Reporting of U.S. Withholding WEDNESDAY, NOVEMBER 7, 2012 1pm - - PowerPoint PPT Presentation

Form W-8IMY: Preparing for Expanded Reporting of U.S. Withholding

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WEDNESDAY, NOVEMBER 7, 2012

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

Kelli Wooten, Of Counsel, Burt Staples & Maner, Boston, MA Gretchen Wyatt, International Senior Tax Manager, Alpern Rosenthal, Pittsburgh Jacqueline Bak, Director, PricewaterhouseCoopers, Washington, D.C.

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Form W-8IMY: Preparing for Expanded Reporting of U.S. Withholding Seminar

Gretchen Wyatt, Alpern Rosenthal gwyatt@alpern.com

• Nov. 7, 2012

Kelli Wooten, Burt Staples & Maner kwooten@bsmlegal.com Jacqueline Bak, PricewaterhouseCoopers jacqueline.bak@us.pwc.com

Today’s Program

Introduction To Changes In Forms W-8 Under FATCA [Kelli Wooten] Form W-8IMY , In Detail [Gretchen Wyatt] Forms W-8BEN-E, W-8ECI And W-8EXP , In Detail [Jacqueline Bak] Compliance Challenges And Best Practices [Kelli Wooten] Slide 8 – Slide 13 Slide 54 – Slide 59 Slide 14 – Slide 41 Slide 42 – Slide 53

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.

7

INTRODUCTION TO CHANGES IN FORMS W-8 UNDER FATCA

Kelli Wooten, Burt, Staples & Maner

New Forms W-8

• The IRS has recently released new draft Forms W-8 incorporating the

requisite data/details needed for FATCA compliance. ― Form W-8BEN: Foreign individual beneficial owner ― Form W-8BEN-E: Foreign entity beneficial owner ― Form W-8IMY: Foreign intermediary ― Form W-8ECI: Income effectively connected with a U.S. trade or business ― Form W-8EXP: Foreign government and other tax-exempt

• rganizations
• Final versions and corresponding instructions are scheduled for

release in December 2012.

• A new Form W-9 is expected prior to the end of the year. It will

include boxes to identify “specified U.S. persons” under Chap. 4.

9

Key Changes

• The complexity of the FATCA provisions requires significant

changes vs. existing form versions.

• Forms will be used for both Chapter 3 (NRA reporting and

withholding) and Chapter 4 (FATCA) purposes.

• Certain FATCA classifications – specifically, PFFIs and certified

deemed compliant FFIs – will require additional documentation such as validation of FFI-EIN or submission of organization chart, financial statements or other documentation in order to be considered valid.

10

Other Key Changes

• The most notable change is that the new Form W-8BEN is now

two separate forms: Form W-8BEN for use by individuals only, and Form W-8BEN-E for use by entities only (significantly expanded to six pages). The new Form W-8IMY generally adopts the format of the new Form W-8BEN-E (significantly expanded to seven pages).

• The draft forms rely heavily on instructions, but the IRS has not

yet released draft instructions. It is difficult to fully appreciate the due diligence requirements without instructions.

• The capacity field has been a consistent challenge for

withholding agents. New forms include a checkbox for capacity, as opposed to requiring the signor to list his/her capacity.

11

Sunset Period

• FATCA implements a six-month sunset period for new tax forms;

withholding agents have six months following the issuance of a new form to transition to the new form. A withholding agent cannot accept a previous version of a form more than six months after a new form is issued.

12

Administrative Matters

• The FATCA proposed regulations ease the administrative burden

by allowing for faxed Forms W-8, if the withholding agent confirms the person furnishing the withholding certificates is the person named on the form.

• Affidavits of unchanged status may be used for forms provided

after payment is made. However, additional documentary evidence is required in addition to the form and affidavit, if the form is submitted to the withholding more than one year after payment is made. Forms received within 15 days of payment will not require an affidavit.

13

FORM W-8IMY, IN DETAIL

Gretchen Wyatt, Alpern Rosenthal

New Form IMY

• Major changes to draft forms

― Form significantly expanded to account for new FATCA certifications (now seven pages vs. two pages) ― Forms will be used for both Chap. 3 and Chap. 4 purposes. ― Form instructions will provide validation requirements. Draft instructions have not yet been released by the IRS.

15

New Form W-8IMY (Cont.)

16

New Form W-8IMY (Cont.)

