A law designed to prevent U.S. taxpayers from hiding their overseas bank accounts has led the IRS to release two potential new versions of Form W-8 BEN.
In the past, foreign persons (entities and individuals) have used form W-8 BEN to inform U.S. payees of their foreign status. Entities also use the form to claim a reduced withholding rate as part of an income tax treaty. (Nonresident individuals claiming treaty benefits for personal services income should use form 8233.)
The proposed new W-8 forms will help enforce compliance with The Foreign Account Tax Compliance Act (FATCA). Instead of a single form W-8 BEN for entities and individuals, the law creates two distinct forms. Foreign individuals will continue to use the standard W-8 BEN (which has a few alterations) while foreign entities will use the new form W-8 BEN-E.
Enacted in 2010, FATCA requires foreign financial institutions to report to the IRS information about accounts held by U.S. persons. The law accomplishes this by establishing new withholding requirements on payments to financial institutions that fail to disclose this information.
To comply with the law, foreign financial institutions must enter into an agreement with the IRS stating that they will identify their U.S. accounts, report certain information about these accounts to the IRS, and withhold 30 percent on certain payments they make to non-compliant foreign banks and account holders. Failure to enter into the agreement results in mandatory withholding.
Once a foreign bank enters into this IRS agreement, they will receive a FATCA ID and a FATCA EIN. This is where the new forms W-8 come in. Rather than require foreign banks to provide two certifications – one indicating their foreign status and another indicating their agreement with the IRS – the new W-8 BEN-E allows banks to verify both provisions on a single form.
Meanwhile, the standard W-8 BEN form is mostly unchanged, although it states at the top that only foreign individuals should complete the form. Line 6 also now asks for the nonresident alien payee to provide their foreign taxpayer identification number in addition to their U.S. TIN. The draft of the new W-8 BEN asks filers to see the form's instructions for more on this requirement, but no instructions are available as of this writing.
Although the new forms W-8 BEN and W-8 BEN-E are both drafts at this time, the final versions will likely be identical. Text on the drafts provides a revision date of December 2012, meaning that these forms should be the W-8s you will send to your foreign payees beginning in 2013. Revised versions of other forms W-8, as well as form W-9, should be released during the coming months, along with changes to the instructions for each.