Foreign National Taxation – Cross Match between Taxation and Immigration Jennifer Trivette, CICA NC Office of State Controller Session Etiquette • Please turn off all cell phones. • Please keep side conversations to a minimum. • If you must leave during the presentation, please do so as quietly as possible. 2 Disclaimer The information within this presentation does not constitute legal advice and each participant should seek his/her own counsel in addressing specific situations. The NC Office of the State Controller is providing this content to enhance the knowledge of the participants in this workshop. Information presented is not intended to be used for the purpose of avoiding any penalties that may be imposed on an institution by the Department of Homeland Security or Internal Revenue Service. 3 Training Agenda • Tax Assessments – How to Perform – Identify the Payee – NRA vs. RA • Recognizing and Interpreting Immigration Documentation – Determining who is eligible to receive payments • Vendor Payments • Scholarship • Treaty Benefits – Benefits and Limitations • Honorariums • Best Practices 4 Foreign National Challenges Establishing effective policies and procedures to comply with government requirements: • Gathering information to comply with rules • Timely communicating changes in data that impact compliance • Keeping current in government rules and procedures • Balancing knowing both immigration laws and tax laws 5 Immigration and Taxation Liabilities • The tax assessment process plays an important role in the area of immigration compliance. • You must understand the basics of immigration compliance in order to successfully complete a tax assessment. • You should partner with all departments, including the immigration office, that process foreign national payments. (example: payroll, accounting, and financial aid). 6 Immigration and Taxation Liabilities Types of Taxable Income • • • • • • • • Wages Assistantships Scholarships Fellowships Stipends Travel Reimbursements Housing Allowances Honoraria Different offices process different payments - this is why it’s important to build good relationships with all departments involved with paying and processing foreign nationals at your institution or agency. 7 Immigration vs. Taxation Liabilities • • • • • Immigration work restrictions Restrictions on the amount of work hours FSLA requirements Is the payment allowable? Change in funding 8 Immigration vs. Taxation Liabilities Examples of Status Violations: • Failure to enroll by the date specified by the school or exchange visitor program. • Unauthorized employment during the stay. • Failure to leave the U.S. following completion of the course, exchange visitor program, or program-related employment. • For academic students (visa category F-1): failure to maintain a full course load without prior authorization for a reduction from the designated school official. 9 Immigration and Taxation Liabilities Best practices in making payment to non-resident Aliens (NRAs) • Implement policies and procedures. • Recommend posting them to your website • Keep in mind the IRS terms “Deemed to Know” and “Due Diligence” and what that means to you and your institution or agency. 10 Tax Assessment What is a Tax Assessment? The process of collecting a COMPLETE and ACCURATE immigration history in order to determine taxation and necessary documentation. 11 Tax Assessment Importance of the Tax Assessment • Foreign Nationals in Nonresident Alien tax status have a specific set of tax laws they must follow while working or receiving compensation in the United States. • Every visa classification has a distinct set of tax laws attached to it. • Failure to collect the required tax amounts can result in large fines and penalties for your agency or institution. • The liability is yours as the withholding agent. 12 Tax Assessment Per IRS Publication 515, “if you cannot reliably associate a payment with valid documentation you must apply certain presumption rules or you may be liable for tax, interest, and penalties. If you comply with the presumption rules you are not liable for tax interest and penalties even if the rate of the withholding that should have been applied based on the payee’s actual status is different from that presumed.” Best Practice: It is better to tax and have those taxes refunded by the IRS to the individual, than to not tax at all and face penalties and fines. 13 Tax Assessment What is permissible? I-9 vs. Taxation • Presumption rule allows tax agents to ask for documentation that can not be obtained during the I-9 process. • Two different agencies, two different sets of rules and regulations. 14 Tax Assessment Documentation (generally) required for payments: Immigration Documentation: – Passport (Some passports will have more than one page) – Visa – I-94 card (Small index looking card with entry date stamped on it. A foreign national CAN NOT legally work without this card.) – Approval notice Taxation Documentation: Nonresident Alien Tax Status – NC-4 – W-4 – W-8BEN – 8233 (If applicable) Resident Alien Tax Status – W-9 – W-4 – W-8BEN IRS REQUIRES ORIGINAL SIGNED TAX DOCUMENTS 15 Tax Assessment Performing a Tax Assessment • Accurate immigration history • Foreign Nationals do not understand the importance of this process. Asking questions will reinforce the information they provided is accurate. Good Questions to ask: • Is this your first time in the United States? • I see in your passport you have a _____ visa? Have you ever used it? • Have you ever lived in any other country other than your home country? • By signing this foreign national information form you are attesting that all the information above is accurate. 