Exploring the Challenges of Tax Compliance and Form W-8BEN NASPP CT Chapter Meeting January 12, 2016

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1 Exploring the Challenges of Tax Compliance and Form W-8BEN NASPP CT Chapter Meeting January 12, 2016 Andrew Gewirtz, KPMG Andrea Kagan, Solium Brian Burke, TD Ameritrade

2 Notice The following information is not intended to be written advice concerning one or more Federal tax matters subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. 1

3 Your Presenters Today 2

4 Discussion Topics W-8BEN vs W9 Overview Who must file a W-8BEN Non-wage income tax withholdings Globally mobile employees FATCA and its impact on your employees Common questions from non-u.s. employees Best Practices 3

5 W9 vs W8 at a Glance W9 Form Filed by U.S. Persons Provides broker with SSN/TIN for reporting purposes Does not expire unless individual has a change in circumstance W-8BEN Form Certifies the individual is the beneficial owner of the account Certifies that the individual a non-u.s person Expires on the last day of the third succeeding calendar year after it is signed Ex: Form W-8BEN signed on September 30, 2015, remains valid through December 31,

6 U.S Person Definition U.S Citizen (regardless of residency) Resident Aliens (satisfy one of the following criteria) Hold a green card Meet the substantial presence test All others should file a W-8BEN form 5

7 Consequences of Failing to File Broker is required to apply 28% backup withholding to all sales Non U.S. persons may lose preferential treaty rates on dividends 6

8 TAX WITHHOLDING AND FORM W-8BEN MORE THAN JUST A FORM TO DOCUMENT TAX STATUS 7

9 Substantiating U.S. Nonresident Status of an Individual Submit signed Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Withholding and Reporting (Individuals) Used by foreign individuals to: Establish foreign status, Claim to be beneficial owner of the income, Claim tax treaty to reduce or exempt income from withholding Provide a TIN when beneficial owner holds an account at a U.S. office of a financial institution Avoid backup withholding on income not subject to 30% withholding 8

10 Substantiating US Nonresident Status of an Individual Given to withholding agent; not IRS Must submit W-8BEN to withholding agent upon request if you are a NRA who is the beneficial owner of an amount subject to withholding whether or not claiming a reduced rate of, or exemption from, withholding 9

11 Do Not Use Form W-8BEN if You are a US citizen even if residing outside the US US citizens on international assignment or employed and living in outside the US always use Form W-9 You are a foreign national who meets the definition of a US tax resident under IRC section 7701(b) and are not a resident of another country under a treaty provision Foreign nationals on international assignment in the US need to update filing (W-8BEN or W-9) based on annual US tax status determination if tax status changes 10

12 Do Not Use Form W-8BEN if You are an NRA claiming an exemption from withholding on compensation For exemptions on compensation use Form 8233 or Form W-4 You are a foreign entity (e.g., trust, corporation, partnership, estate) documenting your foreign status (use Form W-8BEN-E) You are receiving income effectively connected with the conduct of a trade or business in the US (other than personal services) Use Form W-ECI 11

13 Form W-8BEN and US Tax Withholding Withholding and reporting obligations depend on the US tax residency status of the taxpayer Physical residence or mailing address does not determine tax status! Have to follow federal and state tax laws State tax resident rules may be different 12

14 How Tax Status Affects Federal Withholding Taxpayer s Status US Nonresident Alien Non-wage income: 30% withholding (absent an exception or treaty relief) Wage income: Graduated rates (unless exempt under treaty or flat rate for certain supplemental wages) US Citizen or Resident Alien Non-wage income: No withholding Wage income: Graduated rates (or flat rate for certain supplemental wages) 13

15 How Tax Status Affects Federal Withholding Taxpayer s Status Documentation is used to: Establish individual taxpayer s status (Form W-8BEN or Form W-9) Claim reduced rate of, or exemption from, withholding (Form W-8BEN (non-wage income), Form 8233 (compensation) and Form W-4) Report income and withholding to IRS / taxpayer (Form 1042/1042S, Form 1099 and Form W-2) 14

16 Nonresident Alien 30% Withholding NRA is subject to tax on US-source income 30% rate on non-wage income Graduated rates on wages paid by an employer Withholding agent responsibilities (non-wage income) Withhold at 30% on gross amount of non-wage income (unless an exception applies or a treaty provides for a reduced rate) Deposit amounts withheld with IRS File information returns (Form 1042 and 1042-S) 15

