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Forms W-8BEN and W-9 Compliance in Foreign and U.S. Business Transactions

Meeting the Demands of the Substantially Overhauled W-8BEN Under New FATCA Rules Today’s faculty features:

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TUESDAY, JULY 25, 2013

Presenting a live 110-minute teleconference with interactive Q&A

Marianne Couch, Principal, COKALA Tax Information Reporting Solutions, Ann Arbor, Mich. Harold Adrion, Director, EisnerAmper, New York Armin Gray, Ruchelaw Law Firm, New York

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Forms W-8BEN and W-9 Compliance in Foreign and U.S. Business Transactions

Marianne Couch, Cokala Tax Information mcouch@cokala.com June 25, 2013 Harold Adrion, EisnerAmper harold.adrion@eisneramper.com Armin Gray, The Ruchelman Law Firm gray@ruchelaw.com

Today’s Program

FATCA Overview [Harold Adrion] FFIs And NFIs [Harold Adrion and Armin Gray] FATCA Funds And Trusts [Harold Adrion and Armin Gray] Significant Ongoing Compliance Challenges With W-8BEN And W-9 [Marianne Couch] Slide 8 – Slide 32 Slide 45 - Slide 56 Slide 57 - Slide 66 Slide 33 – Slide 44

Notice

ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.

You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.

FATCA OVERVIEW

Harold Adrion, EisnerAmper

Overview

FATCA is the law Signed by President Obama on March 18, 2010 Proposed regulations issued on Feb. 8, 2012 (published Feb. 15, 2012) Final regulations issued on Jan. 17, 2013 (officially published Jan. 28, 2013) Bilateral inter-governmental agreements can modify outcomes under the final regulations. New withholding tax and information reporting system for payments made to “foreign financial institutions” (FFIs) Similar system of withholding tax and information reporting for payments made to “non-financial foreign entities” (NFFEs)

9

Overview (Cont.)

Designed to reduce the incidence of improper tax avoidance through the use of offshore accounts and non-US investments Targets financial institutions serving US investors rather than the US investor itself Goal: Increased information reporting and transparency Enforcement mechanism:30% withholding tax imposed on US payments to certain non-US persons

10

To Whom Does FATCA Apply?

• Foreign financial intermediaries that have U.S. clients, directly
• r indirectly
• U.S. client is determined using U.S. tax law definition of U.S.

person: Resident of the United States (green card holder or person who satisfies the substantial presence test) or U.S. citizen (including a dual citizen), U.S. corporation or U.S. partnership, trust or estate

• Virtually every foreign financial institution that holds, trades or

invest in U.S. investment property for itself of on behalf of an account holder (whether or not the client is a U.S. person)

11

To Whom Does FATCA Apply? (Cont.)

• Includes: Banks, trust companies, custodians, investment

entities (i.e., collective investment vehicles), insurance companies that issue policies that have “cash value”

• Final regulations treat managers of investment entities as

financial institutions. (1.1471-5)e)(4)(i)(A)

• Excludes: Non-financial holding companies, start-up companies,

entities in the process of liquidation or reorganization, hedging

• r financing centers of non-financial groups with respect to

transaction with non-FFI affiliates, and certain charitable

• rganizations

12

To Whom Does FATCA Apply? (Cont.)

• U.S. payors and foreign institutions that make withholdable

payments to FFIs and NFFEs

• Withholdable payment means any payment of U.S.-source,

FDAP income (i.e., interest, dividends, rents, premiums, annuities, etc.) and any gross proceeds from the sale of other disposition (occurring after 12/31/16) of any property of a type that can produce interest of dividends that are U.S.-source FDAP income

13

30% Withholding On A Withholdable Payment

• FATCA’s lever to achieve this goal is a NEW 30% withholding tax

levied on “withholdable payments” or any foreign pass-through payment made to non-participating “foreign financial institutions” (FFIs) and “non-financial foreign entities” (NFFESes) by “withholding agents.”

• “Withholdable payments” include all U.S.-source income

(FDAP) and gross proceeds from the sale of disposition of any property of a type that can produce interest or dividends from U.S. sources.

