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Updates to Forms W-8 and W-9 and the Coordination RegulationsAndrew McQuilkin

Compliance Technologies International, LLP

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Agenda• FATCA Overview• How Even Non-FATCA Withholdable Payments are

Impacted by FATCA• Operationalizing Changes

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FATCA Overview

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What is FATCA?• FATCA is the Foreign Account Tax Compliance Act which

was enacted in March 2010 to minimize offshore tax evasion by U.S. persons.

• The goal of FATCA is to supplement existing Form 1099 information reporting requirements by requiring similar reporting from foreign financial institutions (“FFIs”) which are generally not required to complete current reporting requirements unless they are part of a U.S. consolidated group.

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FATCA’s Impact on MNCs• FATCA will impact non-financial entities as both Payors and

Payees. • As a Payor, a non-financial entity must:

– Identify withholdable payments.– Categorize non-U.S. payees.– Withhold and report as required.

• As a Payee, a non-financial entity must:– Determine FATCA status for each entity.– Establish FATCA status by providing appropriate documentation:

U.S. Legal Entities – Form W-9. Non-U.S. Legal Entities – Generally a Form W-8. Failure to provide appropriate documentation will result in 30% FATCA

withholding and reporting.

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Non-Financial Entities Need to:• Develop a master list of all legal entities.• Determine FATCA status for each legal entity.

– U.S. Legal entities.– Non-U.S. Legal entities.

• Non-U.S. legal entities will then need to define FATCA status. – Is the entity engaged in financial or non-financial activities?

Remember, FATCA broadly defines financial institution! If financial, will the entity qualify for a deemed compliant status? If non-financial, will the entity qualify for an excepted status?

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Legal Entity Analysis• Determine FATCA status for each legal entity.

– U.S. Legal entities.– Non-U.S. Legal entities.

Majority will be likely be NFFEs, most likely Active NFFEs. Foreign Retirement Funds – FFI or Exempt BO? Treasury Center – FFI or Excepted Non-financial Group Entity? Captive Finance Entity – FFI or Excepted Non-financial Group

Entity? Non-financial group entity if primary activity is to enter into

financing or leasing transaction with / for suppliers, dealers, customers of such entity or any member of the expanded affiliated group that is an active NFFE.

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Excluded Non-Financial Payments8

• Certain payments made in the ordinary course of a withholding agent’s business are excluded from FATCA.

• Excluded non-financial payments include:– Compensation for services, the use of property, office and

equipment leases, software licenses, transportation, freight, prizes and awards, and interest on accounts payable. Goods are not specifically mentioned as goods are not considered

FDAP income and would therefore never be considered a withholdable payment.

• Watch out for treasury payments such as those made in connection with a forward, futures, options or notional principal contracts, custodial fees, and bank or brokerage fees as those are NOT excluded.

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How Even Non-FATCA Withholdable Payments are

Impacted by FATCA

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New Forms W-8 and W-9• New Forms W-9 and W-8 have been issued by the IRS in order to

accommodate new data elements that will be required by FATCA which have not previously been required – e.g., GIIN, country of citizenship, date of birth, etc.

• The IRS is also taking this opportunity to update forms for industry feedback, as the last version of the forms W-8 were issued in 2006.

• The new Form W-9 was issued in final form during August 2013.• The IRS issued a second round of draft Forms W-8 in May-August of

2013. • Final Forms W-8 were issued between February and April 2014.

– As of May 7, 2014 still awaiting instructions for Form W-8BEN-E and W-8IMY.

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How to Prepare• Review new data elements for each form in correlation with new

Form 1042-S codes to ensure that systems can store data.• Ensure that Section 1441 procedures are compliant. Your

organization cannot be FATCA compliant if it is not compliant with existing tax regulations.

• Review payment types to determine which payments your organization makes that will require FATCA certifications.

• Train staff on form changes and new validation requirements.• Prepare payee communications to explain updates in requirements,

policies, and procedures. • Update policies and procedures and follow them!

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FORM W-9ISSUED AUGUST 2013

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New Form W-9• August 2013 Version:

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New Form• New Certification:

• If using a substitute Form W-9, it must be updated for the additional certification.

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Vendor Payments Implications• What does this new form mean for Vendor Payments?

– Not much.– AP departments are still be able to rely on “eyeball rule” even if

the Exempt Payee Code has not been completed; however, this may need to be revisited once Chapter 61 and Chapter 3 (Section 1441) coordination regulations are issued later this year.

– Will still be able to rely on four essential elements required in the backup withholding regulations: Name TIN Signature Date

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Recommended Best Practices• Always collect a Form W-9 from U.S. payees, even for

payments subject to 1099MISC reporting.• If using substitute forms, must update for changes. • Always TIN match the name/TIN combination provided on the

form upon receipt. • Always do a bulk TIN match once Form 1099 payee file is

finalized prior to reporting.• Track changes in payee information by requiring an updated

Form W-9 to be submitted with the new information.• Financial services: Systemically capture new codes provided

on Form W-9 for exempt recipients.

