Q. (cont.) I have done a TIN match on this number with the IRS website and it comes back as a 7 (TIN and Name combination matches the IRS EIN records). Since they have provided this U.S. tax ID number then:
- Are they exempt from withholding?
- Do we send them a 1042 or a 1099?
- Do they need to also claim the tax treaty benefit?
A. In both cases they have completed Part III #14 a and b, but neither of them completed #15. Is this going to be an issue? If no, is it because they have a U.S. tax ID number? Do we need to go back to them and have them complete line 15?
The U.S. tax ID you are referring to is an ITIN (individual taxpayer identification number). That the tax ID is an ITIN does not tell you anything about whether to withhold or not; it's simply a number assigned by the IRS, used for the filing of tax information, and is available to individuals and entities who aren't eligible to get a social security number or EIN, typically foreign ones. Having a U.S. ITIN does not mean they are to be treated as U.S. entities.
The determination about whether to withhold--and how much--depends on the type of payment being made and the tax treaty claimed by the vendor.
You state that the vendors have filled out lines 14a and 14b on the W-8BEN-E form, meaning they ARE claiming tax treaty benefits. A valid tax treaty claim means you withhold at a lower rate than the full 30 percent -- in some cases, such as Canada, the rate is 0 percent, so you would not have to withhold at all; the amount depends on the treaty with the individual country in question. You'll need to look this up to know; here is a link to IRS Publication 901.
Line 15 is filled out only in specific situations; let me refer you to the IRS Instructions for Form W-8BEN-E, pages 11-12. If these circumstances do not apply, there is no need to have them fill it in.
Since these are foreign entities, you must report payments on a Form 1042-S (unless the payment type is exempt from reporting, as in the case of payment for merchandise only, or if the payment is non-U.S. source).
Because the Chapter 3 and Chapter 4 (FATCA) withholding requirements are fairly complex, based on what the payments are for, you may want to call the IRS international support line at 267.941.1000. They prefer not to answer specific questions about withholding, but may be able to help clarify the particulars of your situation.