• Line 2: Country of incorporation or organization

― Country names cannot be abbreviated. Abbreviating (e.g., U.K. instead of United Kingdom) will invalidate the form.

• Line 3: Chap. 3 status

― Intermediary will have to select Chap. 3 status. ― Only one box can be selected.

17

New Form W-8IMY (Cont.)

• Line 4: Chap. 4 status

― Other status is supposed to be a placeholder for any additional statuses that may be announced as part of final regulations. ―

• Chap. 3 and Chap. 4 statuses must be consistent – e.g., an NQI for
• Chap. 3 cannot be an owner-documented FFI for Chap. 4, as owner-

documented FFIs cannot be intermediaries.

18

New Form W-8IMY (Cont.)

• Line 5: Permanent residence address

― Country names cannot be abbreviated.

• Line 6: Mailing address

― Country names cannot be abbreviated.

• Line 7: U.S. taxpayer identification number

― Now includes FFI-EIN, WP or WT EIN

• Line 8: Foreign tax identifying number

― Will likely be a required field ― Instructions will be required to determine what, if any, due diligence requirements will apply for validating foreign tax ID number.

19

New Form W-8IMY (Cont.)

• Part II through Part VI

― Provide additional information re: Chap. 3 status.

• Note additional language “has provided or will provide a

withholding statement, as required, for purposes of Chapter 3 and 4 of the Code that is subject to the certifications made on this form;” which makes it clear withholding statements are held to the same standards as the Form W-8IMY itself.

• References to documentary evidence on previous form have

been replaced by references to documentation, in order to encompass a broader range of documentation that may accompany the form on an ongoing basis.

20

New Form W-8IMY (Cont.)

• Part VII through Part XXIII

― Provide additional information re: Chap. 4 status.

• Part XXIV: Certification

― New language explicitly requires the entity to provide a new form, if there is a change in circumstance. ― Income reference on existing form is changed to amounts such that it includes gross proceeds that would not necessarily be considered income.

21

Form W-8IMY Comparison

Changes to the W-8IMY stem mostly from the need to modify for

• Chap. 4 of Code for FATCA disclosure purposes.

Prior to the issuance of the new draft, the Form W-8IMY was requested from any person that is an intermediary (whether a qualified or a non-qualified intermediary) or a withholding foreign partnership, a withholding foreign trust or a flow-through entity. The new form will require entities to complete two sets of certifications (one for Chap. 3 and one for new Chap. 4). In addition, several sections have been added referring to code sections within the federal tax regulations. These new requirements increase the form from 2 pages to 7.

22

W-8IMY Changes To Specific Line Items

I. Part I – Identification of entity

• A. Line 3 – Entity type

I. New form – Chap. 3 status only – adds new category – territory financial Institution – must complete Part XX (new section) B. Line 4 – Entity type I. New form - Line 4 Chap. 4 status (FATCA status) a. You may not chose countering status of Chap. 3 and

• Chap. 4.

b. QI branch in this section does not appear to require an additional FATCA section c. Other - must enter code - It is not clear what this status refers to or what code needs to be entered.

23

Part I Of Draft Form W-8IMY

24

Changes To Specific Lines (Cont.)

I. Part I (Cont.)

• A. Line 5 – No longer allows in-care-of-address
• B. Line 7 – U.S. taxpayer identification

I. Added FFI-EIN and WP or WT EIN

• a. Foreign financial institution
• b. Withholding foreign partnership or withholding

foreign trust

25

Part I Of Draft Form W-8IMY (Cont.)

26

Changes To Specific Lines (Cont.)

• II. Part II - Qualified intermediary
• A. New form specifies withholding statement, as required for

purposes of chapters 3 and 4 of the Code that is subject to the certifications on this form. i. Also submitting this form as a branch that is eligible to act as a QI; enter the country in which the branch submitting the form is situated

• B. Must assume either withholding under chapters 3 and 4

with respect to payments of U.S. source FDAP income, or NOT

• C. Form no longer has box for 1099 reporting and back-up

withholding responsibility.

27

Part II Of Draft Form W-8IMY

28

Changes To Specific Lines (Cont.)

• III. Part III – Non-qualified Intermediary
• A. Again, references chapters 3 and 4
• IV. Part IV – Certain U.S. branches
• A. Line 12 – New form clarifies U.S. branch of a foreign bank
• r insurance company and not effectively connected …
• B. Line 13 and 14 now indicate they relate to a U.S. branch
• f “a participating FFI.”