14

FATCA Mechanics And Applications

• FATCA introduces a new “Chapter 4” of the Internal Revenue

Code, with two key sections:

• Sect. 1471 – payments to “foreign financial institutions”

(FFIs)

• Sect. 1472 – payments to “non-financial foreign entities”

(NFFEs)

• U.S. payers accordingly have the statutory obligation (unless

modified by regulation) to determine whether payees are “good” or “bad” FFIs and NFFEs.

• NOTE: FATCA withholding is a “filter” that applies before

applying the standard NRA withholding rules (Chapter 3 withholding).

15

FATCA Mechanics And Applications (Cont.)

• All Chapter 3 rules (1441, 1446, 1442), systems and procedures

remain fully applicable, if Chapter 4 requirements are satisfied.

• Difference in application of treaties

16

Slide Intentionally Left Blank

Two Regimes

• Final regulations
• Intergovernmental agreements (IGAs)
• FFI considered to be deemed compliant FFI
• Model I IGA (e.g. Cayman Islands and UK) does not enter into an

agreement with the U.S. but rather with the IGA jurisdiction.

• Model II IGA S (e.g. Switzerland and Japan) enters into an

agreement with the U.S. and applies regulations.

18

IGAs Will Be Primary Way FATCA Is Enforced

• IGA now appeard to be the predominate way FATCA will be

enforced.

• More than 75 countries have either entered an IGA or are in the

process of negotiating them.

• IRS is expected to publish a list of countries that will be

considered to either have an IGA or be on the way to obtaining them.

19

20

IGAs

• In February 2012, the U.S., France, Germany, Italy, Spain and

the UK issued a joint statement in support of the underlying goals of FATCA but recognized legal impediments to compliance.

• In June 2012, Switzerland and Japan, with the U.S., issued a

joint statement describing an approach different from that of the G5 countries.

• U.S. is open to an inter-governmental approach to

implementing FATCA and reportedly is in discussions with over 75 countries regarding such inter-governmental approach.

21

IGAs (Cont.)

• To date, 3 different approaches:
• Model I with reciprocity
• Model I without reciprocity
• Model II

22

IGAs (Cont.)

• Benefits
• Local law generally governs interpretation and compliance.
• No withholding tax is collected, only information reporting.
• No pass-through payment regime
• Possibility of reciprocity
• Greater certainty for FFIs to avoid withholding tax (less likely

to have due diligence failure that leads to improper tax withholding)

• No certifications by responsible officer or complex IRS-imposed

verification procedures (Model I only)

23

IGAs: Model I Agreements

• Model I agreements: Automatic information exchange
• Partner country would pursue legislation to implement a regime

whereby FFIs would perform due diligence to identify U.S. accounts and report to their local government. Partner Country would then transfer such reported information to the U.S.

• FFIs in Partner Country would not be required to terminate or

impose pass-through payment withholding on recalcitrant accounts, or impose pass-through payment withholding on payments to other FFIs in a country that has an inter- governmental agreement

• U.S. would not require FFIs in Partner Country to enter into a

separate agreement and would eliminate withholding under FATCA on payments to FFIs in the partner country. 24

IGAs: Model I Agreements (Cont.)

• Model I Agreements: Automatic information exchange (Cont.)
• Reciprocity: U.S. would commit to reciprocity with respect to

collecting and reporting information regarding U.S. accounts of Partner Country residents to the authorities of the Partner Country.

• FFIs include “investment entities” – any entity that conducts as

a business (or is managed by an entity that conducts as a business) one or more of the following activities or operation for or on behalf of a customer:

• Trading in money market instruments (cheques, bills,

certificates of deposit, derivatives etc.); foreign exchange; exchange; interest rate and index instruments; transferable securities; or commodity futures trading 25

IGAs: Model I Agreements (Cont.)

