Do you or your clients take advantage of reduced withholding rates by collecting Form W-8BEN-E from foreign vendors? If so, you should be aware of proposed changes that would require taxpayers to identify the limitation of benefits clause they meet in order to qualify for the benefit.

Before we discuss proposed changes to Form W-8BEN-E, let’s start by discussing when and why a company would benefit from it. The United States generally imposes a 30 percent withholding tax rate on most U.S. sourced payments to non-resident recipients. Foreign recipients can use a network of over 60 income tax treaties negotiated by the U.S. and its trading partners to reduce or eliminate this withholding in certain cases.  To potentially use a reduced withholding rate from a treaty, U.S. withholding agents are generally required to obtain Form W-8 (W-8BEN-E, W-BEN, W-8IMY, etc.) from their foreign payees.

One important article included in almost every U.S. treaty is the limitation on benefits, which lays out qualifying criteria. When filling out the existing Form W-8BEN-E, foreign entities navigate through a variety of clauses or “tests” to confirm they met the criteria. In the new draft version of the form, this section has been expanded, requiring taxpayers to identify which specific limitation of benefits clause they meet.

For non-public companies, the limitation of benefits articles can be complicated, making it hard to determine which clause should be used to qualify for the tax treaty benefits. While the treaty should be read closely to determine which clauses are included, typically, most private companies will qualify by relying on the derivative benefits, ownership and base erosion, or the active trade or business tests.

If the final version of Form W-8BEN-E reflects changes proposed in the draft, foreign recipients who prepare and review these forms should expect the process to take additional time. Also note that the IRS has not indicated how long certifications on the previous version of the form will be valid if the draft is finalized — so taxpayers should pay close attention to ensure all required documentation is updated timely.

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As the pendulum of internal controls swings to a more conservative approach, many middle-market companies and larger, privately held organizations are starting ask, “What about my foreign affiliates?” To be sure, many organizations that have taken a holistic approach to risk management should have identified critical business and financial risks at foreign operations, but many have ignored smaller (less financially impactful) entities.  While this may be a cost-effective approach to internal controls, it’s often these small operations that can have a significant control failure (or lack of control to begin with) that results in a material audit adjustment, FCPA violation, or other operational failure.

High-performing, well-controlled organizations establish baseline control objectives throughout the global organization — both from an entity level down to the operations (including sales offices) and from a financial and operational perspective. Smaller foreign operations shouldn’t be required to house a control suite similar to that of its parent organization.  These organizations should have certain controls and expectations to meet on a monthly, quarterly, and annual basis that ensure the integrity of financial information is maintained, operational objectives are met, and compliance requirements are upheld.

Whether entering a new foreign market or executing a control health-assessment, organizations are encouraged to understand the current state of internal controls, communicate openly with their foreign entities, and develop a defined work plan to establish a system of internal controls with recurring (not necessarily annual) assessments of the operating effectiveness of those internal controls.

Please contact Plante Moran’s International Concierge Desk at internationaloffice@plantemoran.com   for more information regarding global internal controls implementation.

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Mexico modifies transfer pricing rules: It’s all about the BEPS

December 30, 2015

The Mexican government included several new transfer pricing provisions in the country’s 2016 federal budget. The changes reflect Mexico’s efforts to align its tax code with principles described by the Base Erosion and Profit Shifting (BEPS) project led by the Organization for Economic Cooperation and Development (OECD). Under new provisions in the Mexican income tax […]

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The Safe Harbor agreement has been overturned. Now what?

December 1, 2015

Recently, The European Court of Justice (EJC) overturned the Safe Harbor agreement between the European Union (EU) and the United States, leaving many companies questioning what to do. Here’s a quick Q&A to help you understand what’s transpired and what it means to companies who were operating under the Safe Harbor Law. What was Safe […]

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Transfer pricing for global structures…is your company prepared?

November 9, 2015

Did you know that the IRS is increasing scrutiny around transfer pricing? Transfer pricing is the method used to set a price for goods and services sold between related legal entities within a business structure.  For example, if a foreign subsidiary sells goods to its parent company, the cost of those goods is the transfer […]

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Justin Trudeau unseats Stephen Harper as Canadian Prime Minister: What does this mean for the economy?

October 29, 2015

After nearly a decade in power, voter discontent and a sluggish economy spurred Canada’s voters to unseat Conservative Stephen Harper in favor of the Liberal Party’s Justin Trudeau in Canada’s October 19th National Election.  Trudeau’s Liberal Party also secured the first liberal majority in 15 years, taking 187 of the 338 districts across the country. […]

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Puerto Rico’s Sales and Use Tax Goes Up to 11

October 29, 2015

On Oct. 1, Puerto Rico’s Sales and Use Tax (SUT) increased from 7 percent to 11.5 percent. The change also incorporates a special 4 percent SUT on certain business-to-business services that were previously exempt. While the revised law continues to allow some companies an SUT exemption on certain services, companies located within Puerto Rico but […]

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Proposed Regulations May Eliminate the Goodwill Exception…But There’s Still Time

October 15, 2015

On September 14, 2015, the IRS issued proposed regulations that eliminate the goodwill exception in outbound transfers of intangible assets. If finalized, these regulations will drastically change the way foreign entity transfers are treated and, unlike most proposed regulations, they’ll go into effect immediately, with retroactive application. Could these changes affect you? It’s very possible. […]

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Good News: Certain FATCA Transitional Rules Have Been Extended

October 1, 2015

In a welcome announcement, certain transitional rules to implement aspects of the Foreign Account Tax Compliance Act (FATCA) have been extended. Issued on September 18, 2015, this notice announces that the Department of Treasury and the Internal Revenue Service intend to amend the regulations to extend the period of time the transitional rules will apply. […]

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It’s Not You; It’s the Audit Rotation Rules

September 17, 2015

Although some U.S. companies have a history of changing audit firms, many have developed long-term relationships with their auditors. After all, we’re known for adding life to any party—what’s not to love? These relationships may be cut short, however, due to the audit rotation rules governing a company’s foreign parent. Most countries have developed their […]

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