We are a UK insurer and have been approached by a US broker to provide a W-8BEN-E form, which apparently certifies our non-US tax residency status. We are looking to underwrite a casualty programme for a US client from the UK, and this is the first time we have ever been asked to provide this form. As we do not have a business in the US, we do not see why we should comply with US tax rules. Is there any downside if we ignore their request?
Unfortunately, if you choose not to provide the W-8BEN-E form, not only will your company have 30% tax withheld on all US sourced income, including future premiums, interest and dividends, but insurance brokers may no longer wish to place US business with your company.
This is due to the fact that if tax is withheld from a premium, the validity of the contract would be brought into question, as premiums must be paid in full by the insured. Failure to comply with the broker’s request will therefore have serious repercussions for your company.
The reason why you have been asked for this form is due to the US Foreign Account Tax Compliance Act (FATCA), which came into force on 1 July this year. It has had a considerable impact on the banking, fund management and life insurance sectors, but unfortunately has had a secondary impact on property and casualty insurance and reinsurance, where US risks are being covered.
Why are the rules needed?
The purpose of the new rules is to enable the IRS to check that their citizens are declaring tax on all income they receive from financial assets held abroad. In a nutshell, from 1 July, non-US institutions that hold financial accounts for US citizens must disclose details of those accounts, either direct to the IRS or to their local tax authority. If they don’t, tax of 30% will be withheld from any fixed, determinable, annual or periodical income (FDAP) that they receive from the US. For these purposes, FDAP includes insurance and reinsurance premiums paid for liability cover for activities conducted in the US, coverage for property located there, or the lives or health of individuals living there.
Unfortunately, although your business is not holding financial assets for US citizens, as you will be receiving FDAP income from the US both your company and the US broker still have reporting obligations that must be adhered to under FATCA, otherwise withholding tax will be due. In your case, the only requirement to claim exemption under FATCA is to provide the W-8BEN-E form.
The form effectively confirms your status as a non-resident recipient of FDAP income and your FATCA status. Although it is a nine page document, you will be pleased to hear that only a fraction of the form will need to be completed.
To determine your FATCA status, you will first need to establish if you are a foreign financial institution (FFI) or a non-foreign financial entity (NFFE). In the insurance arena, FFIs are restricted to entities underwriting cash value insurance contracts, such as investment-linked contracts, or bundled insurance and savings products with surrender values. As your company is not regulated to insure such risks, you will be an NFFE.
Non-foreign financial entities
As an NFFE, you will then need to establish if you are an excepted NFFE, an active (and excepted) NFFE, or a passive NFFE. If you are publicly traded or affiliated to a company that is, then you will be an excepted NFFE. If less than 50% of the annual income received into the company last year was secured from assets connected with your reserve activities, then you will be an active (and excepted) NFFE. If it was more than 50%, you will be a passive NFFE.
If you are a passive NFFE, you will need to secure a global intermediary identification number (GIIN) from the IRS, via its website. You will also need to disclose, either to the IRS or to brokers requesting W-8BEN-Es, details of any US citizens holding more than 10% of stock in the company. I would recommend that for confidentiality and administrative purposes, you take the option to disclose US owners direct to the IRS, when you apply for your GIIN. Excepted NFFEs are exempt from this reporting obligation.
Once your FATCA status has been confirmed, the W-8BEN-E can then be completed. This should be done by a responsible officer within your organisation, usually the company’s chief compliance, operations or finance officer. The W-8BEN-E form expires three years after the December following signature, and you will be pleased to hear that copies of the same form can be supplied to requesting brokers or US insureds. Although the initial task of completion maybe somewhat onerous, when one considers that failing to do so will have the downside of a loss of 30% of US sourced revenue, I am sure you will conclude that the exercise is worthwhile. Of course, you could always ask for the assistance of an external advisor to help you complete the form. You should also consider registering and uploading the completed form to the Council of Insurance Agents and Brokers’ FATCA portal. The portal has been set up as an industry facilitation measure, with the purpose of enabling brokers to obtain the W-8BEN-Es, without having to approach the responsible officer for the insurer.
The IRS has conceded that if contracts are underwritten between 1 July and 31 December 2014, W-8BEN-Es to support tax exemption need not be secured until 30 June 2016. Organised brokers have though already adopted procedures, so that they request the forms from foreign insurers before concluding the placement of US business.
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