Companies that send international payments must collect tax information from their international vendors. At the end of each year, those companies must file vendor tax information with the United States tax authority (IRS). W-8 forms are provided by foreign individuals and companies need to provide their taxpayer identification information to the companies that pay them. Filing an accurate form is an important opportunity for international vendors to claim a reduced rate of withholding tax on certain types of income.
There are two types of W-8 tax forms:
W-8BEN (individuals)
Below is how the page appears when a vendor selects "I am an individual":
Entity Information:
Legal name of the individual who is the beneficial owner.
Permanent residence address:
The individual's registered address (do not use a P.O Box or in-care address).
Mailing address:
An address for receiving mail from IRS (if different from your permanent residence address).
Tax treaty benefits:
The reduced withholding tax rate that a foreign individual (beneficial owner) may be eligible for under a tax treaty between their country of residence and the United States.
When a foreign individual earns income from U.S. sources, the U.S. government typically withholds a certain percentage of that income as tax. However, many countries have entered into tax treaties with the United States to avoid double taxation and promote cross-border trade and investment.
The tax treaty benefit allows the foreign individual to claim a reduced withholding tax rate or exemption from withholding tax on certain types of income covered by the tax treaty. By submitting a properly completed W-8BEN form, the beneficial owner certifies their eligibility for the tax treaty benefits and provides the necessary information to the U.S. payor to determine the appropriate withholding tax rate.
The specific benefits and eligibility criteria for tax treaty benefits may vary depending on the tax treaty between the individual's country of residence and the United States. These treaties typically cover various types of income, such as dividends, interest, royalties, and capital gains.
It's essential for the foreign individual to accurately complete the W-8BEN form, ensuring that all required information is provided, including the claim of tax treaty benefits, to avoid over-withholding of taxes on their U.S. income. If the individual is not eligible for tax treaty benefits or fails to provide a valid W-8BEN form, the standard withholding tax rate will apply to their U.S. income.
Under tax treaty benefits in W-8BEN, there are some key elements:
Article and Paragraph:
On the W-8BEN form, the foreign individual must specify the applicable treaty article and paragraph that allows them to claim tax treaty benefits. This section identifies the specific provision in the tax treaty between the individual's country of residence and the United States that grants the tax advantage.
Withholding Rate:
The withholding rate refers to the percentage of income that is withheld by the U.S. government for tax purposes. Under the tax treaty benefit, the withholding rate is usually reduced from the standard withholding rate to a lower rate or, in some cases, exempted entirely.
Type of Income:
The W-8BEN form typically covers various types of income, such as dividends, interest, royalties, and capital gains. For each type of income, the form allows the foreign individual to declare their eligibility for a reduced withholding rate or exemption as per the applicable tax treaty.
Taxpayer Identification number
A Taxpayer Identification Number (TIN) is a unique identification number used by tax authorities to track and identify individuals or entities for tax-related purposes. It is also commonly referred to as a Tax ID or Tax Number
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US Taxpayer ID Number is a United states taxpayer identification number issued by the Internal Revenue Services (IRS)
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Foreign tax ID Number is a taxpayer identification number provided by the home country where the individual pays taxes
More information can be found about W-8BEN here.
W-8BEN-E (businesses)
Click here for more information on W-8BEN-E tax forms. Much of the information provided above regarding W-8BEN for individuals also applies to the W-8BEN-E for companies. We’ll highlight the specific W-8BEN-E differences below.
Entity Information:
Company name (as shown on income tax return) of the foreign entity that is completing the W-8BEN-E form.
Entity Type:
The legal structure or form of the foreign entity. It clarifies the classification of the entity for tax purposes and determine how it should be treated under US tax laws.
FATCA:
Stands for Foreign Account Tax Compliance Act. FATCA is a U.S. federal law that was enacted in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act. The primary purpose of FATCA is to combat tax evasion by U.S. taxpayers with financial accounts held outside of the United States.
For more information on FATCA status, please visit the IRS website here.
GIIN:
A global intermediary identification number. It is a unique identification number assigned to certain financial institutions and entities by the Internal Revenue Service (IRS) in the United States. The purpose of GIIN is to facilitate compliance with the Foreign Account Tax Compliance Act (FATCA). You might not have a GIIN.
Limitation on Benefits (LOB) provision:
This addresses the eligibility criteria a foreign entity must meet to claim certain benefits under a tax treaty between its country of residence and the United States.
Tax treaties between countries often include provisions to prevent treaty shopping, which is a practice where taxpayers try to take advantage of more favorable tax rates or benefits available in one country by using an intermediary entity in another country. The LOB provision is designed to prevent abuse of tax treaties and ensure that treaty benefits are available only to eligible entities that meet specific requirements.
Article and Paragraph:
On the W-8BEN-E form, the foreign company must specify the applicable treaty article and paragraph that allows them to claim tax treaty benefits. This section identifies the specific provision in the tax treaty between the company’s country of incorporation and the United States that grants the tax advantage.
Withholding Rate:
The withholding rate refers to the percentage of income that is withheld by the U.S. government for tax purposes. Under the tax treaty benefit, the withholding rate is usually reduced from the standard withholding rate to a lower rate or, in some cases, exempted entirely.
Type of Income:
The W-8BEN-E form typically covers various types of income, such as dividends, interest, royalties, and capital gains. For each type of income, the form allows the foreign company to declare their eligibility for a reduced withholding rate or exemption as per the applicable tax treaty.
For more information about W-8BEN-E, check here.