29

Parts III And IV Of Draft Form W-8IMY

30

Changes To Specific Lines (Cont.)

• V. Part V – Withholding foreign partnership or withholding foreign

trust

• A. Changed from “provided or will provide a withholding

statement, as required” to “has assumed primary withholding responsibility for purposes of both Chapter 3 and 4 of the Code with respect to payments that it accepts on behalf of its partners, beneficiaries, or owners, as applicable”

31

Part V Of Draft Form W-8IMY

32

New Lines On Draft Form W-8IMY

• VI. Parts VII through XXIII are new parts added for FATCA.

33

New Content On Form

Part VIII - The significant change for participating FFI and registered deemed compliant FFI is the addition of the certification to assume primary withholding responsibility for gross proceeds and foreign pass thru payments. Like with the Form W-8BEN-E, a new field for a FATCA ID is provided. The new ID will be the ID that withholding agents use to match against the public list available from the IRS. Part IX - A certification was added to indicate the owner-documented FFI is a partnership, simple trust or grantor trust, which indicates that entities of these types must use the Form W-8IMY and not the Form W- 8BEN-E. Part XIV - Although not a separate FATCA classification, a classification section was provided for a restricted fund.

34

Part VIII Of Draft Form W-8IMY

35

Part IX Of Draft Form W-8IMY

36

Part XIV Of Draft Form W-8IMY

37

New Content On Form (Cont.)

Parts XVII and XVIII - Date fields have been provided for the start-up date for an excepted start-up company and the bankruptcy date for an excepted non-financial entity in liquidation or bankruptcy. This date will need to be stored and tracked by the withholding agent, as it will trigger additional documentation requirements after a certain period of time has elapsed. Part XX - The certification in Part XX of the form will be for territory financial institutions acting as intermediaries, and gives the entity the

• ption to either be treated as a U.S. person for Chap. 3 and Chap. 4

purposes; or to provide a withholding statement along with documentation or withholding certificates for underlying payees. Part XXIV - A difference between the prior form and this future form is that the entity must now certify to provide a new Form W-8IMY , if any certification made on the form becomes incorrect.

38

Parts XVII And XVIII Of Draft Form W-8IMY

39

Part XX Of Draft Form W-8IMY

40

Part XXIV Of Draft Form W-8IMY

41

FORMS W-8BEN-E, W-8ECI AND W-8EXP, IN DETAIL

Jacqueline Bak, PricewaterhouseCoopers

New Form W-8BEN-E

• Major changes to draft forms – Form W-8BEN and W-8BEN-E

― W-8BEN (individual) ― Remains a one-page form ― Intended to simplify the certification process for individuals ― W-8BEN-E (entity) ― Significantly expanded (1 page to 6 pages) ― Contains numerous entity classifications and corresponding certifications required under FATCA ― Forms will be used for both Chapter 3 and Chapter 4 purposes. ― Form instructions will provide validation requirements.

43

New Form W-8BEN-E (Cont.)

Old W-8BEN for an entity New W-8BEN-E for an entity

44

New Form W-8BEN-E (Cont.)

• Line 2: Country of incorporation or organization

― Country names cannot be abbreviated. Abbreviating (e.g., U.K. instead of United Kingdom) will invalidate the form.

• Line 3: Chap. 3 status

― Beneficial owner will have to select Chap. 3 status. ― Only one box can be selected. ― It includes an additional question to make sure that flow- through entities (foreign partnerships, foreign simple trusts, foreign grantor trusts) and disregarded entities are completing the correct form. If it is one of those entities, the question asks whether it is an hybrid making a treaty claim.

45

New Form W-8BEN-E (Cont.)

• Line 4: Chap. 4 status

― Beneficial owner will have to select Chap. 4 status. ― Only one box out of 24 can be checked (with limited exceptions). ― No checkbox for IRC Sect. 501(c) organizations or international

• rganizations (Form W-8EXP is available for these entities).

46

New Form W-8BEN-E (Cont.)

• Line 5: Permanent residence address

― Country names cannot be abbreviated.

• Line 6: Mailing address

― Country names cannot be abbreviated.

• Line 7: U.S. taxpayer identification number

― Now includes FFI-EIN, QI-EIN and EIN boxes

• Line 8: Foreign tax identifying number

― Will likely be a required field ― Instructions will be required to determine what, if any, due diligence requirements will apply for validating foreign tax ID number.

47

New Form W-8BEN-E (Cont.)

