Ernie Humphrey:
Hello everyone. I’m Ernie Humphrey, the CEO of Treasury Webinars. I’m thrilled to be hosting a compelling webinar in the Tipalti Payables Nation webinar series. Hot topics for global tax requirements in accounts payable. I would like to thank everyone for taking the time to join us for our webinar today. The end of the year is coming. Today you’ll hear from experts at KPMG on creating compliant processes for handling tax requirements when dealing with domestic and international suppliers as you close out 2019 and head into 2020. Today we’re honored to have Laurie Hatten-Boyd, Principal at KPMG, with us to explain how tax requirements impact organizations with global supplier basis and the legal and financial penalties for noncompliance. Today you’ll learn how to master IRS tax rules as they relate to paying global suppliers, steps for avoiding legal and financial penalties, conquering complex W-8 and 1042-S situations and improper withholding. Before I delve into the content, I’m going to offer a few quick housekeeping items and then I’m going to welcome our esteemed speakers to the webinar today.
Ernie Humphrey:
A few housekeeping items. We can take your questions at any time in the questions area of our GoToWebinar control panel. We’ll do our best to get to your questions at the tail end of the webinar today during our Q&A session, time permitting. Fear not if we don’t get to your question during the webinar today, we’ll follow up with you directly. If you have any technical issues, please use the chat window in order to communicate with us. If you’re interested in receiving CPE credits for today’s webinar today, you’ll have to be on the line for the entire webinar and complete all of our polling questions today. Now, it is my distinct pleasure to welcome our featured speakers to the webinar. First, we have Anand Misra, Product Marketing at Tipalti. Anand is the Director of Product Marketing at Tipalti where he drives product positioning, sales, messaging, competitive analysis and product differentiation among other things. Before Tipalti, he was Director of Product Marketing at NetSuite.
Ernie Humphrey:
Where he spent six years driving messaging and positioning for their ERPC. With over 15 years experience in product marketing and product management, he has helped launch many new products over the years. Prior to NetSuite, he was a senior product marketing manager at ADP. His work experience also includes roles at Thompson Reuters and Wolters Kluwer. He holds a BS in biology, MS in Communication and an MBA in Banking and Finance. Laurie Hatten-Boyd is a Principal in KPMG’s information reporting and withholding tax services practice. In this role, she advises financial institutions and other withholding agents on their tax withholding and information reporting requirements for payments made to US and non-US account holders and counterparties. As a partner in KPMG’s IRW practice, Laurie routinely engages a wide range of withholding tax advisory services to assist both financial and non financial institutions in complying with their tax information, reporting and withholding requirements. She is a frequent speaker on foreign withholding taxes and has authored articles appearing in The Tax Lawyer and the International Tax Review.
Ernie Humphrey:
She holds a JD degree from Gonzaga University and an LLM from Georgetown University Law Center. Laurie, it’s our pleasure to have you. Welcome to the webinar. The floor is yours. Take it away.
Laurie Hatten-Boyd:
Thanks Ernie. We’re going to just start talking about the payments that you’re making. We’re really going to focus on accounts payable as we go through this. First I’ll just run through the agenda. First we’re going to talk about the compliance issues as it relates to 1441 withholding, which is the withholding of the substantive tax that’s required on payments made to non-US persons. We’re going to talk about focusing on tax documentation, W-8’s, W-9’s. We’re going to go into some of the persistent problems we’re seeing with those forms. Then most importantly in this space, we’re going to go over the 1042 audit processes. The IRS is very focused on exams in the 1042 space right now. We’re going to talk about some of the best practices you could do so that you’ll be prepared if and when that happens.
Ernie Humphrey:
All right, thank you so much. Before we let Laurie really dive into her content, we’re going to go ahead and launch our first polling question here today. We’re asking you to share with you and when you collect tax forms from suppliers during supplier onboarding before payment is ever made. Do you try and collect during onboardings but sometimes you don’t get it until after the payment goes out, at year end when you need to prepare 1099/1042-S reports, or you don’t regularly collect tax forms? Please be honest. We’re not going to tell your boss on you if you don’t regularly collect your tax forms. We appreciate everyone’s consideration in answering all of our polling questions here today. Please note that those of you interested in receiving CPE credits for today’s webinar, you’ll have to answer all of our polling questions here today. Just a quick reminder, we can take your questions at any time in the questions area in your GoToWebinar control panel. It’s a tremendous opportunity as Laurie is a world renowned thought leader in this area and Anand has tremendous experience in this arena as well.
Ernie Humphrey:
So I encourage you to take advantage of this tremendous opportunity. We’re going to go ahead and take a quick peek at the results and then we’re going to let Laurie dive into IRC section 1441, the compliance initiative. Let’s go ahead and close that polling question. Let’s go ahead and share those results really quickly. Let’s take a quick peek. Laurie, does anything jump out to you here? Is this about what you expected, better, worse? What are your thoughts here?
Laurie Hatten-Boyd:
Yeah No, I think this is great. I mean, obviously you want to get those forms before the payments are made and it looks like the vast majority of people are really doing that. That’s great news.
Ernie Humphrey:
Okay. I’m sure you’re going to touch on this later, but in case not so much right now. If you would give us a brief overview, what are the implications of not doing that before a payment goes out and why is that a best practice?
Laurie Hatten-Boyd:
Yeah. It’s going to hinge of course on the types of payments you’re making. But if you’re making certain FDAP payments, fixed, determinable, annual, periodical income, if you don’t have the tax documentation prior to making a payment, that in the regulations there’s mandatory presumption rules. We’ll go over that in just a little bit. But in essence, those presumption rules are purposefully designed to ensure that the highest rate of withholding is going to be required. Of course as the withholding agent, if you don’t impose the withholding that you’re supposed to impose, then the liability becomes yours. That’s why it’s so significant that you get those forms upfront.
Ernie Humphrey:
Thank you so much. Let’s go ahead and jump in to your next section.
