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Administrative Procedure 8.868 Administrative Procedure 8.868



Title

Reporting and Withholding on Payments to Nonresident Aliens and Foreign Corporations

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Administrative Procedure Chapter 8, Business and Finance
Administrative Procedure AP 8.868, Reporting and Withholding on Payments to Nonresident Aliens and Foreign Corporations
Effective Date:  June 2016
Prior Dates Amended:  December 1993, July 1996    
Responsible Office: Office of the Vice President for Budget and Finance/Chief Financial Officer
Governing Board and/or Executive Policy: EP 1.102, Authority to Manage and Control the Operations of the Campus
Review Date:  August 2018

I. Purpose

To establish guidelines for 1042S reporting and withholding on 1042S Reportable Payments (Attachment 1) made to nonresident aliens and foreign corporations, in accordance with Internal Revenue Code sections 1441 and 1442 and the Tax Reform Act of 1986.  Determination of the payee's residence for tax purposes is obtained from UH Form WH-1 "Statement of Citizenship and Federal Tax Status" (Attachment 2).

II. Definitions

The following definitions are from the Department of Treasury, Internal Revenue Service Publications:

A.  Candidate for a Degree – A student (whether full or part-time) who (1) Attends a primary or secondary school or is pursuing a degree at a college or university, or (2) Attends an educational institution that is authorized and accredited to provide a program that is acceptable for full credit toward a bachelor's or higher degree, or offers a program of training to prepare students for gainful employment in a recognized occupation.

B.  Dependent Personal Services - Personal services performed as an employee rather than as an independent contractor.

C.  Domestic Corporation - A corporation that was created or organized in the U.S. or under laws of the U.S. or any of its states.  Also includes a foreign corporation that elected to be treated as a domestic corporation.

D.  Effectively Connected Income - When a nonresident alien or foreign corporation engages in a trade or business in the U.S., generally all income from sources within the U.S., except for annuities, compensation, dividends, gains, interest, premiums, profits, rents, royalties, salaries and wages, is considered to be effectively connected with a 
U.S. trade or business.  These exceptions may or may not be effectively connected with a U.S. trade or business.  The factors to be considered in establishing whether these exceptions are effectively connected include:

    1.  Whether the income is from assets used in, or held for use in, the conduct of the payee's trade or business, or

    2.  Whether the activities of the payee's trade or business were a material factor in the realization of the income.

If one of the above applies, the payee can elect to treat income as being effectively connected with a U.S. trade or business.

Nonresident aliens and foreign corporations are taxed in a different manner on income that is "effectively connected with a U.S. trade or business" vs. income that is "not effectively connected with a U.S. trade or business".  Effectively connected income received by nonresident aliens and foreign corporations are taxed at graduated rates; which is how U.S. citizens, domestic corporations and resident aliens are taxed.  Withholding is not required on such income (except for payroll withholdings on salaries and wages that are effectively connected with a U.S. trade or business).  In order to determine taxes owed on effectively connected income, nonresident aliens and foreign corporations must file a U.S. income tax return.

Income that is not effectively connected with a U.S. trade or business is generally taxed at a flat statutory rate (30% or 14%). Withholding is required on income paid to nonresident aliens and foreign corporations that is not effectively connected with a U.S. trade or business.  The University as payer of such income is required to withhold the taxes.  While the statutory rates are generally 30% or 14%, exemption or a reduced rate of withholding may apply under a tax treaty. 

E.  Foreign Person (individual or corporation) - A foreign person is a nonresident alien individual or foreign corporation that has not made an election under 26 CFR, section 897(i) to be treated as a domestic corporation, foreign partnership, foreign trust, or foreign estate.  It does not include a resident alien individual.

F.  Independent Personal Services - Personal services performed by an independent contractor as contrasted with those performed by an employee.  Compensation includes payments for professional services, such as fees of an attorney, physician, or accountant made directly to the person performing the services.

G.  Nonresident Alien - A nonresident alien is an individual who is not a U.S. citizen or resident alien.

H.  Qualified and Nonqualified Educational Expenses for Scholarship, Fellowship and Traineeship Grant - Amounts used by a recipient of a scholarship, fellowship or traineeship for the following expenses:

    1.  Tuition and fees required for enrollment or attendance at an educational organization, and

    2.  Fees, books, supplies, and equipment required for courses of instruction at the educational organization.

    3.  Tax Treatment of Scholarship/Fellowship Payments (Attachment 3)

I.  Resident Alien - An alien who is a lawful permanent resident of the U.S. or meets the "Substantial Presence Test".  This test is met if the alien is present in the U.S. for more than 31 days during the current calendar year and 183 days during the 3-year period that includes the current year and the 2 years immediately before that.  For actual requirements of the test, see IRS Pub. 519 "U.S. Tax Guide for Aliens".  Resident aliens are taxed in the same manner as U.S. citizens.