17 Nonresident Alien 30% Withholding Employer responsibilities (wage income) Withhold at graduated rates (unless an exception or treaty applies) Deposit amounts withheld with IRS File Form W-2 16

18 Non-wage Income Subject to 30% Withholding Interest (e.g., bonds, notes, government obligations) Exception for portfolio interest Dividends Royalties Rents Pensions and Annuities Special rule for modified withholding Alimony 17

19 Non-wage Income Subject to 30% Withholding (cont d) Withholding at 30% required Withholding may be reduced if NRA completes and submits form to withholding agent Form W-8BEN, Part I NRA identified as beneficial owner of the income Form W-8BEN, Part II Completed when NRA is claiming treaty benefits Withholding agent reporting Completes Form 1042 / 1402-S Due date March 15 18

20 Persons Subject to 30% Withholding Foreign person only Includes NRA, foreign corporation, foreign partnership, foreign trust or estate, or any other person that is not a US person NRA includes: Non-US citizen or resident Resident of a foreign country under a treaty residence article (i.e., treaty tiebreaker) IRC section 6013 election (election to treat a nonresident alien individual as a resident of the US) Subject to NRA withholding for all income except wages 19

21 Backup Withholding Backup withholding rules require income tax withholding of 28% from certain payments if the payee is not exempt from backup withholding and fails to furnish correct taxpayer identification number (TIN) The IRS may also notify a payer to begin backup withholding because of payee underreporting Backup withholding can apply to rents, non-employee compensation for services, royalties, reportable gross proceeds paid to attorneys, and other fixed or determinable gains, profits, or income payments that are reportable on Form 1099-MISC Backup withholding does not apply to wages or pension payments 20

22 Backup Withholding Payers of US-source, non-wage income to US persons generally must report that income on Form 1099 US persons must provide Form W-9 with TIN to the payer If payment subject to reporting and no Form W-9 provided and the recipient is not exempt from W-9 requirement then payer must impose backup withholding Foreign person generally not subject to US reporting and backup withholding unless foreign person treated as US nonexempt recipient under presumption rule of IRC sec regulations 21

23 Backup Withholding Under presumption rule an undocumented payee is treated as a US person subject to backup withholding so Foreign person must provide documentation of foreign status (e.g., Form W-8BEN) to be exempt from US reporting and backup withholding Failure to follow the backup withholding rules can result in penalties to the payer for filing incorrect information returns. The payer may also become liable for any uncollected amounts 22

24 FATCA IMPACT 23

25 What is FATCA? Foreign Account Tax Compliance Act Signed into law as part of the HIRE (Hiring Incentives to Restore Employment) Act January 17, 2013, US Treasury and IRS released final regulations for FATCA US policy to address underreporting of US taxable income related to assets held outside the US 24

26 FATCA (continued) Increase enforcement of US taxable income reporting: Requiring Foreign Financial Institutions (FFI) to find and disclose US taxpayers holding assets in non-us funds Requiring individuals to report foreign financial assets 25

27 Impact on FFI Acquire appropriate due diligence information and documentation for accountholders/investors/payees (W8/W9) US indicta (7) Report as required (Form 8966, Foreign Account Tax Compliance Act (FATCA) Report) Operate withholding as necessary 26

28 US Indicta Identification of an account holder as a U.S. resident or citizen; U.S. place of birth; U.S. resident address or U.S. mailing address (including a U.S. post office box); U.S. telephone number; Standing instructions to transfer funds to an account maintained in the United States; Power of attorney or signatory authority granted to a person with a U.S. address; or An in-care-of address or hold mail address that is the sole address the FFI has identified for the account holder. 27

29 Impact on Participant Where not a US Citizen/resident, may be asked to prove that W9 is not correct form Particularly where participant has no connection to US other than account with share plan administrator, this can be difficult to understand US taxpayers Form 8938, Statement of Specified Foreign Financial Assets 28

30 Common Questions What happens if I do not complete the W-8BEN form? So if taxes are deducted I can get them back pretty easy? If I move from Spain to Switzerland do I have to file a new W- 8BEN? How do I find out if there is a tax treaty between my country and the U.S.? I changed jobs but the new employer uses the same broker why do I have to complete new forms? 29

31 Thank You Brian Burke Director, Stock Plan Services TD Ameritrade Andrea Kagan U.S. Lead Regulatory and Tax Solium Andrew Gewirtz Managing Director KPMG 30

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