• Individual and collective portfolio management; or
• Otherwise investing, administering, or managing funds or

money on behalf of other persons

26

IGAs: Model II Agreements (Switzerland And Japan)

• Model II agreements: Direct transfer of data when privacy laws

are waived; treaty information exchange in all other cases

• Partner Country directs FFIs to enter into FFI agreements with

the IRS, but the FFI agreement would be modified by the IGA, particularly the rules relating to due diligence and account identification.

• FFIs, including investment entities, would directly transmit

information to the IRS after a waiver is obtained from the account holder/investor.

27

IGAs: Model II Agreements (Switzerland And Japan), Cont.

• Account holders that refuse permission to transmit information

to the IRS would have their information reported to the IRS via “group requests,” pursuant to an existing information exchange agreement.

• No “automatic exchange” of information

28

IGAs: Model II Agreements (Switzerland And Japan) Cont.

• Investment entity: Any entity that conducts as a business (or is

managed by an entity that conducts as a business) one or more

• f the following activities or operations for or on behalf of a

customer:

• Trading in money market instruments (cheques, bills,

certificates of deposit, derivatives etc.); foreign exchange; exchange; interest rate and index instruments; transferable securities; or commodity futures trading;

• Individual and collective portfolio management; or
• Otherwise investing, administering, or managing funds or

money on behalf of other persons

29

IGAs (Cont.)

• As of Feb. 19, 2013, IGAs have been signed or initialed with:

30

IGAs (Cont.)

• Treasury indicates it is in discussions with 75 countries.
• A “Partner” country would need to have an income tax treaty or

TIEA with the U.S. or be a party to the OECD Convention on Mutual Administrative Assistance on Tax Matters, as a precursor to an IGA.

31

Slide Intentionally Left Blank

FFIS AND NFIS

Harold Adrion, EisnerAmper Armin Gray, The Ruchelman Law Firm

Treasury Agreement

• A foreign financial institution (FFI) must enter into an

agreement with Treasury or be in a jurisdiction that has a Model I IGA to:

• Determine whether any of its accounts is a U.S. account or

held by recalcitrant accountholders or non-compliant FFIs

• Annually report certain information about its U.S. accounts
• Adopt a compliance program under the authority of a

“responsible officer” to periodically verify compliance with its FFI agreement

• Comply with requests by the Treasury for additional

information with respect to its U.S. accounts

34

Treasury Agreement (Cont.)

• Withhold on recalcitrant accountholders and non-

participating FFIs

• Obtain a waiver of any foreign law confidentiality provisions

with respect to its U.S. accounts (or to close the account)

• The IRS plans to create a secure online Web portal by July 15,

2013 so that FFIs can register with the IRS and received a “global intermediary identification number” (GIIN)

35

Information On U.S. Accounts

• If an FFI enters into an agreement with the IRS, it must annually

report the following information about each of its U.S. accounts

• n soon-to-be-released IRS Form 8966 by March 31 (plus a 90-

day extension):

• The name and address and tax identification number of the

U.S. account holder

• The account number
• The account balance
• The gross receipts and gross withdrawals or payments from

the account

36

Reporting And Withholding By U.S. Payor And FFIs

• Any withholdable payment made by a U.S. payor to a non-U.S

entity is subject to FATCA.

• Any withholdable payment made by a FFI with respect to a

financial account maintained by any individual or to any entity is also subject to FATCA.

• Identify, report and withhold

37

Reporting And Withholding By U.S. Payor And FFIs (Cont.)

• Step 1: Identify the payee under the relevant rules applicable to

U.S. payors or to FFIs

• Special rules for “preexisting accounts” (those in existence as of

1/1/14)

• Step 2: Report the payment to the IRS under prescribed rules
• Step 3: Withhold tax if payment is made to non-participating

FFI, recalcitrant client (i.e., an individual or passive NFFE that has not provided sufficient information to the payor)

38

U.S. Withholding Agents

• U.S. withholding agents
• Preexisting accounts
• Withholding
• Withholding with respect to payments to “prima facie FFIS” – 7/1/14
• Withholding with respect to payments to all other undocumented

preexisting accounts – 1/1/16

• Gross proceeds withholding begins 1/1/17
• Reporting
• Form 8966 reporting (identifying U.S. owners) for 2013 and 2014 occurs
• n March 31, 2015.
• Reporting FATCA reportable amounts (1042/1042-S) begins March 15,

2015.

