GAP 200.137, Documentation Requirements for Payments to Foreign Vendors

  1. General
  2. Documentation Required
  3. Required Forms for Payments to Individuals
  4. Required Forms for Payments to Others
  5. Other

I. GENERAL

Requirements for payments to foreign individuals and entities:

Under United States law, foreign individuals and entities are subject to withholding on U.S. sourced income. The source of income can be affected by the type of income. For example, the source of compensation income is where the services giving rise to the income were performed. As the withholding agent, Duke University is required to withhold tax on these types of payments unless a foreign payee can demonstrate that income is not U.S. sourced income or a tax treaty exemption is available.  

Foreign Account Tax Compliance Act

The Foreign Account Tax Compliance Act (FATCA) is aimed at addressing perceived tax abuse by U.S. persons through the use of offshore accounts. Among the new requirements, foreign financial institutions must provide the Internal Revenue Service (IRS) with information on certain U.S. persons invested in accounts outside of the U.S. and to have certain non-U.S. entities provide information about any U.S. owners.

FATCA requires payers to:

  1. Have procedures in place to categorize foreign payees and identify any payments that would be subject to withholding.
  2. Have procedures in place to report and potentially withhold tax from payments that are subject to withholding.
  3. Receive appropriate documentation (e.g. W-9, 8233, W-8 form) to verify the payee’s FATCA status. If a valid W-8 is not received, the Treasury Regulations contain presumption rules for withholding agents to apply in determining the status of payees for withholding purposes. (Presumption Rules).

For newly used foreign vendors, a valid foreign vendor checklist, appropriate Form W-8, and/or Form 8233 should be required before any payment is made to them to avoid application of the presumption rules or the need to obtain the documentation, which may delay payment.

Income sourcing rules

Income includes payments for services, royalties, software licenses, other licenses, and lease of real or intangible property. The source is determined by the location of performance or use. If the payment is for services and the services occur in the U.S. the payment will be U.S. sourced. A payment for royalty, software license, or other license to use is U.S. sourced if used or accessed in the U.S. For the lease of real or intangible property it will be U.S. sourced if located in the U.S. A payment is foreign sourced income to the recipient when it is not U.S. sourced income. To help make this determination please use the Checklist for Payment to Foreign Vendors and Payments to Foreign Vendors Flowchart (pdf).

II. DOCUMENTATION REQUIRED

When Payment is Foreign Sourced Income

When making payments to foreign vendors for foreign sourced income for goods or services, Duke only needs the vendor to provide documentation showing their foreign status.

Complete the Checklist for Payment to Foreign Vendors, Part I by the Department and Part II by the vendor.

When Payment is U.S. Sourced Income

If the payment is U.S. Sourced income it is subject to reporting on Form1042-S. It is also subject to withholding of 30% federal tax and 5.85% state tax (or 4% for individuals performing services), unless the vendor can claim a tax treaty and is not subject to FATCA withholding.

Complete the Checklist for Payment to Foreign Vendors, Part I by the Department and complete the appropriate Form W-8 as discussed below.

Tax Treaty Benefits

Foreign individuals and entities may be eligible to claim the benefit of a tax treaty if one exists between their country of tax residence and the United States. If a treaty exists, then it has to be determined if there is an Article number for the type of payment being made. There can also be limitations that will be stated in the Article, so you will need to ascertain whether the payment meets the requirements of the Article.

The U.S. Tax Forms used to claim the benefits of a tax treaty are discussed below.

III. REQUIRED FORMS FOR PAYMENTS TO INDIVIDUALS

For required documentation for payments to foreign individuals for payments for services rendered or reimbursement of substantiated expenses incurred in the United States, see Required Documentation for Payments Issued to Foreign Nationals through Accounts Payable.

IRS Form 8233 (Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual):

IRS Form 8233 is used to claim a tax treaty exemption from tax withholding on independent personal services income rendered by a nonresident alien individual who performed services as an independent contractor in the United States. These services include payments for consulting, honoraria paid to visiting professors, teachers, researchers, scientists, and prominent speakers, and payments for performances by public entertainers. Keep in mind that not all countries have a tax treaty with the United States. Form 8233 is submitted with the Accounts Payable check request. It is good for a calendar year. One form is completed for each withholding agent and for each type of income.

