IRS Final Regulations Regarding Withholding Certificates Like The W-8BEN
Earlier this month, the Internal Revenue Service (IRS) published final regulations that explained due diligence and reporting rules applicable to persons, including credit unions, making U.S. source payments to foreign persons. The final regulations, among other things, clarified the requirement for a withholding agent to obtain a foreign taxpayer identification number (foreign TIN) and date of birth on a withholding certificate.
Before getting into what the regulation did, it may be helpful to understand what some of these terms mean. IRS Publication 515 provides background information about the withholding of tax for foreign persons. It defines a foreign person as "a nonresident alien individual, foreign corporation, foreign partnership, foreign trust, foreign estate, and any other person that is not a U.S. person." On the other hand, the IRS's definition of a U.S. person includes a citizen or resident of the United States, several types of domestic entities, and anyone that is not a foreign person. U.S. source income is income earned within the United States. A withholding agent is "a U.S. or foreign person, in whatever capacity acting, that has control, receipt, custody, disposal, or payment of an amount subject to chapter 3 withholding."
IRS Publication 515 notes that foreign persons are usually subject to a U.S. tax of 30% on U.S. source income unless there is an applicable exemption. If the credit union has members that are foreign persons under the IRS's definition, it is possible that the members could be subject to a 30% tax on any U.S. source income payments made by the credit union (e.g., the payment of dividends).
Bank deposit interest (i.e., dividends), however, is exempt from this domestic backup withholding requirement, but foreign persons are required to submit a Form W-8BEN, a withholding certificate, in order to claim the exemption.
Requirement to Obtain a Foreign TIN and Date of Birth
The final regulations explain how credit unions and other withholding agents can satisfy the requirement to obtain a foreign TIN and a date of birth on a W-8BEN. The requirement is contained in section 1.1441-1(e)(2)(ii)(B) of the IRS regulations. For payments made on or after January 1, 2018, the regulation requires that a withholding certificate, such as a W-8BEN, must include (1) a foreign person's foreign TIN or a reasonable explanation as to why the person does not have one and (2) the foreign person's date of birth. The regulation permits the date of birth to be included on the withholding certificate or found somewhere within the withholding agent's (i.e., the credit union) files. A withholding agent may rely on a date of birth provided on a withholding certificate unless the withholding agent knows or has reason to know that the date of birth is incorrect.
With respect to documenting the foreign TIN, there are two potential options depending on when the W-8BEN is obtained. For payments made on or after January 1, 2020 for which the W-8BEN was obtained before January 1, 2018, the W-8BEN is valid under the final regulations even if it does not contain a foreign TIN as long as the withholding agent obtains a written statement that includes the foreign TIN or otherwise has the foreign TIN within its files. For payments made on or after January 1, 2020 for which the W-8BEN was obtained on or after January 1, 2018, the standard for having a valid W-8BEN is much higher. While it is still possible to have a valid W-8BEN if the actual withholding certificate does not include the foreign TIN, the IRS final regulations require obtaining the foreign TIN in a written statement subject to certain extra requirements that effectively make the written statement part of the withholding certificate. Those additional requirements are "a signed written statement that acknowledges that such statement is a part of the withholding certificate and the withholding agent associates the statement with the account holder's withholding certificate."
Consequence of Not Having a Valid Withholding Certificate
To the extent the credit union does not have a valid W-8BEN, U.S. source payments made to foreign person members might be subject to the 30% backup withholding tax.
Tax law is highly specialized and often beyond the scope of NAFCU’s expertise. Therefore, credit unions may wish to consult their tax professionals for more guidance in this area.