39

U.S. Withholding Agents (Cont.)

• New accounts
• Withholding begins with respect to payments made on or after

1/1/14

• Same timeline for reporting

40

Slide Intentionally Left Blank

Withholding And Reporting By FFIs

• FFIs
• Preexisting accounts
• Generally the same for U.S. withholding agents, but
• Withholding begins for undocumented high value preexisting

accounts on 1/1/15.

• Withholding begins for remaining undocumented preexisting

accounts on 1/1/16.

• Pass-through payment withholding will commence on the later
• f 1/1/17 or six months after final regulations are published.
• New accounts
• Same as U.S. withholding agents

42

Distinguishing FFIs From NFFEs

• FFI is any financial institution that is a foreign entity.
• Includes any entity that is engaged primarily in the business of

investing, reinvesting or trading in securities, partnership interests, commodities, notional principal contracts, insurance or annuity contracts, or any interest in such items; and that is managed by a “financial institution”

• An entity is engaged primarily in this business if 50% or more of its

gross income is attributable to such investing, reinvesting or trading activities.

• Rental income or proceeds from the sale of real property is not

included.

• Dividends and proceeds from the sale of REIT stock or partnerships

holding direct real property are included.

43

Distinguishing FFIs From NFFEs (Cont.)

• NFFE is a foreign entity that is not a financial institution.
• A passive NFFE is an NFFE that derives passive income, such as

rental income or proceeds from the sale of real property.

• Should a fund whose direct investments consist of real estate be

classified as an FFI or a passive NFFE? What about indirect investments in real estate?

• Indirect investments in real estate are more likely to result in

FFI treatment, since the underlying investments are held via JVs/partnerships/REITs.

44

FATCA FUNDS AND TRUSTS

Harold Adrion, EisnerAmper

Application Of FATCA To Funds

• U.S. fund with foreign investors
• FATCA withholding requirements will apply to withholdable payments

made by a U.S. fund to foreign entity investors (i.e. payments to FFIs and NFFEs).

• Required to withhold 30% of any withholdable payment, unless the U.S.

fund can reliably associate such payment with documentation that allows it to treat the payment as exempt from withholding

• Requires fund to collect withholding certificates (W-8BEN series) and,

in some cases, supporting documentation from non-U.S. investors and W-9s from U.S. investors

• Withholding phased in over several years
• Required to conduct information reporting with respect to

withholdable payments

46

Application Of FATCA To Funds (Cont.)

• Foreign fund that is an FFI
• FATCA withholding requirements will apply to withholdable

payments made by a foreign fund to FFIs and NFFEs (i.e., must withhold 30% without qualifying documentation)

• FATCA withholding obligations will also apply to withholdable

payments and, in the future, to foreign pass-through payments (payments “attributable to” withholdable payments) made to certain individual and entity investors (i.e., recalcitrant investors and non-participating FFI investors (NPFFIs)).

• FATCA reporting obligations are triggered by a U.S. person’s or a

U.S. owned foreign entity’s ownership of an interest in an investment fund.

47

Application Of FATCA To Funds (Cont.)

• Funds treated as FFIs have two (possibly three) choices:
• Option 1: Enter into an FFI Agreement with IRS to conduct due

diligence, report information about its U.S. account holders, and withhold tax on NPFFI and recalcitrant account holders

• FATCA provides a blanket exception from the 30% withholding tax, if an

FFI enters into an FFI Agreement and complies with such agreement.

• Option 2: 30% withholding tax imposed on all U.S.-source income

(e.g., interest or dividends) and on gross proceeds from sale of such property

• Tax imposed when FFI is the beneficial owner and when it collects the

payment as an intermediary on behalf of client

• Foreign pass-through payment rule is intended to force FFIs to become

participating FFIs.

48

Application Of FATCA To Funds (Cont.)