Laurie Hatten-Boyd:
Yes, sure. First we’re just going to talk about 1441 withholding in general. Here we had those FDAP payments that I was talking about. It’s fixed, determinable, annual, or periodical income. To the left hand here, we’ve got payments going to a US person. In that circumstance, you’re going to have a requirement to get a tax ID. In certain cases, it needs to be under penalties of perjury. Which means it actually needs to be provided in a W-9 form. But for certain accounts payable, you just need to get the TIN in any manner provided. If you don’t get the TIN prior to making the payment, there is a 24% backup withholding that’s required on those payments. Of course, the reporting for that would be on a Form 1099. The 1099-MISC for the vendor payments that we’re going to focus on today. Then of course the IRS is matching that 1099 up with the vendor’s tax return to make sure that they’re properly reporting the income and paying the tax. On the right hand side, we’ve got those same type of payments but going to a non-US person.
Laurie Hatten-Boyd:
Here we’ve got the statutory 30% rate of withholding on the FDAP payments. There are certain reductions either under the code or an income tax treaty. We’ll get into what is necessary to be able to reduce those rates of withholding at source. Of course, on this side, we’re only focused on US source income versus the payments to the US persons. Because as US persons we’re taxed on a worldwide income, we would care about US and non-US source income. Then the payments to the foreign persons, the information return associated with those is the Form 1042-S. It’s just the non-US equivalent of the 1099. Where treaty benefits have been claimed by the persons, the United States shares that information with its treaty partners so that they can also make sure that those persons are reporting their income locally where required in paying the tax. First we talked about this 30% withholding, and we’re going to focus right now on the payments to the non-US persons. Again, there’s a statutory rate of 30% withholding.
Laurie Hatten-Boyd:
It’s gross basis taxation, so it’s on the gross payment. Then we’ll talk about certain reductions that might be available. As a withholding agent, determining the character and source of the payment is your responsibility. As you could imagine, there’s presumption roles that are going to result in the worst case scenario if you’re not able to reasonably determine what that character and source of the payments are. The 30% can be reduced as I said, and the documentation, the W-8 forms is the key, really the cornerstone to that regime. The only way you’re going to be able to reduce the rate of withholding is to have these valid forms. We’ll get into that in detail. I talked about the Form 1042-S’s, the information return associated with these payments. The tax return is the 1042. This is where you’re going to report the gross income that you paid and the withholding that was imposed. All of these forms are due on March 15th of the calendar year following the year of payment.
Laurie Hatten-Boyd:
There are extensions for the 1042. You can get an automatic six month extension to September 15th by filing the Form 7004. For the Form 1042-S, you can get a 30 day extension by filing the Form 8809. That is only for the IRS copy. For the recipient copy, you have to actually send a letter requesting a 30 day extension to the Martinsburg, West Virginia Computer Center. The address is in the instructions to the form. But it’s really important that you get that separate letter in, because that’s what’s going to extend the recipient copy. One thing that is important here is, the rules do say that you can get an additional 30 days upon request. The IRS has been very stingy. You get an automatic 30 days by requesting, but to get an additional 30 days, something really catastrophic had to have happened. They’ve really been denying those routinely now. Why do we care about all of this? Well, we care because the IRS cares. For years, probably a decade, they’ve been saying they’re going to start actively auditing this area.
Laurie Hatten-Boyd:
It just didn’t really happen until the last probably year to 18 months. Before that, they did conduct audits of this, but it was really focused on financial institutions who were making huge volumes of interest and dividend payments offshore. Now they are actively engaged in audits of nonfinancial entities looking at the accounts payable, just the routine vendor type payments. They’ve trained over 3000 examiners. They now have territories across the country that are all supported by this New York group in the financial payments practice within LBNI. Those are the auditors that have been auditing this space since 2001 when this regime was developed but focused on the financial institutions. But they’re there as the resource to all of these examiners across the country now. They’re really looking at this. One thing that’s important to know, the examiners when they’re doing a normal audit of the 1120, for example, they’re actually required now to pen their name to the manager report to say that yes, in fact they did look at the 1042.
Laurie Hatten-Boyd:
We’re seeing standalone 1042 audits, but we’re also seeing them as an add-on to the normal tax return audit that’s happening. As I mentioned here, we’re seeing a large uptick in the accounts payable exams. This is just in the last 12 to 18 months. Now we’re just going to go in what exactly are we looking at in this type of payment? I had mentioned this FDAP income fixed, determinable, annual or periodical income. It’s really all income that you’re paying that’s US source other than gained from the sale of property, market discount or option premiums. There is one exclusion to the exclusion. If you sell an IP right and the sales price is contingent on future use, that, even though it was actually a sale, each of those payments that are made is going to be treated as a royalty. If the IP right is used in the United States, that would be a US source royalty and that would be included. Normally, your payments for goods and products and supplies are not going to be included in the types of payments you’re looking at in accounts payable.
Laurie Hatten-Boyd:
But we would be looking for services and royalties when you … Software acquisitions, if it’s treated as a service or a royalty, that of course is going to be captured and you’re going to need to be able to determine the source to see if you’re going to be needing to comply with these rules. Then the source of the payment, as I said, as a withholding agent, it’s your responsibility to determine the source. The regulations provide that if you can’t make a reasonable determination of the source of the payment, you have to presume that it’s US source. I’ve got an example here where a US company contracts with a foreign company to perform services for it. It’s an upfront payment in this example and the services at that time we don’t know where those services are going to be performed. The presumption rules are going to require that you treat the entire upfront payment as a US source service, and would have to withhold accordingly. I had mentioned earlier that documentation is really the key, the cornerstone to 1441 withholding.
Laurie Hatten-Boyd:
Your documentation is going to help you to determine are you paying a US person or a non-US person. Is the person you’re paying the payee or the beneficial owner. The distinction would be, if you’re making a payment to a non-US floater entity, like a partnership or a grantor or a simple trust, they are a payee, not the beneficial owner. The underlying partners or beneficiaries or grantor would be the beneficial owner. That the documentation will be the key to that. It’s going to let you know if you’re making that payment to the beneficial owner, are they an individual, are they a corporation, which is going to make a big difference in certain circumstances depending on the type of payment. Then of course, if you can reduce the rate of withholding, either under an internal revenue code section or under an income tax treaty, that those claims would be made on the W-8 forms. Then finally, and we’ll talk about this a lot as we go through this, if you don’t have that documentation at the time you make the payment, there’s mandatory presumption rules.
