The W-8ECI is to be used by a foreign person to claim exemption from withholding when the payee has effectively connected income. The form W-8ECI cannot be used by a nonresident alien individual with personal service income. A valid form W-8ECI must include a U.S. TIN or it is invalid. A U.S. TIN is defined as a social security number, employer identification number or IRS individual taxpayer identification number (ITIN).
IRS Form W-7
The Form W-7 is used to apply for an ITIN. Forms W-8BEN and W-8ECI that do not have a U.S. TIN will remain in effect from the date the form is signed and ending on the last day of the 3rd succeeding calendar year received unless a change in circumstances makes any information on the form incorrect. For example, if the form was received on September 30, 2010, it will remain in effect until December 31, 2013. Form W-8BEN with a U.S. TIN will remain in effect until a change in circumstances makes any information on the form incorrect, provided the withholding agent reports on Form 1042-S at least one payment annually to the beneficial owner who provides the W- 8BEN form.
What is Form W-8?
Foreign persons who provide certain series W-8 forms are exempt from backup withholding and Form 1099 reporting.
U.S. Withholding Agent Presumption Rules
Remember a US withholding agent must withhold at 30 percent unless the payment can be associated with a document to support lower rates or exemption from withholding. The Code requires that the document offered by the foreign persons be valid in order to be relied upon by the withholding agent. If the withholding agent cannot reliably associate a payment with valid documentation, the agent must use the “Presumption Rules” provided in the Code. If the withholding agent complies with the Presumption Rules he will not be liable for tax, interest, or penalties even if the rate of withholding that should have been applied … based on the payee’s actual status is different from that presumed and withheld.
The Presumption Rules apply to the determination of
- The status of the person you pay;
- Whether the payee is a beneficial owner or intermediary;
- Whether the payee is a individual, corporation, partnership, or trust.
Using Form W-8ECI
Form W-8ECI should be used by a foreign vendor to certify that the payment is income that is effectively connected with a U.S. trade or business. No withholding is required on such income – because that income should be reported on the foreign vendor’s U.S. business’ income tax return. The Form 8233, Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual, is used by a NRA to claim a tax treaty exemption from withholding of taxes. The form is used to claim a withholding exemption on some or all income from independent contractor services, wages, personal services income and non-compensation scholarship or fellowship income. Also, the Form 8233 is used to claim a personal exemption amount to reduce independent personal services income. This form generally requires a SSN, however, an ITIN may be used.
Claiming Tax Treaty Exemption on Withholding
To claim a tax treaty exemption the NRA provides three copies of the Form to the U.S. payer, that is the withholding agent. The U.S. withholding agent should review and sign the certification in Part IV if he or she is satisfied that the claim is correct. The U.S. withholding agent then mails one copy of the Form with all attachments submitted by the nonresident alien individual to the IRS within five days of receipt of the claim. After mailing the Form to the IRS, the U.S. withholding agent must wait at least 10 days to see if the IRS has any objections.
Claiming Tax Treaty Exemption
If the U.S. withholding agent is later notified by the IRS with objections to the NRA’s claim, the agent must begin withholding immediately. Form 8233 must be completed by the nonresident alien individual and filed by the U.S. withholding agent annually.