• Funds treated as FFIs have two (possibly three choices):
• Option 3: Obtain “deemed compliant” status by either

certifying that you have no U.S. person clients/owners or that your entity poses a low risk of tax evasion

• Registered deemed-compliant FFIs (includes certain investment

funds)

49

Application Of FATCA To Funds (Cont.)

• Certified deemed-compliant FFIs
• Owner-documented FFIs (includes certain investment funds)
• Fund located in a jurisdiction with an applicable IGA
• Funds treated as NFFE
• If fund is considered a passive NFFE (less than 50% of assets or

income is from active, non-financial trade or business), then the fund will be obligated to provide a certification.

• NFFE certification
• NFFE has no 10% or greater U.S. owners directly or indirectly, or
• NFFE identifies those 10% or greater U.S. owners to the person

paying it a withholdable payment.

50

Example: Foreign Trust

• FFI or NFFE?
• Passive NFFE?
• Owner-documented FFI?
• Sponsored entity?

51

Application Of FATCA To Trusts

• Under the final U.S. regulations, many trusts will be required to

register as an FFI, since their trustees will be deemed to be investment entities.

• Examples 5 and 6 given in Reg. 1.1471-5(e)(4)(v) (page 422)

suggest that any trust for which trust services are provided by a corporate trustee would be regarded as an investment entity (as would the corporate trustees). Recent years have seen a marked shift towards the use of corporate trustees rather than individual trustees, primarily because this makes it easier when trustees wish to retire or move on for other reasons.

52

If Foreign Trust Is FFI, How Can It Avoid FATCA Withholding?

• Several ways:
• The trustee can invest only in assets that do not generate

payments subject to FATCA withholding, which in general means avoiding U.S.-related investments. But this is not a full solution, because while a trustee may be able to invest in a manner that ensures that the trust does not directly receive U.S.-source income, as a practical matter it may be difficult for a foreign trustee to control the receipt of pass-through payments. If, for example, a foreign trust has an account with a foreign bank or an interest in a foreign investment fund that itself directly or indirectly holds assets that produce U.S.-source interest or dividends, then the foreign trust is likely to have income from pass-through payments.

53

If Foreign Trust Is FFI, How Can It Avoid FATCA Withholding? (Cont.)

• The trustee can enter into an agreement with the IRS on behalf
• f the trust and cause the trust to become a “participating FFI.”
• An FFI that is resident in a country with a Model I IGA, such as

the U.K. or Cayman Islands, is a registered deemed-compliant FFI and exempt from withholding if it meets the obligations of the IGA.

• An FFI that is a resident in a country with a Model 2 IGA (e.g.,

Switzerland) is deemed compliant if it enters an agreement with the U.S. to become a participating FFI.

54

If Foreign Trust Is FFI, How Can It Avoid FATCA Withholding? (Cont.)

• A trust that is an FFI not resident in a FATCA partner jurisdiction

also can avoid withholding without becoming a participating FFI

• r a registered deemed-compliant FFI, by becoming a certified

deemed-compliant FFI. Categories of certified deemed- compliant FFIs that are relevant to trusts include an “owner- documented FFI” and a sponsored closely held investment vehicle.

55

Slide Intentionally Left Blank

SIGNIFICANT ONGOING COMPLIANCE CHALLENGES

Marianne Couch, Cokala Tax Information

Compliance Challenges

I. IRS writes regulations and develops forms from the perspective that the recipient/taxpayer/vendor/payee, etc. knows who and what they are for U.S. tax purposes.

• II. Form W-9 is difficult for many payees to complete as it is

without the FATCA modifications.

• III. Forms W-8 have become even more complicated.

58

Form W-9 Ongoing Compliance Challenges

I. Many limited liability companies (LLCs) believe themselves to be corporations for tax purposes, even though most have not elected corporate tax status.

• II. Disregarded entities
• A. IRS previously removed “disregarded entity” checkbox

from LLC section of new Form W-9.

• B. LLCs that are DEs must instead include owner’s name in

name line, and LLC name in business name/DE line.

• III. Instructions for how LLCs and DEs are to complete the form

are found on page 2 of Form W-9, which few payees receive.

