Foreign Entity Payments

Effective Date:

January 1, 2015

Function:

Payment Taxation Compliance (PTC)

Contact:

Ned Gellner

Basis for Procedure

The RF ensures that payments to foreign entities are appropriately reported and taxed according to the "Foreign Account Tax Compliance Act" (FATCA) legislation.

Procedure Summary

This procedure will provide step-by-step instructions on how to evaluate and determine foreign supplier "IRS Sourcing" status and evaluate the invoice to these suppliers for taxability and/or exemption when paying foreign entities.

United States Taxpayer Identification Numbers (US TIN)

Any payment that must be reported on a tax statement at calendar year end requires a US TIN. IRS "US Source" payments that are subject to taxation and/or reporting rules require a US TIN. Excludible payments, such as IRS "Foreign Source" or goods, products or supplies, do not require a US TIN. Furthermore, under the IRS rules, if paying taxable and/or reportable activity and the supplier does not provide a US TIN, the concept of backup withholding at the highest possible tax rate can and should be exercised. In this case for NRA payments, withhold at 30%.

Procedure Steps

High level:

Identify IRS Sourcing

Step

Role or Responsibility

References or Tips

Identify all new foreign suppliers (Supplier Classification and Type of "Foreign Supplier (Companies / Organizations)"

Campus and/or central office

Early identification is important to timing to accomplish certain evaluations leading to payment of an invoice. Easy identification of payments processed - run "RF NRA Individual or Foreign Entities Report"

IF an invoice is processed against a foreign supplier and the steps below haven’t been completed the invoice will be place on hold.

Evaluate the supplier for IRS "Sourcing" rule determination and complete the RF "Supplier Initial IRS Sourcing Analysis" (PDF Fill-in) form and click the "Submit Form" button at top right to send to central office.

Campus administrators

The form has a list of items to help make this determination. Campus administrators most likely will need to request assistance from other staff or assistance of the supplier to make a correct determination.

Review RF Sourcing form received from campus administrator and send appropriate RF letter to the foreign supplier.

 

Foreign Source letter OR

U.S. Source letter

Attach RF Sourcing form and letter in AP at the supplier level

AND

Indicate the appropriate source on the supplier.

Central office AP staff and Payment Compliance Manager

 

If IRS Foreign Source – no further action required

If U.S. Source continue to the next block

Campus administrators

Foreign Source activity is not subject to U.S. Taxation or reporting rules

Payments to US Sourcing

Step

Role or Responsibility

References or Tips

When an invoice is created for foreign suppliers that are identified as IRS "US Source" in the AP system - a Hold for tax review will be placed on the invoice

Automatic -Accounts Payable System Edit

Run the "RF Invoice on Hold Report" routinely as needed during each week to find "Foreign Entity – Tax Review" Holds, central office communicates with the campus administrators and review the AP system records at both the supplier level and invoice level for documentation to determine tax and reporting status for the invoice processing.

If the supplier "Sourcing" evaluation is IRS "U.S. Source" - Complete the RF "Invoices Analysis on U.S. Source Income" (PDF Fill-in) form and click the "Submit Form" button at top right to send to central office.

Campus Administrator

RF invoice analysis form identifies payments as either "excluded" from tax and reporting or "subject to" tax and reporting rules

Attach the RF "Invoice Analysis on U.S. Source Income" form at the invoice level within the AP system

Central office

It is not unusual for multiple invoices to require separate or different treatment. Also see "Split tax and reporting invoices" section after this table

If invoice analysis shows the invoice activity is "not subject" (excluded) to tax and or reporting rules such as goods, product or supplies – review AP system record to ensure no AP "Withholding group" is present, release hold and provide specific instructions to campus administrator to process invoice

If invoice analysis shows the invoice activity is "subject to" tax and or reporting rules such as services or royalties - go to next steps

Central office

 

 

 

 

 

 

 

 

If "subject to" tax and or reporting:

The IRS form series W-8 should be collected from the entity at this time. Every effort should be made to obtain the information needed to make a clear determination, however if missing information does not make a clear determination possible, make a reasonable determination based on the facts available.

Based on the IRS W-8 form received from the supplier, central office contacts and works with campus administrator to establish a plan of action to complete invoice processing

When resolution decided central office releases hold with specific instructions on processing invoice.

Campus and / or central office

The default withholding rule is 30%, but FATCA is more about information than withholding. The plan more likely will be to continue the invoice hold and further communication with the supplier for receipt of an appropriate IRS W-8 form. If supplier insists on payment and refuses to provide an IRS W-8 series form then the default 30% must be withheld.

In order to report these payments or withhold tax a US TIN is required.

Review of IRS W-8 series forms:

Review IRS W-8 series f to determine the forms are complete and valid to the best of your ability. This includes reasonably ensuring, based upon available knowledge and the facts and circumstances surrounding the payment, that all proper form areas are completed per the IRS W-8 series form instructions and the form is signed and dated.

Split tax and reporting invoices

Exercise caution when the activity associated with an invoice is reviewed and the "Invoice Analysis on U.S. Source Income" form is completed. If a portion of the activity covered on the invoice is "excluded’ or not taxable and/or reportable but another portion is "subject to" taxation and reporting, it may be best to create separate invoices for the different taxation and reporting impacts. Procedurally you will need to make sure that taxes are only withheld against the taxable portion.

Definitions

NRA Taxation and Reporting Rules- A separate and distinct set of IRS tax and reporting rules applicable to individuals or entities that are not US Citizens (or meet IRS residency as "resident aliens") or are foreign based suppliers.

Foreign Entity- IRS term for any non U.S. individual or organization. For the purpose of the RF procedures and reports, the term foreign entity will mean entities other than "individuals" such as corporations, partnerships, or other business organizations.

IRS "Sourcing" rules- IRS critical first determination for applying NRA (NRA) taxation and Reporting Rules. IRS sourcing rules criteria are unique to each type of taxable and/or reportable payment classification. "Sourcing" for foreign entities is based upon the amount of presence or business activity the entity has in or outside the U.S.

United States Taxpayer Identification Number (US TIN)- A taxpayer identification number provided by the U.S. government and required when the RF must pay and report U.S. Source taxable and reportable payments on a year-end tax statement 1042-S. TINs consist of Social Security Numbers (SSN), Individual Taxpayer Identification Numbers (ITIN) or Employer Identification Numbers (EIN). Income deemed US source and reportable inherently ties the entity to US filing obligations and therefore the entity is required to obtain a US TIN if they do not already have one.

Excluded activity- Two general classes of invoice activity are excluded from taxation and reporting rules for foreign entity payments. The highest level of excluded activity is any payments tied to the IRS determination of "foreign source" supplier. Next level is for activity tied to purchase of goods, supplies or products and any activity tied to "ordinary course of business expenses" not deemed taxable and/or reportable income based on facts and circumstances or presumed information available.

IRS W-8 Series forms- Sister form(s) of the IRS W-9 for US Citizens or entities which solicit the official name, address, US TIN and tax status of a NRA individual or entity. There are multiple W-8 forms and all were revised in connection with the release of FATCA in 2014. The series of W-8 forms that pertain to foreign entities are the W-8BEN-E (new 2014), W-8ECI, W-8EXP and W-8IMY.

Related Information

None

Forms

RF Supplier Initial IRS Sourcing Analysis

RF Invoice Analysis on U.S. Source Income

Change History

Date

Summary of Change

January 1, 2-15

New procedure created.

 

 

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