UVM Policies, Procedures, and Guidelines


University Policy and Procedure

Payments Made to Nonresident Aliens: A Policy and Procedure Manual

TABLE OF CONTENTS

Introduction

Determining U.S. Tax Residency

Tax Withholding Rates for Nonresident Aliens

Payments Through the Payroll System

Payments Through Accounts Payable

Payments Credited to a Student's Account

Income Tax Treaties

How to Obtain More Information


INTRODUCTION

U.S. tax law requires the University to withhold federal income tax from and report to the IRS all payments made to or on the behalf of a nonresident alien. Therefore, in order for the University to be in compliance with this law, the University must be able to identify all payments made to a nonresident alien or to a third party on his or her behalf. The University is then required to apply the appropriate tax withholding and report the payments made to those individuals in the correct manner. Please note that the U.S. tax withholding and reporting rules governing nonresident aliens are quite different than those governing U.S. citizens and resident aliens.

The Tax Administrator will monitor all payments made by the University (i) for possible nonresident alien tax withholding and reporting liability, (ii) to ensure compliance with all IRS rules and regulations, and (iii) to confirm that all information and required forms have been completed and collected. The Tax Administrator will be charged with making final determinations of U.S. tax residency status and applying applicable tax withholding and reporting requirements for all payments made by the University. Therefore, all questions concerning the policies and procedures contained in this manual should be directed to the Tax Administrator.

The first step in analyzing any payment is to determine the individual payee's U.S. residency status for tax purposes--that is, whether the individual is, in fact, a "nonresident alien." This threshold determination must be made regardless of the payment type (e.g., compensation, scholarship, fellowship, stipend, honorarium) or payment method (e.g., Payroll Office, Accounts Payable, or Student Accounts). Such a determination will depend on a variety of factors specific to each individual's situation. Therefore, the University must collect all necessary information required to make a residency determination prior to making any payment to the individual or to a third party on his or her behalf. The department requesting a payment to any individual is responsible for the collection of all information necessary for the Tax Administrator to make a U.S. residency determination for tax purposes; the Tax Administrator is responsible for making all tax withholding decisions.

Policy and Procedures Summary

This manual will serve as a reference tool to be used by departments when making payments to or on the behalf of a nonresident alien. A department is neither required nor expected to understand the complexities associated with taxation of nonresident aliens. Therefore, the University has designated a Tax Administrator to review and approve all payments made to nonresident aliens. Departments will be responsible for the collection of all necessary information and forms; the Tax Administrator will make all residency determinations and tax decisions related to nonresident aliens. It is important to note that the procedures described herein should in no way affect the University's decision to hire or otherwise engage any individual. The University of Vermont is committed to ensuring full compliance with the tax laws. The tax withholding and reporting requirements relating to nonresident aliens are very complex. As such, this manual will serve as a guide for individuals and departments to enable all parties to meet their tax withholding and reporting requirements. This manual is not intended to serve as a complete source of information regarding the University's tax treatment of payments made to nonresident aliens. All questions regarding these policies and procedures should be directed to the Tax Administrator. A summary of the basic points in this manual is set forth below:

U.S. Residency Status for Tax Purposes

Under U.S. tax laws, all non-U.S. citizens are considered to be either "resident aliens" or "nonresident aliens." Residency status rules for tax purposes are governed by the IRS and the Treasury Department. Resident aliens are taxed on their worldwide income in the same manner as U.S. citizens and are not subject to the policies and procedures addressed in this manual. Nonresident aliens, however, are taxed only on income from U.S. sources under special rules and are subject to the policies and procedures addressed in this manual. The residency status rules for tax purposes are related to, but are not the same as, the residency status rules for immigration purposes, which are governed by the Immigration and Naturalization Service (INS). Therefore, individuals who are resident aliens for tax purposes may in fact be nonresident aliens for immigration purposes. Unless otherwise stated, this manual pertains to residency status for tax purposes only.

Types of Payments Made to Nonresident Aliens

The University is required to withhold U.S. income tax at the time a payment is made to a nonresident alien or to a third party on his or her behalf; if the University does not withhold the appropriate amount of tax at the time of payment, the University can be held liable for the tax that is not withheld. The types of payments to which this rule applies include, but are not limited to:

After the University has determined the individual's residency status for tax purposes and the amount of income subject to taxation, the University must then determine the appropriate amount of tax to withhold and must collect any additional required information. These withholding and reporting determinations are based upon the type of payment made to the individual.

Non-employee payments made to nonresident aliens are subject to a general 30 percent rate tax withholding; however, scholarships and fellowships, which require no service to be performed as a condition of the grant, may be subject to a reduced withholding rate of 14 percent. Compensation paid to nonresident alien employees is subject to the graduated rates of tax withholding; however, some restrictions pertaining to marital status and withholding allowances will apply.

Possible Exemptions From Tax Withholding

An individual may be eligible to claim an exemption from the 30 or 14 percent or graduated rates of withholding if he or she qualifies for an income tax treaty exemption. An income tax treaty is an agreement between the U.S. and a foreign country that is intended to alleviate double taxation. Income tax treaties also contain various provisions designed to promote cross-cultural education and exchange by allowing students, teachers, and researchers of one country to perform certain related activities in the other country and receive an exemption from tax. These "tax treaty" exemptions are usually only valid for a limited time period and/or for a specified dollar amount. An individual must meet the qualifications of a particular tax treaty in order to claim an exemption and must complete a form requesting the exemption. The Tax Administrator will review the information collected by the requesting department to determine whether the individual qualifies for a tax treaty exemption and will submit all necessary forms on behalf of the individual to the IRS.

