W-8s and Foreign Withholding Requirements - Are You Behind the Eight Ball?
In the normal course of business, a law firm may make payments to foreign recipients. These payments may include litigation expenses paid on behalf of clients or payments out of an attorney trust account. Law firms that are U.S. tax residents, with custody of these funds, are accorded the responsibility and liability of a withholding agent.
What does this mean to you?
As a taxpayer making these payments, your firm may be held liable if it does not identify and obtain the required documentation. With the enactment of the Foreign Account Tax Compliance Act (“FATCA”) legislation there are new rules and new forms (W-8BEN-E), as well as changes to old forms (W-8BEN, W-8IMY and 1042 series). These new rules and changes have made the task of keeping abreast of your withholding requirements challenging, and may be overwhelming to your finance personnel.
You may want to consider bringing in some outside help to assist you in identifying issues and meeting the requirements of FATCA. A qualified service provider should:
- Obtain an understanding of your firm’s business and typical payments, thus developing an ability to identify potential problem areas;
- Educate your finance personnel on the different withholding regimes and when each may apply;
- Design compliance procedures, including requiring either a W-9 or W-8 before issuing any payments;
- Draft letters for vendors; and
- Implement controls and long-term oversight procedures.Two examples of potential problem areas for law firms include:
- Payments to foreign service providers such as professionals providing expert witness testimony and
- Payments on behalf of foreign partners and income allocations to foreign partners.
FATCA compliance is now a part of life for firms operating internationally, and liability may prove onerous. Limit your exposure to penalties by taking a good hard look at your procedures surrounding payments to foreign recipients.