How FATCA Will Affect Your W-8BEN Forms

Recent regulatory changes mean the law impacts more CUs than previously thought.

July 01, 2014
KEYWORDS income , status , w-8ben
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Congress passed the Foreign Account Tax Compliance Act (FATCA) in 2010 in response to a series of U.S. tax evasion scandals. FATCA requires foreign financial institutions (FFIs) to report on their U.S. accounts to the Internal Revenue Service (IRS). Credit unions have been asking what, if any, impact the new law will have on them.

CUNA’s initial reaction was “probably none,” because U.S. credit unions aren’t FFIs. When the regulation implementing FATCA was issued in January 2013, we changed our initial response to “unlikely, but a few credit unions could be affected.” That’s because the regulation clarified that withholding agents, such as U.S. credit unions, will be required to withhold 30% on any withholdable payments made to any FFI that hasn’t agreed to report its U.S. accounts to the IRS.

But our response changed even further when the IRS issued “coordinating regulations” in March 2014. These temporary regulations, which expire Feb. 28, 2017, revise the provisions for withholding tax on nonresident aliens’ income (IRS regulations, Chapter 3) to coordinate with FATCA’s withholding requirements (Chapter 4).

As a result, the new coordinating requirements will affect all credit unions that obtain IRS Form W-8BEN (“Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding”) from their nonresident alien members.

Exactly how significantly credit unions’ procedures will be affected by the new requirements depends on the many changes still to come. The IRS plans to issue correcting amendments and clarifying guidance in the coming months. Until we have a complete final regulation with accompanying guidance, the full impact of these new rules on U.S. credit unions will be unclear.

But, for now, we can address the impact of some elements of the rules.

Effective dates

The FATCA rules include a phased-in compliance approach, with several effective dates ranging from 2014 through 2017. Most of these effective dates apply to FFIs. But the July 1, 2014, effective date applies to the new Form W-8BEN compliance requirements.

As that compliance date approached, financial institutions and withholding agents raised concerns and requested an extension because the IRS hadn’t issued the forms, instructions, and other guidance necessary to comply.

Rather than grant the extension, the IRS issued a notice in May 2014 allowing for a “transition period” until Dec. 31, 2015. During the transition period, the IRS will take into consideration the extent to which a credit union has made “good faith efforts” to comply with the new requirements before enforcing penalties.

Although no one seems to know for sure what “good faith effort” means, one IRS official has stated that “written procedures that reflect what is being implemented will be received well.”

Credit unions should make every effort to comply as soon as possible and document their efforts.

Form W-8BEN compliance

Credit unions, as withholding agents, must obtain an IRS Form W-9 “Request for Taxpayer Identification Number (TIN)” from each member, or withhold taxes. A member may inform the credit union he or she is exempt from U.S. income tax because he or she is a nonresident alien, and provide the credit union a Form W-8BEN.

The new temporary regulations make a number of changes to the Form W-8BEN procedures.

Key changes include:

♦ Period of validity. Like the current regulation, a Form W-8BEN will be valid until the last day of the third calendar year following the year in which the W-8BEN is signed or until the day that a change in circumstances makes any information on the form incorrect, whichever is earliest. The temporary regulations revise the expiration dates of certain documentary evidence for off shore accounts.

To provide transitional relief as withholding agents implement these new requirements, W-8BEN forms that were valid on Dec. 31, 2013, won’t be treated as invalid until Jan. 1, 2015, unless a change in circumstances occurs before that date.

Current regulations allow W-8BENs with a U.S. TIN to remain in effect indefinitely so long as a Form 1042-S is filed annually and there’s no change in circumstances that makes any of the information incorrect. The temporary regulations remove this general provision and replace it with 12 specific situations that allow for indefinite validity.

For example, the new rule allows indefinite validity for W-8BEN forms that do not have a current U.S residence address, a U.S. mailing address, or a U.S. telephone number as the only telephone number on the form. The other provisions address, for example, certain off shore obligations, foreign private foundations, qualified and non-qualified intermediaries, foreign trusts, and foreign partnerships.

Change in circumstances. A W-8BEN becomes invalid from the date of a change in circumstances affecting the correctness of the form.

A person is considered to have a change in circumstances only if the change affects the person’s claim of nonresident alien status. According to the new rule, a change of address to another foreign address is not a change in circumstances, but a change to a U.S. address is a change of circumstances.

Withholding agents may rely on W-8BEN forms without inquiring into possible changes of circumstances unless the agent knows or has “reason to know” circumstances have changed.

Standards of knowledge. A credit union will be considered to have “reason to know” a W-8BEN is incorrect or unreliable if a reasonably prudent person would question the claim of nonresident alien status, or under one of these four scenarios:

  1. The form is incomplete with respect to any item relevant to the claim of foreign status;
  2. The form contains any information inconsistent with the member’s claim;
  3. The credit union possesses account information, including information acquired by anti-money laundering due diligence, inconsistent with the member’s claim; or
  4. The form lacks information to establish a reduced rate of income tax.