Following is a general overview of the forms required in connection with payments made to nonresident aliens; a detailed discussion of the procedures for properly requesting each type of payment and completing each form is included in the subsequent pages. Failure to follow the payment processing steps set forth in this manual will result in the maximum amount of tax withholding for the individual and/or a significant potential tax liability for the University. Therefore, it is essential that all deans, department chairpersons, administrators and other personnel clearly understand and comply with the University's policies and procedures for payments made to nonresident aliens as set forth in this manual.

Employees

All Employee Classifications, Including Student Employees
Independent Contractors and Honoraria Recipients
Students

F, J, M, or Q visaholders receiving scholarship or fellowship grants
(no services required)
With Treaty Exemption
Without Treaty Exemption
With Treaty Exemption
Without Treaty Exemption
With Treaty Exemption
Without Treaty Exemption
--Alien Information Collection Form

--Meeting with Tax Administrator

--Form 8233 (and any attachments)

--Form W-4 (using special instructions)

--Alien Information Collection Form

--Meeting with Tax Administrator

Form W-4 (using special instructions)

--Alien Information Collection Form

--Form W-8

--Form 8233

--Alien Information Collection Form

--Form W-8

--Alien Information Collection Form

--Form 1001

--Alien Information Collection Form

Because many terms used in the discussion of nonresident alien taxation may be confusing, please review the following definitions before reading this manual.

Definitions

Form I-94/I-94W: A Form I-94/I-94W is an Arrival/Departure card (the small white or green card stapled in the front of the passport). The date written on this card is the date on which the individual's permission to stay in the U.S. expires.

Nonresident Alien: The U.S. tax residency status of a non-U.S. citizen who is temporarily present in the U.S. Nonresident aliens are required to pay taxes only on their income from U.S. sources.

Original Date of Entry to the U.S.: An individual may enter or leave the U.S. several times during the period of his or her U.S. visit (for vacation, holidays, etc.) The original date of entry in the U.S. is the first date that he or she arrived in the U.S. before beginning his or her study, teaching, research, etc.

Permanent Resident Alien: An individual granted lawful U.S. permanent residence status. Permanent resident aliens (often referred to as "green-card holders") are taxed in the same manner as U.S. citizens.

Resident Alien: The U.S. tax residency status of an individual who has been present in the U.S. for a period of time long enough to meet the substantial presence test (defined below). Resident aliens are taxed on their worldwide income and in the same manner as U.S. citizens.

Substantial Presence Test: A test used to determine an individual's U.S. residency status for tax purposes. It involves a calculation of the number of days that an individual has been present in the U.S. over a period of three years.

Tax Treaty: The U.S. maintains income tax treaties or agreements with over 47 countries in an effort to reduce or eliminate double taxation.

U.S. Residency Status For Tax Purposes: U.S. tax is imposed based upon an individual's U.S. residency status for tax purposes; this status is not associated with the individual's immigration or visa status. A non-U.S. citizen's residency status is either a resident alien or nonresident alien. A resident alien is taxed on worldwide income in the same manner as a U.S. citizen; a nonresident alien is taxed only on income from U.S. sources.

Visa Type: "Visa type" refers to the category of visa that a non-U.S. citizen holds. The "visa type" is marked on visa stamp or sticker in the individual's passport. For more information regarding the various types of visas or appropriate type of visa needed for a particular individual, see the visa chart on the following page and/or contact the Office of International Educational Services.

VISA Classifications

A-1, A-2: Diplomats and foreign government officials and their dependents. Some dependents are granted work authorization.

B-1: Business visitors. No work authorization. Eligible to receive reimbursement for travel expenses and per diem.

B-2: Visitors for pleasure. No work authorization. May not receive any reimbursements for any expenses.

C-1: Transit visa. No work authorization.

D-1: Foreign crewmen. Work authorized for sponsoring employer.

E-1: Treaty trader. Work authorized for sponsoring employer.

E-2: Treaty investor. Work authorized for sponsoring employer.

F-1: Students. Work authorized for host institution under very limited conditions.

F-2: Spouse and dependents of students. No work authorization.

G-1, G-2: Employees of international organizations. Some

G-3, G-4: dependents are granted work authorization.

H-1A: Nurses. Work authorized for the sponsoring employer.

H-1B: Professionals. Work authorized for sponsoring employer.

H-2A: Temporary Agricultural Workers. Work authorized for sponsoring employer.

H-2B: Temporary workers. Work authorized for sponsoring employer.

H-3: Trainee. Work authorized for sponsoring employer.

H-4: Dependents of H visaholders. No work authorization.

I-1: Foreign Journalists. Work authorized for sponsoring employer. Dependents are not work authorized.

J-1: Exchange Visitors including students, scholars, teachers and researchers. Work authorized under certain conditions.

J-2: Spouse and dependents. Work authorized under certain conditions.

K-1: Fiancee of U.S. citizen. Work authorized.

L-1,A,B: Intra-company executive, managerial, or specialized-knowledge transferee. Work authorized for sponsoring employer.

L-2: Dependents. No work authorization.

M-1: Vocational student. Work authorized under certain conditions.

M-2: Dependents. No work authorization.

