October 27, 2021
US IRS revises Forms W-8ECI, W-8BEN-E, W-8BEN
The United States (US) Internal Revenue Service (IRS) has updated Forms W-8ECI, W-8BEN-E, W-8BEN (the Forms W-8) and their accompanying instructions. The Forms W-8 have October 2021 revision dates and are final. Form W-8IMY remains in draft. This Alert focuses on the final forms and their instructions.
The Forms W-8 reflect changes to the Chapter 3 regulations, which were introduced in final regulations issued in December 2019 (TD 9890), following updates of the forms in June and July 2017.
The other updates primarily relate to new withholding requirements under Internal Revenue Code1 Section 1446 on sales of interests in publicly traded partnerships (PTPs) and distributions made by PTPs. The release of the updated Forms W-8 began after the Treasury Department and IRS released Notice 2021-51, which delayed the effective dates of certain parts of the Section 1446 regulations, including the new PTP withholding requirements, to 1 January 2023 (from 1 January 2022).
Withholding agents can continue to accept the prior versions of Forms W-8 until the end of six full months after the revision date shown on the updated Form W-8 (unless the IRS provides otherwise). Based on the timing of the updated Forms W-8 and the October revision date, updated Forms W-8 must be used beginning 1 May 2022, absent guidance to the contrary. Forms obtained before the cutoff date continue to be valid for the usual validity period.
Due to the timing of the final versions, withholding agents may continue to receive the prior version of Forms W-8 from clients during early 2022 and can continue relying on unexpired prior-version forms. The Section 1446 updates to Forms W-8IMY and W-8ECI are needed for purposes of the PTP withholding requirements on payments made after 31 December 2022. Therefore, withholding agents making payments subject to Section 1446 withholding may need to consider a Section 1446-specific solicitation in 2022 to obtain updated Forms W-8 from clients who have not provided the latest version of their form.
The following is a summary of several of the noteworthy changes and updates in the Forms W-8.
Line 4 (Chapter 3 status) has been updated on the Form W-8ECI. The classification of "foreign government" on the prior version of the form has been replaced with two classifications: an integral part of a foreign government and an entity that is controlled by a foreign government.
The breakout of types of foreign government entities resolves an open question with the Form 1042-S Chapter 3 recipient codes. The 2020 Form 1042-S added new recipient codes for "Foreign Government — Integral Part" and "Foreign Government — Controlled Entity." Withholding agents could not make this distinction based on the current versions of Forms W-8, other than on Form W-8EXP. The distinction between the types of foreign government entities reflects their different statuses under Section 892.
Forms W-8BEN-E and W-8BEN
Identical to the changes to the Form W-8ECI (discussed previously), line 4 of the Form W-8BEN-E separates the "Government" classification into "Foreign Government — Controlled Entity" and "Foreign Government — Integral Part."
Line 14b of Form W-8BEN-E has been expanded to add a checkbox for "No LOB in treaty." The instructions indicate that this box must be checked by a resident of a country whose treaty does not have a Limitations on Benefits (LOB) Article.
This update confirms that residents of the few countries without an LOB Article in their treaties must complete line 14b. The instructions for the prior Form W-8BEN-E include only a minor reference to selecting the "Other" checkbox and writing "N/A" on the corresponding line, which was often overlooked. The Form 1042-S LOB codes might be updated to incorporate this new checkbox.
US tax treaties do not tax business profits that are not attributable to a US permanent establishment (US PE) and are not addressed in other articles of the treaty. The instructions for Forms W-8BEN-E and W-8BEN have been updated to reference treaty claims on business profits and gains. A business profits claim is made by completing the "Special Rates and Conditions" line (line 15 of Form W-8BEN-E and line 10 of Form W-8BEN), identifying the article (and paragraph) of the treaty, claiming a reduced rate of withholding (e.g., 0%), and stating that the gains are not attributable to a permanent establishment.
