July 9, 2007

TO: Distribution

FROM: John Staples

RE: IRS Issues Draft Form W-8BEN and Instructions

The IRS recently issued a draft version of Form W-8BEN tentatively dated January 2008. The instructions to the draft form provide many clarifications of the positions that the IRS has taken in that past, as well as new positions and requirements. We have prepared two PDF files, showing the proposed changes to the form and instructions, that you can download by clicking on the links in this sentence. Here are the highlights of the proposed changes to the instructions, along with our observations:

Powers of Attorney. The instructions state, “You may authorize an agent to sign Form W-8BEN only in the case of disease or injury or if the IRS has granted permission to you to do so for other good cause.” (Emphasis added.)

Comment. Perhaps the most important part of the draft instructions is a greatly expanded section describing who may – and who may not – sign the form. The language regarding powers of attorney is probably the most controversial new item in the draft. The regulations appear to allow foreign persons to freely appoint agents to sign U.S. tax returns and other forms. But, in the draft instructions, the IRS seems to be taking the position that only the beneficial owner may sign, except in extraordinary circumstances. While the draft language may appear to apply only to individuals, we have it on good authority that the IRS also intends to restrict the ability of foreign entities to appoint agents to sign forms.

Acceptable Titles. The draft includes specific titles that are acceptable for the “capacity” line in the signature block, suggesting that other titles are not acceptable. For corporations, the president, vice president, treasurer, assistant treasurer, or chief accounting officer of a corporation may sign the form. In addition, any other officer (such as a tax officer) who is authorized to sign may do so. The instructions state that a “general partner or member manager” must sign the form for a “partnership.”

Comment. The capacity line has always been controversial, and the draft is likely to make that line even more contentious. It is not clear how the withholding agent should view titles that are not on the list above. Should a “managing director” be presumed to have the authority to sign the form, or does the withholding agent need evidence that the signer has authority? What about foreign titles that do not translate neatly into one of the titles the IRS lists as acceptable? The problem is even worse for “partnerships.” The U.S. may treat an entity as a partnership for tax purposes even though it is a corporation for legal and other purposes. For instance, a UK limited company can make a “check the box” election to be treated as a partnership, but it would continue to be run by a president or CEO. Such an entity should indicate that it is a partnership on Form W-8BEN. A UK limited company is unlikely to have either a general partner or a member manager.

Foreign Tax ID Numbers Generally Required. A beneficial owner will be required to provide a foreign taxpayer identification number, if it has one. This is currently optional. The draft includes an exception for direct account holders of qualified intermediaries, direct partners of withholding foreign partnerships, and direct beneficiaries of withholding foreign trusts.

Comment. It is unclear whether withholding agents are required to know which countries require their residents to have tax ID numbers or what those numbers are supposed to look like. Presumably, like a form that does not state the capacity of the signer, a form with a missing or inappropriate foreign tax ID number may have to be rejected by the withholding agent.

“Hold Mail” is a Mailing Address. An account holder who instructs a financial institution to hold mail should enter the branch’s address as a mailing address on Line 5.

Comment. This instruction is designed to require U.S. financial institutions to get additional documentation and (from individual account holders) a reasonable explanation showing that the account holder is in fact foreign, despite a U.S. mail drop. The instructions do not address account holders who get their statements exclusively online.

• Old Versions of Form May Not Be Used. The draft instructions now include an explicit direction not to use prior versions of Form W-8BEN after a particular date (December 31, 2007, in this case). Earlier versions of the instructions did not include such a deadline.
• Names if Trusts. The instructions state that if the beneficial owner is a trust, the name on the form should be only the name of the trust, not including the name of the trustee.
• Joint Accounts. The instructions say that joint account holders must each provide his or her own Form W-8BEN, even for husband-and-wife accounts.
• Complete Forms Required. The instructions state that the form “will not be accepted by the withholding agent or payer” unless it is complete in all material respects (including treaty claims).
• Parent/Guardian. Parents and guardians of minor children may sign for them, and should indicate their status on the “capacity” line in the signature block.
• Corporations and Partnerships in Bankruptcy or Receivership. If a receiver, trustee, or assignee of the beneficial owner provides the form, then that fiduciary must sign, rather than an officer, partner, or member manager. Receivers and trustees must provide a copy of the relevant court order and complete the capacity line.
• Estates and Trusts. The fiduciary must sign and complete the capacity line.
• U.S. Returns Required in Some Cases. The instructions remind foreign persons that they may have to file a Form 8833 to disclose a treaty-based return position.
• Abbreviations Permitted. The draft Form W-8BEN eliminates the warning not to abbreviate country names.