Presenting a live 110 minute teleconference with interactive Q&A Form W 8BEN and W 9 Compliance in Foreign and US U.S. Business Transactions Avoiding Traps With Unnecessary Back Up Withholding or Invalid Payee Documentation THURSDAY, JUNE 30, 2011 1pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Marianne Couch, Principal, COKALA Tax Information Reporting Solutions, Ann Arbor, Mich. Anthony Martirano, Director, Tax Controversy Services Group, Deloitte Tax, Parsippany, N.J. For this program, attendees must listen to the audio over the telephone. Please refer to the instructions emailed to the registrant for the dial-in information. Attendees can still view the presentation slides online. If you have any questions, please contact Customer Service at1-800-926-7926 ext. 10.
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Form W 8BEN and W 9 Compliance in Foreign and US U.S. Business Transactions Seminar June 30, 2011 Marianne Couch, COKALA Tax Information Reporting mcouch@cokala.com Anthony Martirano, Deloitte Tax amartirano@deloitte.com
Today s Program Significant Compliance Challenges [Marianne Couch] Slide 7 Slide 19 Best Practices For Validating Forms [Anthony Martirano] Slide 20 Slide 33 Current IRS Audit Imperatives [Anthony Martirano] Slide 34 Slide 38
Marianne Couch, COKALA Tax Information Reporting SIGNIFICANT COMPLIANCE CHALLENGES
U.S. Vs. Non U.S. U.S. WORLDWIDE INCOME Citizens Residents o Green card o Substantial presence test (SPT) Entities organized under U.S. law W-4/W-2 o Standard wage withholding W-9/1099 o 28% back-up withholding o Some corporate exemptions o $600 threshold for most reporting No treaty benefits (some exceptions) No reporting for goods purchases Filing deadlines o Payees: 1/31 o IRS: 2/28-4/30 Non-U.S. U.S. SOURCE INCOME Not U.S. citizens or residents Not organized under U.S. law W-4/W-2 o Special withholding rules W-8s/8233/1042-S o 30% withholding (14% on scholarships) o No corporate exemption o No minimum i dollar threshold h for payments o No reporting for goods purchases Can claim treaty benefits to avoid or lessen U.S. taxation/withholding ti ithh if qualifying Filing deadlines o Payees: 3/15 (W-2: 1/31) o IRS: 3/15-4/15 8
Individuals: Resident Or Non Resident Alien? I. If your payee is not a U.S. citizen, then you must know his or her country of tax residency to determine whether to treat the payee as a U.S. or non-u.s. person. II. 9 A. Resident aliens are U.S. persons, for tax purposes. 1. Green card holders 2. Individuals who have passed the SPT 3. Worldwide income taxation 4. Form 1099/W-2 B. Non-resident aliens are non-u.s. persons, for tax purposes. 1. These individuals,,generally, are not in the U.S. or are here for only short periods of time. 2. U.S. source income taxation 3. Form 1042-S/W-2 U.S. citizens or green card holders outside the U.S. are U.S. persons, and can be subject to Form 1099/W-2 reporting.
