The IRS recently added three frequently asked questions to its Foreign Account Tax Compliance Act (FATCA) compliance page elaborating on identification requirements for a beneficial owner withholding certificate.
Question: Under what circumstances is a withholding agent required to collect a foreign taxpayer identification number (TIN) or date of birth on a beneficial owner withholding certificate?
- A withholding agent must obtain a foreign TIN on a beneficial owner withholding certificate in the following circumstances:
- For a foreign person claiming a reduced rate of withholding under an income tax treaty, if the foreign person does not provide a U.S. TIN and the income is a type to which the TIN requirement apples, and
- Except as otherwise provided for a foreign person that is an account holder of a financial account maintained at a U.S. branch or office of the withholding agent, but only if the withholding agent is a financial institution.
Question: Is a beneficial owner withholding certificate invalid during calendar year 2017 if it doesn’t include a foreign TIN or date of birth for the beneficial owner identified on the certificate?
- For calendar year 2017, a withholding agent isn’t required to treat an otherwise valid beneficial owner withholding certificate as invalid when it does not include a foreign TIN because, in the absence of actual knowledge otherwise, the withholding agent may assume that the foreign person does not have a foreign TIN.
For beneficial owner withholding certificates obtained by a withholding agent on or after January 1, 2017, the withholding agent must collect a date of birth on a beneficial owner withholding certificate for an individual beneficial owner. However, if the withholding agent has the beneficial owner’s date of birth in its files, it may use that information for reporting purposes and will not be required to treat a Form W-8BEN as invalid because it didn’t include a date of birth.
Question: How is a withholding agent permitted to obtain a foreign beneficial owner’s foreign TIN that isn’t included on an otherwise valid beneficial owner withholding certificate for purposes of satisfying the requirements?
- Where a foreign beneficial owner’s foreign TIN isn’t included on an otherwise valid beneficial owner withholding certificate, in order to satisfy the requirements, a withholding agent is allowed to obtain the foreign beneficial owner’s foreign TIN on a written statement provided by the beneficial owner (including a written statement transmitted by email). The statement must indicate that the foreign TIN is to be associated with the beneficial owner withholding certificate. A withholding agent is similarly permitted to obtain the reasonable explanation for the absence of a foreign TIN.
Background on withholding
In general, nonresident aliens and foreign corporations are subject to a U.S. withholding tax on certain income from U.S. sources that aren’t effectively connected with a U.S. trade or business. Such “fixed, determinable, annual, and periodic income” includes interest, dividends, royalties, compensation, and certain gains. The withholding tax is generally collected at the source by a withholding agent, who is generally the last person in the U.S. who handles the item before it is remitted to the foreign taxpayer or the taxpayer’s foreign agent.
The Internal Revenue Code requires withholding agents to withhold 30% of certain payments to a foreign financial institution (FFI) unless that enterprise has an agreement with the IRS to report certain information with respect to U.S. accounts, among other things. The code also imposes withholding, documentation, and reporting requirements on withholding agents related to some payments made to certain non-financial foreign entities (NFFEs). In cases where foreign law would prevent an FFI from complying with its agreement with the IRS, two alternative intergovernmental agreement models help facilitate application of FATCA.
A beneficial owner withholding certificate is a statement by which the beneficial owner of a payment states it is a foreign person and, if applicable, claims a reduced withholding rate. A separate certificate must be submitted to each withholding agent. A beneficial owner receiving more than one type of payment from a single agent may have to submit more than one withholding certificate to the agent for the different types of payments.
A withholding certificate is valid for purposes of a payment of an amount subject to withholding only if it is provided on:
- Form W-8 (“Certificate of Foreign Status”),
- Form 8233 (“Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual”), in the case of personal services income or certain scholarship or grant amounts,
- A withholding agent’s substitute form, or
- Any other form that the IRS prescribes.
Note: A substitute form is acceptable if its provisions and signature-under-penalties-of-perjury statement are identical to those on the official form and its certifications are similar. A substitute form is acceptable even if it doesn’t contain all of the provisions contained on the official form, so long as it contains those provisions that are relevant to the transaction for which it is furnished.
Sidebar: FATCA Act: What’s required?
The Foreign Account Tax Compliance Act (FATCA) was passed as part of a 2010 law. It generally requires that foreign financial institutions and certain other non-financial foreign entities report on the foreign assets held by their U.S. account holders or be subject to withholding on withholdable payments. The 2010 law (the Hiring Incentives to Restore Employment Act) also contains requirements for U.S. persons to report, depending on the value, their foreign financial accounts and foreign assets.