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FINAL FORM W-8BENISSUED FEBRUARY 2014

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Form W-8BEN for Individuals

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Key Changes• The final Form W-8BEN incorporates the following new

requirements:– Country of Citizenship.– Foreign Taxpayer Identification Number.– Date of Birth for countries not issuing Taxpayer Identification

Numbers.• The “do not abbreviate” instruction was left off of the final version

country lines.• Foreign Taxpayer ID number is not required- it can be entered in

place of a date of birth (either/or is required).• A foreign TIN can take the place of a US TIN for the purpose of

claiming a treaty benefit.– This is only applicable for the BEN, so will not apply to personal services

income.

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Form W-8BEN for Individuals

• The Form W-8BEN is the only Form W-8 that still requests a capacity if the form is not signed by the beneficial owner.

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Recommended Best Practices• Ensure that your systems can capture newly required data

elements: – Country of Citizenship– Foreign Taxpayer ID Number OR Date of Birth

• Review guidelines and incorporate procedures for verifying foreign taxpayer ID number or date of birth once instructions are issued.

• Standardize vendor information update forms to require a new Form W-8 when the change is material to the vendor’s tax status.

• Not necessary to TIN match U.S. tax IDs at this time.• Identify treaty claim, eligibility, country.

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FINAL FORM W-8BEN-E ISSUED 3/31/2014

(ISSUE DATE ON FORM IS FEBRUARY 2014)

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Final Form W-8BEN-E

• The final form is eight pages long.

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Form W-8BEN-E Part I Updates• Expansion of Part I for FATCA Status, GIIN:

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Form W-8BEN-E: New Part II and III

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Form W-8BEN-E Parts IV-XXVIII• These sections will correspond to the Chapter 4 (FATCA) status

types listed in Line 5 of Part I. • Most of the Chapter 4 status types will require additional

certifications, additional information, or documentation to substantiate their Chapter 4 status claim.

• These sections of the form are only required for payments in scope for FATCA withholding.– Generally, this includes payments of interest and dividends. – Recipients of excluded non-financial payments will not be

required to provide a FATCA status.

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Form W-8BEN-E Certification• Capacity/title no longer required, just a checkbox.

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Recommended Best Practices - Vendor Payments

• Develop a substitute form for payments not in scope for FATCA.

• Review payment processing procedures to determine which, if any, payments are in scope for FATCA.

• Update validation procedures. Consider electronic validation tools.

• Ensure that your systems can capture new data elements on the form.

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Recommended Best Practices - Vendor Payments (cont’d)

• Review guidelines and incorporate procedures for validating forms once the instructions are issued.

• Standardize vendor information update forms to require a new Form W-8 when the change is material to a vendor’s tax status.

• Identify treaty claim, eligibility, country.• Determine validity of form based on treaty claim, US

indicia.

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FORM W-8IMY FINAL FORM ISSUED 4/30/2014

(VERSION DATE APRIL 2014)

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Form W-8IMY – April 2014 Version

• Final Form still eight pages long.• Changes similar to updated Form W-8BEN-E.

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Form W-8IMY- Part I Changes

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Form W-8IMY- Part II

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Form W-8IMY- CH 3 Certifications

• Chapter 3 Certifications are required and enhanced from the existing 2006 version of Form W-8IMY.

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Form W-8IMY- CH 4 Certifications• Additional FATCA certifications are required as well.

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Recommended Best PracticesVendor Payments

• Develop a substitute form for payments not in scope for FATCA.

• You will likely receive these forms for partnerships, so leverage existing Form W-8IMY validation requirements:– Validate IMY on its face.– Review withholding statement.– Review tax forms provided by underlying partners to identify

reporting/withholding responsibilities.• Follow best practices for Forms W-8BEN to capture required

information for underlying partners.

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FINAL FORM W-8ECI ISSUED FEBRUARY 2014

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Form W-8ECI

• Form is still one page.

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Form W-8ECI (cont’d_

• Capacity and change-of-circumstance changes consistent with other Forms W-8.

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FINAL FORM W-8EXP ISSUED APRIL 2014

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FormW-8EXP• Part I removes the “if required” language from CH 4 Status.

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FormW-8EXP - New Part III• Part III includes CH 4 Status certifications (if required).

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Form W-8EXP (cont’d)

• Capacity and change-of-circumstance treatment consistent with other Forms W-8.• The final form is three pages long.

