IN THIS ISSUE

	Forms and Rules for Withholding Certificates for Foreign Persons
	July Nonresident Alien Tax Training
	Upcoming Product Webinars

Forms and Rules for Withholding
Certificates for Foreign Persons

by Paula N. Singer, Esq.

In order for a nonresident alien or foreign entity (collectively “foreign persons”) to claim an exemption from or reduced rate of withholding tax, the beneficial owner of the income must provide the payer with a valid withholding certificate.  In most cases, for a claim for exemption from tax to be valid, the withholding certificate must include a U.S. taxpayer identification number (TIN) – a Social Security number (SSN), individual taxpayer identification number (ITIN) or employer identification number (EIN).

Much of the IRS’s auditing of NRA withholding involves checking Forms W-8 for validity.  There are several different forms that can be presented to a payer by a foreign vendor.

Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding, has three possible uses:

1. To document foreign status (no U.S. TIN required) to avoid 28 percent backup withholding and 1099 reporting
2. To claim a tax treaty benefit for fixed or determinable annual or periodic (FDAP) income (U.S. TIN required)
3. To claim a treaty benefit for services provided by an entity through its employees or contractors (U.S. EIN required).

Individuals who are beneficial owners of the income must provide a SSN or ITIN for a treaty claim but not to avoid 1099 reporting and backup withholding.  They may not use an EIN even if they have one for business purposes.  Individuals must use Form 8233 for personal services income to claim treaty benefits, but where no treaty claim is made, Form W-8BEN (Part I and signed) is needed to avoid 28 percent backup withholding.  (Since 30 percent is the current maximum NRA withholding rate, the 28 percent backup withholding would be moot as long as 30 percent was withheld instead.)

U.S. source income related to a treaty claim or which is subject to NRA withholding must be reported on Form 1042-S under the applicable income code for the type of income reported. Services income of entities is reported under Income Code 50 (unspecified).  Records for treaty-exempt income are reported under Exemption Code 04; taxable income is reported under Exemption Code 00.

If a treaty claim is made on effectively connected income, such as business profits of a foreign corporation from pay for services of its employees or contractors, the foreign corporation is required to submit a Form 1120F tax return to the IRS.  Nonresident aliens who are in F, J, M, or Q immigration status and who are claiming a treaty exemption from tax on effectively connected income, such as a scholarship or fellowship grant, must submit a Form 1040NR or 1040NR-EZ tax return even if the entire amount is treaty-exempt.

Form W-8ECI, Certificate of Foreign Person’s Claim That Income Is Effectively Connected With the Conduct of a Trade or Business in the United States, may be used by entities (U.S. EIN required) and by individuals for business income such as U.S. rental properties (U.S. SSN or ITIN required).

Individuals who are the beneficial owners of the income may NOT use this form for personal services income.  Personal services income is subject to either 30 percent tax or treaty-exempt pursuant to a valid Form 8233 as discussed below.

Effectively connected income (ECI) legitimately covered by a W-8ECI is reported on Form 1042-S under Income Code 50 and Exemption Code 01.  Under IRS Section 6012, nonresident aliens and foreign entities with effectively connected income must submit a U.S. tax return.

Form W-8IMY, Certificate of Foreign Intermediary, Foreign Flow-Through Entity, or Certain U.S. Branches for United States Tax Withholding, may be submitted by a flow-through entity (i.e., the owners are subject to tax, not the entity) such as a foreign partnership.  Unless the partnership is a withholding foreign partnership (WP-EIN required) responsible for the withholding and reporting of the partners, withholding certificates completed by each of the partners and an allocation of income must accompany the Form W-8IMY.  (Similar rules apply to other flow-through entities.)

Income is reported on Form 1042-S in the names of the beneficial owners of the foreign partnership,  not in the name of the partnership, using the applicable Income Code and Exemption Code depending on the income and form submitted.

A foreign partnership claiming a treaty exemption from tax may use Form W-8BEN only if the entity is one of the types of entities named by the treaty as a resident for treaty purposes.