J.  Withholding Agent - Any person required to withhold tax including an individual, trust, estate, partnership, corporation, government agency, association, or tax-exempt foundation, whether domestic or foreign.  Withholding agents could include U.S. citizens and residents.  They also include foreign nominees and fiduciaries that are residents of treaty countries and must withhold additional U.S. tax under tax treaty provisions.  Resident or domestic fiduciaries of trusts or estates are withholding agents on payments to beneficiaries who are nonresident alien individuals, foreign partnerships, or foreign corporations.

III. Administrative Procedure

A.  General Information

    1.  Visa Types

        a.  F-1 Student Status.  F-1 student status may be obtained by a non-immigrant alien student who has been admitted to a program of academic or language study, and who receives an I-20 form (Certificate of Eligibility for Non-Immigrant F-1 Status) from the institution that he/she will attend.  The F-1 status, if approved, is demonstrated by an endorsement (generally a visa stamp) in a non-U.S. passport and on an electronic I-94 form issued to an alien entering the U.S.  The F-1 student is a bona fide student pursuing a full course of study.  An F-1 visa is issued for the "duration of status (D/S)", i.e., the entire length of the academic study program, including any period of authorized practical training after completion of a degree program.  F-1 students may transfer institutions or continue in the same or another institution to complete a different program, but a change of institution or degree objective must be reported to the U.S. Citizenship and Immigration Services (USCIS).  F-1 students have selective employment benefits which currently include: on-campus employment, curricular and optional practical training in the field of study, off-campus employment under a Dept. of Labor Pilot Program, and off- campus employment based upon severe economic necessity.  All work permissions must be authorized by the school's Designated School Officer (DSO).

        b.  J-1 Exchange Visitor.  The J-1 visa is intended to promote cultural or academic exchange between the U.S. and other nations.  J-1 visa status may be granted to students, trainees, teachers, researchers, or persons demonstrating special skills. Institutions approved by the U.S. Information Agency (USIA) may issue to any of the above persons a DS-2019 (Certificate of Eligibility for Exchange Visitor (J-1) Status), and become the Program Sponsor.  The DS-2019 is used to apply for the J-1 visa, which if approved, generally appears as a stamp in the non-U.S. passport and on the Electronic I-94 created for the person entering the U.S.  A J-1 visa is currently issued for the duration of status (D/S).  The J-1 may extend his/her stay, or transfer institutions by approval from institutional sponsors and notification of USIA.  After the program end date noted on the DS-2019, the J-1 has 30 days to depart the country.  Typically the J-1 is required to return to the home country for a period of two years before they are eligible to reenter the U.S. as temporary workers or permanent residents.  J-1 students may be employed when specifically authorized by letter from their sponsor, for on-campus employment, practical training off-campus or on-campus, or when severe economic necessity requires it.

        c.  M-1 Vocational Student.  An endorsement on a passport issued to students who enter the U.S. temporarily or solely to pursue a full course of study at an established vocational or other recognized nonacademic institution (other than a language training program).  The vocational or nonacademic institution must have been designated by the student and approved by the Attorney General of the U.S. for attendance by these students.  The individuals are admitted to the U.S. under the Immigration and Nationality Act.

        d.  For common visa types seen in Hawai‘i refer to Attachment 4.

    2.  1042S Reportable Payments to Nonresident Aliens.  The University is required to withhold and deposit taxes and file returns with the IRS for 1042S Reportable Payments (Attachment 1) made to nonresident aliens and foreign corporations. The University also issues statements to each nonresident alien payee for income paid and taxes withheld, if any.

        a.  Determination of Resident Status for Tax Purposes:  Nonresident Aliens.  For tax purposes, payees are classified into one of the following categories: (1) domestic corporation / U.S. citizen (2) resident alien or (3) nonresident alien / foreign corporation.  The University uses Form WH-1 "Statement of Citizenship and Federal Tax Status" (Attachment 2) to obtain the payee's resident status.  Withholding and reporting requirements of this section do not apply to domestic corporations / U.S. citizens or resident aliens; only to foreign corporations / nonresident aliens.  A foreign corporation is one that was not created or organized in the U.S. or under laws of the U.S. or any of its states, and has not elected to be treated as a domestic corporation. A nonresident alien is an alien who does not meet either the "Green Card Test" or the "Substantial Presence Test".  Requirements for each test are as follows:

            (1)  "Green Card" Test Permanent Resident, Immigrant, or Refugee - A lawful permanent resident of the United States, at any time who has received the privilege, according to immigration laws, of residing permanently in the United States as an immigrant.  An alien generally has this status if the Immigration and Naturalization Service (INS) has issued such person an Alien Registration Card or "Green" Card and such person has not received an administrative or judicial determination of abandonment of U.S. residency.

            (2)  Substantial Presence Test - To meet this substantial presence test, the alien must be physically present in the United States on at least:

                (a)  31 days during the current calendar year, and

                (b)  183 days during the 3-year period that includes the current calendar year and the 2 calendar years immediately before that, counting:

                    (i)  All the days you were present in the U.S. in the current year and

                    (ii)  1/3 of the days you were present in the first year before the current year, and

                    (iii)  1/6 of the days you were present in the second year before the current year.

        b.  For the substantial presence test, days for which the alien is an exempt individual should not be counted.  The term "exempt individual" does not refer to someone exempt from U.S. tax, but to anyone in the following categories:

            (1)  An individual temporarily present in the U.S. as a foreign government-related individual.

            (2)  A teacher or trainee, temporarily present in the U.S. under a "J" visa (other than as a student), who substantially complies with the requirements of the visa.

            (3)  A student, temporarily present in the U.S. under an "F", "J", or "M" visa, who substantially complies with the requirements of the visa.

            (4)  A professional athlete temporarily present in the U.S. to compete in a charitable sports event.

        c.  An alien who meets either the "Green Card Test" or the "Substantial Presence Test" will be classified as a resident alien for tax purposes.

    3.  Determination of U.S. Source and Effectively Connected Income: 1042S Reportable Payments (Attachment 1)

        a.  Nonresident aliens and foreign corporations are generally taxed only on income received from sources within the U.S. (U.S. source income).

        b.  Source of income is determined as follows:

Type of IncomeSource Determined by:
InterestResidence of payer
Royalties/RentsWhere property is used/located
Scholarships and FellowshipsResidence of payer
Compensation for personal servicesWhere services are performed


    4.  Income that is not effectively connected is described below:

Income that is not effectively connected includes the gross amount of U.S. source fixed or determinable annual or periodic gains, profits, or income.

Income is fixed when it is paid in amounts known ahead of time. Income is determinable whenever there is a basis for figuring the amount to be paid. Income can be periodic if it is paid from time to time. It does not have to be paid annually or at regular intervals. Income can be determinable or periodic even if the length of time during which the payments are made is increased or decreased.

Items specifically included as fixed or determinable income are interest (other than original issue discount), dividends, dividend equivalent payments (defined in chapter 2), rents, premiums, annuities, salaries, wages, and other compensation. A substitute dividend or interest payment received under a securities lending transaction or a sale-repurchase transaction is treated the same as the amounts received on the transferred security. Other items of income, such as royalties, also may be considered as income that is not effectively connected.
Nonresident aliens and foreign corporations are taxed in a different manner on income that is "effectively connected with a U.S. trade or business" vs. income that is "not effectively connected with a U.S. trade or business".  Effectively connected income received by nonresident aliens and foreign corporations are taxed at graduated rates; which is how U.S. citizens, domestic corporations and resident aliens are taxed.  Withholding is not required on such income (except for payroll withholdings on salaries and wages that are effectively connected with a U.S. trade or business).  In order to determine taxes owed on effectively connected income, nonresident aliens and foreign corporations must file a U.S. income tax return.

Income that is not effectively connected with a U.S. trade or business is generally taxed at a flat statutory rate (30% or 14%).  Withholding is required on income paid to nonresident aliens and foreign corporations that is not effectively connected with a U.S. trade or business.  The payer of such income is required to withhold the taxes.  While the statutory rates are generally 30% or 14%, exemption or a reduced rate of withholding may apply under a tax treaty.  Withholding may also be reduced by a claim for personal exemption.  The University as payer of such income is required to withhold the taxes. While the statutory rates are generally 30% or 14%, exemption or a reduced rate of withholding may apply under a tax treaty. 

B.  Statutory Withholding Rates

The statutory withholding rate on 1042S Reportable Payments is 30%, except on scholarship, fellowship and traineeship grants.

Special rules apply for withholding rates on scholarship, fellowship and traineeship payments to nonresident aliens.  Withholding on such payments is based upon several factors including; candidate's degree status, use of funds and visa type.  The statutory withholding rate on these payments can be either 0%, 14% or 30%.

If the payee is a candidate for a degree and funds are used for qualified educational expenses, no withholding is required.

If the payee is a candidate for a degree and funds are used for both qualified and nonqualified educational expenses, the nonqualifying portion must be determined.  This usually occurs when the grant amount clearly exceeds the cost of qualifying expenses or when the grant specifies expenditure categories that are non-qualifying in nature.  An exception to this is that if the grant terms stipulate that the recipient must perform services as part of the scholarship, fellowship or traineeship grant, then withholding is only required on the portion which represents payment for services and not the entire amount of the scholarship or fellowship.  Taxes must be withheld at 14% on amounts received from U.S. sources by an alien present under an "F", "J" or "M" visa, if the funds are used for unqualified purposes (e.g. room, board, incidental expenses).

If the nonresident alien receiving a scholarship, fellowship or traineeship grant is not a candidate for a degree and is presently in the U.S. under an "F", "J" or "M" visa, taxes must be withheld at 14% (unless an exemption or reduced rate is claimed) on the total amount of the grant that is from U.S. sources if the following requirements are met:

    1.  The grant must be for study, training, or research at an educational organization in the U.S., and

    2.  The grant must be made by:

        a.  A tax-exempt organization operated for charitable, religious, educational, etc. purposes,

        b.  A foreign government

        c.  A federal, state, or local government agency, or

        d.  An international organization, or a binational or multinational educational or cultural organization created or continued by the Fulbright-Hays Act.

If the grant does not meet both (a) and (b) above, taxes must be withheld at 30% on amounts from U.S. sources, unless an exemption or reduced rate is claimed.

If the nonresident alien receiving a scholarship, fellowship or traineeship grant is not a candidate for a degree and does not have an "F", "J" or "M" visa, taxes must be withheld at 30%, unless an exemption or reduced rate can be claimed.

C.  Exemption or Reduced Rate of Withholding

Although the statutory rate of withholding is 30% or 14% for scholarship, fellowship and traineeship grants, a nonresident alien may claim exemption from withholding or a reduced rate of withholding under the following conditions: (1) effectively connected income and (2) tax treaty.

    1.  Effectively Connected vs. Not Effectively Connected Income

Nonresident aliens may claim exemption from withholding on any income that is effectively connected with a U.S. trade or business and is included in their gross income, except on compensation for personal services.  Withholding is required on compensation for personal services whether or not it is effectively connected with a
U.S. trade or business, unless a tax treaty applies (see item 2 below).

Payees who are present in the U.S. under an "F", "J" or "M" visa are deemed to be engaged in a U.S. trade or business.  The portion of these payees' scholarship, fellowship or traineeship grant that is used for non-qualifying purposes is effectively connected with a U.S. trade or business.  Thus the payee can be exempt from withholding on such income, if the proper forms are filed.  The payee may also elect to treat other types of income as being effectively connected, provided that the connection criteria are met.  The process for determining the required forms are described below.  If the nonresident alien payee does not complete and submit the proper forms, taxes will be withheld at the statutory rate of 30% or 14%.

    2.  Tax Treaty

Nonresident aliens may choose to claim exemption or a reduced rate of withholding under a tax treaty.  A U.S. tax treaty is an agreement between the U.S. and another foreign country, which may exempt or reduce withholding on payments made to residents of that country. (Attachment 6)  The exemptions from tax or reduced rates of tax vary between countries and as to specific types of income.  If a treaty does not cover a particular type of income or if there is no tax treaty between the U.S. and the payee's country of residence for tax purposes, then the University must withhold taxes at the statutory rates.  If the income is covered by a tax treaty and the proper forms are submitted, the University should follow the provisions of the treaty, since tax treaties override the Internal Revenue Codes and Regulations.  If the nonresident alien payee does not complete and submit the forms required to inform the University that they are residents of a treaty country, taxes will be withheld at the statutory rates.  The process for determining the proper forms are described below.

D.  General Guide for Payment Processing

Matrix for Payment Processing for NRAs by Visa Type (Attachment 7).  The matrix provides a basis for various types of payments which could be considered reportable/ taxable based on whether is covered by tax treaty, U.S. TIN, and applicable documentation required. 

E.  Responsibilities

    1.  Campus/Department

For the 1042S Reportable Payments (Attachment 1), a Form WH-1 "Statement of Citizenship and Federal Tax Status" (Attachment 2) must be obtained from the payee.  Campus/departments are also responsible for updating any changes in status.  A separate statement will not be required for each payment; only if there are any changes regarding information provided on Form WH-1.  Campuses/departments are not responsible for providing assistance with preparation of the foreign payee's tax return.  Applicable IRS forms must also be obtained from the payee.

    2.  Disbursing Office

        a.  Information from the Form WH-1, "Statement of Citizenship and Federal Tax Status (Attachment 2) is used to determine the proper withholding rates or exemption from withholding.

        b.  During the year, amounts withheld are deposited with the IRS in accordance with the regulations.  Deposit requirements vary, based upon the balance of taxes withheld.

        c.  At year end, a 1042S "Foreign Person's U.S. Source Income Subject to Withholding" (Attachment 5) must be issued to the payees and filed with the IRS.

This return includes all reportable payments made to nonresident aliens / foreign corporations and amounts withheld, during the calendar year. Form 1042 "Annual Withholding Tax Return for U.S. Source Income of Foreign Persons" (Attachment 8), which is a summary of the individual 1042S', must also be filed with the IRS.

F.  General Procedures

    1.  Campus/Departments

        a.  Prepare the Payment Request (PREQ) or Disbursement Voucher (DV) payment with the proper object symbol and determine whether it is a 1042S Reportable Payment (Attachment 1).

        b.  For 1042S Reportable Payments, if this is an initial payment to a particular payee, obtain a Form WH-1 "Statement of Citizenship and Federal Tax Status" (Attachment 2) from payee.  The Disbursing Office can be contacted to see whether a Form WH-1 "Statement of Citizenship and Federal Tax Status" (Attachment 2) and applicable forms have already been submitted for the payee.

Note:  If payee notifies you that they are a U.S. citizen, domestic corporation or resident alien and object symbol is only 1042S reportable (not 1099 reportable), it is not necessary for them to complete a Form WH-1 "Statement of Citizenship and Federal  Tax Status" (Attachment 2).

            (1)  If payee is a U.S. citizen or a resident alien, requirements of this section do not apply.  Form 1099-MISC information reporting and backup withholding may apply if object symbol is a 1099-MISC reportable type (See APM A8.867 for requirements).

            (2)  If payee is a nonresident alien, determine income type and obtain applicable forms from the payee as listed on the WH-1 form, Directions, All Others, #3, 4, 5 through 8 (if applicable).

Payment is based on treaty position, and other criteria for scholarship, fellowship and traineeship payments.  Applicable withholding rates are 0%, 14%, or 30% for “F”, “J” or “M” type visa.  The following should be used in conjunction with the procedures below.

                (a)  Royalties or other income (e.g., travel expenses and nonpersonal services)

                    (i)  Determine whether there is a tax treaty between the U.S. and the payee's country of residence for tax purposes.  See listing of U.S. Tax Treaties (Attachment 9) which is shown by individual country and income type.  Although a tax treaty exists between the U.S. and the payee's country of residence for tax purposes, it should be noted that additional requirements may apply (e.g., amount received, number of days present in the U.S.).  The Disbursing Office will determine eligibility for the tax treaty, using the additional information provided on Form WH-1.  Specific requirements of the tax treaties can be found in IRS Publication 901 "U.S. Tax Treaties".

                    (ii)  Obtain forms required from the payee, based upon election of exemption for treaty position.

                    (iii)  Inform nonresident alien payee of withholding rate.

                        °  If no treaty exists, taxes will be withheld at the statutory rate of 30%.

                        °  If treaty exists, the payee may be exempt from withholding or taxed at a reduced rate.  Actual rate of withholding may vary between 0% to 30%. Determination will be made by the Disbursing Office based upon evaluation of information provided on the Form WH-1 "Statement of Citizenship and Federal Tax Status".

                    (iv)  Attach required forms to encumbrance or initial payment document and forward to the Disbursing Office.

                (b)  Scholarship, Fellowship and Traineeship Grants

                    (i)  Determine whether this income is effectively connected with the payee's U.S. trade or business. Scholarship, fellowship and traineeship recipients who are present in the U.S. under an "F", "J" or "M" visa are deemed to be engaged in a U.S. trade or business.  The portion of these payees' scholarship, fellowship or traineeship grant that is used for non-qualifying educational purposes is deemed to be effectively connected with a U.S. trade or business.

                    (ii)  Determine whether there is a tax treaty between the U.S. and the payee's country of residence for tax purposes.  See IRS Pub 901, U.S. Tax Treaties; Table 2. Compensation for Personal Services in the US Exempt from US Income Tax Under Income Tax Treaties.  Although a tax treaty exists between the U.S. and the payee's country of residence for tax purposes, it should be noted that additional requirements may apply (e.g., amount received, number of days present in the U.S.). The Disbursing Office will determine eligibility for the tax treaty, using the additional information provided on Form WH-1 "Statement of Citizenship and Federal Tax Status".  Specific requirements of the tax treaties can be found in IRS Publication 901 "U.S. Tax Treaties".

                        °  If there is no tax treaty between the U.S. and the payee's country of residence for tax purposes, obtain information on degree status, visa type and meeting of specific requirements from Form WH-1 "Statement of Citizenship and Federal Tax Status".

                        °  If a tax treaty exists between the U.S. and the payee's country of residence for tax purposes, no additional information is required. Tax treaties override the Internal Revenue Codes and Regulations.  However, just because there is an existing treaty, an applicable treaty article must be present in order to claim treaty benefits.

                    (iii)  Obtain forms required from the payee, based upon election of exemption for treaty position.

                    (iv)  Inform nonresident alien payee of withholding rate.

                        °  If no treaty exists, taxes will be withheld at rates ranging between 0% to 30%, based on the payee's degree status and type of visa.

                        °  If treaty exists, the payee may be exempt from withholding or taxed at a reduced rate.  Actual rate of withholding may vary between 0% to 30%. Determination will be made by the Disbursing Office based upon evaluation of information provided on the Form WH-1 "Statement of Citizenship and Federal Tax Status".

                (c)  Compensation for Independent Personal Services

                    (i)  Determine whether there is a tax treaty between the U.S. and the payee's country of residence for tax purposes. See IRS Pub 901, U.S. Tax Treaties; Table 2. Compensation for Personal Services in the US Exempt from US Income Tax Under Income Tax Treaties.  Although a tax treaty exists between the U.S. and the payee's country of residence for tax purposes, it should be noted that additional requirements may apply (e.g., amount received, number of days present in the U.S.).  The Disbursing Office will determine eligibility for the tax treaty, using the additional information provided on Form WH-1 "Statement of Citizenship and Federal Tax Status".  Specific requirements of the tax treaties can be found in IRS Publication 901 "U.S. Tax Treaties".

                    (ii)  Obtain forms required from the payee, based upon treaty position and election of personal exemption.

                    (iii)  Inform nonresident alien payee of withholding rate.

                        °  If no treaty exists, taxes will be withheld at the statutory rate of 30%.

                        °  If a treaty exists, the payee may be exempt from withholding or taxed at a reduced rate.  Actual rate of withholding may vary between 0% to 30%.  Determination will be made by the Disbursing Office based upon evaluation of information provided on Form WH-1.

        c.  If payee receives income that is effectively connected with a U.S. trade or business or if payee claims exemption or reduced rate of withholding under a tax treaty:

            (1)  Inform payee that a Taxpayer Identification Number (TIN) is required for nonresident aliens who receive effectively connected income or elect an exemption or reduced rate of withholding under a tax treaty.

            (2)  If the payee does not have a TIN and is notified by the Social Security Administration that a Social Security Number (SSN) cannot be issued, use Form W-7 "Application for IRS Individual Taxpayer Identification Number" (Attachment 10) to apply for an IRS individual taxpayer identification number (ITIN).  An ITIN is a nine-digit number issued by the U.S. Internal Revenue Service (IRS) to individuals who are required to have a U.S. taxpayer identification number but who do not have, and are not eligible to obtain, a SSN.  ITINs are intended for tax use only.  ITINs also only have a five (5) year lift period unless the individual files a Federal Tax return during that period.  For example, the numbers will create no inference regarding the immigration status of a foreign person or the right of that person to be legally employed in the United States.

            (3)  Payee must provide the TIN on Form WH-1.  If the payee is claiming exemption or reduced rate of withholding under a tax treaty, the TIN must be provided on the exemption form.

    2.  Disbursing Office

        a.  For all payments made on 1042S reportable object codes:

            (1)  Review Form WH-1 "Statement of Citizenship and Federal Tax Status" and ensure that applicable sections have been properly completed.

            (2)  Ensure that applicable forms are on file and review for completeness.

            (3)  Evaluate information to determine proper withholding rate or exemption from withholding.

            (4)  Process Payment Request (PREQ) or Disbursement Voucher (DV) payment to nonresident alien payee, net of accrual amount due to IRS.

        b.  Deposit taxes withheld with IRS. Deposit requirements vary, based upon the balance of taxes withheld.

        c.  At year end, file a Form 1042S "Foreign Person's U.S. Source Income Subject to Withholding" (Attachment 5) and Form 1042 "Annual Withholding Tax Return for U.S. Source Income of Foreign Persons" (Attachment 8) with the IRS.  Issue a Form 1042S to the individual nonresident alien payees.

IV. Delegation of Authority

There is no administrative specific delegation of authority.

V. Contact Information

Disbursing Office, 956-8575, or uhdisb@hawaii.edu, or UH Tax Director
Website:  http://www.fmo.hawaii.edu/payment_reimb/index.html

VI. References

A.  Link to superseded Executive Policies in old format https://www.hawaii.edu/policy/archives/ep/
B.  Link to Administrative Procedures in old format https://www.hawaii.edu/policy/archives/apm/sysap.php
C.  Treasury Regulation Section 1.1441-1 thru -9. Withholding of Tax on Nonresident Aliens
    •  Section 1.1441-1(e)(4)(vii). Requirement for the collection of taxpayer identification number
    •  Section 1.1441-1T. Requirement for the deduction and withholding of tax on payments to foreign persons and definition of taxpayer
    •  Section 1.1441-6. Claim of reduced withholding under an income tax treaty
    •  Section 1.1441-6T(b)(1). Reliance on claim of reduced withholding under an income tax treaty
D.  Treasury Regulation Section 1.1461-1. Payment and returns of tax withheld
E.  Treasury Regulation Section 301.7701 (b)-1 thru (b)-9
F.  Internal Revenue Code Section 117. Qualified Scholarships
G.  Internal Revenue Code Section 871(a). Income not connected with United States business – 30 percent tax
H.  Internal Revenue Code Section 871(c). Participants in certain exchange or training programs
I.  Internal Revenue Code Section 1441. Withholding of tax on nonresident aliens

VII. Exhibits and Appendices

Attachment 1:    1042S Reportable Payments KFS object codes rev 061416

Attachment 2:    WH-1 “Statement of Citizenship and Federal Tax Status”

Attachment 3:    Tax Treatment of Scholarship/Fellowship Payments

Attachment 4:    Listing of Common Visa Types seen in Hawaii

Attachment 5:    1042-S “Foreign Person’s U.S. Source Income Subject to Withholding” and Instructions

Attachment 6:    U.S. Tax Treaties by Country

Attachment 7:    Matrix for Payment Processing for NRAs by Visa Type

Attachment 8:    Form 1042 “Annual Withholding Tax Return for U.S. Source Income of Foreign Persons” and Instructions

Attachment 9:    U.S. Tax Treaties - Royalties

Attachment 10:  Form W-7 “Application for IRS Individual Taxpayer Identification Number” and Instructions

Attachment 11:  Form W-8-BEN “Certification of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals)” and Instructions

Attachment 12:  Form W-8-BEN-E “Certification for Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Entities)” and Instructions

Attachment 13:  Form 8233 “Exemption with Withholding on Compensation for Independent Personal Services of a Nonresident Alien Individual” and Instructions

Attachment 14:  Form W-8EXP “Certificate of Foreign Government or Other Foreign Organization for United States Tax Withholding and Reporting” and Instructions

Attachment 15:  W-8ECI “Certification of Foreign Person’s Claim that Income is Effectively Connected with the Conduct of Trade or Business in the United States” and Instructions

Approved

    Signed    
    Kalbert Young    
    June 13, 2016    
    Date    
    Vice President for Budget and Finance/Chief Financial Officer

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