Laurie Hatten-Boyd:
Again, they were purposely designed so that the maximum amount of withholding would be required to be imposed.
Ernie Humphrey:
All right. Thank you very much, Laurie. Let’s go ahead and launch our next polling question. Asking you to share with us the main types of tax forms you’re required to submit. W-9, W-8BEN, W-8BEN-E, or none as we are located outside of the US? Just real quick, a few quick hitters as we have the polling question up. Could you give us a little bit more color on what you mean by non-US person? Someone’s asking that, hopefully that will be a quick hitter for you.
Laurie Hatten-Boyd:
Yeah, absolutely. A US person is going to be, if they’re an individual, they’re a citizen or a resident of the United States. If they are a corporation or a partnership, they’re organized in the United States. Then a non-US person by default is any person that’s not a US person. An individual that is a resident outside the United States absent … A US citizen would still be a US person regardless of whether they live outside the US. Then any entities organized outside the US would be non-US.
Ernie Humphrey:
Great. Thank you very much. Perfect. Let’s go ahead and leave the polling question up for just a few seconds in order to be mindful of our time. Then we’ll take a quick peek and then we’ll let Laurie dive back in to talk about the types of NRA documentation. Let’s go ahead and close the polling question. Anything stick out to you here? Or really I guess it depends on the audience demographic. But I think that’s-
Laurie Hatten-Boyd:
Yeah. It looks like the vast majority of the payments are made to US persons and we’ve got some non-US persons, and so this makes sense. Again, to your point, Ernie, it’s going to hinge on the type of audience and what type of payments they’re making. Here I’m just going to go through and briefly describe the different types of W-8 forms that there are or forms that you would get from non-US person. First the W-8BEN, that would be provided by a non-US individual who is the beneficial owner of the income. It’s the way that they are able to certify that they’re not US and also to claim a treaty benefit if they’re entitled to one. The W-8BEN-E is the exact same thing, except for an entity that’s a beneficial owner. For a non-US corporation for example. Again they’re certifying their non-US status and able to claim a treaty benefit on that form. The W-8ECI stands for effectively connected income. That would be a non-US person that is certifying that they’re not US, but the income is effectively connected to a US trader business.
Laurie Hatten-Boyd:
What that means, if a non-US person has a US trader business, they’re taxed just like you and I as opposed to the gross basis taxation. They’re taxed at the graduated rates, they get deductions and whatnot. This is just the form they would provide for that. A W-8EXP, I would not expect to see these in a normal accounts payable world. This is from a non-US government or a non-US tax exempt entity and they’re claiming an exception under the code. A W-8IMY, this is from a non-US person that is not the beneficial owner. They’re claiming they’re not US, but they’re saying, “The income is not mine. I’m acting on behalf of someone else as an intermediary or an agent. Or I’m a non-US partnership, I’m receiving this income on behalf of my partners.” All of these forms as a withholding agent, you get the form, you validate it and then you just keep it in your files for an audit if you’re audited to support whatever withholding or reporting that you did. The oddball form here is the 8233. This is a form for an individual, a non-US individual, that has performed independent personal services.
Laurie Hatten-Boyd:
So an independent contractor. They’re using this form to claim treaty benefits. This form is unique in that, one, it requires a US TIN for a non-US person that’s not an individual performing services, two, be entitled to a treaty rate. They can actually use their non-US TIN. They don’t need to go get a US TIN to claim that treaty benefit. That here, this is an individual that has come here to perform services in the United States. The withholding agent actually has to validate the form, send a copy to the IRS, wait five days. If you don’t hear from the IRS, then you can make the payment at the zero rate of withholding that they’ve claimed on that form. That’s just one that’s a little bit unique and it’s only good for one year at a time. You would have to get one every single year. The other forms, with the exception of the IMY that’s valid indefinitely absent to changes in circumstance, they’re valid for the year signed plus the three full calendar years after that. Again, that 8233 is the oddball.
Laurie Hatten-Boyd:
That’s what we’ve all talked about. We start with the 30% mandatory rate of withholding, the statutory rate. If you’ve got documentation to support a lower rate, then that’s what you would do. If you don’t have the form, as I said, you would apply the presumption rules. The presumption rules are mandatory where you don’t have documentation. It’s going to help you determine if you’re treating the payee as an individual or as a corporation and whether you’re going to have to treat them as US or non-US. Then you would withhold and report in accordance with the presumption rules. The only time you wouldn’t do that is if your actual knowledge is actually going to result in a higher rate of withholding or reporting that wouldn’t otherwise be there. Which is very rare, because as I had mentioned, these are purposefully designed to make sure that the maximum amount of withholding and reporting is imposed. There, I just wrapped up an overview of this regime. Now I’m going to go into some hot topics or some persistent documentation issues that we just continue to see.
Ernie Humphrey:
All right. Let’s go ahead and let me jump in here and let’s do a real quick level set here. Get our audience to share with us how they calculate withholding so we can get essentially the technology landscape and maybe we can add some context around that. But I’m sure Anand will address that in great detail later and share with us how this world is really changing and it’s really much easier and much more efficient. Maybe you use manually a spreadsheet, maybe you have a home grown tool, maybe have a complete AP automation tool, or you just don’t do that or you might feel it’s not applicable for your business. Again, everyone interested in receiving CPE credits, you’ll have to answer all our polling questions here today. Of course, we appreciate everyone’s consideration in answering all of our polling questions. In order to be mindful of our time, I’ll go ahead and leave the polling question up for a few more seconds and then we’ll get Laurie’s take on the results. Then we’ll let Laurie dive into some W-9 misconceptions. Let’s go ahead and give you a couple more seconds.