O-1: Individual of Extraordinary Ability in the sciences, education, business, athletics or the arts. Work authorized for sponsoring employer.

O-2: Accompanying workers. Work authorized for sponsoring employer.

O-3: Dependents. No work authorization.

P-1: Internationally known athletes and entertainment groups. Work authorized for sponsoring employer.

P-2: Performing artists under a reciprocal exchange program. Work authorized for sponsoring employer.

P-3: Culturally unique entertainers. Work authorized.

P-4: Dependents. No work authorization.

Q-1: International Cultural Exchange. Work authorized for sponsoring employer.

R-1: Religious Workers. Work authorized for sponsoring employer.

TN: "Trade NAFTA" (Canadians only). Supersedes "TC" designation. Work authorized for specified employer only.

WB: No work authorization. Eligible to receive reimbursement for travel expenses and per diem.

WT: No work authorization. May not receive any reimbursements for any expenses.

F and J are the visa types most commonly sponsored by the University.


DETERMINING U.S. TAX RESIDENCY

Is the Individual a U.S. Resident or Nonresident Alien for Tax Purposes?

The Alien Information Collection Form is designed to collect the information necessary to determine the U.S. tax residency status of a non-U.S. citizen. The form contains the information necessary to apply the substantial presence test which is used to make such determinations. The departmental or University representative responsible for administering Form I-9 is now responsible for ensuring that all non-U.S. and non-permanent resident aliens (green-card holders) are given the Alien Information Collection Form to complete at the same time. When requesting a payment to a non-employee, the department requesting the payment must ask the individual if he or she is a U.S. citizen or permanent resident alien; if the individual is not a U.S. citizen or permanent resident alien, the individual must complete the Alien Information Collection Form to determine his or her U.S. residency status for tax purposes. Completion of the Alien Information Collection Form is the only method that can be used to determine an individual's U.S. residency status under University policy.

The individual should complete the form using the following instructions:

1. NAME AND ADDRESS/PHONE: Enter your full name and U.S. or current address/phone number.

2. COUNTRY OF CITIZENSHIP: Enter your country of citizenship.

3. SOCIAL SECURITY NUMBER/Individual Taxpayer Identification Number: Enter your U.S. social security number/individual taxpayer identification number. If you do not have a U.S. social security number, you must apply for an individual taxpayer identification number using Form W-7 (the instructions for the form's completion are below). If you are from Canada, do not enter a social security number issued by the Canadian government.

4. UNIVERSITY STATUS: Indicate whether you are a full-time student and/or an employee or non-employee.

5. ADDRESS IN HOME COUNTRY: Enter your permanent foreign address.

6. University Department/College: Enter the University department and telephone number in which you are currently affiliated with.

7. Passport Number/Visa Number: Enter the your visa and passport numbers.

8. CURRENT VISA STATUS: Indicate the type of visa on which you are currently present in the U.S.

9. ORIGINAL DATE OF ENTRY TO U.S.: Indicate the first date on which you entered the U.S. for the purpose of this visit.

10. VISA EXPIRATION: Enter the date on which your permission to stay in the U.S. expires.

11. PRIOR VISIT: Were you present in the U.S. prior to this particular visit? If yes, enter the date on which you were present in the U.S. and the type of visa held during the prior visit.

12. Attendance at Other Institutions: Indicate the name of the institution, if any, that you previously attended and the period of attendance.

13. STEP 1 OF THE SUBSTANTIAL PRESENCE TEST: Indicate whether you are/were a student present in the U.S. for less than five calendar years, or a teacher, specialist or professor present in the U.S.. for less than two calendar years. If you marked either box in Step 1, do not complete Step 2, complete only Sections E and F.

14. STEP 2 OF THE SUBSTANTIAL PRESENCE TEST: If you did not mark a box in Step 1, indicate the number of days present in the U.S. during a three calendar year period by following the instructions set forth on the form.

Current Year: Indicate the number of days present in the U.S. during the current calendar year.
1st Preceding Year: Determine the number of days present in the U.S. during the last calendar year and divide that number by 3.
2nd Preceding Year: Determine the number of days present in the U.S. during the calendar year before the last calendar year and divide that number by 6.
Total: Add the calculated numbers.

If the Total is less than 183 days, you are a nonresident alien; if the Total is equal to or greater than 183 days, you are a resident alien.

15. RESIDENCY STATUS: Indicate your residency status based upon the results of Step 1 or Step 2 of the Substantial Presence Test.

16. SIGNATURE AND DATE: Sign and date the form.

DO NOT COMPLETE SHADED BOXES

The Substantial Presence Test (Steps 1 and 2 of the Alien Information Collection Form)

The Substantial Presence Test

To determine whether the individual is a "nonresident alien," administer the substantial presence test:

If the individual has been in the U.S. for less than 31 days in the current calendar year he or she is automatically considered to be a nonresident alien for tax purposes,

or

If the individual has been in the U.S. for 31 days or more and less than 183 days during a three year period including the current calendar year and the two immediately preceding calendar years using the formula set forth below, he or she is considered to be a nonresident alien.

All days present in the U.S. during the current calendar year

+ 1/3 of days present in the U.S. during the 1st preceding year

+ 1/6 of days present in the U.S. during the 2nd preceding year

= Total number of days present in the U.S. for tax purposes

The substantial presence test is a method used by the IRS to determine if an individual should be taxed as a nonresident alien. This test is made each year, and in general, is a calculation of the number of days that an individual has been physically present in the U.S. during a three calendar year period.

