Non-U.S. persons must pay U.S. tax on certain kinds of income they receive from U.S. sources. Typically, the income is taxed at a flat rate of 30%. The only exception to paying the full amount is if an income tax treaty exists between the U.S. and another country that authorizes a lower rate of tax.

Let’s take a slight digression to discuss how the United States collects this tax. For example, the non-U.S. person might decide not to pay it. What recourse does the U.S. government have if that doomsday scenario rears its ugly head? Unless the U.S. has a tax treaty with the foreign government, it has little or no leverage to collect the tax from the non-U.S. person directly. For that matter, it is unlikely that the U.S. would even attempt to do so as it would be an exercise in futility.

Indeed, the U.S. knows all too well that it would be a waste of time to dispatch law enforcement agents to all four corners of the world attempting to track down a single tax evader, who may owe only a trivial amount of tax. For this reason, the U.S. will not take on the role of a bounty hunter.

Can the U.S. enlist the foreign government in which the non-U.S. person resides as a “collections agent” to enforce its demand? Unless the U.S. has a treaty that explicitly provides for such assistance, the foreign country has absolutely no incentive to do the United States’ “dirty work” for it. Therefore, this outcome is just as unlikely.

Because the IRS has as good a chance of collecting tax directly from a non-U.S. person as it does of getting blood out of a stone, it will not even attempt the futile act of doing so.

So how is the tax collected? It is withheld at the source from payments to foreign persons. In this way, the balance of power between the foreign person and the U.S. government is reversed. Very simply, the foreign person can no longer avoid the tax.

Who is a withholding agent? 

A withholding agent is any person, U.S. or foreign, who has responsibility for withholding the required tax and paying it over to the IRS. Contrary to popular believe, a withholding agent is not just limited to a bipedal primate (i.e., human being). Withholding agents may also be corporations, partnerships, trusts, associations, or any other entity including foreign intermediaries, foreign partnerships, or U.S. branches of certain foreign banks and insurance companies.

The withholding agent will rue the day that he fails to collect and pay over the tax because the government, in its infinite wisdom, has made the agent personally liable for the tax. This explains why some withholding agents border on being obsessive compulsive when it comes to ensuring that they have performed all of their duties relating to withholding.

Of the many responsibilities associated with being a withholding agent, none is more important than obtaining a certification from the payee. The purpose of a certification is to validate a payee’s claim of foreign status. Very simply, it is a document in which the foreign person certifies – under penalty of perjury – that he is not a U.S. person.

By now you might be wondering if there is an IRS form that embodies this certification. As tax practitioners have come to expect, the IRS has a form for virtually everything and this case is no exception. Foreign persons must complete one of the forms in the Form W-8 series (e.g., W-8BEN, W-8BEN-E, W-8ECI, W-8EXP, and W-8IMY). U.S. persons have no responsibility to complete any of these forms. Instead, they must complete Form W-9, the Form W-8 counterpart.

The payee’s certification must be thorough, accurate, and complete because it determines what responsibilities the withholding agent has. For example, certification by a payee that he is a non-U.S. person triggers an obligation on the part of the withholding agent to withhold taxes. But if the payee is a U.S. person, then the payor has no responsibility to withhold any tax.

Due Diligence Requirements

Does the withholding agent have any other responsibilities above and beyond obtaining the certification and withholding the tax? Yes. The withholding agent is responsible for ensuring that the information that triggered the Form W-8 reporting requirement in the first place is complete and accurate.

Can a withholding agent reasonably rely on the information and certifications provided on the form, including the status of the beneficial owner as an individual or entity? Yes, unless the withholding agent had actual knowledge or reason to know that the information was unreliable or incorrect.

Reason to know that the information is unreliable or incorrect exists in the following circumstances:

• The withholding agent has knowledge of relevant facts or statements contained in the withholding certificate that would cause a reasonably prudent person to question the claims made; or

• The withholding agent has knowledge of documentation that would cause a reasonably prudent person to question the claims made.

Reason to know that a Form W-8 is unreliable or incorrect exists in the following circumstances:

• The Form W-8 is incomplete with respect to any item that is relevant to the claims made;

• The form contains any information that is inconsistent with the claims made;

• The form lacks information necessary to establish that the beneficial owner is entitled to a reduced rate of withholding; or

• The withholding agent has other account information that is inconsistent with the claims made.

What type of income is subject to withholding? 

Below is a list:

• Certain kinds of interest;
• Dividends;
• Rents;
• Royalties;
• Premiums;
• Annuities;
• Compensation for, or in expectation of, services performed;
• Substitute payments in a securities lending transaction; or
• Other fixed or determinable annual or periodical gains, profits, or income.

Are there any types of U.S.-source income that are not subject to foreign-person withholding?

Examples include the following:

• Broker proceeds (e.g., sales of U.S. stock and securities);
• Short-term CD (183 days or less);
• Bank deposit interest;
• Foreign source interest, dividends, rents, or royalties;
• Proceeds from a wager placed by a nonresident alien in the games of blackjack, baccarat, craps, roulette, or big-6 wheel.

However, you may still be required to submit Form W-8BEN to claim an exception from U.S.-information reporting and so-called “backup withholding” for these types of U.S.-source income.

Instructions for Payees

Form W-8BEN must be signed and dated by the beneficial owner of the income, or by an authorized representative as evidenced by a completed power of attorney. IRS Form 2848, Power of Attorney, may be used for this purpose.

How Long is the Form W-8BEN Valid?

Generally, a Form W-BEN is valid from the date signed until the last day of the third succeeding calendar year. For example, a Form W-8BEN signed on September 30, 2012 remains valid through December 31, 2015. A Form W-8BEN with a U.S. TIN remains in effect until a change in circumstance makes any information on the form incorrect, provided that the withholding agent reports on Form 1042-S at least one annual payment to the beneficial owner.

Form W-8BEN must be kept up-to-date.  If not, the foreign person may find that the payor has wrongfully withheld tax on the income. If you thought that getting a refund would be easy, you’re in for a rude awakening. Trying to disgorge wrongfully withheld amounts from the IRS is like trying to get tickets for the “Super Bowl” on the day of the big game – it is virtually impossible. Many have tried, but few have succeeded. In both cases, my guess is that those who have succeeded only did so after enduring a time-consuming, costly, and harrowing experience.