Entities i I. What if you are paying an entity (company, partnership, trust, estate, LLC, corporation, etc.)? II. III. IV. 10 Then, you must determine under the law of which country that entity is formed/organized. If organized under U.S. law (50 states plus DC), treat as U.S. payee A. Standard 1099 rules B. Worldwide income If organized under the law of a country other than the U.S., treat the payee as a non U.S. person A. 1042-S reporting B. U.S. source income C. Subject to 30% withholding D. Treaty may apply E. ECI claim may apply
1099 Withholding Vs. 1042 S Withholding I. 1099 back-up withholding A. Payers must effect back-up withholding if payment is reportable and: 1. Payer doesn t have payee s TIN 2. Payee hasn t timely and appropriately responded to B Notice correspondence 3. Payee hasn t appropriately certified TIN under penalty of perjury a. INT, DIV, OID, PATR, B II. 1042-S withholding A. Payers must effect 30% withholding on payments of U.S. source income to non-u.s. persons, unless an exception applies. 1. Income tax treaty is biggest exception 11 a. U.S. TIN required for claim, except for certain dividend payments 2. Valid claim that income is effectively connected with the conduct of a U.S. trade or business a. US U.S. TIN required b. Filing of U.S. returns required
Taxpayer Identification Numbers (TINs) I. Even though a non-u.s. person has a U.S. TIN, withholding is nonetheless required on payments of U.S. source income, unless there is a valid treaty claim or claim of ECI. II. This requirement is different than the requirement to provide a TIN to avoid back-up withholding on certain Form 1099 reportable payments. 12
Types Of Reportable Payments I. In general, if a payment is subject to Form 1099 reporting when paid to a U.S. person, it is subject to Form 1042-S reporting when paid to a non-u.s. person. II. Services, interest, t rents, royalties, dividends, id d etc. A. Note: Non-U.S. citizens or green card holders (NRAs, RAs who have passed SPT) performing services in the U.S. require work authorization. 1. Not a tax issue, but organization should be aware of it 2. Can t cure immigration violation by failing to pay for the services 13
Types Of Reportable Payments (Cont.) I. Always subject to exceptions A. Attorney gross proceeds (Box 14, Form 1099-MISC) are not reportable on Form 1042-S S. B. Scholarships paid to U.S. individuals are not reported on Form 1099; non-qualified scholarship payments to non- U.S. persons are reported on Form 1042-S (and subject to 14% withholding absent valid treaty claim). C. Others II. Goods purchases are not reportable on Form 1099 or 1042-S. 14
I. Goods, licenses, royalties? Software Purchases II. III. Transfer of a copyright right A. Transferee acquires substantially all rights = sale B. Transferee acquires at least one of the rights = license = royalty payment Transfer of a copyrighted article A. No copyright rights are transferred B. If benefits and burdens of ownership transfer, a transaction is the sale of a copyrighted article = goods purchase. 1. Most canned software purchases with shrink-wrapped license agreements will fall into this category. C. If there is a time limitation it ti on use of the program, a transaction ti is generally a lease, not a goods purchase, and = rental income. 15
Copyright Rights I. The right to make copies of the computer program for purposes of distribution to the public by sale or other transfer of ownership, or by rental, lease or lending; II. The right to prepare derivative computer programs based upon the copyrighted computer program; III. The right to make a public performance of the computer program; or IV. The right to publicly display the computer program 16
Form W 9 Compliance Issues I. IRS has removed the disregarded entity checkbox from LLC section of new the Form W-9. II. LLCs that are DEs must instead include an owner s name in name line, and an LLC name in business name/de line. III. Many LLCs believe themselves to be corporations, for tax purposes. IV. Best course of action: Do not permit corporate exemption for U.S. LLC payees/vendors V. Original forms W-9 not required 17 A. Faxes, e-mail attachments, etc. permitted B. Substitute forms permitted
Summary Of When 30% Withholding Is Not Required On Payments To Non U.S. Persons I. Payment is not U.S. source income II. A. Payments are not reportable. A payee has made a reliable claim that the income is effectively connected with the conduct of a U.S. trade or business. A. W-8ECI B. Must have U.S. TIN C. Payments are still 1042-S reportable. III. Valid treaty claim A. Payee must have U.S. TIN B. Treaty must exist and must apply. C. Some treaties require some amount of withholding. D. Payments are still 1042-S reportable. 18