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OPERATIONALIZING CHANGES

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Due Diligence• Review procedures must be standardized. • Additional U.S. indicia – will apply for FATCA, and extended to cover

Chapter 3 (Section 1441) payments starting July 1, 2014. • Checklists are the minimum acceptable standard for validation. It is

highly recommended to utilize a more sophisticated tool/outsourcing solution for forms requiring FATCA certifications.

• Given complexity and length of new Forms, many withholding agents are moving to electronic Form W-8 applications which enable vendors and account holders to complete the Form using an easy to understand interview approach combined with automated validation processes.

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Changes to Existing Section 1441 Requirements

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• Forms W-8 can be accepted via scan or fax beginning July 1, 2014 provided you do not have actual knowledge that the person providing the form is not authorized to do so.

• Certain indefinite validity rules will apply; however, this is not applicable for tax forms submitted with treaty claims.

• Beginning July 1, 2014, either a U.S. TIN OR a foreign TIN is acceptable for claiming treaty benefits on payments of non-actively traded U.S. source income (vendor payments).

• Beginning July 1, 2014 checklists can be used to obtain the reasonable written explanation for U.S. addresses, etc.

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Reasonable Written Explanation Checklist

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I, ________________, certify that I am a non-U.S. person as defined for U.S. tax purposes. I have a U.S. address for one of the below reason(s):

I certify that I am one of the following:

□ (1) A student at a U.S. educational institution and hold the appropriate visa.

□ (2) A teacher, trainee or intern at a U.S. educational institution or a participant in an educational or cultural exchange visitor program and hold the appropriate visa.

□ (3) A foreign individual assigned to a diplomatic post or a position in a consulate, embassy or international organization in the U.S.

□ (4) A spouse or unmarried child under the age of 21 years of one of the persons described in a (1), (2) or (3).

□ I certify that I do not qualify as a U.S. resident under the substantial presence test and am providing the necessary information to support this calculation.

□ I certify that I meet the closer connection exception to the substantial presence test because I meet all of the following criteria:

I have been present in the United States for fewer than 183 days in the current year;

I maintain a tax home in the country of __________________ during the current year; and

I have a closer connection during the current year to this country because ________________________________________________________________ ________________________________________________________________________________________________________________________________

□ I certify that I am treated as a resident of ______________ for purposes of the income tax treaty between it and the U.S. and am not treated as a U.S. resident or citizen for purposes of that income tax treaty.

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Changes to Existing Section 1441 Requirements (cont’d)

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• The affidavit of unchanged status concept has been extended to Section 1441 allowing withholding agents to retrospectively cure invalid or missing Forms W-8. – If affidavit is dated more than one year after payment, additional

documentary evidence is required to support the affidavit’s claim – e.g., passport, etc.

• Under penalties of perjury, I declare that I have examined and signed the Form W-8____ dated ________________and that the information and certifications contained therein remained the same and unchanged from January 1, 20XX and were true, correct and complete from that time.

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Additional Data Elements Required

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• FATCA requires certain additional data elements to be collected as part of due diligence efforts. These data elements will subsequently be used for reporting. – If withholdable payment is being made, must collect FATCA

status.– If FATCA status is PFFI or RDCFFI, must collect GIIN and

document GIIN validation date. – Foreign taxpayer identification number.– Date of birth.

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Updated U.S. Indicia - Individuals

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Updated U.S. Indicia - Entities

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Expiration Dates• When will the new forms expire?

– New regulations permit extended validity for certain form scenarios: Forms W-8BEN/BEN-E for certain individuals / entities with no treaty

claim. Forms for certain exempt entities.

– Indefinite validity rules will typically only apply if no U.S. address /phone number, if continual monitoring for changes in circumstance, and if additional documentation available to support foreign status.

• Stay tuned for the Instructions to the Requestor that the IRS is expected to issue for the new forms for additional information.

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Sunset of 2006 Versions of Forms W-8• The expectation is that the new forms will be put into place within a

reasonable amount of time of when the instructions are issued.– This may mean six months from when instructions are issued.

• Valid, existing forms W-8 will continue to be valid until their expiration date – generally the earlier of a change in circumstance making the existing form invalid or the end of the third calendar year following the year of signature.

• Finalized regulations confirm that forms that were set to expire on December 31, 2013 have been extended through December 31, 2014. The previous expectation was that expiration would extend through June 30, 2013.

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NOTICE 2014-33• Released May 2, 2014.• IRS announces that 2014 and 2015 will be regarded as a

“transition period” with respect to enforcement and administration of FATCA.

• During this period the IRS will take into account the extent to which a withholding agent has made a good faith effort to comply with FATCA.

• What does this mean? ‾ Documenting FATCA status where required‾ Application of new presumption rules‾ Application of coordination regulations

• Chapter 3 is still fair game, and if no “good faith effort” evidenced, no Chapter 4 relief provided.

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Questions?

Andrew McQuilkinamcquilkin@cticompliance.com