When we speak with finance and accounting teams that work with overseas suppliers and partners, one area that causes AP tax compliance issues is dealing with the convolution and complexity that is the W-8 series IRS tax form process.
W-9 forms are fairly well understood. It’s a single form for dealing with US-based entities and, while there’s a lot of information on the form, it only collects a few fields including the payee’s contact information and their Social Security Number (SSN) or Employer Identification Number (EIN). That is why Tipalti has embedded a digital W-9 version that payees can fill out as part of its payee onboarding interface.
W-8s, however, are actually a series of different forms with varied requirements. W-8BEN, W-8BEN-E, W-8EXP, W-8IMY, W-8ECI, and Form 8233 are all used by the IRS to determine the business relationship with these suppliers.
The reason the IRS has created this more complex W-8 form series is to deal with tax loopholes by US suppliers with foreign bank accounts. As such, the US enacted the FATCA (Foreign Account Tax Compliance Act) tax compliance provisions as part of the 2010 Hiring Incentives to Restore Employment (“HIRE”) Act to address tax evasion. In fact, penalties for non-compliance are a 30% withholding tax on net U.S. sourced payments. And according to Deloitte, 2016 looks to be the year when the IRS will begin auditing for FATCA non-compliance.
The key to navigating the flurry of new W-8 form requirements is ensuring that the supplier is correctly matched with the form that fits their corporate entity structure.
How Companies Deal with W-8 Tax Form Issues
Many times, companies push the responsibility on the supplier to figure out the right form, but if you’re in a different country, deciding which forms are required can be challenging. This often opens up an ad hoc dialog between the supplier and accounts payable team, which adds significant drag to getting that payee onboarded. It might even involve tax lawyers.
To make matters worse, many companies don’t collect the forms until the end of the year, meaning they have to go back to dozens or hundreds of suppliers to collect their tax forms as part of annual 1099 and 1042-S tax preparation crunch-time. Then someone has to contend with a series of emails or faxes from various parts of the world. In some situations, a company may not even work with that partner anymore, but they still have to ask a supplier for their tax information. If the relationship isn’t great because of some falling out, that can be an awkward and slow-yielding conversation.
One more point of complexity: In some situations, the payor will be obligated to withhold a portion of the payment from certain payees, just as you would an employee. Whether you must withhold taxes from the payee largely depends on what country that supplier is in and if the US has an established treaty with that country and what the withholding rates are for that country. One-offs like this become a bookkeeping nightmare (and test your knowledge of international commerce law).
If you have one or two suppliers, maybe it’s not a hardship. But if you’re dealing with hundreds or thousands of payees across various borders, the process is often very time-consuming and completely manual.
Tipalti’s FATCA-Compliant W-8 Form Capabilities, Reviewed by KPMG
If this is not your idea of fun, you’re probably not secretly vying for a position at a trade commission.
Good news though: Tipalti recently announced the first ever W-8 management solution that is fully integrated with a payments system. Tipalti’s AP tax compliance capabilities have been reviewed and approved by KPMG to help the payor ensure tax compliance with the IRS’ FATCA provisions and to help them avoid stiff tax penalties.
Tipalti has added the unique capability to guide suppliers to digitally submit the correct W-8 series tax forms, in addition to the W-9 forms and VAT ID declarations, as part of the payee onboarding process. The tax form process offers the option to walk a payee through a short questionnaire to determine what form will be required of them. In the case of W-9, W-8BEN, or W-8BEN-E, those forms can be filled in digitally with help from the Tipalti payee interface. The payee form data is then automatically validated against over 1,000 rules to ensure the payee completed it correctly. For example, Tipalti validates TIN information, such as EIN and SSN before allowing a form to be submitted.
As situations require it, Tipalti can also manage the withholding calculations and makes this deduction at the point of payment, providing a full report at the end of the year. In addition, because Tipalti is a cloud-based service, the most up-to-date forms, and withholding requirements are always provided. Tipalti manages the treaty requirements so your accounts payable and tax team doesn’t have to.
At the end of the year, because Tipalti has kept track of how much everyone is paid, the system is able to generate a report that can be used to submit to a 1099 and 1042-S processing service to record the information with the IRS and to handle mailings.
As you probably know, Tipalti is a big proponent of properly onboarding payees. Instead of waiting until the end of the year to ask payees for their tax forms, we urge everyone to take care of this step early. This robust Tipalti FATCA tax compliance capability helps to greatly simplify this process going forward.