59

Form W-9 Ongoing Compliance Challenges (Cont.)

I. S v C corp designations continue to be cause for confusion.

• A. Questions arise regarding the corporate exemption to Form 1099

reporting. B. Some payers believe S corporations are not entitled to the corporate exemption. II. Name conventions for sole proprietors

• A. Even though sole proprietors have DBAs or business aliases, the

business owner’s name is the name to be used for tax reporting. B. In the case of individually owned sole proprietorships, payers can use either the SSN or EIN on the 1099, though the IRS prefers the SSN.

60

Form W-9 Ongoing Compliance Challenges (Cont.)

I. When a signature under penalty of perjury is required

• A. For payments reported on Forms 1099-B, DIV, INT

, OID and PATR.

• B. In a first “B notice” situation
• C. To overcome a presumption of foreign status
• D. FATCA certifications (new)
• II. Otherwise, signature not required
• A. Perjury language includes no certification that the payee

is of the entity type it claims to be.

• B. E.g., corporation, individual, partnership

61

Form W-9 New Compliance Challenges

I. Payees claiming exemption from backup withholding (i.e., Form 1099 reporting) must, per the new DRAFT Form W-9, include an exemption code (found in the instructions).

• II. Payees claiming exemption from FATCA reporting must, per

the new DRAFT Form W-9, include an exemption code (found in the instructions).

• III. Certain payees will have to attest to the FATCA certification

now included on the Form W-9.

62

Form W-9 New Compliance Challenges (Cont.)

I. Once the FATCA regulations become effective, corporations exempt from Form 1099 reporting will be required to provide a Form W-9 (or other allowable documentation per the FATCA regs [such as a copy of the entity’s Articles of Incorporation] to avoid 30% FATCA withholding and reporting on Form 1042-S, even if the payee has a corporate indicator in its name, such as Inc., P .C., corp. and there are no indicia of foreign status (such as a foreign address or other indicator).

• II. This requirement effectively renders the domestic “eyeball”

test extinct.

63

Form W-9 New Compliance Challenges (Cont.)

I. Contrast with the per se foreign corporation “eyeball” test

• A. If a beneficial owner has a per se foreign corporate

indicator in its name, then the payor/withholding agent must treat the beneficial owner as foreign.

• B. Examples: Ag, SA, PLC
• C. These entities cannot claim, and withholding agents are

not permitted to honor a claim of, U.S. status.

• II. See Reg.

301.7701-2(b)(8)(i) for list of per se foreign corporate indicators.

64

Form W-8BEN Compliance Challenges

I. Good news: Shorter-than-current Form W-8BEN as is to be completed by individuals only. II. The new Form W-8BEN asks for country of citizenship, rather than country of residency. A. Tax treatment, for U.S. purposes, depends on country of residency (except for U.S. citizens, who are subject to U.S. tax on worldwide income regardless of where they reside). B. The new Form W-8BEN still asks for permanent residence address.

• III. This change may make it easier for the payee to complete.
• IV. This change may possibly make it easier for the payer to identify conflicting

information and claims, provided the relationship between citizenship, residency, and tax status is understood. V. Foreign tax identifying number may be required.

65

Form W-8BEN-E Compliance Challenges (Cont.)

I. The new Form W-8BEN-E relies on a high degree of training and care on the part of the person who completes the form for the foreign entity. II. Many payers frequently encounter some current Forms W-8BEN fail the initial sufficiency review, largely because the foreign person did not understand the U.S. regulatory terms used on the form and did not read the “Instructions” for the form. III. The new W-8BEN-E raises that challenge exponentially for the foreign person as well as the payer/requester. IV. It also creates great complexities for U.S. payers that must design systems and procedures to accommodate a large number of new status categories, treatments appropriate for each, and detailed written procedures for what we envision as a significant number of W-8BEN-Es requiring individual intervention and review by personnel trained in post-FATCA compliance. V. Foreign tax identifying number may be required. VI. Finally, we do not yet have new instructions for the new forms.

66