Ernie Humphrey:
All right, let’s go ahead and let’s take a quick peek. Again, it depends on the demographics of audience. But just from what you’re seeing with your clients, Laurie, is there any big surprise here about what you expected?
Laurie Hatten-Boyd:
Yeah. No, I think this is right. Again, to your point, Ernie, that it’s really going to hinge on the type of withholding agents that we’re looking at. The number of cross border payments are very small, yes, I would expect to see just a spreadsheet being used. For someone that may be in the tech industry that are paying a lot of royalties, for example, to non-US persons, then I would expect some type of automated tool. That’s kind of reflects that.
Ernie Humphrey:
Yeah, right. I think I’d kind of dovetail on this which you mentioned, which was fantastic. But people need to understand, if you’re doing it manually, when you start going across borders, this can get really complicated really quickly. Let’s go ahead and get back to your compelling content and let’s talk about some W-9 misconceptions.
Laurie Hatten-Boyd:
Yeah. First of all, the W-9, some common misconceptions that we see. Per the regulations, a W-9 must have a name, a tax ID, it needs to be signed and it needs to be dated. We see a lot of problems where people are saying, they’re invalidating the form because the entity status wasn’t completed. Well, that should not invalidate the form. However, if the field is completed, you want to review it for consistency. You want to make sure that it’s consistent with the type of entity that they’re claiming, and also consistent with any exemption statuses that they claim. For example, if they claim they’re an exempt recipient, which would mean not subject to 1099 reporting because they’re a corporation, you want to make sure they checked corporation on the form and not partnership, for example. Oftentimes people think they need to invalidate a W-9 because it doesn’t have a US address. That’s not right. We don’t care with US persons. Again, we’re taxed on our worldwide income regardless of where we live.
Laurie Hatten-Boyd:
We don’t care about an address outside the United States. That’s not going to matter. Then this date stamping. This is an interesting issue. As I said, the treasury regulations require the person completing the form to date the form. The W-8 instructions say that if a withholding agent receives a W-8 that has not been dated, that they may date stamp it on the date that they receive it. We don’t have that same consideration for a W-9 form. It needs to be dated by the persons that’s completing the form. On the W-8 form, some of the common misconceptions. For the country on line two, we would expect it to generally be a non-US country, but there are some exceptions. That would be if the chapter 3 status is a trust or an international organization. An international organization could be treated as non-US but have a US address. That would be fine in that case. Then a trust. Whether a trust … They have some different rules regarding how one is treated and it’s a controlled and court taxed. A US formation country would be acceptable for a trust.
Laurie Hatten-Boyd:
The next two are whether the chapter 3 status and the chapter 4 status are always required, and they’re not. The regulations say that you complete the form for the transaction. If somebody is providing a W-8BEN-E for example to a bank outside the United States to certify their non-US status and there’s no US source income, chapter 3 status is not required. Then more important for you as people that are looking at this compliance with accounts payable, the chapter 4 status, that’s the FATCA status. That’s not necessary because a routine accounts payable payment is not a withholdable payment for FATCA purposes. A chapter 4 status is not required on the routine accounts payable payments. Then also, whether the permanent residence address has a PO Box, the instructions and the form itself actually says it shouldn’t be a PO Box. However, there is a Notice 2001-4 that says, if the withholding agent doesn’t know or have reason to know that the person is US or that a street address is available, a PO Box is fine.
Laurie Hatten-Boyd:
I actually worked with Chief Counsel’s Office at the IRS when this notice was issued. The reason was, many people came in and said for example, “Saudi Arabia doesn’t have physical addresses or we’ve got rural routes in Canada where they use PO Boxes as opposed to physical addresses.” This concession was for those types of circumstances. Obviously if it’s Paris, France, we know they have addresses and so you would expect that. That if it’s something where you just don’t know that they would have a physical address, the PO Box would be fine. All US addresses must be cured. That is a common misconception. Normally, yes, that’s right. On a W-8ECI, that’s again, they’re claiming that the income’s effectively connected with the trader business. You would expect them then to have a US address. Then the W-8IMY. The due diligence rules for the tax forms and when you need to cure a US address, which usually means you have to go get organizational documents or a reasonable explanation in writing as to why they have a US address, it only applies to beneficial owner withholding certificates.
Laurie Hatten-Boyd:
Because a W-8IMY, they’re certifying, I’m not the beneficial owner, we don’t care if that form has a US address. That is fine. Then another misconception is that, affidavits cure everything. Unlike a W-9, if you don’t have that tax ID file on file when you make that payment, you can’t cure it after the fact. You were just supposed to impose backup withholding, and if you didn’t, you’re liable. On the W-8 side, the payments to non-US persons, you can actually get what’s called a retroactive W-8 form after the fact. That is just the IRS form with an affidavit at the bottom where they’re certifying that the information on the form was true and correct back at the time they made the payments. The IRS came out with regulations in 2014 that required additional documentation. If that retroactive affidavit is obtained more than a year after the time that you made the payment, then you would also need to get documentary evidence to support the claims that they’re making. Then the W-8ECI is always provided for effectively connected income. That’s not true. If the non-US person is investing in a partnership, the W-8ECI is not necessary.
Laurie Hatten-Boyd:
I’m going to speed up a little bit here in the interest of time because these forms have been out for a while, but you always need to be using the latest version of the form. The current forms were released in June and July of 2017. They needed to be used by January or February of 2018. There’s some transition rules where you basically get six months before you need to start using the new form. The one thing that is important to note is, when you’re looking at these dates, it’s the date that you’re receiving the form. The acceptance date, not the signature date. A lot of people will fill forms out and post them up on their website, and when you need it, they’ll direct you over there. It’s the date that you received it. If they’ve got an old version of the form up there, you could not accept it now. You would have to make sure that they gave you a new form on the most recent version. I think we’ve covered all of this.