An individual is taxed in the same manner as a U.S. citizen if he or she meets the substantial presence test by being physically present in the U.S. for at least 31 days in the current calendar year and at least 183 days, taking into account (i) all of the days present in the U.S. during the current calendar year, (ii) one-third of the days present in the U.S. during the first preceding calendar year, and (iii) one-sixth of the days present in the U.S. during the second preceding calendar year.

The "Exempt Individual" Rules

Certain individuals are exempt from counting days toward the substantial presence test. They are individuals who are present in the U.S. under the following circumstances:

The term "exempt individual" as used in connection with the substantial presence test refers only to an individual who is "exempt" from having to count days of presence in the U.S. The term "exempt individual" does not mean that the individual is "exempt" from paying federal income or FICA tax or filing a U.S. income tax return.


TAX WITHHOLDING RATES FOR NONRESIDENT ALIENS

The IRS requires that special tax withholding rates be applied to all payments made to or on the behalf of nonresident alien individuals. The rate of tax withholding is dependent upon the type of nonresident alien recipient and the type of income paid. The following chart sets forth the generally applicable tax withholding rates.

Employees

All Employee Classifications, Including Student Employees
Independent Contractors and Honoraria Recipients
Students

F, J, M, or Q visaholders receiving scholarship or fellowship grants/stipends
(no services required) in excess of tuition and required fees
With Treaty Exemption
Without Treaty Exemption
With Treaty Exemption
Without Treaty Exemption
With Treaty Exemption
Without Treaty Exemption
0%*
Withholding Rates using "Single," One Withholding Allowance, and an additional $4.00 per week
0%*
30%
0%*
14%

* Please note that income tax treaties contain annual dollar and/or time limits for income tax exemption. If an individual meets or exceeds the dollar and/or time limits, the tax treaty exemption is no longer applicable.


PAYMENTS THROUGH THE PAYROLL SYSTEM

Payments Made to New Employees Through the Payroll System

All full-time or part-time new employees are required to complete a Form I-9 (Employment Eligibility Form) at the time of hire. Therefore, it is the responsibility of the departmental or University representative who certifies Form I-9 to determine the new employee's U.S. citizen/permanent residency status by following the steps set forth in this section of this manual.

How to Process a Payment Through the Payroll System

a) The departmental or University representative responsible for administering and certifying Form I-9 must review the information on the form to determine whether the new employee is a U.S. citizen or permanent resident alien. Please keep in mind that all new employees are required to complete this question and provide information about their U.S. citizenship/permanent residency status on this form, regardless of whether there is reason to believe that the individual may or may not be a U.S. citizen.

b) If the new employee indicates on Form I-9 that he or she is a U.S. citizen or permanent resident alien, there is no change to current procedures.

c) If the new employee indicates on Form I-9 that he or she is not a U.S. citizen or a permanent resident alien (an "other alien authorized to work until"), the departmental or University representative responsible for administering and certifying Form I-9 is now responsible for giving the new employee an Alien Information Collection Form to complete to determine his or her U.S. residency status for tax purposes. The departmental or University representative is also now responsible for notifying the new employee that he or she must schedule an appointment with the Tax Administrator (a copy of the Employee Notification Sheet is attached).

d) The new employee must take the Alien Information Collection Form with him or her to meet with the Tax Administrator in order to review the form, discuss the applicable tax withholding status, and complete any additional tax forms. Failure of the new employee to meet with the Tax Administrator in a timely fashion will result in tax withholding at the maximum rates; any tax withheld due to failure to complete necessary forms prior to payment CANNOT, by IRS regulation, be refunded by the University.

e) The Tax Administrator will review the individual's tax situation to determine whether the individual qualifies for a U.S. tax exemption under an income tax treaty and, if so, assist the individual with the completion of any additionally required forms. If the individual does not qualify for an income tax treaty exemption, he or she will be required to complete Form W-4 following the special instructions shown on page 15. A Form W-4 should only be com-pleted with the direction of the Tax Administrator; a Form W-4 completed in any manner other than that discussed on page 15 will not be processed.

How to Complete Form W-4

Nonresident Alien Employees

Nonresident aliens who receive employee compensation are subject to graduated rates of withholding and required to complete Form W-4 as follows, regardless of their actual status:

Special withholding tax rules apply to employee compensation payments made to nonresident aliens. Nonresident aliens are required to complete Form W-4 following the special guidelines discussed below. Also, no tax withholding is required to the extent that the compensation payment is exempt from income tax under either a provision of the Internal Revenue Code or a tax treaty. Form W-4 should be completed by all nonresident alien employees with the assistance of the Tax Administrator; however, for your information, detailed instructions and a sample of the form are included in this manual. A Form W-4 completed in a manner other than that discussed below will not be processed.

1. NAME AND ADDRESS: Enter name and local U.S. mailing address.

2. SOCIAL SECURITY NUMBER: Enter social security number. If the new employee does not have a social security number, he or she must apply for one immediately.

3. MARITAL STATUS: Mark "Single" for marital status regardless of actual marital status.

4. NUMBER OF ALLOWANCES: Claim only one withholding allowance by entering a "1" on line 5, regardless of the number of actual withholding allowances. Canadians, Mexicans and American Samoans are entitled to the same personal allowances as U.S. citizens. Japanese and Koreans are entitled to claim one allowance for themselves, and one additional allowance for their spouse and dependent children who are present with them in the U.S. Students from India are entitled to claim one additional allowance.

