Four years ago I wrote my first blog about the W8BEN – it still gets a large number of hits and I still get phone calls every month or so arising from it. Now that we have had the new W8BEN-E with us for over a year it seems a good idea to write a new blog summarising all of the key W8 related issues.
In basic terms the US tax system requires that domestic customers either account for withholding tax at 30% when paying an overseas supplier of services, or complete the W8BEN demonstrating that an appropriate tax treaty benefit applies.
It’s important to note that the W8BEN is completed in respect of services and not goods. Sometimes goods are shipped to a customer and installed – the installation element of the fee is viewed as a service and so a W8BEN may be required in respect of the proportion of the overall fee that relates to the install.
The W8BEN itself is merely a declaration by the supplier to the customer that they are an entity tax resident in a jurisdiction with which the US has a tax treaty, and that they are the beneficial owner of the item of income or gain which is under review. In essence the declaration is asking the supplier to confirm that it genuinely belongs in the UK, and is not a shell company being used to access the preferential terms of the UK/US treaty.
In addition, the W8BEN now asks for confirmation of the relevant part of the treaty that is being relied upon and some background information. Some knowledge of the tax treaty is therefore required to complete this correctly.
Historically US businesses were very bad at obtaining the necessary documentation to allow gross payment. The IRS undertook a sustained period of audit and that has led to a swing in the opposite direction – US businesses are very careful to ensure that they only pay gross once the necessary documentation is in place. That nervousness often leads to over compliance – many US businesses believe that in order for the W8BEN to be complete the foreign supplier must have an US EIN (employer identification number) even though they employ no US staff. This is not correct – however often in order to get the payment made gross the practicality of the situation is that it is quicker to apply for the EIN and give the customer what they want.
One of the downsides of registering for an EIN is that the IRS system then sends you a notice deliver a US tax return. However, you may wish to complete a tax return in any event – if you are doing business with customers in the US then technically speaking you should file a nil return and tick a box to claim treaty relief (because you have no fixed place of business there). The benefit of doing this is that the statute of limitations runs out after three years whereas if no nil return is ever submitted the clock never gets started. Usually this is something for the larger businesses to consider.
The new W8BEN-E is a daunting form because it was redrafted to accommodate all of the disclosures now required under FATCA, however for trading SMEs operating in the US there is only one box to tick to confirm that it is not a foreign financial entity. The rest of the form is largely superfluous.
As with all services provided to overseas customers UK businesses need to establish the withholding tax position when quoting for work. At the same time some effort should be made to understand the paperwork required. All too often we are asked to help with a W8BEN when the UK supplier desperately needs payment. Sometimes the EIN registration can take 4 weeks, so if the US customer is feeling overly compliant then the UK business is not going to get paid any time soon. Advance preparation is therefore key.
At Francis Clark we help an awful lot of clients with W8BEN issues, and we help our clients complete their forms. If you need help with a W8BEN related matter please get in touch.