Laurie Hatten-Boyd:
On the underlying forms, if you receive a W-8IMY and the underlying forms, when you’re looking at the acceptance date, so let’s say you had a non-US partnership and the partners gave the forms, it’s the date they gave them to the partnership. Unless it’s obvious from the date that they couldn’t have been presented within that six month period, you’re fine to accept them. Well, and one last thing with these misconceptions is the withholding statement. The withholding statement is the form that’s associated with the W-8IMY. It’s how the withholding agent is able to allocate the payment it’s making to all of the underlying owners. Again, let’s go back to our non-US partnership example. It’s how you know to allocate the payment to each of the partners that you’re getting documentation for. Under the regulations, there’s like 15 fields that are required on a withholding statement. In all the years I’ve been doing this, I’ve never seen a valid withholding statement. Nobody ever has all of those fields.
Laurie Hatten-Boyd:
The industry complained to the IRS saying, “I’m getting all these underlying W-9BEN’s and BEN-E’s and I have all the information I need to report on those forms. Why do I have to treat this withholding statement invalid if I’ve got everything I need to properly withhold and report?” The IRS said, “Okay, fine. We’ll allow you to have this simplified withholding statement as long as there is an affidavit on that form that says that the person providing it, the non-US partnership, has validated the forms and there’s nothing in their files that conflict with the information.” If we go to the next slide, you can see there’s an example here of what that would look like, that blue language at the bottom. You can see this withholding statement is very limited, just the name of the underlying owner, their address, their allocation information. Everything else you could get from the tax forms that are provided. But you’ve got to have this affidavit on the bottom where they’re certifying that there’s nothing in their files that conflict.
Laurie Hatten-Boyd:
Then you could accept this alternative withholding statement. Then finally, before we move into exam, we talked about this several times now. If you don’t have documentation when you make the payment or it’s invalid for some reason once you went through your validation process, you must apply the presumption rules. If the payment is to an individual, as long as it’s not an offshore payment, so any US withholding agent that’s making a payment to an individual, the presumption is going to be that that payee is US. Which would mean 24% backup withholding. Again, you would apply that unless your actual knowledge resulted in higher withholding. If I actually knew they were non-US, then I would go with my actual knowledge because 30% withholding under the 1441 regime is higher than the backup withholding. For entities, it’s a little bit different. You’re going to be looking for indicia. Whether there’s US indicia or a foreign indicia. Again, then your actual knowledge is only going to trump the presumption rule if it’s going to result in a higher rate of withholding.
Laurie Hatten-Boyd:
The key to all this, is make sure you have the documentation because the presumption rules are extremely complicated. You just don’t want to have to be going through that process when you can just get the documentation. Now I’m just going to talk about the IRS 1042 audit initiative. I’ve got a link here that you can go. They’ve updated the Internal Revenue Manual. That’s the instructions for the IRS examiners about how to conduct an audit. I can tell you from my experience, they’re pretty much going by the book. If you read through that IRM, you’re going to have a great idea of what they’re going to be looking for and the types of questions they’re going to be asking you. They specifically listed these industries here as the ones that they’re focused on. We are seeing this. We’re seeing in particular the high tech industry. We’ve seen a lot of IDRs in this area. That is definitely one that they’re focused on. Historically these audits had been very much forms driven. It was really just a validation of your W-8’s and your W-9’s. We’re seeing them go far beyond that.
Laurie Hatten-Boyd:
Where they’re really looking for what are your policies and procedures. We want to look at them. They’re looking at reconciling the 1042 to the 1042-S, and in particular looking at the code you’re using. Historically, on exams, I never saw the IRS impose penalties. As long as the income and the tax withheld on the 1042-S was correct, we just never saw penalties. But now where there’s incorrect codes, incorrect exemption codes, wrong Boxes used, we’re seeing them impose the penalties. The penalties are now $270 per form. So $540 per payee that you made the payment to that you were reporting. Because we’ve got the recipient copy and the IRS copy. Those penalties add up very quickly. We’ve just got some areas here to focus. Of course for you it’s really the accounts payable. You want to go through and just make sure you’re capturing all the correct payments so that you’re withholding correctly. One thing to know, and don’t be surprised, it surprised me for a long time, but to expect it. When the IRS is examining, if you’ve got a lot of payments, if your volume is really big to non-US persons, they’re going to sample.
Laurie Hatten-Boyd:
Unfortunately, which I think is just patently unfair, but they do it, they subtract out everything from the population where you impose the 30% withholding. It doesn’t seem right to me, it seems like a got you because they’re only focused on where there might be some money and not where you did the right thing. But that is their stance and there’s been a lot of pushback and they’re still sticking with it. If you have a very small volume, expect them to look at everything. Otherwise, they’re going to take a sample, they’re going to exclude the 30%, and usually they’ll exclude the low dollar payments. One bit of good news with all this. I had talked a little bit ago about, that you can get retroactive W-8 forms. You’re not going to get a lot of claim in an audit. But if the IRS finds that you don’t have documentation or invalid documentation, you’ll usually get about 60 days to be able to go get that documentation to support the rate of withholding that you imposed.
Laurie Hatten-Boyd:
Previously, the IRS would calculate the underwithholding in the sample, extrapolate it across the population, and then subtract out the cures. They actually were extrapolating something that you were able to cure, that liability across the whole population. They have changed that now. Now if you’re able to get the curative documentation within that 60 day period, they’ll actually then subtract it out of the liability before they extrapolate across the population. Which can make a significant difference in the overall tax liability. Preparing for audit, what should you do? First, make sure you’ve got policies and procedures. Make sure you’ve got written policies and procedures that you can show them. They’re going to be interviewing your personnel. Make sure that you have coached your personnel and make sure you limit who they’re going to talk to. You don’t want them to just be able to be going through the organization talking to anybody they want to. You want to have that very, very much controlled. Proving the negative, they’ve been spending a lot of time revealing the businesses that they’re about to examine.