A U.S. taxpayer ID in the form of a Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN) is required to claim a tax treaty exemption. If the nonresident alien does not have a U.S. taxpayer ID, and they want to claim the exemption, please contact the Duke Corporate Tax Department to see if Duke University can assist them with applying for an ITIN.

IRS Form W-8BEN (Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals):

The W-8BEN is completed by a nonresident alien individual to document foreign status and to claim a tax treaty benefit for certain types of payments. In most cases, this individual is subject to U.S. tax on its U.S. sourced income. Most types of U.S. sourced income received by a nonresident alien are subject to U.S. federal tax of 30% and state tax of 5.85% (or 4% for individuals performing services). A reduced rate, including exemption, may apply if there is a tax treaty between the nonresident alien’s country of tax residence and the United States. The nonresident alien must have a U.S. taxpayer ID to claim the tax treaty exemption. A valid W-8BEN must be provided before payment is issued. Form W-8BEN is valid for the calendar year in which it was signed, as well as the three succeeding calendar years, unless a change in circumstances makes the information provided on the form inaccurate. Thus, a W-8BEN signed during calendar year 2016 would be valid for calendar years 2016, 2017, 2018, and 2019. A new form W-8BEN would be required for any payments to be made after December 31, 2019.

Use this form for nonresident aliens receiving royalty payments, whether claiming a tax treaty exemption or not. Also use this form for nonresident aliens receiving payment for compensation, or in expectation of, services performed inside the U.S. , where the nonresident alien is not claiming a tax treaty exemption. If the nonresident alien is completing the form to document foreign status and not claiming a tax treaty exemption, they complete Part I and Part III.

If they are completing the form to document foreign status and to claim a tax treaty exemption, they complete Part I, Part II, and Part III. For services performed in the U.S. where the nonresident alien is claiming a tax treaty benefit – see Form 8233 discussion above.

IV. REQUIRED FORMS FOR PAYMENTS TO ENTITIES

W-8BEN-E (Certification of Status of Beneficial Owner for United States Tax Withholding and Reporting (Entities):

Please consult with a tax advisor regarding the proper completion of Form W-8BEN-E. The material contained herein does not constitute tax, legal, or accounting advice.

The W-8BEN-E is to be completed by foreign entities, not individuals. This form contains 30 parts; however, very few of them are required to be completed to permit vendor payments.

Sections to be completed are:

Complete Part I and the associated Part # from the box checked in #5. This section is required to determine FATCA status. Without this section completed the payment will be subject to withholding. Complete Part III if claiming a tax treaty exemption (must have either a U.S. or foreign tax ID to claim a tax treaty benefit). If not claiming a tax treaty the payment will be subject to withholding. The final section that needs to be completed is Part XXX.

As with the Form W-8BEN, a Form W-8BEN-E is valid for the calendar year in which it was signed, as well as the three succeeding calendar years, unless a change in circumstances makes the information provided on the form W-8BEN-E inaccurate. Thus, a W-8BEN-E signed during calendar year 2016 would be valid for calendar years 2016, 2017, 2018, 2019. A new form W-8BEN-E would be required for any payments to be made after December 31, 2019.

Forms W-8EXP, W-8ECI, and W-8IMY

Duke University doesn’t normally have payments to vendors that would use these forms. If a vendor fits any of the scenarios below, it is likely they have knowledge of the form they need to fill out.
Form W-8EXP is completed by foreign governments, international organizations, foreign central banks of issue, foreign tax-exempt organizations, foreign private foundations, and governments of U.S. possessions.

Form W-8ECI is completed by vendors claiming that income is effectively connected with the conduct of a trade or business in the United States. These vendors file an annual U.S. income tax return to report income claimed to the effectively connected with a U.S. trade or business. The vendor will need to complete Part I and Part II.

Form W-8IMY is completed by vendors receiving a reportable amount or withholdable payment on behalf of another person or as a flow-through entity.

The information provided in this GAP is based only on the types of payments Duke University would typically issue through their Accounts Payable department.  For other types of payments, the requirements may be different.

V. OTHER

Embargoed and Sanctioned Countries. The U.S. Treasury’s Office of Foreign Asset Control (OFAC) bans or restricts financial transactions with certain individuals or countries. Prior to engaging in any financial transactions with countries on the restricted list please contact Duke’s Office of Export Controls to determine if the transaction is allowed. Please see their website for a list of the countries.

Duke’s Corporate Accounts Payable Department reviews all payment requests for these countries with the Office of Export Controls.