By Anthony Diosdi
Form W-BBEN is used by foreign individuals to document their status for purposes of Chapter 3 and Chapter 4, as well as for certain other Internal Revenue Code provisions.
Generally, withholding agents are required to withhold U.S. tax at the source on certain payments made to nonresident aliens and foreign corporations. A withholding agent for Chapter 3 means any person required to deduct and withhold any tax under Internal Revenue Code Sections 1441, 1442, 1443, or 1461. The withholding rate is typically 30%. FATCA introduced Chapter 4, a documentation regime imposed in addition to the existing Chapter 3 for certain payments to foreign payees that include FFIs and NFFEs. Chapter 4 withholding can be considered a penalty tax imposed when certain withholding payments are made and the U.S. payer does not have the appropriate documentation regarding the foreign payee. If Chapter 4 withholding applies, the payer must withhold 30% of the payment. There is no reduced rate of Chapter 4 withholding permitted under an income tax treaty. The withholding rate under Chapter 4 is either zero or 30 percent. See FATCA: A New World of Terminology and Compliance, Philip Pasmanik and Peter Stratos (April 30, 2015).
Generally, an amount subject to Chapter 3 withholding is an amount from sources within the U.S. that is FDAP income. FDAP income is all income included in gross income, issue discount (“OID”), dividends, rents, royalties, and compensation. On March 18, 2010, the HIRE Act added to the Internal Revenue Code Chapter 4, composed of Sections 1471 through 1474 (referred to as FATCA). Chapter 4 generally requires withholding agents to withhold 30 percent on withholdable payments made to certain FFIs (FFI is the abbreviation for foreign financial institution) and NFFEs (NFFE is the abbreviation for any non-U.S. entity that is not treated as a financial institution). Chapter 4 payments may not be reduced by tax treaty.
Withholding taxes is effected primarily through the imposition of an obligation on the person or entity making the payment to the foreign person to withhold the tax and pay it over to the Internal Revenue Service or (“IRS”).
A withholding agent who fails to withhold is liable for the uncollected tax. Therefore, withholding agents must carefully monitor any payments to foreign persons to ensure that the appropriate amount of tax is being withheld. The withholding regulations focus on the documentation that the payee must provide to the payor. U.S. persons must provide Form W-9, which contains the U.S. person’s taxpayer identification number. A U.S. person’s taxpayer identification number is typically the social security number for individuals and employer identification number for entities.
Foreign persons must file a type of Form W-8. Although there are three different types of Forms W-8, the most common is the Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals). A foreign individual uses a Form W-8BEN to:
1) Establish foreign status;
2) Claim beneficial ownership of the income for which the form is furnished;
3) Claim a reduced rate of withholding under an income tax treaty; and
4) Claim exemption from back-up withholding for income that is not subject to withholding under Section 1441.
Receipt of valid documentation by the payor, such as a Form W-9 or Form W-8BEN can be relied on when determining the appropriate withholding. See Treas. Reg. Section 1.1441-1(b)(2)(vii)(A). Many times income is paid to foreign recipients through foreign intermediaries. The withholding regulations differentiate between a qualified intermediary (“QI”) and a nonqualified intermediary (“NQI”). A qualified intermediary has qualified and registered with the IRS to be responsible for withholding payments to the ultimate beneficiaries at the appropriate withholding rate. NQIs must provide the appropriate Form W-9 and W-8BEN to the payor, who retains responsibility for withholding at the appropriate rate.
This article will discuss how to prepare the W-8BEN that is provided to a U.S. withholding agent or payer of income. The W-8BEN is used by foreign individuals that may be subject to U.S. withholding tax. The W-8BEN is provided to a withholding agent and not the IRS. This article is based on instructions issued by the IRS to prepare the W-8BEN. This article goes through the W-8BEN line by line.
Part I. Identification of Beneficial Owner
Line 1.
For Line 1, the name of the beneficial owner. The term beneficial owner means the person who is the owner of the income for tax purposes and who beneficially owns that income. Thus, a person receiving income in a capacity as a nominee, agent or custodian for another person is not the beneficial owner of the income. Foreign partnerships, foreign simple trusts, and foreign grantor trusts are not the beneficial owners of income paid to the partnership or trust.
Line 2.
For Line 2, enter your country of citizenship. If you are a dual citizen, enter the country where you are both a citizen and a resident at the time this the W-8BEN was completed.
Line 3.
For Line 3, enter your permanent residence address as the address in the country where you claim to be a resident for purposes of that country’s income tax. If you are completing Form W-8BEN to claim a reduced rate of withholding under an income tax treaty, you must determine your residency in the manner required by the tax treaty.
