MLR

Draft IRS form for foreign organizations claiming reduced tax rate or exemption

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The IRS has published a draft revision of a form that qualifying foreign entities file if they receive certain types of income and want to claim a reduced withholding rate or an exemption from withholding.

The draft revises Form W-8EXP, Certificate of Foreign Government or Other Foreign Organization for United States Tax Withholding. It updates the Form W-8EXP to reflect the Foreign Account Tax Compliance Act (FATCA).

Generally effective for payments made after Dec. 31, 2012, the Hiring Incentives to Restore Employment Act of 2010 (HIRE) established rules for withholding on payments to foreign financial institutions (FFIs) – which generally include non-U.S. banks, broker-dealers and other custodians, investment vehicles and certain insurance companies – and for withholding on payments to other foreign entities.

The new rules provide for withholding taxes to enforce new reporting requirements on specified foreign accounts owned by specified U.S. persons or by U.S.-owned foreign entities (U.S. accounts). A financial account is defined as any depository or custodial account maintained by the financial institution or any equity or debt interest in the financial institution (other than interests regularly traded on an established securities market).

A withholding agent must withhold 30 percent of certain payments to an FFI unless the FFI has entered into an “FFI agreement” with the IRS to, among other things, report certain information with respect to U.S. accounts.

Foreign entities that receive certain types of income file Form W-8EXP. The form is used to:

  • Establish that the entity is not a U.S. person;
  • Claim that the entity is the beneficial owner of the income for which Form W-8EXP is given; and
  • Claim a reduced rate of, or exemption from, withholding as a foreign government, international organization, foreign central bank of issue, foreign tax-exempt organization, foreign private foundation or government of a U.S. possession.

The new draft of Form W-8EXP reflects the FATCA rules as follows:

  • Part I (Identification of Beneficial Owner) is expanded by adding new Section 3 for filing entities to indicate their FATCA status. There are a total of 11 checkboxes (e.g., participating FFI, international organization, 501(c) organization).
  • A new Part III is added, titled “Qualification Statement for Chapter 4 Status (if required).” It carries entries to be completed by non-reporting intergovernmental agreement foreign financial institutions, territory financial institutions, foreign governments, exempt retirement plans of foreign governments, 501(c) organizations, and passive nonfinancial foreign entities.
  • The draft includes a new sentence indicating that the filing entity agrees to submit a new Form W-8EXP within 30 days if any certification made on the form being filed becomes incorrect.