16 Tax Assessment Review the immigration information: • Where was the document issued? (issuing post) • Is your university listed on the approval notice? • Do I know the person who signed this approval notice? (I-20 or DS-2019) • Do I know that DSO? • Are the immigration documents expired? • Is this a change in funding? Is it listed on the approval notice? • Is the foreign national intake form complete? 17 Tax Assessment Completed the tax assessment, next step: • Review all the information you went over during the tax assessment. • Remind the foreign national the requirement to update their personal information, their job or income, and their visa information. • Did you provide a “friendly reminder” info sheet? A change in visa status can change everything! 18 Tax Assessment Changes to be aware of: • No longer stamping I-20’s and DS-2019’s at the port of entry. • Eliminating I-94 cards. • Causing delays with the Social Security Administration 19 Other Issues to Consider What if the foreign national cannot obtain a Social Security Number or ITIN? • If you did not withhold at 30% for every 1042-S that is produced without a SSN or ITIN, you will be fined $100.00. • You cannot use IRS Rev. Proc. 88-24. • You cannot grant tax treaty. 20 Vendor Payments Vendors • Pay for services to an individual – If the individual meets the conditions of the Independent Personal Services (i.e. Income from Self-Employment) Articles • Benefit is in the Business Profits Article of newer treaties – Limitations vary by treaty • • • • Maximum time period Maximum amount Fixed base or permanent establishment Any combination of the above 22 Vendors • Pay for services to an entertainer or athlete – Must meet the requirements of the article covering selfemployment (or employment if the individual is the payer’s employee) and – The treaty has no maximum gross receipts amount in the Artists or Athletes Article • Some treaties have no Artists or Athletes Article (Poland, Russia, Kazakhstan, countries covered by the former USSR treaty) • Some treaties override the gross receipts limitation if the payments are from public funds 23 Vendors • Pay for services to an entity – Under the Business Profits Article of the treaty – Provided the services are not attributable to a permanent establishment that the organization has in the United States – No treaty benefits if the Business Profits Article has a services PE provision and the services provided by the organization’s employees or contractors exceed the limitations. 24 Vendors • Royalties – Royalties are payments for the right to use or use of intangible personal property (regardless of the name given to the payment) • License fees • Contingent payments based on the productive use of intangible property such as patents • Sponsorship fees – Royalty Article may reduce or eliminate the tax depending on the type of royalty • Generally no treaty benefit if attributable to a PE • Some treaties classify payment for motion picture and TV rights as business profits (e.g. Germany) 25 Vendors • Rents on tangible personal property – Equipment rentals are included in the Royalty Article of older treaties – Covered by the Business Profits Article of newer treaties • Some articles specifically classify them as ECI • Some articles cover them only if they are in fact ECI – If they are not ECI they might be covered by the Other Income Articles 26 Vendors • Rents on real property – Generally considered to be attributable to a PE so no treaty benefits – Treaty might allow for an election to be treated as ECI • Election is available under the IRC as long as it is made on a timely filed return 27 Vendors • Grants, prizes, and awards – Covered by the Other Income Article, if any, provided • The Article covers US – source income and • The income is not attributable to a US PE – Covered by the Student/Trainee Article if the payments is for the individual’s study, training or research (and is not in return for services) • Scholarships and fellowships for relatives of employees of the organization are generally wages of the employee 28 Scholarships Scholarships Section 117 of the Internal Revenue Code taxes scholarship and fellowship grants for items that are not qualified (nontaxable). Although scholarship and fellowship grants for which no services are required are not reportable to US citizens and resident aliens, the recipient may nevertheless be subject to income taxes on the grant. Taxable scholarship and fellowship grants paid to or on behalf of nonresident alien recipients, however, are subject to withholding and reporting unless a tax law or treaty exception applies. 30 Scholarships Qualified • Qualified (nontaxable) grants are for tuition and required fees for enrollment, along with books, fees, supplies, and equipment required of all participants in a course of study provided the recipient is a “candidate for a degree at an educational organization described in section 170(b)(1)(A)(ii).” 31 Scholarships Nonqualified Grants • • • • • Room and board, Travel, Research, Clerical help, or Equipment and other expenses that are not required for enrollment in or attendance at an eligible educational institution. • Refunds issued for remainder of scholarship 32 Publication 970 33 Tax Treaties Tax Treaty • An agreement between two governments (U.S. Treasury and the other government – over 60 countries) • Avoids double taxation (i.e. the foreign national will have to pay taxes on that income either in the U.S. or in their home country.) • Eliminates or reduces the 30% withholding tax and NC 4% withholding tax. • A constantly changing agreement. (Treaty protocols can amend previous treaty agreements.) • Each visa category has a different treaty associated with it. Cannot use a “a one size fits all” approach. 