Sorting And Liability I. You must identify and appropriately sort payees from the beginning of your relationship with them. II. Reporting and withholding rules follow from your categorization. III. If you were supposed to withhold the tax at time of payment and didn t, your organization is liable for the amount, plus interest and penalties. IV. IRS is auditing heavily on these reporting and withholding requirements. 19
Anthony Martirano, Deloitte Tax BEST PRACTICES FOR VALIDATING FORMS
Best Practices For Validating Forms W 8, And Red Flags On IRS Audit I. Forms W-8BEN A. Part I Identification of Beneficial Owner i. Lines 1-4 must be completed. ii. Line 1 should only contain one name. iii. Only one box checked on Line 3 iv. If "Partnership Partnership, " "Simple Trust" or "Grantor Trust" checked on line 3, then the form is invalid unless a hybrid entity is involved. v. If Disregarded Entity, obtain Form W-8 or Form W-9 from owner vi. No PO box or care-of address on line 4 vii. No U.S. address on line 4 or 5, or in your files Curing a U.S. address viii. U.S. taxpayer identification 21
Best Practices For Validating Forms W 8, And Red Flags On IRS Audit (Cont.) B. Part II Claim of Tax Treaty Benefits i. Line 9a must be checked, and country of residence provided Treaty residence different than address on line 4 or 5 invalidate claim of treaty benefits Cure ii. iii. iv. Line 9b only where TIN required for treaty benefits Line 9c must be checked if the beneficial owner is an entity. Line 10 must be completed if special rates or conditions apply. Non-individual id vendor claiming i treaty t benefits Beneficial owner claiming a lower treaty rate on dividends paid by a company in which owns a certain percentage of voting shares, e.g., Article 10.2.a. of U.S/U.K. Income Tax Treaty 10% or greater 5% rate 22
Best Practices For Validating Forms W 8, And Red Flags On IRS Audit (Cont.) C. Part IV Certification i. Form must be signed ii. Form must be dated d using month/day/year / Date stamp permissible, unlike Form W-9 iii. Capacity i. If individual not required ii. Entities officer of the beneficial owner iii. Third parties 23
Best Practices For Validating Forms W 8, And Red Flags On IRS Audit (Cont.) II. Form W-8ECI A. Part I Identification of Beneficial Owner i. Lines 1-6 and 9 must be completed. ii. Line 5 must contain a U.S. address. iii. Line 6 must contain a U.S. taxpayer identification number. iv. Line 9 must designate the income effectively connected with the conduct of the beneficial owner s U.S. trade or business. B. Part II Certification i. Same requirements as Form W-8BEN 24
Best Practices For Validating Forms W 8, And Red Flags On IRS Audit (Cont.) III. Form W-8IMY 25 A. Part I Identification of Beneficial Owner i. Lines 1-4 must be completed. ii. U.S. EIN is required on line 6 for a U.S. branch of a foreign bank or insurance. A QI-EIN is required on line 6 for a qualified intermediary, withholding foreign partnership or withholding foreign trust. Must begin with 98- iii. Other entities are not required to provide an EIN. B. Part II Qualified Intermediary i. Line 9a must be checked. ii. iii. iv. Lines 9b and/or 9c not required unless QI acting as a withholding QI Withholding statement required unless a full withholding QI If withholding QI account number entered on line 9b and/or line 9c in lieu of withholding statement
Best Practices For Validating Forms W 8, And Red Flags On IRS Audit (Cont.) C. Part III Nonqualified Intermediary i. Line 10a must be checked. ii. Lines 10b generally must be checked. Exception - payment of foreign source income D. Part IV Certain U.S. branches i. Line 11 must be checked ii. Either line 13 or 14 must be checked, not both. E. Part V Withholding Foreign Partnership or Withholding Foreign Trust i. Line 14 must be checked if claiming this status 26
Best Practices For Validating Forms W 8, And Red Flags On IRS Audit (Cont.) F. Part VI Nonwithholding Foreign Partnership, Simple or Grantor Trust i. Line 15 must be checked if claiming i this status t G. Part VII No capacity required 27
Best Practices For Validating Forms W 8, And Red Flags On IRS Audit (Cont.) H. Withholding statements i. No IRS prescribed format ii. iii. For NQIs and non-withholding flow-through entities: Name and address of underlying beneficial owner/indirect accountholder U.S. tax ID, if any Type of tax document provided for beneficial owner Country of residence Tax status (NRA, U.S. exempt, U.S. non-exempt) Recipient code (see Form 1042-S instructions) Whether entitled to treaty rates Rate of withholding on income types Exemption code (see Form 1042-S instructions) Allocable percentage of income For non-withholding QI withholding rate pool information 28
