IN THIS ISSUE

	Agents and Intermediaries
	IRS Examiner to Present at Windstar’s Year-end NRA Tax Training
	International Tax Navigator® Webinar
	Upcoming Trade Shows and Events

Agents and Intermediaries

by Paula N. Singer, Esq.

Accounts Payable departments familiar with the ins and outs of 1099 reporting and backup withholding must now master the long-standing (but long-ignored) withholding and reporting rules that apply to U.S.-source income payments to foreign persons. (For a definition of foreign persons see “U.S. Person or Foreign Person,” Crow’s Nest, Volume 7 Number 4, July/August 2010 Edition). U.S.-source income payments made to foreign persons are subject to 30 percent withholding (called “NRA withholding”) and reporting on Form 1042-S unless an exception applies. For example, wages are subject to wage-withholding and reporting on Form W-2 unless the wages are exempt from withholding under a tax treaty, in which case the income must be reported on a Form 1042-S.

NRA withholding and Form 1042-S reporting must be in the name of the beneficial owner of the income unless an exception applies. The beneficial owner is the person subject to tax on the income under U.S. tax principles. Because payers (also called withholding agents) frequently make income payments to agents or intermediaries, rather than to the beneficial owner of the income, determining the recipient of the income is not always an easy task.

An agent is a person who acts on behalf of another person. An intermediary is a person who collects payments on behalf of another person. An agent or intermediary may be either a U.S. or foreign individual or entity. The documentation provided by the recipient of the income or facts known by the payer determine whether the income must be withheld on and reported in the name of a foreign person who is other than the person receiving the payment.

U.S. Agent of a Foreign Person
Section 1.1441-1(b)(ii) of the tax regulations requires a withholding agent that has actual knowledge that a U.S. person is receiving the payment on behalf of a foreign person to treat the payment as if it were made to the foreign person and withhold and report accordingly. (There are exceptions for certain U.S. financial institutions and insurance companies.) Facts known by anyone in the organization are imputed to the individual making the payment even if no procedures have been implemented to communicate the known facts to such individual.

When dealing with payments to or on behalf of a foreign person, the withholding agent should request a Form W-8BEN from the beneficial owner of the income. If one is not provided and the withholding agent does not know the name of the foreign person, the income and taxes must be reported on Form 1042-S showing the payee as “Unknown Foreign Recipient.”  This will effectively prevent beneficial owners from applying the withheld taxes as a credit on their U.S. income tax return.

Foreign Agent of a Foreign Person
A foreign agent acting on behalf of a foreign person may provide the withholding agent with a Form W-8IMY.  For purposes of this form, a foreign intermediary is any person that acts as an agent for another person.

A nonqualified foreign intermediary presenting this form can be acting on behalf of an individual or a flow-through entity such as a partnership, simple trust, grantor trust, or estate.  The partners of the partnership and beneficiaries of the trust or estate are the beneficial owners of the income.  In each case, the foreign agent must

• Provide a Form W-8BEN or Form W-9 for each beneficial owner of the income
• Provide a statement that allows the withholding agent to allocate the payment to the actual beneficial owners
• Complete a Form 1042-S or Form 1099 for each beneficial owner depending on their U.S. tax status

There are exceptions for flow-through entities that are receiving income effectively connected to the conduct of a U.S. trade or business or are qualified residents of a tax treaty country and eligible for a treaty exemption from withholding. If these flow-through entities present a valid withholding certificate - Form W-8ECI or W-8BEN with Part II completed with the treaty claim - the income is reported in the name of the flow-through entity.

Qualified Agents and Intermediaries
Several types of agents and intermediaries have entered into agreements with the IRS to be responsible for withholding and reporting.  A withholding agent making income payments to any such agents or intermediaries is relieved of responsibility for withholding and reporting assuming the proper documentation has been provided by the agent.  

Foreign intermediaries that may have such agreements include qualified intermediaries, withholding foreign partnerships, and withholding foreign trusts.  They indicate their status and acceptance of responsibility for withholding and reporting on a Form W-8IMY, which must include a U.S. taxpayer identification number.  Payments made to these foreign persons are withheld on and reported in the name of the intermediary, not the name of the underlying beneficial owners of the income.  Their intermediary status must be indicated by the Form 1042-S Recipient Code.

A nonresident alien entertainer or athlete who performs in the United States may enter into a Central Withholding Agreement (CWA) with the IRS as authorized by Section 1.1441-4(b)(3) of the tax regulations and described in Rev. Proc. 89-47.  CWAs are issued only for individuals, not for groups.  The CWA is effective only for the tour or events covered and payments stipulated by the CWA.  Each CWA requires a designated withholding agent that is an independent third party as a party to the agreement.  Nonresident alien individuals entering a CWA pay taxes based on their anticipated income tax liability.  The withholding agent that is in receipt of a letter from the IRS regarding a specific CWA is relieved of withholding and reporting on payments that are covered by the CWA.

Authorized Agents
A foreign agent may enter into a written agreement with a withholding agent to accept the responsibility for withholding and reporting.  For the agreement to be effective, the IRS must receive notification of the agreement prior to the first payment for which the authorized agent acts on behalf of the withholding agent in order for the agreement to be effective.  (Make notification to the Internal Revenue Service, International Section, P.O. Box 920, Bensalem, PA 19020-8518.)  The books and records of the authorized agent must be available to the IRS to evaluate the agent’s compliance with its withholding and reporting obligations.  Under such agreements, the U.S. withholding agent remains fully liable for the acts or omissions of its agent and may not assert any of the defenses that might otherwise be available.