The special treaty claim updates in the instructions can impact ordinary income. A treaty claim for business profits may apply when services are performed inside the US. Such treaty claims typically arise when payments are made to foreign vendors (e.g., consultants, law firms, etc.) resident in a treaty country for services performed in the US.
Accounts payable (AP) departments will need to update validation processes related to the "Special Rates and Conditions" line.
The Form W-8BEN Line 10 treaty instructions (Special Rates and Conditions) have also been updated to address:
The standard of knowledge for withholding agents to review remittance claims is unclear. The form instructs agents to base the claim on the amount that is remitted. At the time the form is provided, however, nothing will have been, or must be, remitted. It may be possible to base the claim on what is projected to be remitted, but this is not addressed in the instructions.
Form W-8BEN also adds a new checkbox immediately above the signature line in Part III, which states: "I certify that I have the capacity to sign for the person identified on line 1 of this form." The instructions indicate that this box must be checked when the Form W-8BEN is signed by an agent acting under a duly authorized power of attorney for the individual referenced in line 1. A valid power of attorney must also be provided with the Form W-8BEN.
Based on the updated instructions, this box only needs to be checked when the Form W-8BEN is signed by an agent. Individuals who sign their own Form W-8BEN and inadvertently check this box do not appear to invalidate an otherwise valid form. However, withholding agents signing the Form W-8BEN will need to ensure that the checkbox is selected and a valid power of attorney (supporting the agent's authority to execute US tax forms on behalf of the individual) is also received and validated.
Changes in all forms
Several additional changes are reflected in all of the Forms W-8 and accompanying instructions.
Requirements for taxpayer identification numbers
Beneficial owner Forms W-8, which are used to open accounts in the US, currently require either a foreign taxpayer identification number (FTIN) or a reasonable explanation for not providing one. The Forms W-8 add a new checkbox to indicate that an FTIN is "not legally required" (i.e., the reasonable explanation):
The checkbox should eliminate the need for a reasonable explanation for the lack of an FTIN in the vast majority of cases. Previously this explanation could be written in the margins of the Form W-8.
The instructions allow a "further explanation" for not providing an FTIN to be included. As drafted, it is unclear how this would be used in conjunction with the "not legally required" checkbox, and the withholding agent's standard of review when receiving multiple explanations on a single form (for example, the checkbox is selected and the account holders also write in the margins that they are awaiting an FTIN recently requested from their local tax authority).
The instructions incorporate revised electronic signature requirements provided in final regulations issued in December 2019. In addition to the Form W-8 itself, withholding agents can consider other documentation or information they may have supporting that a Form W-8 was electronically signed.
The reference to the ability to use other documentation in the instructions is helpful, as electronic signatures often come with an attachment, or link to an attachment, that provides the electronic signature details. Despite being included in the regulations, this option was often overlooked.
Section 6050Y imposes certain information reporting requirements for life insurance settlement transactions and death benefits. The instructions to the Forms W-8 have a minor update to the "Who Must Provide" section specifying that the form may be provided by a foreign person who is the seller of a life insurance contract (or an interest therein) under Section 6050Y.
Section 1446(f) changes
Brokers must withhold 10% of the gross proceeds on the sale of a PTP interest under Section 1446(f) unless an exception applies. One such exception is for non-US securities dealers (defined in Section 475(c)(1)) certifying on Form W-8ECI that "any gain from the transfer of the PTP interest is effectively connected with the conduct of a trade or business within the United States without regard to the provisions of [Section] 864(c)(8)."
A new checkbox has been added to the Form W-8ECI for security dealers to make this certification. When this checkbox on new line 12 is selected, Section 1446(f) withholding will not apply.
The final instructions provide no guidance on a withholding agent's standard of review for whether an actual securities dealer selected line 12. The final Section 1446(f) regulations set the standard at "actual knowledge that the information is incorrect or unreliable." This may be further addressed in updated Form W-8 Requester instructions, which have not yet been released.
