Form W-9 or W-8ben? the Proper Classification of a Dual Resident Taxpayer for Purposes of Documenting Status With a Foreign Financial Institution Under the Foreign Account Tax Compliance Act
| Publication year | 2017 |
| Author | By Liliana Menzie & Steven L. Walker |
By Liliana Menzie2 & Steven L. Walker3
If a dual resident taxpayer, who determines that he or she is a resident of a treaty partner, is contacted by a foreign bank and asked to provide documentation to confirm the individual's status as a United States ("U.S.") person or a foreign person pursuant to the Foreign Account Tax Compliance Act ("FATCA"), is such an individual required to provide a (1) Form W-9 (Request for Taxpayer Identification Number and Certification), or (2) Form W-8BEN (Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals)) to the foreign financial institution? There is no guidance on this issue as of yet, and consequently, the purpose of this paper is to request clarification on what is the correct status of an individual in this situation who must certify, under penalty of perjury, his or her status as a U.S. or a non-U.S. person.
The status of the account holder as a U.S. person or a non-U.S. person determines whether the foreign financial institution classifies the account as a U.S. reportable account. Therefore, it is crucial to determine whether the account is deemed held by a U.S. person.
The authors believe that a dual resident taxpayer who is a resident of a treaty partner pursuant to the provisions of a tax treaty should be treated as a nonresident alien of the U.S. for FATCA Banking Certification purposes. The authors propose that the Internal Revenue Service ("IRS") issue guidance by either updating the instructions to the Form W-8BEN or the online FATCA Q&A on the IRS website.
This paper will draw from the following hypothetical. Gabriela is a citizen and resident of Mexico under Mexico's internal law. Gabriela's parents started and developed a company in Mexico that sells organic produce. The family business has recently expanded to include certain locations in California. Gabriela has been involved in overseeing the family business in the U.S., and during the past few years has spent a significant amount of time traveling from Mexico to Silicon Valley for the business. Gabriela holds a nonimmigrant "E" investor visa, and due to the number of days she has spent in the U.S., she has become a resident alien under the Internal Revenue Code ("IRC" or "Code") (i.e., a U.S. tax resident because she satisfies the "substantial presence test").4
The U.S. and Mexico have entered into an Income Tax Convention5 ("Treaty") which, among other provisions, establishes the rules for determining the country of residence of an individual (such as Gabriela) who is deemed a tax resident of the U.S. and also a tax resident pursuant to the internal laws of his or her home country.6 Gabriela is deemed a resident of Mexico under the Treaty.
Gabriela has a bank account at a financial institution in Mexico titled in her name, and a second account with the same bank held by a Mexican Sociedad Anónima de Capital Variable, a Mexican corporation, where Gabriela owns 52 percent of the shares ("Mexican Corporation"). The remaining shareholders of the Mexican Corporation are citizens and residents of Mexico. As part of its FATCA due diligence and verification procedures, the foreign bank asks Gabriela to provide documentation to verify her status as a U.S. person or a non-U.S. person.
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In this case, should Gabriela provide the bank in Mexico a (1) Form W-9, Request for Taxpayer Identification Number and Certification; or (2) Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals)?
DIAGRAM OF BUSINESS IN MEXICOGabriela: Gabriela has an E visa, travels to U. S. for business and is a U.S resident under the substantial presence test.
United States
Mexico
Mexican Sociedad Anonima de Capital Variable, a Mexican corporation ? Sells and Exports Organic Produce
| 52% Shareholder
Bank in Mexico ? Gabriela: Gabriela is a citizen and resident of Mexico.
Gabriela has a bank account held in her name and an account held in name of Mexican Corporation. Should she provide a Form W-9 or W-8BEN to the bank?
B. FATCA OverviewAs part of the Hiring Incentives to Restore Employment ("HIRE") Act7, Congress enacted several provisions aimed at identifying and deterring tax evasion by U.S. persons. These provisions are commonly referred to as FATCA. The most significant FATCA provisions are in the new Chapter 4 of the Code.8 Chapter 4 consists of IRC sections 1471 through 1474 and is mainly intended to identify and deter tax evasion by U.S. persons who have unreported income from accounts that are held outside the U.S., either directly or indirectly through foreign entities.
