I return in this blog to one of my favourite subjects – the US tax forms W-8. Many firms struggle with not just with the complexity of the forms themselves but also with the various rules that must be applied before they can be reliably used.

The IRS threw the industry a bone in July this year, whether or not that was intentional, by revising all the forms at pretty much at the same time. Why is this a good thing? Well, right now there are many NQIs out there trying to understand QI status or in process of transitioning to QI status. In either case, the level of attention given to the W-8s becomes more important. Most NQIs collect W-8s but are doing so without really understanding the purpose of the forms or their implications. That’s because as NQIs they are generally operating omnibus accounts in which US assets are taxed at the maximum rate of 30%. So, unless they are impacted by FATCA, the presence or reliability of the W-8 is less problematic because they are already taxing the income at the maximum rate possible. All that changes when you become a QI.

I also hear many firms asking about the evergreen status of W-8s. Evergreen means that the form you receive is ‘valid indefinitely’. If that were true it would be great because you’d only need to collect and validate the form once. While it sounds like a great idea in principle, there are a couple of problems that mean the evergreen status is not really the panacea that people think it is. First, evergreen status is based on a number of variables, the main one being the presence of a TIN, but the rules vary by form and are not simple to operationalise in a firm that’s receiving BENs, BEN-Es and IMYs. Second, even if you did operationalise all these permutations and have systems to track which forms were evergreen and which weren’t (meaning multiple, bifurcated document tracking procedures) you would still be left with the fact that my original comment at the top of this paragraph, while accurate is, unfortunately, incomplete. What over-rides all the evergreen rules is ‘material change of circumstance’. This rule means that whatever systems you have in place, you will still need to explicitly inform your customers that, even with the appropriate TIN for evergreen status, they have an obligation to present a new form within thirty days of a material change in circumstance.

So, how does this fit in with the IRS’s latest revision dates? Well, whether you’re a QI or, more probably an NQI, the W-8 forms do have benefits. The main one being that you don’t have any liability for any under-withholding if the form is otherwise valid. The question is whether form is valid (or in the US vernacular – reliable). Six years ago, I was writing that the failure rate (i.e. the rate of unreliability) of W-8s I was seeing in the market was around 75%, particularly in Asia Pacific (around 30% in Europe). We completed the latest of nine Interim Periodic Reviews (IPR) a couple of weeks ago, and guess what? In 2017, the fail rate of W-8s we’re seeing is still around the 75% mark. An IPR is a compliance health check that we conduct under the same general rules as the periodic review in Revenue Procedure 2017-15 (the current QI Agreement).

All this means that most firms have a very high proportion of unreliable forms which, prior to transitioning to QI status, meant nothing because the applied tax rate was 30% anyway and there is no real visible enforcement of the regulations on NQIs by the IRS. However, in transitioning to QI status, the quality of documentation processes becomes a contractual as well as a regulatory issue. As a QI, even if you are taxing US sourced income at the maximum, your documentation processes have to be based on robust and effective internal controls. If you then try to provide treaty benefits to clients, the issue becomes even more acute. So, you must now pay far more attention to the W-8s than you used to as an NQI.

Now, stay with me as I try to connect all these dots together. Irrespective of your status in front of the IRS and US Withholding Agents (USWAs), you are likely to have a very fractured client base in terms of the W-8 documentation you have on hand. First, there is the issue just described – simple reliability. Second, you’ll have clients that provided their forms some time ago – so you don’t have the most current form from them and you may not be collecting the required data. If you have a mix of old and new forms AND you have entity clients, I can pretty much guarantee that you will not have followed the Limitation of Benefits procedures that were required before the latest W-8BEN-E came out. So, your population of W-8 forms is almost certainly very fragmented both in quality and in time.

So, when the IRS revised all the W-8s with effect from July 2017, it actually presented an opportunity that does not come along very often in compliance circles – the chance to get all your clients onto one consistent page from one specific date. Now, you have to connect one more dot to get the full picture. The IRS allows QIs and NQIs up to six months from the issuance of a new form revision, during which you may still use the old form version. However, after that six month period, you MUST start using the new form version. In the case of the most recent revisions, all QIs and NQIs must be using the July 2017 forms by January 1st 2018 – and that would be with respect to on-boarding of new clients, updating of clients with changes of circumstance and any client whose old form would naturally be expiring under the old three-year rule (absent the ‘evergreen’ argument above, most QIs and NQIs adopt the more operationally simple model that the form expires on December 31st of the third year after the form was signed).

My argument is simple: if you’re going to have to start using the new forms – all of them – from January 1st 2018, why not take the opportunity to re-paper all your pre-existing clients. There are several advantages. First, it gives you an opportunity to get that fail rate down to a more manageable level, which in turn reduces the risk that you will be under-withholding (which is a material failure and an event of default in the QI agreement). Second, it would ensure that you have collected the new data that you may not have collected using the old forms (LOB certifications for entities, dates of birth for individuals). Third, there are a whole bunch of firms out there being penalised under FATCA when they shouldn’t be. Finally, at this time of year there are many NQIs frantically trying to get QI status by the end of the year so that they can begin acting as a QI on January 1st 2018 and thus make their annual tax return (1042) and information reporting (1042-S) much, much easier. For these firms, who, by the way are also the firms with the least reliable pre-existing W-8s, conducting a re-papering project between now and calendar year end means they begin life as a QI with a clean and hopefully compliant sheet as far as the IRS is concerned.

In addition, re-papering pre-existing clients now, and then using the new forms from January 1st 2018, means that the effort now would trigger a nice relatively quiet three year period in which all clients would already be properly documented, robustly validated, and correctly taxed without having to return the clients on a one by one basis i.e. effort now leads to much less effort needed tomorrow. Absent a change of circumstance, all their forms would remain valid until December 31st 2020.

Now I hear some of you cry that such a project would be complex and costly and you don’t have the resources for it. For those I have two comments. First, the cost and risk of not taking this rare opportunity to get everyone onto one three year cycle with the latest forms at the same time is probably very much greater in the long term than the cost in the short term. Second, technology has moved on and where most firms still have staff manually validating forms, there are platforms around today that can take much of that manual work off your hands and handle the volume too (e.g. GlobeTax’s eCerts platform). In short, its not as difficult a task as you may at first think.

Like most things in this space, the argument for a particular operational process or project is rarely simple or straightforward. The dots that you have to connect to make sure that an action in one area does not create an unintended consequence in another are both many and varied.

From our point of view, as subject matter experts with clients in fifteen countries, this is just one of a number of areas of knowledge and expertise that helps us to join those dots for each of our clients particular circumstances so that they can be educated and make informed decisions and, in the end, be more competitive because they view tax as a product and not a task, and when you do that you get compliance as a side effect of providing better service to clients.

If you want more information or help with any of the topics covered in this blog, just get in touch at TConsult or connect with me on Twitter @RossKMcGill.