The line 12 checkbox applies only for Section 1446(f) withholding purposes, which includes PTP sales and certain PTP distributions (to the extent the PTP has identified an amount in excess of cumulative net income (ECNI)). The final instructions also provide that the line 12 selection applies to each transfer of a PTP interest associated with this form unless specified otherwise on line 11 or an attachment.
The checkbox does not exempt effectively connected income included in PTP distributions from Section 1446(a) withholding. Therefore, the applicable Section 1446(a) withholding rates will apply to account holders documented with a Form W-8ECI (based on the type of distribution and how the form is completed for Chapter 3 purposes).
Line 11 still must be properly completed to exempt other types of US-source payments (that are effectively connected with a US trade or business) from withholding tax. Based on the final instructions, it appears that line 11, where the beneficial owner describes the income that should be treated as effectively connected income (ECI), does not need to also reference gain from the transfer of a PTP interest when line 12 is checked.
Forms W-8BEN-E and W-8BEN
The instructions for Forms W-8BEN-E and W-8BEN have also been updated to reference treaty claims on business profits and gains to reduce withholding under Section 1446(f). This is largely consistent with the Preamble to the final Section 1446(f) regulations.
As noted, a business profits claim is made by completing the "Special Rates and Conditions" line (line 15 of Form W-8BEN-E and line 10 of Form W-8BEN), identifying the article (and paragraph) of the treaty and claiming a zero rate of withholding. The instructions require that the free text field on Line 15 or Line 10 include a statement that gains from the transfer of the PTP interest are not attributable to a US PE, and also reference the name of each PTP to which the treaty claim relates.
PTPs generally have a US PE due to the nature of their businesses (e.g., oil and gas, shopping malls, real estate, etc.). Therefore, an investor in a PTP that has a US PE would not be able to satisfy the treaty requirements outlined previously. A 0% treaty rate on PTP transfers based on a business profits article will turn on whether the specific PTP has a US PE. The final instructions address a key Section 1446(f) consideration for withholding agents by requiring the "Special Rates and Conditions" line to include a reference to a specific PTP.
Operational and practical challenges will be associated with treaty claims on PTP transfers. Under the Chapter 3 regulations, a withholding agent can generally apply reduced treaty rates "absent actual knowledge or reason to know otherwise." This may necessitate reviewing a treaty claim on a PTP transfer on an ad-hoc or manual basis (e.g., reviewing the PTP prospectus or other documentation issued by the PTP). In addition, the account holders could hold positions in multiple PTPs, requiring a withholding agent to further review the PTP name referenced on Lines 15 or 10 and apply treaty benefits to only certain PTP transfers.
US tax IDs (e.g., ITINs, EINs) are provided on Line 10 of Form W-8BEN-E and Line 5 of Form W-8BEN. The updated instructions indicate that the form must include a US tax ID if provided by a partner in a partnership that has a US trade or business.
The addition of this new requirement raises several practical concerns from the standpoint of validating tax forms. It appears that a missing tax ID will invalidate the form for Section 1446(f) withholding purposes only (e.g., 10% withholding applies regardless of an exemption under a qualified notice or treaty claim). In addition, the instructions do not address how to determine if the PTP is engaged in a US trade or business during the initial validation process. A missing US tax ID will also affect investors trying to take a Section 1446(f) withholding credit on their US tax return (which also requires attaching a Form 1042-S containing a US tax ID).
The penalties of perjury statement in the "Certification" part of Forms W-8BEN-E and W-8BEN has been expanded to include that the form relates to "the partner's amount realized from the transfer of a partnership interest subject to withholding under section 1446(f)."
Withholding agents that utilize substitute Forms W-8 will need to make the appropriate updates to the penalty of perjury statements. The updated Form W-8 requester instructions may address the particular specifications and whether this statement is needed for substitute Forms W-8 used to only document accounts that cannot hold PTP interests (e.g., cash depository accounts).
For additional information with respect to this Alert, please contact the following:
Ernst & Young LLP (United States), Financial Services Office