5. ADDITIONAL WITHHOLDING: Nonresident aliens are required to have $4.00 per week deducted in addition to the tax withheld as graduated withholding. This amount will vary depending on the period of payment. For example, if an individual is paid bi-weekly, he or she should indicate $8.00 on this line. Students from India are not required to have the additional withholding.

6. EXEMPTION: A nonresident alien is not permitted to claim "Exempt" on this line; in the case of an exemption under an income tax treaty, Form 8233 (discussed below) should be completed in addition to Form W-4. Form W-4 should be completed in the manner outlined above and will apply at the time the treaty-based exemption no longer applies.

7. SIGNATURE: The individual must sign and date the form.

FICA Tax Withholding

The F, J, M, and Q Visaholder Exception

A broad FICA tax exemption exists for all nonresident alien F-1, J-1, M-1, and Q-1 visaholders who are performing services to carry out the primary purpose of their visa's issuance. As previously discussed, F, J, M, and Q student visaholders are exempt from counting days of presence in the U.S. under the substantial presence test for five calendar years; J and Q teacher, researcher and trainee visaholders are exempt from counting days for two calendar years. Once such an individual is in the U.S. long enough so as to lose his or her "exempt individual" status, the individual must begin counting days of presence in the U.S. under the substantial presence test. Once such an individual counts 183 days of U.S. presence toward the substantial presence test, he or she is considered a resident alien for that entire calendar year and is subject to FICA tax retroactively to January 1 of that calendar year.

In addition, in order to qualify for the FICA tax exemption, the nonresident alien's work must be "performed to carry out the purpose specified in" the F, J, M, and Q visa. The individual will typically satisfy this requirement by being the primary visaholder (the "-1" visaholder); however, the spouse/dependents (the "-2" visaholders) will not meet this requirement because their employment does not "carry out the purpose" of the F-2, J-2, M-2, or Q-2 visa. Therefore, the "-2" visaholders are not eligible for the FICA tax exception.

All FICA tax exemptions will be determined and monitored by the Tax Administrator based upon information provided by the individual on the Alien Information Collection Form and the individual's visa documentation. The individual must meet all three requirements as discussed above in order to qualify for the exemption. If the individual's visa expires, documentation of a visa extension must be provided to the Tax Administrator; if the necessary documentation is not provided, the FICA exemption will no longer apply.

FICA Exception for F, J, M and Q Visaholders

An individual can be exempt from FICA tax withholding if he or she meets all of the following criteria:

1. a nonresident alien, and

2. present in the U.S. under an F-1, J-1, M-1, or Q-1 category visa, and

3. performing services in accordance with the primary purpose of the visa's issuance (i.e., the primary holder of the visa, the "-1" visaholder.)

EXAMPLE: If an F-1 student arrived in the U.S. on February 1, 1992, the student would be able to "exempt" five calendar years from counting days of presence in the U.S. (i.e., 1992, 1993, 1994, 1995, and 1996). The student would begin counting days of presence in the U.S. beginning on January 1, 1997, and would technically qualify as a U.S. resident for tax purposes after 183 days, on July 3, 1997; however, the student would be considered a resident alien retroactively to January 1, 1997, and would be subject to FICA tax as of that prior date. Therefore, the University must begin withholding FICA tax on January 1, 1997, unless there is evidence that the student will leave the U.S. prior to July 3, 1997.


PAYMENTS MADE THROUGH ACCOUNTS PAYABLE(Procurement Services)

Payments Made Using a Check Request Form

The question on the revised Check Request Form and Multiple Check Request Form must be answered for all payments (i) made to individuals and/or (ii) associated with non-employee conference/travel; if the question is not answered, the payment will not be processed. When making a payment through Accounts Payable, it is the responsibility of the individual who completes the Check Request Form and Multiple Check Request Form to determine whether the payee is a U.S. citizen or permanent resident alien. Such a determination should be made by asking each payee about his or her U.S. citizenship/permanent residency status, regardless of whether there is reason to believe that the individual may or may not be a U.S. citizen. If it is determined that the payee is a nonresident alien, the payment must be processed using a Check Request Form; do not use a Multiple Check Request Form. If the payee is a third party being paid on the behalf of another individual, the question regarding U.S. citizenship/permanent residency status applies to that of the true beneficiary of the income, not the check payee.

Example: If tickets are purchased from a travel agency, the true beneficiary or recipient of the income is the individual for whom the ticket is being purchased or the actual traveler. Therefore, in this example, the question regarding U.S. citizenship/ permanent residency status applies to the traveler, not the travel agency. This serves as an example for third party payments.

Please note: Before inviting or otherwise agreeing to pay a non-U.S. citizen/non-permanent resident alien, the University official inviting/engaging the guest should ensure that the individual is/will be present in the U.S. under a visa classification eligible to legally receive payment and/or travel reimbursement. See page 6 for more information or contact the Office of International Educational Services for assistance.

If the steps set forth below are not followed by the individual completing the Check Request Form and Multiple Check Request Form, the payment will not be processed. Also, if the necessary forms are not completed by the payee or the true beneficiary and attached to the Check Request Form, the maximum rate of tax will be withheld from the payment. Any federal tax withheld due to failure to provide the required information or forms CANNOT, by IRS regulation, be refunded by the University.

How to Process a Payment Using a Check Request Form

a) The individual who completes the Check Request Form or Multiple Check Request Form is responsible for determining whether the payee or the true beneficiary of the income is a U.S. citizen or permanent resident alien. The question on the revised Check Request Form and Multiple Check Request Form regarding U.S. citizenship/residency status must be completed.

b) If the payment is made to or on behalf of a U.S. citizen or permanent resident alien (green-card holder), there is no change to current procedures. The Check Request Form and Multiple Check Request Form, containing the appropriate attachments and supporting documentation, including the Independent Contractor/Employee Status Determination Form if applicable, should be forwarded to Accounts Payable for payment processing.

c) If the payment is made to or on behalf of a non-U.S. citizen/non-permanent resident alien, the payment must be requested using a Check Request Form. The beneficiary of the income must complete an Alien Information Collection Form to determine his or her U.S. residency status for tax purposes.

d) All payees or beneficiaries of income who are nonresident aliens must complete a Form W-8 to establish foreign status. Please note that Form W-9 should be completed by U.S. citizens or permanent resident aliens, not nonresident aliens.

e) If the payment is made to or on behalf of a nonresident alien and the individual is from a country with which the U.S. maintains an income tax treaty (see below), he or she must complete a Form 8233 and/or Form 1001 to claim an exemption from tax withholding (Form 8233 and instructions for the form's completion are found on pages 30-31; Form 1001 and instructions for the form's completion are found on pages 32-33); if the individual does not submit a properly completed Form 8233 and/or Form 1001, tax withholding at a rate of 30 percent will be deducted from the payment. If the individual is not from a country with which the U.S. maintains an income tax treaty, tax withholding at a rate of 30 percent will be deducted from the payment.

f) If the payment is made to or on the behalf of a nonresident alien and the individual does not have a U.S. social security number, the individual must apply for an individual taxpayer identification number using Form W-7. The instructions for the form's completion are below. A copy of the completed Form W-7 with evidence that it has been processed by the IRS must be attached to the Check Request Form.

g) If the payment is made to or on behalf of a nonresident alien, all required forms and supporting documentation, including a copy of the individual's passport and visa documentation, must be attached to the Check Request Form and forwarded to Accounts Payable for payment processing. This office will then forward the payment to the Tax Administrator.

h) The Tax Administrator will review the Check Request Form and any attached forms to determine the individual's U.S. tax status and whether the individual qualifies for a tax exemption under an income tax treaty. Based upon the information and forms provided, the Tax Administrator will calculate and deduct any necessary tax withholding from the payment. The payment will then be processed by Accounts Payable.

How to Complete Form W-8

Form W-8 is completed by a nonresident alien to establish his or her foreign status. All nonresident alien non-employees must complete Form W-8 and attach the form to the Independent Contractor/Employee Status Determination Form. Only the following questions should be completed:

1. NAME: Enter name.

2. U.S. TAXPAYER IDENTIFICATION NUMBER: Enter social security number.

3. PERMANENT ADDRESS: Enter permanent foreign address.

4. CURRENT MAILING ADDRESS: Enter U.S. or current mailing address.

5. ACCOUNT INFORMATION: Leave blank.

6. CERTIFICATION: Leave blank.

7. SIGNATURE AND DATE: The nonresident alien should sign and date the form.

How to Complete Form W-7

Form W-7 should be completed by individuals, who are not otherwise eligible to receive a social security number, in order to apply for an IRS individual taxpayer identification number (ITIN). The form may be submitted to most IRS offices and certain U.S. consular offices abroad. In addition, an individual may also submit the form through an acceptance agent; however, the University has not yet been designated as an acceptance agent. Therefore, the form and such documentation should be submitted directly to the IRS. In the event that the University becomes an acceptance agent, the individual may meet with the Tax Administrator while on campus instead of submitting the form to the IRS. The individual must submit with the form original or authenticated copies of documentation that certify his or her identity and foreign status. Only the following questions should be completed:

1. NAME: Enter name.

2. ADDRESS OF TAX RESIDENCE: Enter permanent foreign address.

3. CURRENT MAILING ADDRESS: Enter U.S. or current mailing address.

4. BIRTH INFORMATION: Enter Date and Place of Birth.

5. SEX: Indicate whether Male or Female.

6. FAMILY INFORMATION: Enter Mother and Father's Names.

7. OTHER INFORMATION: Enter country of Citizenship, Foreign Tax Identification Number, Passport Information, Visa Information, Reason for Filing a Form W-7, and Previously Assigned U.S. Identification Number Information.

8. SIGNATURE AND DATE: The nonresident alien should sign and date the form.


PAYMENTS CREDITED TO A STUDENT'S ACCOUNT

Payments Made to a Student Through Student Accounts

All payments credited to a student's account will be reviewed by the Tax Administrator for possible tax withholding and reporting liability. The department actually granting the award is not required to complete any additional forms; therefore, the following information is for informational purposes only.

