 2015, so the FATCA status is required to be disclosed on Line 5 as of January 1, This may pose some concern since the dates precluding status disclosure are the same as the dates when FATCA withholding begins, leaving no time for a payer to solicit the new form with a status prior to the effective date of withholding. Pre-existing accounts that have provided an older version of the W-8IMY (2006 version), supporting documentary evidence and, where required, a GIIN that is validated on the IRS website within 90 days, will not need to provide the newer version of the W-8IMY until the end of 2016 to avoid FATCA withholding.

5 The instructions say that an entity is only required to provide its chapter 4 status if it is the payee of a FATCA withholdable payment or it is documenting the status of an account it holds with an FFI. This is good news for those who do not pay FATCA withholdable payments, such as non-financial payments made in the ordinary course of business including non-financial service fees, rentals on office and equipment leases, payments for the use of other property, software license fees, transportation and freight, awards, prizes, scholarships and other similar Accounts Payable disbursements. Line 5 is required to be completed by: - Payees acting as intermediaries with respect to a FATCA withholdable payment - Flow-through entities receiving a FATCA withholdable payment on behalf of their owners - Payees that provide a withholding statement that allocates a portion of the payments to a chapter 4 withholding rate pool of U.S. payees with respect to their direct account holders, or - Payees providing this form to an FFI requesting the form to document the payee s chapter 4 status. Line 8, U.S. taxpayer identification number: A nonqualified intermediary, a nonwithholding foreign partnership, or a nonwithholding foreign simple or grantor trust is generally not required to provide a U.S. TIN on Form W-8IMY. Read the instructions for line 8 to make certain to recognize all other entity types that are required to provide a U.S. TIN. A QI, WP or WT must provide its specially assigned EIN. Line 9, special rules for GIINs: A participating FFI (including reporting Model 2 FFI), registered deemedcompliant FFI (including a reporting Model 1 FFI), direct reporting NFFE (including a sponsored direct reporting NFFE), and a trustee of a trustee documented FFI are required to enter their GIIN (assigned with regard to their country of residence) on line 9. For payments made prior to January 1, 2015, however, a Form W-8IMY provided by a reporting Model 1 FFI need not contain a GIIN. For payments made prior to January 1, 2016, a sponsored direct reporting NFFE or sponsored FFI that has not obtained a GIIN may provide the GIIN of its sponsoring entity. Expiration date. The new instructions follow the February 2014 changes in the regulations (published March 6, 2014, in the Federal Register) regarding when the Form W-8IMY expires. It will remain valid until the status of the person whose name is on the certificate is changed in a way relevant to the certificate or there is a change in circumstances that makes the information on the certificate no longer correct. The indefinite validity period does not extend, however, to any other withholding certificates, documentary evidence, or withholding statements associated with the certificate, particularly in regard to the underlying beneficial owner information. This means that withholding agents will need to track the expiration dates of W-8 forms passed through with the certificates by non-qualified intermediaries and non-withholding partnerships and trusts. Future changes in circumstances as to the certified payee and as to beneficial owner information. Instructions to the form make clear to submitters that if the information provided becomes incorrect for purposes of chapter 3 or chapter 4 (when relevant), they must notify the withholding agent within 30 days and provide a new Form W-8IMY or provide new documentation or a new withholding statement (if applicable).