Organisations operating in the United States need to have accurate tax ID information to report income that’s paid to their suppliers. This process of data collection applies to companies based in both the US and abroad, if they have operations in the US.
What this means is that it’s essential to store accurate W-series tax ID information about your suppliers in order to meet the US’s requirements under federal tax law, and to avoid being hit by penalties because of a lack of compliance.
To this end, companies must have a robust process in place that allows them to collect relevant information from all of their suppliers. Furthermore, you also need to validate supplier tax ID information, such as US Taxpayer Identification Numbers (TIN) and EU Value Added Tax (VAT) numbers.
In this article we take a look at W-8 forms, W-9 forms, EU VAT and US TIN, so make sure you keep on reading to find out about each type.
What are W-8 series tax ID forms?
To make things more confusing, the W-8 series contains five different forms that can be used to manage tax requirements for entities that are claiming foreign tax ID status. These are:
As you can see, the US tax code system certainly has its complexities. This can create challenges for businesses that need to gather data about tax ID for suppliers that are operating in the US.
If suppliers complete the wrong form, or happen to fill out the right form but with incorrect information, it can have a serious impact on your company.
You also need to pay close attention to the rules outlined by the Foreign Account Tax Compliance Act (FATCA), under which any entity making a payment of US source income must also consider whether it is subject to the FATCA. Due to its wide-ranging nature, FATCA covers nearly every non-US supplier which is receiving most types of US-source income.
What is a W-9 tax form?
W-9 forms are used to provide a company’s federal Taxpayer Identification Number (TIN) to an entity that makes taxable payments to said company. The difference between a W-9 or W-8 forms is that the W-9 tax form is only required to be used by companies or associations that are created or organised in the US under the United States’ laws.
The details included on W-9 forms are important because they give the paying company an understanding of what kind of entity they are paying, based on information such as address and TIN. The Internal Revenue Service (IRS) uses W-9 forms to check the income reported by recipients against the payments reported by the paying company.
As such, it’s important for there to be communication and (accurate) data passed between organisations and their suppliers so that the IRS doesn’t get suspicious.
EU Value Added Tax (VAT) and IRS Taxpayer Identification Numbers (TIN)
Working with suppliers from different locations means it’s important to validate the foreign tax ID of a supplier by checking it against the tax authority under which the supplier operates.
This is good practice because it allows you to confirm the supplier’s accounting framework and validate their legal standing in their country of origin.
This is what the Internal Revenue Service’s TIN, and European Union’s VAT, are for. They are tax ID numbers used in the administration of tax laws and as such are critical parts of W-8 or W-9 tax forms.
In the US, common forms of IRS TIN are social security numbers, individual taxpayer identification numbers and employer identification numbers.
In the EU, VAT numbers play a crucial role in validating supplier identities for companies based within and outside of the EU. In short, it is always recommended that you validate tax identification information for both new and existing suppliers.
To find out more about how you can use an automated solution to support you with this, check out our detailed guide on tax credentialing here.