Laurie Hatten-Boyd:
They’re reading all of the information on the websites. They’re really trying to understand the business before they go in there. Just be prepared for that. They’re also looking at any Form 5471 that’s filed. A lot of that might be non-US source income, but that’s kind of their starting point on some of the payments that you’re making to related parties. They’re very focused on that. Then I had also talked about this, they’re very, very focused on the reconciliations. Make sure that the forms 1042-S that you’re filing match up with the income and the tax withheld on the 1042 that you filed. Because again, this is very focused. They’re very focused on this space. Ask for draft IDRs. You want to know what they’re going to ask so that you can be clear on the ask. Because you’re able to negotiate some of this stuff to get clarity. Also, make sure if you need additional time, you want to ask for it before they issue that IDR. Because once they issue the IDR and have a timeframe in there, they’re going to stick to it. That’s because their management is going to be on them for that.
Laurie Hatten-Boyd:
For them to go back to their management and ask for extension causes them a lot of internal problems. If it’s a busy season for you, if your business is cyclical and they actually come in when everybody in the tax department is just overwhelmed, make sure they know that upfront. Because they’ll work with you on that and they’ll give you more time in the IDR. But they need to know about it before they actually issue the IDR. Make sure that you talk to them if they are going to sample because you’ve got a vast volume of payments. Make sure you talk to them about the sampling that everybody’s on board with what the sample is going to be. Then the key here, be prepared. You can conduct annual health checks yourself. Go pull a sample of payments, go look at the documentation you have, make sure it supports the rate of withholding, and then tie it out to the reporting. Make sure you use the proper codes, the proper income withholding. Make sure all of that is taken care of.
Laurie Hatten-Boyd:
Because again, as I said, the cross border payments to non-US people, you can fix these things. You can amend returns and you can go get retroactive tax documentation. So really important to know where you stand before you’re sitting in that opening meeting, talking with the examiners. Then just very briefly, I’ve talked about most of this, about knowing where you stand before audit. But another thing, if you get to a point where you’ve gone through this exercise, you’ve done a health check, you’ve obtained all the retroactive documentation that you possibly can and you just find yourself with an underwithholding … Perhaps you made payments to people that were not resident in treaty countries and you didn’t withhold the 30%, consider a voluntary disclosure. The IRS is very open to these. They don’t have a formal process in place or a formal program, but they do have a process in place. They’re very agreeable to this.
Laurie Hatten-Boyd:
I can tell you, I’ve never seen them impose the penalties where you’re coming in voluntarily to say, “Yeah, I’ve been reviewing my compliance. I see some problems. I’ve fixed it, but I’d like to amend my tax return and pay this tax.” I think it’s something to consider if you’re going through this process. As opposed to, oftentimes we’ll see people just have a reserve booked because they know that liability. You need to know, one of the very first IDRs they’re going to ask is, “Have you booked a reserve for underwithholding liability?” It’s just kind of the smoking gun when you have to come back to them and say, “Yes, in fact I have.” Important to know that there is that avenue if you find yourself in a situation where you just can’t remediate some past mistakes. I think that’s it. I’m going to turn it back to you, Ernie.
Ernie Humphrey:
Thank you so much, Laurie, for your compelling content. I know that was a lot. The good news is, that we’ll be recording the webinar and we have some very in depth questions that I don’t think many of these are quick hitters. We’ll do our best to follow up with each and every one of you after the webinar. Now it’s my pleasure to turn the floor over to Anand Misra who will talk about future proofing financial operations. Really how far we’ve come and where we’re going to ensure compliance leveraging technology. Anand, the floor is yours my friend.
Anand Misra:
Thanks Arnie and thanks Laurie for the comprehensive and detailed presentation and [inaudible 00:40:13] on the global payments taxes and its implications. As Ernie mentioned in the beginning, my name is Anand Misra and I’m the Director of Product Marketing here at Tipalti. Before we move to the Q&A section, I wanted to provide an overview of what Tipalti’s take on taxes. This is not meant as a tax advice or anything, it’s just how we manage in the system itself. What Tipalti does is, Tipalti is working with KPMG to solve the complex and highly manual process of collecting tax information through digital capture directly during the onboarding flow. What this does is, it ensures that information is validated before a payment is ever processed. If you look at the results of the polling question number three, a majority were calculating or withholding the taxes manually. Which is generally fraught with risks. We mitigate that by acquiring all the payees or suppliers to fill out tax forms or provide their VAT or local tax ID as a part of [inaudible 00:41:13] on the Tipalti portal.
Anand Misra:
What this does is, it helps you rest easy knowing that your payables or AP operation is always up to date with the latest tax laws in many cases. We have a guided tax form, a wizard actually, that helps suppliers of US payers choose the correct tax form based on the country and the business structure. Once the correct tax form is selected, Tipalti digitizes the tax form documents and applies 1,000 plus rules including TIN matching to ensure that proper data has been provided. At the year end, Tipalti generates the 1099 and 1042-S tax reports and calculates any necessary withholdings. For non-US payers, local and VAT tax ID collection is available. For European countries, Tipalti also provides supporting documents and collections of those so that suppliers can provide additional information when needed. Self billing invoice [inaudible 00:42:14], where suppliers must approve invoices before payments can be processed in many countries. Moving onto the next slide. Here’s a quick overview of the Tipalti solution. Tipalti provides an end to end solution to manage the entire supplier payments operations, not just a piece of it.
Anand Misra:
It starts with our white label supplier management that is essentially built to make onboarding easy. We kind of capture all the payment data, we validated over 26,000 plus rules and we screen suppliers against lists such as OFAC, AML, et cetera. The suppliers provide the tax forms, the tax IDs, as I mentioned earlier in our system. It vets and validates to ensure legitimacy and accuracy. If you do invoice processing, we have an OCR technology that cuts the manual re-keying of invoice details from the process. We also have a two and three-way PO [inaudible 00:43:14] if that’s something that you need, and with advanced approvals and routing capabilities built into the system. We provide cross border payments across 190 countries in 120 currencies in six different payment methods. What you can do is, centrally manage accounts payable across multiple brands, subsidiaries or entities and geographies, and with automatic reconciliation with several of your ERP systems for quick closing of the books.
