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Do You Make Payments to Foreign Persons and Know Form W-8?

The Internal Revenue Service is cracking down hard on businesses that make payments to foreign persons. The IRS requires US taxpayers to both withhold the proper amounts (often 30%) and retain Form W-8. Requesting the proper Form W-8 before you make any payments will help you avoid potential penalties (see Penalties discussed below) for withholding noncompliance.

Below is a general discussion on Form W-8 and related withholding. Please consult your tax advisor regarding your individual circumstances.

In General

If you pay income to foreign persons (including non-resident aliens, foreign corporations, foreign partnerships, foreign trusts, foreign estates, foreign governments, and international organizations), you may become a withholding agent, responsible for withholding on payments, and filing and retaining pertinent tax documentation. You are a withholding agent if you are a US or foreign person with control, receipt, custody, disposal, or payments of any item of income of a foreign person subject to withholding. Generally, a foreign person is subject to US tax on its US income. Most types of US source income received by a foreign person are subject to 30% withholding requirements unless they are exempt or reduced by tax treaties.

Tax treaties between the US and other countries may provide for a reduced rate or, in some circumstances, an exemption from paying tax on the US income. As a withholding agent, you can apply the reduced rate or exemption if you can reliably associate the payment with documentation establishing that the income recipient is a US person or a foreign person entitled to the benefit. This documentation can come in a number of forms and is generally provided on Form 8233 for personal service income and a version of Form W-8 for other income. In the absence of proper documentation, you are liable for the tax that must be withheld. As a withholding agent, you may rely on a payee’s claim of a treaty benefit if at the time of payment you do not have reason to believe a claim to be false.

Forms W-8

For a detailed explanation of certain W-8 forms, click on the links below:

W-8BEN, Certificate of Foreign Status of Beneficial Owner for US Tax Withholding

W-8ECI, Certificate of Foreign Person’s Claim That Income Is Effectively Connected With the Conduct of a Trade or Business in the US

W-8EXP, Certificate of Foreign Government or Other Foreign Organization for US Tax Withholding

W-8IMY, Certificate of Foreign Intermediary, Foreign Flow-Through Entity, or Certain US Branches for US Tax Withholding

Expiration Dates

Generally, Forms W-8BEN, W-8ECI, W-8EXP, or a substitute form expire at the end of the third calendar year following the year in which it is signed or created. For example, a Form W-8BEN signed on January 10, 2008 remains valid through December 31, 2011. Form W-8IMY usually remains valid for an indefinite period. However, when the information reported on any of these forms becomes incorrect due to a change in circumstances, the form becomes invalid. On the date received, you may date the Form W-8 if the provider failed to do so.

Penalties

As a withholding agent, you are personally liable for any tax required to be withheld. If you fail to withhold and the foreign payee fails to satisfy its US tax liability, the IRS can come after you to pay the tax, plus penalties and interests [Reg. 1.1461-1(a)]. For an explanation of potential penalties, click here.

What should I do now?

If you make payments to any foreign person, you should do the following before making a payment:

1. Determine the type of entity you are making the payments to (individual, corporation, partnership, trusts, estates, government, international organization, etc.)
2. Determine the type of payments you are making (interest, dividends, service fees, ECI, etc.)
3. Request the appropriate Form W-8 based on 1 and 2 above
4. Review the Form W-8 to make sure it is complete before making your payment, and withhold accordingly
5. Periodically review W-8s in your files and request new W-8s if they are set to expire at the end of the year, or if a change in circumstances makes a form incorrect. You need to have a valid W-8 on hand before you make your payments.

If you have any questions, please contact Jennifer Zamarin at 312-980-3317, Amanda Zhong at 312-980-3324, or your Blackman Kallick representative.

 

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.