Are we responsible for the validity of the documentation presented to us by the foreign vendor

Yes, you are responsible for the validity of the documentation presented to you by the foreign vendor.

Legal Reasoning and Rationale:

1. Requirement for Valid Documentation:
   • According to the IRS FAQ, in order to rely on the documentation provided by a foreign vendor, it must be valid. The documentation must meet the requirements of Treasury Regulation §1.1441 and must be completed in accordance with the applicable form instructions (e.g., Instructions for the Requester of Forms W-8BEN, W-8ECI, W-8EXP, and W-8IMY).
2. Standards of Knowledge:
   • Treasury Regulation §1.1441-7(b)(1) states that if a withholding agent knows or has reason to know that a withholding certificate or documentary evidence provided by the payee is unreliable or incorrect, the withholding agent must generally either withhold at the maximum tax rate of 30% or withhold at the backup withholding rate (currently 24%), as determined based on the presumption rules.
   • The withholding agent is considered to know, or have reason to know, the facts within the knowledge of its agent if it relies on an agent to obtain documentation.
3. Reason to Know:
   • A withholding agent will be considered to have reason to know a claim of foreign status or for a treaty-based withholding rate to be incorrect or unreliable if the statements contained in the withholding certificate or in other information which the withholding agent has, would cause a reasonable person to question the claims made (Treas. Reg. §1.1441-7(b)(3)(i)).
4. Actual Knowledge:
   • Despite representations made on an otherwise valid withholding certificate or the presumption rules, a withholding agent must withhold and report based on its actual knowledge of facts concerning the recipient when that knowledge results in a higher rate of withholding than would have otherwise applied.
5. Documentation Validity:
   • The documentation must be valid, and the withholding agent must not know, or have reason to know, that the information provided on the documentation is unreliable or incorrect. If the documentation is invalid for any reason, the withholding agent must apply the presumption rules set forth in Treasury Regulation §1.1441-1(b)(3).
6. Review and Validation:
   • The withholding agent must review the documentation to ensure it is complete and consistent on its face, compare the information on the form with the information in the account file, and check for any material contradictions that may invalidate the form based on the reason to know and actual knowledge standards.

In summary, as a withholding agent, you are responsible for ensuring the validity of the documentation presented by the foreign vendor. This includes verifying that the documentation meets the regulatory requirements, is complete and consistent, and does not contain any information that would cause a reasonable person to question its validity. If the documentation is found to be unreliable or incorrect, you must apply the appropriate withholding rates based on the presumption rules.

Sources:
§ 1441. Withholding of tax on nonresident aliens
§ 1471. Withholdable payments to foreign financial institutions
Publication 515 (2024)
IRM Part 4. Examining Process. Chapter 10. Examination of Returns. Section 21. U.S. Withholding Agent Examinations - Form 1042
Rev. Proc. 2014-47