Anand Misra:
The NetNow piece is basically our built in early payment automation solution. What that does is, with NetNow solution, you can pay your suppliers earlier without adding to your workload or impacting your working capital as such. That’s a quick view of Tipalti’s platform. We have hundreds of customers from fast growing startups to established companies across various industries that benefit from our solution. We have many, many resources dedicated to get our customers up and running quickly, and to assist them as they encounter new needs as they grow their business globally. The ongoing support that our customers receive and the breadth of our offering is why we have a 98% customer satisfaction rate. As we scale and grow with our customers as they grow globally as such. With that, I will hand it back to Ernie for the Q&A section.
Ernie Humphrey:
Thank you very much, Anand, and thank you so much for giving us an overview. The technology piece of this is absolutely mind-blowing to me. I’m sure we’ve got a lot of questions that we’ll get into here and we’ll save some for after the webinar as well. I just want to remind everyone we can still take your questions in the questions area of your GoToWebinar control panel. Again, we are going to do our best to get to your questions. If not, we’ll follow up with you directly. A real quick question. Laurie, I don’t know if this is a general thing you can answer, but just some questions around when a wet signature is required as opposed to a digital signature, particularly in a W-8 versus a W-9 form. Is there any general guidance you could give us there?
Laurie Hatten-Boyd:
Yeah. Any electronic signature is fine as long as it meets the E-Sign Act. One thing that’s important, there was a regulation change that just recently happened that said, if you have an electronic system and you’re providing the forms to another person … Let’s say, again going back to my example of the non-US partnership. Let’s say that non-US partnership has an electronic W-8 system and they’re getting W-8’s with electronic signatures. That the signature line needs to indicate just by looking at it, that it was an electronic signature. Electronically signed by or something like that. As opposed to just the type signature. Because you’re providing those forms to somebody else who doesn’t have any relationship with that system. If it doesn’t, then you’re going to have to give a certification that your system meets the requirements of the IRS. But as far as meeting the E-Sign Act, what the IRS wants is to make sure that when the signature is being provided, that the person understand that they’re signing this tax form. Oftentimes we see something like, “By typing my name and hitting submit, I acknowledge that I’m signing this tax form under penalties of perjury.”
Laurie Hatten-Boyd:
What the IRS is looking for is, they don’t want the person signing the form to ever be able to have an argument to say, “When I did that, I had no idea I was signing this tax form.” That’s usually the types of things we see to meet the requirements of the E-Sign Act.
Ernie Humphrey:
Thank you very much, Laurie. Let me go ahead and ask the next question to Anand. This kind of gets in my wheel house as a treasury professional from my past life. In my experience, a tax compliance and payments processes were managed in complete silos. From your solution, it looks like there might be tremendous benefits to having those aligned. How are you getting companies to look at this as the overall process and make this streamlined so that the tax compliance is part of that payments process? What role is technology playing here? (silence)
Ernie Humphrey:
Anand, are you there with us?
Anand Misra:
Can you here me, Ernie?
Ernie Humphrey:
Yeah, I can hear you. All right. Let me get back in there. I think I had a little technical issue there. Anand, can you share with us how you’re motivating companies to really look at this entire process of payments and tax compliance in the same vein instead of looking at these in silos and the role that technology can play there?
Anand Misra:
Yeah. I mean, can you hear me, Ernie, now?
Ernie Humphrey:
Yeah, I can hear you.
Anand Misra:
Because I was responding to the previous question? Sorry about that.
Ernie Humphrey:
That’s okay.
Anand Misra:
I was actually not on mute. That is a technology problem. To your previous question, what we do is, like I mentioned earlier, it’s a part of our onboarding process. We try to collect all the forms, the W-9’s and W-8’s and all the forms that are there and as prescribed by KPMG upfront, so that our suppliers and payers are basically in compliance when it comes to that. Then I mentioned earlier, we do all the withholdings with 1099s and 1042-S and provide the withholdings at the end of the year. We don’t provide, again, tax advice, but we ensure that we are compliant with the system as it relates to the payments that go out to the system itself. From that perspective, not only do we kind of provide that information, but we also collect the documentation at our end so it is available for review and analysis towards the end as well.
Ernie Humphrey:
Okay. Just a quick followup. How do you ensure that the information that you showed on the tax side is up to date? You said you work with KPMG, but how is that data getting pushed in there? Can you just touch on that just a little bit?
Anand Misra:
Yeah. We have actually a team that separately works on this, keeping it updated on a regular basis. They are kind of tasked with monitoring all the changes that happen with the IRS, et cetera. Then on occasion, I think works with KPMG to validate what we are doing is the right way of doing it. It’s a team that is dedicated to updating it. Because we are a software company primarily and we are able to update this quickly and pass it on to our basically customers to do that.
Ernie Humphrey:
Great. That’s just one thing that I’m really excited about the technology. Is that, a lot of this technology is being built to serve the accounting and treasury and finance profession. It’s really exciting for me as a former practitioner. Laurie, let me go ahead and direct the next question to you. Someone’s asking if they can process a payment to non-US persons with no withholding certificate as long as they withhold 30%.
Laurie Hatten-Boyd:
Yes, that’s right. If you don’t have tax documentation and you’re making a payment of us source FDAP income to a non-US person and you impose the 30% withholding, then you have satisfied your responsibilities as a withholding agent. Yes.
Ernie Humphrey:
Okay. Thank you so much. All right. Someone’s asking, Laurie, go ahead and I’ll put this your way. If you have a W-8 documentation on file for all the foreign vendors, does it mean a 1042 is not needed and if not, when would you give them advice to use the Form 1042?
Laurie Hatten-Boyd:
Yeah. If you’ve got the W-8 forms for your payments to your non-US vendors and you’re making payments of US source FDAP income … Let’s say they’re coming to the US and performing services for you and you’re making those payments. You would have the W-9 to see if you could reduce the rate of withholding under a treaty. You would always have reporting. Let’s say it’s exempt under the treaty, that doesn’t exempt you from reporting. There is always reporting if you make a US source FDAP payment to a non-US person. You would be reporting on the 1042-S the information return, a copy goes to the IRS and a copy goes to your non-US vendor. Then the 1042 is actually the tax return. You would always file that even if there’s no tax liability because the tax documentation supported a zero rate of withholding. You would still just show that there’s no tax liability, you’d show the gross income. But there would always be the 1042, the tax return and the 1042-S reporting.