In general, Chapter 4 requires foreign financial institutions ("FFI") to identify U.S. account holders and report certain information of such accounts to the IRS.9 If a FFI does not comply with FATCA, it is subject to a 30 percent withholding tax on gross payments of certain types of U.S. fixed or determinable annual or periodical income ("FDAP income") and certain gross proceeds from the sale or other disposition of debt or equity interests in U.S. issuers.10 Stated differently, if a FFI does not want to participate in FATCA and receives certain U.S. source payments, the withholding agent will withhold 30 percent as a Chapter 4 withholding tax. A withholding agent will know whether a FFI is participating if the FFI is registered and has received a received a Global Intermediary Identification Number ("GIIN"). Due to the risk of being subject to this significant 30 percent withholding tax under FATCA, it is in the interest of every FFI and account holder (both U.S. and non-U.S.) to comply timely and properly.
The term FFI is broadly defined under FATCA to include banks, custodial institutions, investment entities such as mutual funds, private equity funds and hedge funds, and any entity investing, administering or managing funds; as well as certain insurance companies, holding companies and treasury centers of affiliated groups that otherwise include one or more FFIs as members of the affiliated group.11 Throughout this paper, we will utilize the term FFI to refer to foreign banks exclusively.
In general, FFIs are required to enter into an agreement with the IRS pursuant to which they agree to undertake the following: (1) perform due diligence with respect to all account holders; (2) report certain information concerning U.S. accounts to the IRS on an annual basis and comply with requests for additional information from the IRS; (3) obtain a waiver of any applicable non-U.S. law restrictions on reporting the required information to the IRS (or close the account if no waiver is obtained); and (4) deduct and withhold 30 percent on any "passthru payments" made to accounts that do not comply with the request of information by the FFI or does not provide a waiver (e.g., "recalcitrant accounts").12
An FFI that enters into and is compliant with an FFI agreement is referred to as a participating FFI ("PFFI"). The Treasury Regulations ("Regulations") under IRC section 1471 provide detailed rules on the due diligence and verification procedures that PFFIs must perform with respect to all existing accounts and new accounts. In addition, the U.S. Treasury has negotiated bilateral FATCA agreements with several countries. These intergovernmental agreements ("IGAs") provide an alternative to FFI agreements for FFIs to comply with FATCA without violating local laws such as privacy laws and bank secrecy laws. There are currently two types of IGAs.13 Model 1 IGAs require FFIs in the partner country (other than certain FFIs that are exempt from reporting) to report information regarding U.S. accounts to the tax authorities of the FATCA partner, which then provides the information to the IRS. Mexico and Canada are some of the countries that have entered into Model 1 IGAs. The Model 2 IGA requires FFIs located in such Model 2 IGA jurisdictions to enter into FFI agreements with the IRS and to report directly to the IRS. Austria and Switzerland are examples of Model 2 IGA jurisdictions. IGAs are relevant to the due diligence and verification procedures of FFIs because all IGAs include an Annex I setting forth the rules on the due diligence obligations of FFIs to identify and report U.S. accounts and payments to certain non-participating FFIs ("NPFFIs").
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C. Dual Resident TaxpayersThe Regulations provide that a dual resident taxpayer who determines that he or she is a resident of another country under a tax treaty is considered a nonresident alien for purposes of computing that individual's income tax liability. Treasury Regulation section 301.7701(b)-7(a)(1) states, in part:
(1) Application. —The application of this section shall be limited to an alien individual who is a dual resident taxpayer pursuant to a provision of a treaty that provides for resolution of conflicting claims of residence by the United States and its treaty partner. A "dual resident taxpayer" is an individual who is considered a resident of the United States pursuant to the internal laws of the United States and also a resident of a treaty country pursuant to the treaty partner's internal laws. If the alien individual determines that he or she is a resident of the foreign country for treaty purposes, and the alien individual claims a treaty benefit (as a nonresident of the United States) so as to reduce the individual's United States income tax liability with respect to any item of income covered by an applicable tax convention during a taxable year in which the individual was considered a dual resident taxpayer, then that individual shall be treated as a nonresident alien of the United States for purposes of computing that...
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