Changes to Foreign TIN Collection Requirements for IRS W-8BEN Form
Back in January 2017, The IRS made a few modifications to its Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting for Individuals (W-8BEN form). This form is filled out and returned to credit unions by individual nonresident aliens who are the beneficial owners of an amount subject to withholding. Sources of income that non-resident members may receive from the credit union subject to withholding can be dividends. This is why many credit unions try to obtain a W-8BEN form when a nonresident member opens a share savings account.
While NAFCU Compliance team does not have expertise in tax law, we thought it may be helpful to highlight some of these changes as many credit unions serve international members. For more complex tax law issues, the credit union may want to consult with its tax attorney/professional. The IRS also has a hotline service that is free and available to tax reporting credit unions and may help answer questions on IRS regulations and guidance documents—1-866-455-7438.
The final rule implemented by the IRS requires that credit unions obtain certain information from individual nonresident aliens such as their foreign tax identifying number (TIN) and date of birth on a withholding certificate. See, Instructions for Form W-8BEN (Rev. July 2017). Here is an image of Part I to the form where this information can be recorded:
Beginning in January 2018, if a member does not have a foreign TIN the credit union will be required to obtain a "reasonable explanation" as to why this information was not collected. See, 82 Fed. Reg. 2051. So what exactly is a "reasonable explanation"? According to the 2017 instructions, a reasonable explanation for not providing a foreign TIN could be the following:
… a statement that you are not legally required to obtain a TIN in your jurisdiction of tax residence. The explanation may be written on line 6, in the margins of the form, or on a separate attached statement associated with the form. If you are writing the explanation on line 6, you may shorten it to “not legally required.” Do not write “not applicable.” In addition, if you are not using this form to document a financial account described above, you may provide the TIN issued to you by your jurisdiction of tax residence on line 6 for purposes of claiming treaty benefits (rather than providing a U.S. TIN on line 5, if required).
Under the IRS instructions, if a member is a resident of country that does not issue TINs (i.e. Cayman Islands, Bermuda and Montserrat), a reasonable explanation may look like this:
It is important for credit unions to understand this new requirement as the IRS makes the credit union liable for the withholding and collection of the tax. See, 26 U.S.C. § 1474(a). In the case that the requirements for waiver of withholding are not met, such as when a W-8BEN is not filled out or is improperly filled out, the credit union must collect the full 30 percent tax. 26 U.S.C. § 1472(a)(2). The instructions on the W-8BEN form states:
…Failure to provide a Form W-8BEN when requested may lead to withholding at the foreign-person withholding rate of 30% or the backup withholding rate under section 3406.
I know IRS rules can be somewhat dry so I am sharing a picture of my younger sister (who is visiting from Spain for the rest of the summer) and the activities we did on our recent trip to NYC. We had incredible Italian food, saw Anastasia on Broadway and took every tour imaginable—all in 36 hours! Talk about enjoying every minute of the day…
Next week, I am taking her to Universal Studios in Orlando. We cannot wait to visit the Wizarding World of Harry PotterTM where we will meet up with my older sister who's already scouted out the theme park for us: