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In recent years, tax authorities have sought to boost revenues by focusing on the gap between anticipated tax revenues and the amounts actually collected. This has created new compliance challenges for US and non-US financial institutions, and for individuals or entities paying or earning income outside their country of residence.
The implementation of FATCA in 2014 made documentation requirements more difficult for US financial institutions, which have been required to document their foreign payees for over 20 years. The general rule is that whenever US-source income (including dividend income, interest or other passive income) is being paid to a non-US person, the intermediary US financial institution must collect an IRS Form W-8 that establishes a reduced rate or exemption from withholding under an Internal Revenue Code (IRC) provision or an income tax treaty.
Payors of US income have liability for any amounts they fail to withhold in accordance with claims made on a W-8. Customers may claim they’re eligible, but if the form is invalid and the IRS lacks jurisdiction (as with a non-US person), it will look to the financial institution.