All scholarship and fellowship grant payments made to nonresident alien students through Student Accounts must be reported to the IRS; however, only a portion (or none) of the grant payment may be subject to U.S. tax. Amounts that are restricted to the payment of (i) tuition and fees required for enrollment, and (ii) fees, books, supplies, and equipment required for courses of instruction are not subject to U.S. taxation for any student, regardless of whether the student is a U.S. citizen, resident alien or nonresident alien. Amounts that do not qualify under these two categories are subject to U.S. taxation. While the IRS does not require the University to withhold tax on taxable scholarship/fellowship payments made to U.S. citizens and residents, tax must be withheld on such payments made to nonresident aliens. Therefore, when awarding a scholarship or fellowship grant to a nonresident alien student by crediting the student's account, it is the responsibility of the awarding department to notify the student of a possible tax liability associated with the payment prior to his or her arrival in the U.S. A "Letter of Tax Information" should be provided to the student at the time the grant is awarded (a copy is available for distribution from the Tax Administrator).

Upon arrival in the U.S., a foreign student must attend a mandatory foreign student orientation or meet with the Tax Administrator to complete an Alien Information Collection Form, Form 1001 and provide other information. Foreign students who do not complete these required forms may have a hold placed on their account to prevent them from registering for classes until the forms are completed.

The Tax Administrator will obtain information from the Office of International Educational Services and the Student Accounts system to identify nonresident alien students receiving scholarship or fellowship grant payments and will calculate any applicable tax. Nonresident alien students who receive scholarship or fellowship grants that are subject, in whole or in part, to U.S. tax will be notified by the Tax Administrator that any applicable tax withholding has been charged to his or her student account; in addition, the awarding department will also receive notification of any tax charged to the student's account.


INCOME TAX TREATIES

What Is an Income Tax Treaty?

The United States maintains bilateral income tax treaties with over 47 different countries in an effort to reduce or eliminate double taxation. It is important to note that each individual treaty is unique and may not contain the same provisions or exemptions as another tax treaty.

While income tax treaties are, for the most part, designed to facilitate commercial trade and the flow of capital between the two countries, all treaties also contain provisions (referred to as "articles") which are intended to promote cross-cultural education and exchange. These articles generally provide for a partial or complete tax exemption for scholarship/fellowship grants and for compensation payments received by students, trainees, teachers, researchers, and independent contractors. The Tax Administrator will make all tax treaty exemption determinations by determining an individual's eligibility for an exemption based upon information provided by the individual on the Alien Information Collection Form and/or during an individual meeting.

All employees who are eligible for a tax treaty exemption must schedule an appointment to discuss with the Tax Administrator the qualifications for exemption and complete all required tax treaty exemption forms. For more information regarding a tax treaty exemption, contact the Tax Administrator.

How Will an Income Tax Treaty Benefit an Individual?

Income tax treaties contain articles which address certain categories of income and different types of individuals; typically, tax treaties contain articles which relate to students, trainees, teachers, researchers, as well as articles that apply to individuals receiving income in the U.S. as employees, independent contractors and honoraria recipients. If an individual qualifies for a tax treaty exemption, the exemption can be claimed at the time of payment by asking the employer or payor not to withhold taxes from the payment and completing all required forms; please note that sufficient time should be allowed for payment processing, usually 10 days. In addition, the exemption can be claimed by the individual when he or she files a U.S. income tax return. Please note that failure by the individual to request a tax withholding exemption will not affect the individual's ability to later claim a tax treaty exemption when completing his or her U.S. income tax return.

Income from Personal Services

Some tax treaties contain a limited exemption for personal services income earned by students, trainees, teachers and researchers while in the U.S., but there is typically an annual maximum dollar amount and/or a time limit of presence in the U.S. for which the exemption can be claimed.

Example: Article 21 of the U.S.-France income tax treaty allows an exemption of $5,000 per calendar year for personal services income earned by a student for a period of five calendar years from the date of the student's arrival in the U.S.

Example: Article 19 of the U.S.-China income tax treaty allows an unlimited exemption from tax on compensation paid to teachers and researchers for a period of three years.

Scholarship and Fellowship Grants/Stipends (no services required)

Many U.S. tax treaties contain a "Student" article that exempts scholarship and fellowship grants or stipends received by an individual who is in the U.S. (i) studying at a U.S. educational institution, (ii) training to pursue a professional specialty, or (iii) studying or doing research under a grant from a governmental, charitable or educational organization.

U.S. Income Tax Treaties Currently in Force

Each income tax treaty is unique and may not contain the same provisions for exemption as another treaty. The existence of an income tax treaty does not mean that an individual will automatically be exempt from tax withholding; the individual must meet all of the qualifications as set forth in the treaty and must complete and submit all required tax treaty exemption forms. The U.S. currently maintains income tax treaties with the following countries:

Armenia*

Australia

Austria

Azerbaijan*

Barbados

Belgium

Belarus*

Canada

China (People's Republic)

Cyprus

Czech Republic

Denmark

Egypt

Finland

France

Georgia*

Germany

Greece

Hungary

Iceland

India

Indonesia

Ireland

Israel

Italy

Jamaica

Japan

Kazakhstan*

Korea

Kyrgystan*

Luxembourg

Malta

Mexico

Moldova*

Morocco

The Netherlands

New Zealand

Norway

Pakistan

Philippines

Poland

Portugal

Romania

Russia

Slovak Republic

Spain

Sweden

Switzerland

Tajikistan*

Trinidad & Tobago

Tunisia

Turkmenistan*

Former USSR*

Ukraine*

United Kingdom

Uzbekistan*

* The former US-USSR income tax treaty applies to the countries of Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgystan, Moldova, Tajikistan, Turkmenistan, Ukraine and Uzbekistan. It does not apply to the Baltic States (Estonia, Latvia and Lithuania) or to Russia.