It’s important to note that the new rules adopt FATCA’s U.S. indicia requirements for the W-8BEN, which might make sense for U.S. accounts in FFIs but might be unreasonable for foreign accounts in U.S. financial institutions. CUNA is discussing this issue with the IRS. This provision states that any U.S. indicia on the form or in account information will render the form unreliable.

U.S. indicia includes any of these five elements:

  1. A U.S. place of birth;
  2. The member being classified as a U.S. person in the credit union’s account information;
  3. A current permanent U.S. residence address or a U.S. mailing address;
  4. The member notifying the credit union of a new residence or mailing address in the U.S.; or
  5. A current U.S. telephone number and no foreign telephone number.

The rule further addresses this strict requirement by providing conditions under which U.S. indicia may be allowed.

According to the rule, a credit union may treat the member as a foreign person, regardless of U.S. indicia, so long as the member submits a valid W-8BEN; the credit union has documentary evidence establishing foreign status of the member that doesn’t contain a U.S. address; and the member provides the credit union with a reasonable written explanation supporting the claim of foreign status.

A “reasonable explanation” supporting a member’s claim of foreign status means a written statement or completed checklist from the credit union stating that the member meets one of these four requirements:

  1. The member certifies that he or she is:
    a. A student at a U.S. educational institution and holds the appropriate visa;
    b. A teacher, trainee, or intern at a U.S. educational institution, or a participant in an educational or cultural exchange visitor program, and holds the appropriate visa;
    c. A foreign individual assigned to a diplomatic post or a position in a consulate, embassy, or international organization in the U.S.; or
    d. A spouse or unmarried child under the age of 21 of one of the persons described above.
  2. The member provides information that he or she hasn’t met the “substantial presence” test;
  3. The member certifies he or she meets the “closer connection” exception for foreign students, states the country to which the member has a closer connection, and demonstrates how that closer connection has been established;
  4. With respect to a payment entitled to a reduced rate of tax under a U.S. income tax treaty, the member certifies he or she is treated as a resident of another country and isn’t treated as a U.S. resident or U.S. citizen for purposes of that income tax treaty.

If the member’s account information includes a U.S. place of birth, the credit union must have documentary evidence of foreign citizenship and either a copy of the member’s Certificate of Loss of Nationality of the U.S., a reasonable written explanation of the member’s renunciation of U.S. citizenship, or the reason the member didn’t obtain U.S. citizenship at birth.

A credit union that has documented the foreign status of a member before July 1, 2014, can continue to rely on that documentation. But if the credit union reviews documentation for a claim of foreign status that contains a U.S. place of birth, or if the credit union receives notification of a change in circumstances, then the credit union has reason to know the information is unreliable or incorrect.

Administrative clarifications

The new rules address several administrative issues credit unions have asked CUNA about in the past, such as:

♦ Mergers: A credit union that acquires accounts in a merger may rely on the transferor’s W-8BEN forms for the lesser of six months from the date of the merger or until the acquiring credit union knows the claim of nonresident alien status is incorrect or a change in circumstances occurs.

♦ Electronic transmissions: A withholding agent may rely on a W-8BEN received by fax or scanned and received electronically, such as an image embedded in an email or as a PDF attached to an email. A withholding agent can’t rely on a form received this way if the agent knows an unauthorized person sent the form. A credit union may establish other procedures to authenticate and verify a W-8BEN sent by these means and may reject any form that fails to meet the procedure’s requirements.

♦ Substitute forms: A credit union may substitute its own form instead of an official Form W-8BEN, if it’s substantially similar. The substitute form is acceptable even if it doesn’t contain all the provisions in the official form. The new rule allows a credit union to use a substitute form written in a language other than English and accept a form that’s filled out in a language other than English. But upon request from the IRS, the credit union must make available an English translation of the form and its contents.

♦ Record retention: W-8BEN forms may be retained as originals, certified copies, or a scanned document, or other means (such as microfiche) that allow reproduction of the document, so long as the credit union records its receipt and can produce a hard copy.

More guidance to come

FATCA and its related rules are confusing and complex. This article focuses on the Form W-8BEN as it relates to deposit interest income (dividends), which is exempt from nonresident alien withholding due to a regulatory provision, rather than a tax treaty. Obviously, credit unions must review their W-8BEN procedures.

Consult your tax specialist if your credit union does business with FFIs, nonfinancial foreign entities, qualifying or nonqualifying intermediaries, or flow-through entities, or if your member seeks a tax reduction due to a tax treaty.

CUNA expects the IRS to issue clarifying information in the coming months to address some of the unresolved issues, such as Substitute W-9 forms, the deposit interest exception, and the definitions of reportable and withholdable payments.

Watch CUNA’s "CompBlog" and e-Guide for new developments.

COLLEEN KELLY is CUNA’s federal compliance counsel. Contact CUNA’s compliance team at

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