U.S. private equity funds, hedge funds, banks and other financial institutions with foreign (non-U.S.) investors may need to remediate significant volumes of U.S. tax withholding certificates (i.e., Internal Revenue Service Forms W-8) this year because the forms are either expired or lack the investors’ foreign tax identification number (FTIN). Forms W-8 are used to document the status of non-U.S. investors and are generally only valid for three years after the year in which they are signed. Additionally, FTINs are now required on W-8s (except W-8IMYs) to comply with rules that were imposed in 2017, but have not been enforced for forms signed on or before Jan. 1, 2018 until now.
Notably, the rules are being enforced now since the grace period granted under IRS Notice 2017-46, which gave U.S. funds and other FIs until Dec. 31, 2019 to collect and report FTINs (and dates of birth for individuals) on forms signed before Jan. 1, 2018, has lapsed. Consequently, effective Jan. 1, 2020, all W-8 forms (except form W-8IMY) associated with payments or distributions of U.S. sourced income made to foreign investors or accountholders in connection with financial accounts (including debt and equity interests) held at US financial institutions and branches, must contain an FTIN or a reasonable explanation for why one was not provided or the payment may be subject to up to 30% withholding. There are exceptions where an FTIN is not required on Forms W-8 if the investor or accountholder:
- Is a permanent resident of Cayman Islands, Bermuda, British Virgin Islands, or Australia;
- Is a government, central bank of issue, international organization, or resident of a U.S. territory;
- Is an indirect partner, accountholder or intermediary (such as a partnership) that provides a form W-8IMY; OR
- Has provided a reasonable explanation for why an FTIN was not provided or is not legally required either in the FTIN field of form W-8, in the margins of the form, or on a separately attached statement. Refer to the OECD’s website for information on other instances where an FTIN may not be required by jurisdiction.
It is important to note that the rule requiring FTINs applies regardless of the form’s expiration date. For example, a Form W-8BEN signed in June of 2017 provided without an FTIN is considered invalid as of Jan. 1, 2020 even though it does not expire until Dec. 31, 2020. As a result, US source income paid to the investor on or after Jan. 1, 2020 will be considered made to an undocumented person subject to US federal income tax withholding at a rate of up to thirty percent (30%). The rules are generally applicable to Forms W-8 signed before Jan. 1, 2018. Forms signed on or after Jan. 1, 2018 were already required to contain FTINs unless they met one of the exceptions discussed above.
In order to comply with requirements, U.S. funds must have a process for collecting and refreshing forms W-8 as needed. Those that fail to collect W-8s with FTINs could be required to withhold U.S. federal income taxes of up to 30% of the amount of certain U.S. sourced payments or distributions made to investors and may be held liable for any amount that they under withhold and assessed additional penalties and interest.
How can RSM help?
RSM’s W-8, W-9, and Self-Certification Form Analysis Service was designed to assist funds with complying with due diligence requirements set forth under relevant provisions of requiring the automatic exchange of information. Using a proven methodology based on guidance published by taxing authorities and our knowledge and understanding of leading industry practices, we assist clients with identifying and remediating potential exposure associated with tax withholding certifications and self-certification forms. Specifically, we can assist with:
- Preparation and analysis of W-8, W-9, and self-certification forms
- Drafting communications to investors or accountholders soliciting new W-8, W-9, or self-certification forms
- Drafting policies and procedures for collection, review, and storage of tax withholding certificates and self-certification forms
- Facilitating customized educational training sessions on requirements for W-8, W-9, and self-certification forms
- Determining the FATCA/CRS status of entities and registration for IRS global intermediary identification numbers (GIINs)) for W-8 forms
- Evaluating new account or investor onboarding systems and processes
- Evaluation of treaty claims for reduced rates of withholding
Forms are collected and tracked electronically using standardized tools and accelerators that allow our teams to work more efficiently.