Forms Required for Exemption Under An Income Tax Treaty

If, after reviewing the qualifications for exemption as set forth in the tax treaty, the Tax Administrator determines that an individual qualifies for a tax treaty exemption, the University can exempt the individual from U.S. tax withholding, but only if the individual completes an exemption form. If the required exemption form is not completed, the University is required to withhold tax even though the individual may otherwise qualify for the tax treaty exemption. If the individual does not file the exemption form at the time of payment, he or she can still claim the benefits of the tax treaty by claiming the exemption when filing his or her income tax return. Please note that sufficient time, usually 15 days, should be allowed for payment processing under these new procedures.

The form used to claim the tax withholding exemption is determined by the type of income received; individuals who receive different types of income may be required to file different forms. Please note that the University CANNOT, by IRS regulation, refund any tax withheld due to the failure of the individual to file all required tax treaty exemption forms.

Form 8233 (Exemption from Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual)

Form 8233 is used to claim a tax treaty-based exemption from federal tax withholding on income received for personal services (i.e., wages, salary or compensation). Form 8233 must be filed by (i) all students, trainees, teachers, researchers, and individuals performing dependent personal services (i.e., services as an employee), and (ii) individuals performing independent personal services (i.e., independent contractors, honoraria recipients and travel reimbursement recipients).

Form 8233 is valid only for the calendar year in which it is filed; the form must be refiled for each year that the exemption is claimed. Employees are required to file only one Form 8233 per calendar year; however, payments made through Accounts Payable require a new Form 8233 for each payment request. The exemption from withholding becomes effective for payments made to an individual 10 days after the date on which the Tax Administrator files the Form 8233 with the IRS. The Tax Administrator will mail Forms 8233 in mid-November to all current employees who are eligible to continue to claim a tax treaty exemption.

Employees who claim a tax treaty exemption for compensation income are required to provide an additional statement detailing the specifics of the exemption claimed; there is no additional statement required for non-employees (e.g., independent contractors, honoraria recipients and travel reimbursement recipients). employees must complete Form 8233 and the required additional statement in the office of the Tax Administrator.

How to Complete Form 8233

1. NAME AND ADDRESS: Enter your full name and U.S. or current address.

2. TAXPAYER IDENTIFICATION NUMBER: Enter your social security/individual taxpayer identification number. If you are from Canada, do not enter a social security number issued by the Canadian government. If you do not have a U.S. social security number, you must apply for an individual taxpayer identification number using Form W-7 (the instructions for the form's completion are found above).

3. U.S. VISA NUMBER: Enter your U.S. visa number and type.

4. COUNTRY: Enter country issuing your passport and your passport number.

5. FOREIGN ADDRESS: Enter your permanent address in your home country.

6. DESCRIPTION OF SERVICES: Place an "X" in the box corresponding to the primary pupose of your visit (if you are an employee with a J-1 vias, refer to question 4 of your Form IAP-66).

7. COMPENSATION: Describe the services you are providing for the University and enter the approximate dollar amount you expect to be paid for these services during this calendar year.

8. TAX TREATY AND PROVISION NUMBER: Indicate the income tax treaty under which the exemption from federal tax withholding is claimed; the Tax Administrator will enter the provision or article number of the applicable tax treaty.

9. COUNTRY OF RESIDENCE: Enter your country of residence for tax purposes.

10. PERSONAL EXEMPTIONS: Leave blank or enter "1".

11. DAYS OF PRESENCE: Enter the approximate number of days you will be performing or performed services in the U.S. during the calendar year.

12. SIGNATURE: Sign and date the form.

13. WITHHOLDING AGENT CERTIFICATION: Do not complete this section; the Tax Administrator will complete, sign and date this section of the form.

Form 1001 (Ownership, Exemption, or Reduced Rate Certificate)

Form 1001 is used to claim a tax treaty exemption for scholarship or fellowship grants and stipends which do not require the performance of a service. Unlike Form 8233, which is valid for only one year, Form 1001 is valid for a period of three calendar years. Because the form was not designed with scholarship or fellowship payments in mind, an individual claiming such an exemption should complete only certain questions using the instructions set forth below.

How to Complete Form 1001

1. NAME AND ADDRESS: Enter your name and U.S. or current address.

2. U.S. IDENTIFYING NUMBER: Enter your social security number. If you are from Canada, do not enter a social security number issued by the Canadian government. If you do not have a U.S. social security number, you must apply for an individual taxpayer identification number using Form W-7.

3. COUNTRY OF RESIDENCE FOR TAX PURPOSES: Enter country for which you are claiming income tax treaty exemption.

4. TYPE OF INCOME: Mark the box "Other income" and describe the payment on the line provided. For example, if the exemption is claimed for a fellowship stipend, write "Fellowship Stipend" on the line provided.

5. COUPON BOND INFORMATION: Leave blank.

6. CALENDAR YEARS: Form 1001 is valid for three calendar years. Enter the years for which you are claiming the exemption. For example, if the form is initially completed at any time during 1996, the form will be valid for 1996, 1997 and 1998.

7. SIGNATURE AND DATE: Sign and date the form.


HOW TO OBTAIN MORE INFORMATION


This Policy and Procedure manual was produced by KPMG Peat Marwick LLP for the exclusive use of the University of Vermont and should not be disclosed or distributed to third parties.


Effective Date

January 29, 1997

Originally Issued

November 1, 1996

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