• Line 10: Claim of tax treaty benefits

― The certification that a TIN was provided on Line 7 has been removed.

• Line 13: FATCA ID

― If participating FFI or registered deemed compliant FFI is selected as a Chap. 4 entity type, a FATCA ID must be listed. ― Due diligence on FATCA ID is required; withholding agents must do an ID match similar to TIN matching. The match must be completed within 90 days.

• Part IV through Part XXIII

― Provide additional certifications and the specific requirements applicable to most FATCA classification categories

48

New Form W-8BEN-E (Cont.))

• Part XXIV: Certification

― New language explicitly requires the entity to provide a new form, if there is a change in circumstance.

• Part XXV: Substantial U.S. owners of passive NFFE

― Space for a passive NFFE to disclose substantial U.S.

• wners as well as their addresses and ownership

percentages

• Capacity line

― Signer’s capacity is still required on draft; however, this will be made consistent with the checkbox appearing on the Form W-8ECI on the final form.

49

Draft Form W-8ECI

I. Form W-8ECI adjustments

• A. Permanent residence and business address; may no

longer use in-care-of address

• B. Line 9 – Previously noted to specify each item of

income expected to be ECI in the U.S. The draft form changed to include each payment of gross proceeds from the sale of property that can produce U.S.-source FDAP income that is considered ECI in the U.S.

• C. Certification – Capacity in which acting is no longer
• required. Instead, a box is checked that the authorized
• fficial had the capacity to sign for the entity.

50

Line 9 And Certification Of Draft Form W-8ECI

51

Draft Form W-8EXP

I. Form W-8EXP adjustments

• A. No longer allowed to use an in-care-of address as a

permanent address

• B. Certification – Capacity in which acting is no longer
• required. Instead, a box is checked that the authorized
• fficial had the capacity to sign for the entity.

52

Certification Of Draft Form W-8EXP

53

COMPLIANCE CHALLENGES AND BEST PRACTICES

Kelli Wooten, Burt, Staples & Maner

Electronic Forms W-8 And W-9

• Expect more and more USFIs and FFIs to consider electronic

forms W-8 and W-9 as an alternative to paper form collection.

• For electronic Form W-8 requirements, see Treas. Reg. Sect.

1.1441-1(e)(4)(iv)(B)(1)-(4)

• Electronic forms W-8 and W-9 are being used by or for:
• U.S. withholding agents and qualified intermediaries
• Vendor payments
• FDAP payments
• Stock plans
• IRC Sect. 6050W

55

Why Electronic Forms?

• Consider establishing a system for electronic submission of E-W8s and

W-9s

― Likely to improve client experience ― Can provide line-by-line instructions and hints on how to complete the form ― Can provide the entire interview experience in their native language ― Reduces claimant errors in completing forms ― Speeds receipt of forms and avoids back and forth ― Reduces risk of loss of paper forms ― Online validation reduces the operational burden of manual validation. ― Uses queues to identify and route forms needing special processing ― Increases capability of processing larger volume of forms in a shorter time frame ― Reduces audit exposure by providing consistent processing of forms, and can obtain memorandum of understanding (MOU) from IRS

56

Compliance Challenges And Best Practices

• New forms, especially Form W-8BEN-E and Form W-8IMY

, will be challenging for entities to complete, given length and required

• certifications. Consider using substitute forms where possible, or

implement an electronic Form W-8 system.

• Current forms are in draft are making it difficult to implement

required systemic and process changes. Use this time to determine all required changes, including policies and procedures, and develop an implementation timeline. Remember, there is a six-month sunset period that you can leverage!

• Withholding agents will need to capture significantly more data

elements on a go-forward basis. Use the draft forms to determine required new fields and identify the types of information that will be required to be reported on the Form 1042-S in the future (e.g., new recipient codes for use on the Form 1042-S).

57

Next Steps

• Policies and procedures need to be updated.

― New processes for opening accounts/vendors, enhance account master to capture new data elements on forms (e.g., foreign tax ID, FFI-EINs, FATCA classifications), add new document types (supporting documents). ― Update validation procedures and checklists. ― Incorporate changes into substitute form as required. ― Track new validity periods (e.g., three years for bankrupt entities unless extended, 24 months for non-financial start-up companies.

58

Next Steps (Cont.)

• Internal training/retraining will be needed.

― New validation procedures (including new U.S. indicia review requirements) ― Responding to questions from clients/vendors

59