Line 4.
For Line 4, enter your mailing address only if it is different from the address you show on Line 3.
Line 5.
For Line 5, if you have a social security number, you should enter your social security number on Line 5.
Line 6a.
For Line 6, if you are providing the Form W-8BEN to document yourself as an account holder with respect to a financial account that you hold at a U.S. financial institution and you receive U.S. source income reportable on a Form 1042-S associated with the filing of the W-8BEN, you must provide your foreign tax identification number or (“FTIN”) issued to you unless your jurisdiction of residence is identified on the list of jurisdictions that do not issues foreign TINs at IRS.gov/businesses/corporations/list-of-jurisdictions-that-do-not-issue-foreign-tins.
Line 6b.
You may check the box in line 6b if you are an account holder as described for purposes of Line 9b and you are not legally required to obtain an FTIN from your jurisdiction of residence. By checking this box you will be treated as having provided an explanation for not providing an FTIN on Line 6a. Line 6b also permits you to provide a further explanation as to why you are not required to provide an FTIN.
Line 7.
For Line 7, you may enter a reference number. In certain occasions a reference number must be stated on Line 7. For example, withholding agents who are required to associate the Form W-8BEN with a particular W-8IMK should use Line 7 for a referring number or code that will make the association clear.
Line 8.
For Line 8, if you are providing this Form W-8BEN to document yourself as an account holder with respect to a financial account, you should list your date of birth on Line 7.
enter the permanent residence address of the entity identified on Line 1. Your permanent residence address is the address in the country where you claim to be a resident for purposes of that country’s income tax.
Part II
Line 9.
For Line 9, if you are claiming the benefits of a tax treaty to reduce or eliminate U.S. withholding taxes, you must state the residence of the foreign country to which the United States entered into a double tax treaty. Please note, in order to claim the benefits of an income tax treaty, you may be classified as a resident of the treaty as per the terms of the treaty. Under the U.S. Model Treaty, a resident is any person who, under a country’s internal laws, is subject to taxation by reason of domicile, residence, citizenship, place of management, place of incorporation, or other criterion of a similar nature. A resident does not include a person who is subject to tax in the country only with respect to income derived from sources in that country. Instead, a resident is someone who a country taxes by virtue of a personal relationship, such as citizenship or residence, as opposed to taxation on the basis of the source of income, Because each country has its own unique definition of residency, an examination of the applicable foreign country’s law may be necessary.
Line 10.
For Line 10, you must include the claimed treaty benefit. Below are a couple of examples of items that may be reported on Line 10:
1. Many tax treaties contain a provision for independent services that governs the taxation of personal services. Such income may be exempt from U.S. taxation unless the services are attributable to an office or other fixed base of business that is located in the U.S.. If you would like to take a treaty position exempting independent services income from U.S. taxation, you should properly report the treaty position on Line 10.
2. The U.S. imposes a flat rate of withholding taxes on dividend, interest, and royalty income derived from U.S. sources. The U.S. statutory withholding rate is 30% for nonresident alien individuals. Tax treaties may reduce or eliminate the U.S. withholding rate on dividend, interest, and royalty income. Persons claiming a treaty rate to reduce U.S. withholding taxes on dividends, interest, or royalties should properly complete Line 10.
Line 10 should specify the treaty provisions on which you base your treaty claim and the type of treaty benefited item and its amount.
Part III Certification
Form W-8BEN must be signed by the appropriate individual.
Conclusion
This article ambitiously attempts to summarize how to prepare the W-8BEN. Tax advisors and withholding agents must understand the U.S. withholding rules and the Form W-8BEN. Failure to understand the U.S. withholding rules along with the Form W-8BEN may trigger surprise tax liabilities and significant penalties.
Anthony Diosdi is an international tax attorney at Diosdi & Liu, LLP. Anthony focuses his practice on providing tax planning domestic and international tax planning for multinational companies, closely held businesses, and individuals. In addition to providing tax planning advice, Anthony Diosdi frequently represents taxpayers nationally in controversies before the Internal Revenue Service, United States Tax Court, United States Court of Federal Claims, Federal District Courts, and the Circuit Courts of Appeal. In addition, Anthony Diosdi has written numerous articles on international tax planning and frequently provides continuing educational programs to tax professionals. Anthony Diosdi is a member of the California and Florida bars. He can be reached at 415-318-3990 or adiosdi@sftaxcounsel.com.
This article is not legal or tax advice. If you are in need of legal or tax advice, you should immediately consult a licensed attorney.