Best Practices For Validating Forms W 8, And Red Flags On IRS Audit (Cont.) I. NQI, non-withholding foreign partnerships and trusts must provide tax documentation for underlying beneficial owners/partners i. Must be valid ii. Copies are acceptable 29
Best Practices For Validating Forms W 8, And Red Flags On IRS Audit (Cont.) IV. Form W-8EXP A. Part I Identification of Beneficial Owner i. Lines 1-4 must be completed. ii. Line 6 - U.S. TIN not required unless claiming an exemption from withholding or a reduction in the applicable rate based solely on a claim of tax-exempt status under Sect. 501(c) of IRC or private foundation status B. Part II Qualification Statement i. Make sure the sections applicable to the type of entity checked on line 3 are completed ii. iii. Make sure only the applicable boxes are checked; e.g., line 9 foreign government check, line 9a and either line 9b or 9c, not both. Name of government must be provided. Make sure to obtain required documentation Opinion letter from counsel that entity qualifies as tax-exempt under IRC 501(c) 30
Affidavit i Of Unchanged Status V. Affidavit of unchanged status A. Used to document payees/beneficial owners retroactively B. Certify under penalties of perjury representations ti made on form were applicable retroactively to a date certain C. IRS prefers the affidavit be embedded at bottom of Form W-8, as opposed to a separate piece of paper. D. Signed on same date as Form W-8 31
Vlidi Validity Periods VI. Validity periods A. Form W-8BEN: Date of form signed until the last day of the third succeeding calendar year, unless a change in circumstances makes any information on the form incorrect. For example, a Form W-8BEN signed on Sept. 30, 2011, remains valid through Dec. 31, 2014. NOT RETROACTIVE TO BEGINNING OF YEAR!!! B. Form W-8ECI: Date form is signed and ending on the last day of the third succeeding calendar year, unless a change in circumstances makes any information on the form incorrect. C. A Form W-IMY: Valid indefinitely unless a change of circumstances make form incorrect. Indefinite validity period does not extend to any withholding certificates or withholding statements associated with the certificate. 32
Vlidi Validity Periods (Cont.) D. Form W-8EXP: Date form is signed and ending on the last day of the third succeeding calendar year, unless a change in circumstances makes any information on the form incorrect. In the case of an integral part of a foreign government (within the meaning of temporary regulations Sect. 1.892-2T(a)(2)) or a foreign central bank of issue indefinite validity, unless a change in circumstances makes any information on the form incorrect. 33
Anthony Martirano, Deloitte Tax CURRENT IRS AUDIT IMPERATIVES
Recent IRS Discussions On Forms W 8 VII. Recent IRS guidance with respect to Forms W-8 A. Contemplated that IRS will issue a field directive that will resolve open Form W-8 questions regarding: i. Titles used on the capacity line ii. Use of faxes, copies and e-mail images of documents iii. iv. Use of third-party addresses Various minor errors on the forms v. Explanations of a U.S. address vi. Cure provision VIII. Increased audits on non-financial multi-nationals A. More extensive analysis of accounts payable i. Vendor payments and other cross border payments like royalties B. Ensure CFCs are carrying out obligations as U.S. payors, for purposes of back- up withholding 35
Recent IRS Discussions On Forms W 8 (Cont.) IX. Audit approach General considerations A. Focus not only on payments treated as subject to withholding (i.e., documented payments) but also on payments not treated as subject to withholding B. Ensure payments are properly characterized and sourced for tax purposes C. Enhance focus on back-up withholding issues and forms (945/1099s) and coordinate with 1042/1042-S enforcement D. Apply penalties where warranted to enhance compliance 36
Recent IRS Discussions On Forms W 8 (Cont.) X. Audit approach Specific A. Identify all EINs used by taxpayer that make reportable/withholdable payments B. Identify a taxpayer s systems involved in processing payments C. Ensure systems are properly coordinated/integrated d/i t t d in terms of information flow and in terms of effectuating the proper withholding result, both for NRA and BUW purposes D. Evaluate processes for data changes/overrides that can affect withholding results. Simple case: Ensure that systems do not inappropriately assume all payees are exempt recipients 37
Recent IRS Discussions On Forms W 8 (Cont.) XI. Chap. 3 withholding is one of the top three areas of focus for the International Business Compliance Unit. A. Training and retooling examiners auditing withholding issues to focus on key areas of non-compliance B. Develop strategic approaches for various market segments C. Engage in dialogue with industry groups 38