Form W-8EXP, Certificate of Foreign Government or Other Foreign Organization for United States Tax Withholding, is used by:

• Foreign governments
• International organizations covered by the privileges and immunities clause (such as the United Nations, World Bank, International Monetary Fund, etc.)
• Foreign tax-exempt organizations (claiming tax exemption under section 501(c))
• Foreign private foundations.

Documentation of status of a foreign government or international organization is not required to be on a Form W-8EXP if the name or other facts surrounding the payment are sufficient to establish its status.
 
Foreign entities who mistakenly think that they are “international organizations” or tax-exempt charities occasionally use this form. Although they usually are “international organizations” in the sense of not being U.S.-based, they are not within the meaning of the term for purposes of this form.

If a foreign tax-exempt organization or a foreign private foundation makes a claim of exemption from tax, Form W-8EXP must be accompanied by supplemental documentation.  Except for international organizations and foreign governments, these organizations must include a U.S. EIN on the form in order to be exempt from tax.  (The treaties with Canada, Germany, Mexico, and the Netherlands include special provisions for organizations that are tax-exempt under the laws of the respective countries.  See the November 2007 Special Edition of the Crow’s Nest for more information.) 

Foreign tax-exempt organizations claiming exemption under section 501(c) must submit a Form 990 if their gross receipts from within the United States exceed $25,000 or if they have substantial U.S. activities.

Form 8233, Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual, has two possible purposes:

1. To claim a tax treaty exemption from withholding on personal services income and, if paid during the same year, nonqualified scholarship/fellowship income (SSN or ITIN required)
2. To claim a reduction in taxable income for a daily allowance which is based on the pro rata personal exemption amount for the tax year (SSN or ITIN required).

The Form 8233 instructions provide an exception allowing individuals who have applied for, but have not yet received, an SSN or ITIN to use this form.  This exception should be used only if the payer can guarantee obtaining the number from the individual prior to submitting the Form 1042-S to the IRS.  If the payer grants a treaty benefit but does not receive the SSN or ITIN by the time they must submit the Form 1042-S reporting the treaty-exempt income (Income Code 04), the payer will be liable for the underwithheld taxes plus penalties and interest.

Since only foreign nationals who are nonresident aliens may use this form, a payer may not accept this form for a treaty claim if the individual is (or will become) a resident alien under the 183-day substantial presence test during the tax year.  Foreign nationals who are resident aliens who are eligible to claim a treaty benefit income for teaching, research, study, or training under a saving clause exception in the treaty must submit a Form W-9 with the treaty claim and explanation about the exception.

The IRS discourages the use of this form for treaty exemption for individual entertainers and athletes if the treaty provision has a gross receipts maximum (most treaties do) because activities at other venues might cause the maximum amount to be exceeded, making the treaty claim invalid.

Self-Employment Income is recorded on Form 1042-S under Income Code 16.  The Exemption Code is 04 for treaty-exempt income and 00 for taxable income.  An exemption for the personal exemption amount is recorded as a Withholding Allowance (box 3).  Treaty-exempt employment income is recorded on Form 1042-S under Income Code 17, 18 or 19 as appropriate, using Exemption Code 04.

Nonresident aliens with effectively connected income from compensation for services performed in the United States must submit a Form 1040NR or 1040NR-EZ even if all of the compensation is exempt from tax under a tax treaty.

To be valid, an individual who has the proper capacity to sign the form for the organization must sign and date the form.  The form is valid until it expires or until facts change which require a new form.  Forms W-8 (except for W-8ECI) are valid through December 31^st of the third calendar year following the year in which the form was signed (or until facts change).  A Form W-8 with a TIN is valid indefinitely, or until facts change, as long as a Form 1042-S reporting the income to which the form applies is issued at least annually.

A new Form 8233 must be submitted to the payer for each new calendar year or sooner when circumstance change making the prior claim invalid.  To be valid, Form 8233 must also be signed by the payer as well as by the beneficial owner of the income and be submitted to the IRS at the address specified in the instructions within five days of acceptance.

More information about who may use these forms and for what purpose is included in the forms’ instructions, in Instructions for the Requestor of Forms W-8BEN, W-8ECI, W-8EXP, and W-8IMY, and in IRS Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities, available under Forms and Publications on the IRS website, www.irs.gov.  

