All About: Forms 8802 (US TRC's)

Do you work for a US entity and bill foreign clients? Do you want to be paid? Do you want to know more about your foreign clients for purposes of FDII? Then, you need to know about US TRC’s (Form 6166). Read more to find out why TRC’s are important and 10 tips for streamlining your TRC process.

If you work for a US company and bill foreign clients, one item you should be adding to your to-do list is obtaining your 2020 US Tax Residency Certificates (TRC’s). They also can be necessary when doing a legal entity restructuring or processing intercompany interest, royalty, and other payments. Often, this task is included in “admin” and sinks towards the bottom of a tax department’s ever-growing priority list. I will explain how to get your 2020 TRC’s and why they should be a higher priority.

What are TRC’s?

US TRC’s (or Form 6166) is obtained by filing Form 8802. You can find the latest form and instructions here. They are obtained to prove your US residency status and are issued by the US Treasury on official paper with a watermark. They are issued annually and certify your US status for purposes of income tax, VAT, etc. These can be requested by a foreign client and are often required before they will settle invoices from your company.

Why are TRC’s Important?

As mentioned above, TRC’s are often required by foreign clients before they will settle invoices received from US entities, so they can determine if withholding tax is required and what rate of tax should apply. Withholding tax is often due on a non-resident’s in-country income. It’s the foreign government’s way of getting “their piece of the pie” from entities that aren’t registered nor pay tax in their country. The US has many bilateral treaties with countries that either reduce withholding taxes or exempt them entirely. (You can find the index of treaty countries with the US here)

The rub is you can’t just say you are a US entity - for audit purposes, foreign clients can require that you certify your residency status via the TRC (and sometimes by requesting Form W8 BEN-E if you are a new vendor). Otherwise, they can apply the non-treaty (higher) rate when settling their invoice. Although withholding tax may generally be taken as a foreign tax credit, this presents several problems:

1. Cash flow: Let’s say you have an invoice to a foreign client in a country where the non-treaty rate is 30%, and you bill them for in-country income of $100K. Instead of receiving back $100K, you get $70K instead. This can cause cash flow headaches if it was unexpected.
2. Potential conflict between tax dept and accounting or business personnel: From an accounting perspective, withholding tax is a reduction to your AR, NOT revenue. However, this fact may not be understood by those in Accounting or in the business. There can be a misunderstanding and potential conflict because some may think that they have to reduce revenue for the tax withheld. 
3. Foreign Tax Credit Limitation: Generally speaking, a foreign tax credit can be allowed for withholding tax. However, technically that credit is limited if the tax is higher than what it should have been had you provided the proper documentation in order to apply treaty benefits. Withholding tax that is in excess of the treaty amount should be disallowed as an FTC.
4. Tax Becomes a Business Partner: Providing either AR groups and/or sales managers TRC’s and other required documentation for foreign clients provides a huge opportunity for Tax to become a true business partner. It allows Tax professionals to develop relationships with colleagues that can yield benefits for other tax-critical items.
5. Better Understanding of Foreign Sales for FDII and Transfer Pricing: With the advent of Tax Reform and the expansion of Transfer Pricing/BEPS, it has never been more important for the tax department to understand more about their foreign business. One way the TRC process can help is providing data about foreign clients which is useful for determining your FDII deduction.  Depending on the income type, it can also yield information about additional foreign-source revenue and creditable withholding tax for FTC’s. I have uncovered foreign-source revenue and tax that was not captured in regular GL analyses solely by uncovering it via the TRC process. Further, by building relationships with business and accounting colleagues, that eases the path to obtain other critical data that can yield a better understanding of your business for transfer pricing purposes, etc.
6. Required for Other Purposes: TRC’s can also come into play in other circumstances besides dealing with payments from foreign clients. Contemplating a legal entity restructuring? Have intercompany payments for interest, royalties, or other withholdable items? Yeah, you’re probably going to need a TRC for that.

Tips & Tricks

So, now you know why TRC’s are important. Now, I will share some tips and tricks that will help you expedite the process and avoid having the IRS reject your Form 8802.

1. Apply early: The IRS will accept 8802s on Dec. 1st of the prior year. (2020 certificates can be requested Dec 1st, 2019). Why should you apply early? They take 6-8 weeks to process. Applying early allows Tax Departments to be proactive and have them on hand when a client requests them, instead of making the client wait another 6-8 weeks before they can pay your company.
2. User fee increased to $185: Please see the instructions, but the IRS has recently increased the user fee to $185 (for non-individual applicants) or $85 (for individual applicants). If you pay the incorrect rate, the IRS will reject your application until you have paid the difference.
3. Pay your user fee online: The best way to pay your user fee is by paying online. You can pay via a credit card or bank account. You get immediate confirmation and can save bank account information or credit card details if you register for a user profile. Don’t forget to add the payment confirmation numbers to the top of Pg 1 for Form 8802.
4. Special instructions for certain entity types: Please refer to the IRS instructions carefully if you are applying for an LLC or other flow-through entity. There are special form requirements such as unique penalty of perjury statements, etc. that are required to obtain a TRC for entities besides C-Corps.
5. Special language for clients in Greece, Spain, Russia, and Portugal: On page 3, you can check the box if you need the certificate certified for a specific country. For most of the countries, you will get the “generic” certificate. However, for Greece, Spain, Russia, and Portugal, the certificate will come back with a special statement pertaining to these countries. Oftentimes, clients in these countries will not accept the “generic” certificate.
6. Special Country Documentation: Some countries require separate documentation in addtion to the US TRC. These countries include Portugal (MOD 21 RFI), India (Form 10F, no PE letter, etc.), Indonesia (Form DGT-1) and others. If you are attaching foreign documentation to Form 8802 itself, please check the box on the top of page 1 to indicate that foreign forms are attached.
7. You can certify for both VAT and Income tax on the same Form 8802. If you are completing the application in pdf, it will only let you check the box to request 1 type of certification. This can lead some to believe that separate 8802s and user fees are required to certify for different purposes. However, if you print the 8802 and you need to certify for both VAT and Income Tax, for example - just handwrite/check the additional box. As long as you include the correct penalty of perjury statements for each type, you can get back both certificates without paying the additional user fee.
8. Call the IRS to get status updates: After you send the 8802, it typically takes about 2 weeks for the IRS to receive it and input it to their system. After that, you can call 267-941-1000 to get a status update. This also could help if you are trying to speed up the process of getting your TRC. Officially, the IRS does not expedite TRC requests however I’ve found if I call regularly, I tend to get the TRC back sooner than if I just wait.
9. Scan a copy of your Form 8802 (after submission): Let’s say you get a request from a client, and you don’t want to wait 6-8 weeks to get the TRC to get paid. Offer the client to email a copy of the Form 8802 package that you submitted. Oftentimes, I have found clients will accept the Form 8802 submission in lieu of the certificate, as long as they are assured they will receive the TRC ASAP. 
10. Keep a list of TRC requests by US entity. By keeping a list of TRC’s requested for one year, you can refer to the list when you early apply for next year. Practically speaking, some companies will request TRC’s for all US entities whereas others will only request them for US entities that bill foreign clients. You can use your list as a check to make sure requests last year are requested the next year.

Wrap-Up

So, now you know what a TRC is, how to apply for them, and why they are important. Now, what are you waiting for? Apply for them today.

Do you have any additional tips for your 8802 process or any questions about the above? Feel free to leave a comment or question. Thanks for reading!