35 Considerations When Granting Treaty Benefits Tax Status: NRA or RA • Provide Social Security Number or ITIN • Country of tax residency – The treaty with the UK covers England, Scotland, Wales, Northern Ireland – The treaty with China does not cover Hong Kong, Taiwan, or Macao • Primary purpose of visit as evidenced by – DS-2019 for J Exchange Visitors – I-797 approval notices for H-1B, O-1, Q – I-20 for F and M visitors • Status of the organization (educational, research, medical, etc.) • Type of Income Paid • Conducting research, teaching, training, other paid activities (honorarium activity) • Aggregate year vs. calendar year 36 Considerations When Granting Treaty Benefits The importance of the tax treaty and what YOUR signature means. • Do I have a complete immigration history? • Does the foreign national have the intent to return home after this visit? • You must submit the tax treaty (8233) to the IRS within 5 business days of accepting. • IRS has 10 business days to reject tax treaty. • Should this treaty be reported on a 8233, W-8BEN, or W-9? • Where is the foreign national performing services? • Tax treaties must be renewed every year. 37 Tax Treaty Benefit Limitations • • • • • • • • Retroactive Loss of Benefits Prospective Loss of Benefits One-Time Use Requirement to Re-establish Residency Back-to-back Rule Combine Benefit Period Saving Clause and Exceptions Remember to consider all the protocols when reviewing a tax treaty. 38 Tax Treaties – Teacher/Researchers • Important to note there are current tax treaties that have one-time use limitations – – – – – – – China Czech Republic France Indonesia Jamaica Portugal Slovak Republic • Retroactive Loss Clause • Prospective Loss Clause 39 How Treaty Benefits are Claimed • Treaty Benefits may be claimed as an exemption from withholding provided a valid withholding certificate is given to the payer prior to payment – 8233 if the income is pay for services to an individual • May also include treaty-exempt scholarships and fellowships • Must be sent to the IRS within 5 days of acceptance • Is not valid if not sent to the IRS – W-8BEN with a treaty claim for all other income payments • Do not send to the IRS – Withholding certificates must have a US TIN to be valid 40 How Treaty Benefits are Claimed • Treaty benefit may be claimed on the recipient’s tax return if taxes were withheld – Form 1040NR for nonresident aliens • Information requested on Form 8233 or W-8BEN must be included with the return – Form 1120F for foreign corporations • Individuals with ECI must submit a tax return even if the amount was exempt from withholding under a treaty – Individuals with treaty-exempt FDAP income on which the correct tax was withheld have no return obligations 41 How Treaty Benefits are Claimed • On Form 1042-S – Exemption Code 04 if the tax is eliminated – Exemption Code 00 if the tax is reduced • If the Form 1042-S record does not have a US TIN, the payer must pay the tax, plus penalties and interest, with Form 1042 – Only exception for no TIN is on investment income on publicly traded income 42 Where to Find Treaties • IRS website – www.irs.gov for current treaties • US Treasury website – http://treasury.gov/resourcecenter/tax-policy/treaties/Pages/default.aspx for treaties in process • http://onesource.thomsonreuters.com/solutions/tax-inforpt/tax-info-rpt-us/articles/120150/ for abbreviated treaties for individual benefits • Tax Treaty Benefits for Foreign Nationals Performing US services • IRS Publication 901, US Tax Treaties 43 Honoraria Payments Honoraria – Definition • Covers nonimmigrant payees in visitor status, visa waiver visitors, certain Mexican border crossers and Canadian walkovers • Restricted to specific payers: – Higher educational institutions and nonprofit affiliates – Nonprofit research organizations – Government research organizations • Covers “usual academic activity”: – Lasting no longer than 9 days at any single institution; – Provided that payee has not accepted honoraria from more than 5 organizations in the prior 6-month period – The sixth institution in 6-month period is acceptable 45 Honoraria – Exception • This “rule” is an exception to the general rule that nonimmigrants may not work (including selfemployment) in the United States • Provisions apply only if all conditions are met, but... 46 B-1/ B-2 Visas Documentation required for payments: • Immigration Documentation: – Passport – Visa – I-94 Card • Taxation Documentation: – Compliance Statement for the American Competitiveness and Workforce Improvement Act (Section 431) – W-8BEN – Social Security Card (or unknown SSN affidavit if n/a) – Form 8233 (for Treaty Benefits with valid SSN) – Dates of Visits (9/5/6 Rule) 47 Visa Wavier/ESTA Program Documentation required for payments: • Immigration Documentation: – Passport – I-94 Card (Make sure the VW notation is on the I-94 card) • Taxation Documentation: – Compliance Statement for the American Competitiveness and Workforce Improvement Act (Section 431) – W-8BEN – Social Security Card (or unknown SSN affidavit if n/a) – For 8233 (for Treaty Benefits with valid SSN) – Dates of Visits (9/5/6 Rule) 48 What Are Your Best Practices??? Audit Tools When is the last time you audited your foreign national compliance program? Tools: • • • • • HR system Student information system I-9’s Tax Treaty Renewal Building partnerships with other departments on campus. 50 Important Things To Remember • Publicly posted Policies and Procedures are important. • Remember the terms “Deemed to Know” and “Due Diligence”. • PARTNER with all departments that are involved with the processing and payments of foreign nationals. • Every visa and every visit counts. • Keep up to date of immigration and IRS changes. (List serves, IRS publications, and USCIS). Foreign national tax compliance is an important service to your university…… You are the last line of defense! 51 Questions? 52 Contact Information • Follow-up questions can be submitted to Jennifer Trivette, with the NC Office of the State Controller, at [email protected] or 919-707-0764. THANK YOU!