Paula Singer, Esq., Co-founder and Chair of Windstar Technologies, Inc. and partner in the tax law firm, Vacovec, Mayotte & Singer LLP, Newton, MA, has over 25 years of experience providing advice and compliance services to individuals and their employers, and payers on cross-border matters.

Watch for Volume 7, Number 4, for a discussion on U.S. and Foreign Persons.

Q: Can I use Form W-8ECI to eliminate withholding on my compensation for services provided in the U.S., which is effectively connected income?

A: No, the regulations and instructions for Form W-8ECI specifically state that an individual may not use Form W-8ECI for compensation for personal services. The practical reason for the rule is that an individual who visits the United States to provide services and then returns to his home abroad might not voluntarily submit a U.S. tax return and pay the taxes owed. By requiring the payer to withhold, the IRS is ensuring the individual will pay the tax.

The Hot Tax Topic this Summer is Payments to Foreign Nationals and Entities. Register for Windstar’s Summer Nonresident Alien Tax Training: July 27^th – 30^th

International tax compliance is a major target of the Obama administration’s 2010 budget. But you can be prepared to help your organization achieve full compliance by attending Windstar’s Summer NRA Tax Training July 27^th – 30^th at the Doubletree Guest Suites, Boston.

Choose from dedicated tracks featuring two days of substantive tax- and immigration-based class sessions followed by two days of hands-on Tax Navigator training. Or, for the ultimate learning experience, attend all four days!

Lecture Session: July 27^th - 28^th
Immerse yourself in two days of comprehensive information on:

• Immigration issues that affect nonresident alien taxation
• Tax treaties, including their benefits and limitations
• The latest IRS updates
• Payments to foreign persons and entities including sessions on:
  • Honorarium payments and travel reimbursements
  • Documenting the U.S. or foreign status of your payee
  • Wages

Tax Navigator Software Training: July 29^th - 30^th
Join the July 29^th -30^th session for in-depth software based training that focuses on:

• Tax Navigator basics and case studies
• Maintaining and updating Tax Navigator
• Web-Based Data Collection and Forms Delivery (FNIS)
• Year-end processing

The Doubletree Guest Suites is an all suite hotel located on the banks of the Charles River, just minutes from downtown Boston and its major attractions.  Hotel features include:

• Shuttle service to major tourist destinations in Boston and Cambridge and nearby train stations
• Low cost transportation to and from Logan International Airport
• High-def flat screen televisions in each room
• Scullers Jazz Club

Click here for a detailed schedule outline and to register.

Upcoming Product Webinars

Windstar is holding two free product demonstrations this summer on the SEVIS Navigator™ and Foreign National Tax Resource.

The June 23^rd SEVIS Navigator webinar will demonstrate how the web-based software application reduces manual data entry in to the Tax Navigator by downloading current biographical, immigration, and income type data for F, J, and M status individuals from the SEVIS RTI (Real Time Interactive) Web Processing website. Click here to register and learn more.

The July 21^st Foreign National Tax Resource webinar will educate attendees on Windstar’s easy-to-use tax preparation software and extensive online library of information researched, organized, and translated into clear language by Windstar’s tax experts. Click here to register and learn more.

Don’t miss the opportunity to learn more about these comprehensive resources. 
Register today! 

©Copyright 2010 by Windstar Technologies, Inc. Windstar reserves all rights to this electronic material. Information contained in this publication is based on the best information available at the time of publication.  While believing the information in this publication to be accurate, Windstar accepts no legal responsibility for its accuracy.

Since 1995 educational institutions, hospitals, research institutions, and corporations have relied on Windstar Technologies, Inc. to deliver the expertise to comply with the U.S. tax residency rules, tax rates, and special tax exemption rules under the law and U.S. treaties. When government agencies require information about foreign nationals in the workplace, Windstar provides straightforward analysis and reporting. Comprehensive software for analysis and reporting, expert knowledge, and unparalleled customer service combine to make Windstar the first choice for nonresident alien tax compliance.

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