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Agents and Intermediaries

by Paula N. Singer, Esq.

Accounts Payable departments familiar with the ins and outs of 1099 reporting and backup withholding must now master the long-standing (but long-ignored) withholding and reporting rules that apply to U.S.-source income payments to foreign persons. (For a definition of foreign persons seeU.S. Person or Foreign Person,” Crow’s Nest, Volume 7 Number 4, July/August 2010 Edition). U.S.-source income payments made to foreign persons are subject to 30 percent withholding (called “NRA withholding”) and reporting on Form 1042-S unless an exception applies. For example, wages are subject to wage-withholding and reporting on Form W-2 unless the wages are exempt from withholding under a tax treaty, in which case the income must be reported on a Form 1042-S.

NRA withholding and Form 1042-S reporting must be in the name of the beneficial owner of the income unless an exception applies. The beneficial owner is the person subject to tax on the income under U.S. tax principles. Because payers (also called withholding agents) frequently make income payments to agents or intermediaries, rather than to the beneficial owner of the income, determining the recipient of the income is not always an easy task.

An agent is a person who acts on behalf of another person. An intermediary is a person who collects payments on behalf of another person. An agent or intermediary may be either a U.S. or foreign individual or entity. The documentation provided by the recipient of the income or facts known by the payer determine whether the income must be withheld on and reported in the name of a foreign person who is other than the person receiving the payment.

U.S. Agent of a Foreign Person
Section 1.1441-1(b)(ii) of the tax regulations requires a withholding agent that has actual knowledge that a U.S. person is receiving the payment on behalf of a foreign person to treat the payment as if it were made to the foreign person and withhold and report accordingly. (There are exceptions for certain U.S. financial institutions and insurance companies.) Facts known by anyone in the organization are imputed to the individual making the payment even if no procedures have been implemented to communicate the known facts to such individual.

When dealing with payments to or on behalf of a foreign person, the withholding agent should request a Form W-8BEN from the beneficial owner of the income. If one is not provided and the withholding agent does not know the name of the foreign person, the income and taxes must be reported on Form 1042-S showing the payee as “Unknown Foreign Recipient.”  This will effectively prevent beneficial owners from applying the withheld taxes as a credit on their U.S. income tax return.

Foreign Agent of a Foreign Person
A foreign agent acting on behalf of a foreign person may provide the withholding agent with a Form W-8IMY.  For purposes of this form, a foreign intermediary is any person that acts as an agent for another person.

A nonqualified foreign intermediary presenting this form can be acting on behalf of an individual or a flow-through entity such as a partnership, simple trust, grantor trust, or estate.  The partners of the partnership and beneficiaries of the trust or estate are the beneficial owners of the income.  In each case, the foreign agent must

  • Provide a Form W-8BEN or Form W-9 for each beneficial owner of the income
  • Provide a statement that allows the withholding agent to allocate the payment to the actual beneficial owners
  • Complete a Form 1042-S or Form 1099 for each beneficial owner depending on their U.S. tax status

There are exceptions for flow-through entities that are receiving income effectively connected to the conduct of a U.S. trade or business or are qualified residents of a tax treaty country and eligible for a treaty exemption from withholding. If these flow-through entities present a valid withholding certificate - Form W-8ECI or W-8BEN with Part II completed with the treaty claim - the income is reported in the name of the flow-through entity.

Qualified Agents and Intermediaries
Several types of agents and intermediaries have entered into agreements with the IRS to be responsible for withholding and reporting.  A withholding agent making income payments to any such agents or intermediaries is relieved of responsibility for withholding and reporting assuming the proper documentation has been provided by the agent.  

Foreign intermediaries that may have such agreements include qualified intermediaries, withholding foreign partnerships, and withholding foreign trusts.  They indicate their status and acceptance of responsibility for withholding and reporting on a Form W-8IMY, which must include a U.S. taxpayer identification number.  Payments made to these foreign persons are withheld on and reported in the name of the intermediary, not the name of the underlying beneficial owners of the income.  Their intermediary status must be indicated by the Form 1042-S Recipient Code.

A nonresident alien entertainer or athlete who performs in the United States may enter into a Central Withholding Agreement (CWA) with the IRS as authorized by Section 1.1441-4(b)(3) of the tax regulations and described in Rev. Proc. 89-47.  CWAs are issued only for individuals, not for groups.  The CWA is effective only for the tour or events covered and payments stipulated by the CWA.  Each CWA requires a designated withholding agent that is an independent third party as a party to the agreement.  Nonresident alien individuals entering a CWA pay taxes based on their anticipated income tax liability.  The withholding agent that is in receipt of a letter from the IRS regarding a specific CWA is relieved of withholding and reporting on payments that are covered by the CWA.

Authorized Agents
A foreign agent may enter into a written agreement with a withholding agent to accept the responsibility for withholding and reporting.  For the agreement to be effective, the IRS must receive notification of the agreement prior to the first payment for which the authorized agent acts on behalf of the withholding agent in order for the agreement to be effective.  (Make notification to the Internal Revenue Service, International Section, P.O. Box 920, Bensalem, PA 19020-8518.)  The books and records of the authorized agent must be available to the IRS to evaluate the agent’s compliance with its withholding and reporting obligations.  Under such agreements, the U.S. withholding agent remains fully liable for the acts or omissions of its agent and may not assert any of the defenses that might otherwise be available.

While Form 2678, Employer/Payer Appointment of Agent, may be used to appoint an agent for withholding, depositing, and reporting purposes for Form 1099 information returns and Form 945, Annual Return of Withheld Federal Income Tax, this form does not provide for such authorizations with respect to NRA withholding and Form 1042-S reporting.

About The Author

Paula N. Singer is a nationally recognized international tax attorney and partner in the law firm Vacovec, Mayotte and Singer LLP, in Newton, Massachusetts, Paula’s practice has concentrated in international tax matters for individuals, businesses, trusts, and estates.In 1994, Paula co-founded Windstar Technologies, Inc., to provide an easy-to-use and understand software solution for international tax compliance and reporting.She is a frequent speaker and author of over 60 published articles and is the author of numerous tax guide books. Her articles on international tax topics have appeared in AILA publications, Tax Analysts’ Tax Notes International and Tax Notes as well as their online services, West and RIA publications, and bar association publications.

The opinions expressed in this article do not necessarily reflect the opinion of ILW.COM.