The IRS is in the process of enforcing compliance of long-standing rules requiring U.S. tax withholding on U.S.-source income payments to nonresident aliens and foreign entities (collectively, foreign persons). As a result, foreign vendors are being asked by their clients to provide them with a U.S. withholding certificate to document their foreign status for U.S. tax purposes or to request an exemption from withholding if an exemption is available.
While there is no federal or state law requiring the recipient of the payment to have a U.S. taxpayer identification number (TIN) in order to be paid, a foreign vendor must submit a U.S. withholding certificate with a U.S. TIN to claim an exemption from, or reduction in, withholding. (The rules allow an exception from the TIN requirement for a claim for exemption from withholding on U.S.-source income on publicly-traded investments.) A U.S. TIN is also required for information reporting on Form 1042-S unless an exception described in the form’s instructions applies. For example, no TIN is required if withholding was at the statutory rate.
A TIN is also required to submit a U.S. tax return, if a tax return is required. No tax return is required from a nonresident alien or foreign entity whose only income is fixed or determinable annual or periodic (FDAP) if the correct amount of tax (including a tax-treaty reduction) was withheld. A tax return is required if the income was effectively connected to the conduct of a U.S. trade or business (ECI), even if the income is treaty-exempt. ECI includes pay for services whether provided by an individual or entity. There is an exception to the filing requirement for nonresident aliens whose only income is wages not in excess of the personal exemption amount.
The type and method of applying for a U.S. TIN that a foreign vendor may obtain depends on a variety of factors.
U.S. TINs for Entities
A U.S. TIN for an entity is an employer identification number (EIN) even if the entity has no employees in the United States. An EIN is the TIN for all types of entities with a federal tax administrative requirement even if the entity is exempt from U.S. taxes.
A U.S. EIN is applied for on Form SS-4. The IRS provides the following instructions for submitting an EIN application for entities that have no principal place of business or no principal office or agency in the United States:
- By Telephone: Entities can obtain an EIN immediately by calling (267) 941-1099. An assistor takes the information, assigns the EIN, and provides the number to an authorized individual over the telephone.
- By Fax: Entities may fax the completed Form SS-4 application using the fax number (267) 941-1040. The IRS will fax the EIN within four business days if the taxpayer’s fax number is provided.
- By Mail: Entities may submit their completed SS-4 by mail to:
Internal Revenue Service
Attn: EIN International Operation
Philadelphia, PA 19255
For more information, go to www.irs.gov/businesses and click Employer ID Numbers (EINs).
U.S. TINs for Individuals
A U.S. TIN for an individual is either a U.S. Social Security Number (SSN) or an individual taxpayer identification number (ITIN). Only foreign nationals who are authorized to work in the United States under the U.S. immigration law are eligible to apply for a SSN. (A foreign national not currently authorized to work may have a SSN issued during a prior work-authorized visit to the United States.) Application for a SSN is made on a Form SS-5 submitted to a local office of the U.S. Social Security Administration.
Foreign nationals not eligible to apply for a SSN who need a U.S. TIN for a federal tax administrative purpose may submit a Form W-7 ITIN application to the IRS ITIN Unit. Foreign nationals may submit the form with their tax return or before submitting their tax return for an allowed pre-tax return reason described in the form’s instructions.
Although an individual may apply for an EIN for business purposes (such as for withholding and reporting on payments to employees or contractors), an individual may not use an EIN for administrative purposes related to their own personal federal tax obligations, such as requesting an exemption from withholding.
Exemptions from Withholding
Whether a TIN is required on a withholding certificate (e.g., W-8 series forms and Form 8233) generally depends on the type of income being paid and whether a claim for elimination of, or a reduction in, withholding is requested. The following types of claims for exemption from withholding require a U.S. TIN:
- The income is effectively connected with the conduct of a U.S. trade or business and the payer has provided a valid Form W-8ECI (identifying the income on line 9) by the entity.
- The income is exempt from tax under an income tax treaty that the United States has with the beneficial owner’s country of tax residency and the beneficial owner of the income has provided a valid Form W-8BEN with the treaty claim described on line 10.
- The recipient has a qualified intermediary agreement with the IRS to accept primary responsibility for withholding and has provided a valid Form W-8IMY with a QI-EIN relieving the payer from withholding.
- The recipient of the income is a withholding foreign partnership or a withholding foreign trust that has provided a valid Form W-8IMY with a WP-EIN or WT-EIN relieving the payer from withholding.
- The beneficial owner of compensation for personal services is a nonresident alien individual who has provided a valid Form 8233 with a claim for exemption from tax under an applicable income tax treaty provision prior to payment. (A resident alien with a treaty claim allowed under a saving clause exception must submit a Form W-9.)
- The beneficial owner of the income is a tax-exempt organization under U.S. tax rules that has provided a valid Form W-8EXP with any required supporting documentation.
No U.S. TIN is required for the following:
- The income is from foreign sources and the beneficial owner has provided a valid Form W-8BEN as a certificate of foreign status as well as evidence that the income is foreign source.
- The recipient of income is a foreign government, a government of a U.S. possession, or an eligible international organization that has submitted a valid Form W-8EXP claiming an exemption from tax under an applicable Code rule.
The instructions to the withholding certificates and IRS Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities, discuss these rules in detail.