While Form 2678, Employer/Payer Appointment of Agent, may be used to appoint an agent for withholding, depositing, and reporting purposes for Form 1099 information returns and Form 945, Annual Return of Withheld Federal Income Tax, this form does not provide for such authorizations with respect to NRA withholding and Form 1042-S reporting.

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 6, for a discussion of Form 1042-S Codes.

Q:  Two years ago, our organization entered into a contract with a foreign entity representing a non-U.S. performing troupe that performed here that year, appointing that entity to act as our agent for withholding and reporting purposes.  We have just found out from one of the performers that they never received an income statement from the appointed agent.   Does our contract indemnify us of the appointed agent’s failure to report (and probably withhold)?

A:  No.  Whenever a U.S. entity appoints a foreign agent to assume its withholding and reporting responsibilities, it not only must notify the IRS of the appointment, but it is still liable for any errors or omissions of the agent.

IRS International Examiner Jamie Moshella Joins Windstar’s Year-end NRA Tax Training Presenters

Jamie Moshella, an international examiner with the IRS, kicks off day one of Windstar’s Year-end NRA Tax training with her insider’s perspective on how IRS initiatives affect your organization.  Her 90-minute presentation will cover:

• Goals of the IRS international initiatives
• LMSB Tier 1 compliance initiative for withholding
• Outbound transactions
• Examination techniques

Following Jamie’s presentation are several sessions designed to help you keep your organization in compliance and prepare for year-end processing from the industry’s top experts featuring either two or four days of instruction…

• Prepare for tax season with lecture-based sessions on NRA rules and regulations on December 7^th and 8^th
• Experience Tax Navigator’s new look in action during hands-on sessions occurring December 9^th and 10^th
• Or, for the best return on your time and money, sign on for all four days – the choice is yours!

The Doubletree Guest Suites hosts Windstar’s Year-end training. 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

A special discounted sleeping room rate is available for reservations made before November 11^th.

Don’t delay, the conference is filling quickly.  Register by October 25^th and receive early-bird discounted pricing.  Visit www.windstar.com to join today!

Free Webinar - Learn How to Automate and Streamline Your NRA Tax Processing with Windstar’s Tax Navigator

Learn how International Tax Navigator^® can help improve your nonresident alien tax processing by viewing a free web demonstration on October 20^th. 

International Tax Navigator is a powerful software solution for nonresident alien tax compliance and income tax treaty analysis.  Tax Navigator applies complex bodies of U.S. tax law and procedures, providing up-to-date analyses for withholding tax rates, and tax and treaty exemptions.  Tax Navigator produces all required IRS withholding certificates, Form 1042 tax return, and 1042-S reporting forms.

With Tax Navigator, users can:

• Determine accurate tax withholding rates easily based on immigration status and history on a case-by-case basis
• Generate all required nonresident alien tax forms and IRS filings
• Communicate and receive individual data via the web using Windstar’s Foreign National Information System™
• Create an audit trail for IRS audits of payments to foreign nationals

The demonstration will educate you on the ease of use of Tax Navigator, the benefits of using this powerful software tool, and give you an overview on how to enter data into the system. 

Don’t miss this opportunity to learn how to streamline and automate your NRA tax processing.

Register today.

Windstar Will Dock at the Following Events

American Payroll Association (APA) Educational Institutions Payroll Conference
Sheraton Hotel
New Orleans, LA
October 17 – 20, 2010

Don’t miss Paula Singer and Terri Crowl’s sessions on NRA tax compliance. 

• Introduction to Nonresident Alien Payments
  October 17^th from 2:00 p.m. to 3:30 p.m.

• Scholarships and Fellowships for International Students
  October 18^th from 10:30 a.m. to 12:00 p.m.

• Income Tax Treaties
  October 18^th from 1:30 p.m. to 3:00 p.m.

• Forms 1042 and 1042S Processing
  October 18^th from 3:30 p.m. to 5:00 p.m.

• New Rules Impacting Nonresident Alien Withholding, Acceptance Agents, and Other Issues
  October 19^th from 8:00 a.m. to 9:45 a.m.

• Income Tax Treaties – Advanced
  October 20^th from 8:00 a.m. to 9:30 a.m.
  

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Thomson Reuters/COKALA Tax Information Reporting Forum
Gaylord Hotel and Convention Center
National Harbor, MD
November 2 – 3, 2010

Don’t miss Windstar experts Paula Singer and Linda Dodd-Major’s session titled “Understanding Payments to Foreign Workers” on November 3^rd from 9:30 a.m. to 10:45 a.m.  

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NAFSA Region XI Conference
Crowne Plaza
Warwick, RI
November 9 – 11, 2010

Don’t miss Paula Singer as she participates on a panel discussion concerning "10 Common Misconceptions about the U.S. Taxation of Foreign Nationals" on November 10^th.    

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Look in future issues of Crow’s Nest or visit http://www.windstar.com/public/events.html for the latest in event information.

©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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