What Exactly Is A W-8BEN-E Form, and How Does It Impact Businesses?

W-8BEN-E is an important tax document which allows businesses operating outside of the U.S. to claim tax exemption on U.S.-sourced income.  The official document title is Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting (Entities).

Under U.S. tax regulations, a mandatory amount of 30% must be withheld by any company paying a foreign entity conducting business within the U.S.  If the foreign company is based in a country which has a tax treaty with the U.S., however, it may fill out and submit a W-8BEN-E to be exempted from the 30% withholding (and other applicable American tax laws).

Foreign businesses are highly incentivized to submit a W-8BEN-E (and to do so accurately): failure to submit, or submitting an inaccurate document both mean that the foreign company must automatically pay the full 30% tax rate.  Clearly, due diligence is in order here.

Key Distinctions: W-8BEN-E Forms vs. W-8BEN Form

Another tax form which pertains to the 30% tax rate on foreign business entities is the W-8BEN form.  Here are some of the key distinctions of the W-8BEN as opposed to the W-8BEN-E.  The W-8BEN tax form, in most instances, has two primary purposes which distinguish it.  It serves to:

—Establish that an individual is a foreign person who is subject to the 30% rate on domestic income earned by foreign businesses.

—Claim that the official owner of the business providing the W-8BEN is an NRA (non-residential alien).

Another term for the W-8BEN is a certificate of foreign status.  Essentially, it serves an opposite function to the W-8BEN-E.  Whereas the W-8BEN-E form exempts a foreign entity from the 30% tax rate based on a country’s treaty status, the W-8BEN form documents a business as owing the full 30% rate, and ensures that the tax is filed as payable.

W8 Collection: Best Practices For Modern Businesses

Managing and recording the flow of a business’s outbound and inbound payments is merely one of the crucial roles of accounts payable departments and staff members.  The other major role played by AP staff revolves around the vital issue of avoiding confusion and legal risks related to sales and use tax requirements.  With tax laws and regulations constantly in flux, a business’s risk of being audited rises exponentially without keen oversight from accounts payable.

Here are a few best practices for W8 collection that conscientious companies should adopt:

—Collect all tax and identification forms digitally, whenever and wherever possible.  The hassle of manual collection contributes to inefficiencies, and the heightened risk of inaccurate data could spell legal trouble.

—The W-8BEN-E is a relatively complex document with many different sections to be filled out, each requiring exact precision under penalty of law.  Businesses should employ web-based questionnaires and other digital aids to ensure that the forms are properly filled out by payees.

—Verify tax forms and information with data automation tools.

—Leverage software that automatically tracks the latest changes and developments around tax regulations.

The Benefits Of W8 Automation

The benefits of W8 automation are many and deep.  Manual W8 collection involves a whole labyrinth of steps that are better off automated.  These include performing manual due diligence on each supplier in question to determine the proper W8 form to use, exact withholding requirements based on entity status, and ensuring accurate completion of the W8 form.

All of this can quickly snowball into an AP nightmare if businesses are negligent or unprepared for the demanding realities of W8 collection and compliance.  An automated solution for W8 collection packs the following benefits for time-strapped AP staff as tax deadlines approach:

—Dramatically cut down on wasted time and company resources, allowing both to be redistributed to productive activities.

—Automatically ensure that every W8 is filled out correctly, so there are no lingering doubts about audit risk or legal standing when tax season rolls around.

—Take advantage of cloud-based communication with suppliers, to enhance visibility and information flow.  This can assist businesses in maintaining positive supplier relations.

—Avoid payment delays resulting from inaccurate W8 forms, as well as any resultant late-payment fines and fees from the IRS.

 

—Automatically deduct the required 30% tax rate when making payments to businesses filing a W-8BEN-E with the IRS, preventing inaccurate withholdings, last-minute adjustments or error corrections.

Summing Up

Tax compliance can easily devolve into a series of escalating stresses if companies let it.  This especially holds true for W8 collection and compliance, since businesses will be collecting forms from a slew of corporate entities, each with its own unique tax and withholding requirements.

This exposes AP staff and departments to a myriad of potential errors, inefficiencies and oversights which could lead to serious repercussions with the IRS.  W8 automation offers a secure cloud-based solution to save companies time and money, and impart vital peace of mind amidst the stresses that can set in during tax season.