Ernie Humphrey:
Great. Thank you so much. Anand, I’ll go ahead and direct the next question your way. Are you seeing any industries in particular where there is more of a technology adoption? Then specifically the adoption of the approach to look at that payables process from end to end, including the tax and the risk compliance. Where are you seeing traction and where do you think there’s really low hanging fruit for people where they can really take control of risks that they don’t know where they are and really save themselves a lot of headaches?
Anand Misra:
Sorry, I was on mute there. We are seeing … I mean if you look at industry, I mean, Tipalti is basically industry agnostic. So we serve cross-functional industries. But if you see adoption wise, I think it’s more on the software and the IT side that we see a lot more adoption and awareness of what needs to be done on automation from the tax perspective. But from the perspective of low hanging fruit, I think most of the customers that we have use this particular capability as it’s built in. We get testimonials from customers, not only from the benefits that we provide in terms of payments and automation, but from protecting them from risk basically. Not just tax, but fraud and other kinds of risks that are built into the system, the OFAC checks, the AML compliance, et cetera, that is built in. That [inaudible 00:53:17] the service that we provide and customers love it and welcome it basically.
Ernie Humphrey:
Thank you so much. Laurie, let me ask you a few more questions then we’ll wrap things up for the Q&A session. Laurie, another question for you. If someone’s paying products to a company in a non treaty country, do they need to withhold and how much?
Laurie Hatten-Boyd:
Yeah. If it’s purchase of good, hardware or supplies, that would be excluded from the definition of FDAP income. There would be no withholding, no reporting required and no tax documentation required. That said, I still think it’s best practice when you’re onboarding a vendor, because you never know when there’s going to be associated services. Let’s say you buy hardware, it may be a lump sum. This is actually something that the IRS is very focused on, on audit. They look for the large hardware acquisitions, and oftentimes it’s just a lump sum. But built in with that hardware purchase is installation, training, maintenance. Those are all services, and if they’re being performed inside the US, the IRS is going to expect you to bifurcate that. To figure out a reasonable allocation for the services versus the goods. But as long as it’s just goods, no withholding, no reporting. But if there’s any associated services, you want to make sure that you’re capturing that.
Ernie Humphrey:
Okay. Great. Last question for our Q&A session. I’m going to go ahead and launch our final polling question. I would like to get input from both of our speakers here today, a little bit different take. Laurie, if you could give us … I know this it might not be the easiest question, but a key takeaway. Three things companies can do just the best way to stay on top of tax regulations, to make sure they stay compliant and that they can sleep better at night?
Laurie Hatten-Boyd:
Yeah, sure. I do think that, as I said … There’s actually a Pub 515 that the IRS issues, and it’s one of the best publication I think that they actually issue. They keep it up to date every single year. It talks in detail about cross border payments, what’s subject to withholding, what’s subject to reporting. A great resource. But I think again, as long as you’re getting tax documentation upfront as a best practice, and again, knowing that the IRS is very focused on automating this particular area of tax compliance right now, and to do that due diligence yourself. You don’t have to engage a third party. Have somebody in your tax department actually act as if they’re the IRS. Pick a sample of payments, go look at your tax documentation, make sure it supports that withholding and all the way through to the reporting. Because again, on the cross border payments, all of that can be fixed upfront. I had mentioned that you can fix it during the exam. 60 days is not very much time.
Laurie Hatten-Boyd:
Oftentimes, you don’t have a business relationship with that person anymore, you can’t find them, you can’t find the right person to sign a form. Do this before you’re actually sitting with the IRS, because there’s a lot you can clean up on your own.
Ernie Humphrey:
Okay, great. Thank you so much. Anand, I’ll go ahead and pose the final question to you. Can you share with us a few key components of the business case for investing in technology to mitigate this risk. But also a few of the benefits to looking at this as an entire process and a advantage of leveraging technology to take control of that payments process for us?
Anand Misra:
Yeah, sure. I think one of the things that we’re seeing is that, accounts payable is a function which can easily be automated, at least 80% of it. It doesn’t need to be manual. People kind of get more time back, more resources back, finance people especially to do more strategic tasks. Then there is technology available to automate it. I don’t see any reason why folks need to do it the manual and the old fashioned way in many cases. If there is any advice that we give to people to do it, is to basically from the tax compliance, risk, fraud, et cetera, be proactive, be prepared and don’t leave it until the last minute. Basically, Laurie mentioned earlier, why care? Because IRS cares in terms of taxes. We want to provide a service to our customers to ensure that all the forms and compliance and everything is collected upfront and validated even before the payments are made. Automate, automate, automate, and then you can focus on strategic tasks. That’s how modern companies work.
Ernie Humphrey:
I think that’s fantastic, Anand. Just to dovetail a little bit. When you really start to look at accounts payable, you look at the tremendous cost savings and processing costs. Again, you’re impacting productivity, which Anand mentioned very well. Well said. Then also on that side of it, is just that you’re controlling these risks and you really can’t put too much of a price tag but you’ve got to quantify that at some point. Keeping yourself out of the paper and those penalties can be extremely large. With that, I’d like to close the Q&A session. Again, we’ll get to folks after the webinar is over to get to those longer complicated questions. First of all, I want to thank Laurie Hatten-Boyd for your tremendous content. We know you’re very busy and she’s in high demand across the world. Laurie, thank you so much. I’d also like to thank-
Laurie Hatten-Boyd:
My pleasure.
Ernie Humphrey:
… and also thank Anand for his fantastic content and insights as well. I strongly encourage everyone to take a look at the Tipalti website. They have some fantastic thought leadership resources across all areas of accounts payable and tax compliance. Finally, to you the audience, thank you so much for your valuable time. We sincerely appreciate the support of each and every one of you. Make the rest of your day great, everyone. Thank you so much.
Anand Misra:
Thanks.
