Payments to Foreign Individuals and Entities: Complying with IRS Requirements for Services, Rents, Royalties, and Interest

Transcription

1 Payments to Foreign Individuals and Entities: Complying with IRS Requirements for Services, Rents, Royalties, and Interest Presented By: Paula N. Singer, Esq. Practice Leader Thomson Reuters (Formerly Windstar Technologies) Session Number:

2 Agenda General Rules Iden-fying Foreign Vendors Iden-fying Type and Source of Income Rules for Interest, Rents, Royal-es, and Pay for Services Forms for Exemp-ons from Withholding Form S informa-on Repor-ng 2

3 General Rules 30% withholding (called NRA withholding) on US- source income payments to foreign persons Deposit withheld taxes under Form 1042 Report US- source income paid and taxes withheld on Form S Report liabili-es and deposits on a Form 1042 tax return (even if all income exempt from withholding) 3

4 General Rules Withholding excep-ons: Wages subject to wage withholding Certain scholarship and fellowship grants subject to 14% withholding Income on certain US investments (portolio interest) Payments to entertainers and athletes covered by a Central Withholding Agreement (CWA) Income reliably associated with a valid withholding cer-ficate suppor-ng an exemp-on from withholding (discussed later) 4

5 General Rules S repor-ng excep-ons: Wages subject to wage- withholding- Form W- 2 But report treaty- exempt wages on Form S Coordinate Form 1042 repor-ng with all departments making S payments Income covered by a CWA Reported by the withholding agent that is party to the CWA Payer is relieved of withholding and repor-ng if IRS sends a special lexer relieving the venue of obliga-ons 5

6 General Rules The rules for NRA withholding are different! There is NO de minimis amount rule The 1099 exempt- recipient rule does NOT apply Payers not engaged in a US trade or business are nevertheless required to withhold and report NRA withholding is similar to wage- withholding you are collec-ng and deposi-ng with the IRS someone else s tax 6

7 Iden/fying Foreign Vendors Foreign persons includes individuals who are NOT: US ci-zens US lawful permanent residents (green- card holders) Resident aliens under the 183- day substan-al presence test (SPT) for US tax residency status SPT is a weighted formula for countable US days over 3 calendar years Cau-on: US days of presence for individuals in A, G, F, J, M, or Q status do not count count days in certain calendar years 7

8 Iden/fying Foreign Vendors En--es that are NOT organized under the laws of one of the 50 states or the District of Columbia Trusts NOT organized in one of the 50 states or DC or All substan-al decisions are NOT made by US persons (collec-vely individuals and en--es) Estates that are NOT US estates 8

9 Iden/fying Foreign Vendors Current presump-on rules absent documenta-on of foreign status: Presume individuals to be US persons subject to 28% backup withholding and 1099 repor-ng But an organiza-on paying scholarship or fellowship grants to nonimmigrants for whom they have immigra-on documenta-on may presume them to be nonresidents Presume en--es to be US partnerships subject to 28% withholding and Form 1099 repor-ng (but will change for certain en--es because of FATCA) But apply actual knowledge if anyone in the organiza-on has knowledge of the payee s status 9

10 Iden/fying Foreign Vendors Apply the higher 30% NRA withholding if reason to doubt the recipient s status is US Payments made to a foreign address or account Individual does not have an SSN Cau-on: foreign na-onals might have a restricted SSN No US taxpayer iden-fica-on number (TIN) or TIN is an individual taxpayer iden-fica-on number (ITIN) En-ty On the IRS per se list of foreign corpora-ons Has an EIN beginning with 98 10

11 Iden/fying Foreign Vendors Collect a Form W- 8BEN as a cer-ficate of foreign status No taxpayer iden-fica-on number (TIN) required Avoids presump-on of US status and 28% backup withholding on worldwide income Withhold 30% on US- source income and report on Form S Collect a Form W- 9 as a cer-ficate of US status TIN required to avoid 28% backup withholding 11

12 Type of Income Determine the type of income in order to apply the proper tax rules The name given to an income payment is not controlling The rule for determining source of income US or foreign - varies by type of income Some income of NRAs is recharacterized con-ngent gains on sales of patents are royal-es not gains 12 12

13 Source of Income Foreign- source income is not subject to US withholding or repor-ng regardless of the payer Document the foreign status of the recipient with Form W- 8BEN to avoid presump-on of US status Collect evidence suppor-ng the income s foreign- source But if the income is US- source, it is subject to US withholding unless an excep-on applies Income reliably associated with a valid withholding cer-ficate suppor-ng an exemp-on S/1042 repor-ng required even if no withholding 13

14 Source of Income Some types of income (certain grants and pensions) have addi-onal condi-ons determining source If a reasonable alloca-on of income source between US and foreign has not been provided by individuals with knowledge of the contract, withhold on the whole amount 14

15 Withholding Cer/ficates Form 8233 treaty claims by individuals on personal services income Form W- 8BEN to claim a treaty exemp-on on all types of income (except 8233 claims) Form W- 8ECI to avoid withholding on income effec-vely connected to a US trade or business (ECI) Form W- 8EXP to claim an IRC exemp-on from tax Used by governments, interna-onal organiza-ons, and US qualified charitable organiza-ons Form W- 8IMY (in addi-on to being a transmixal document) for Withholding Foreign Partnerships (WP) and Trusts (WT) 15

16 Withholding Cer/ficates A US TIN must be recorded on a withholding cer-ficate for the form to be valid for a claim of exemp-on from tax No TIN is required for a cer-ficate of foreign status A TIN is an SSN or ITIN for an individual and an EIN for an en-ty Excep-ons described in form instruc-ons include: Form W- 8BEN for a treaty claim on income from publicly traded investments Form W- 8EXP for a government or interna-onal organiza-on 16

17 Interest There are many types of interest Mortgage interest PorTolio interest Credit financing interest NonporTolio con-ngent interest Most are FATCA withholdable payments, some not Source of interest is generally the residence of payer 17

18 Interest A treaty exemp-on from tax might be available if the payer is a resident of the treaty country who derives the income An en-ty must also meet the Limita-on on Benefits Ar-cle provision of the applicable treaty Form W- 8BEN provided by the beneficial owner must Include cer-fica-on to the above facts on lines 9a, b, and c Include a US TIN except for income on publicly traded investments Generally, describe the income on line 10 (because rates vary by type of interest and/or type of payer) 18

19 Royal/es Must differen-ate between Payment for use of intangible property (royal-es) Payment for crea-ng intangible property (services) Payment for sale of all substan-al rights in the property (sale proceeds) US- source if payer used (or has the right to use) the intangible in the United States Loca-on of beneficial owner is not relevant for sourcing purposes Keep records for property used outside the United States to support foreign source 19

20 Royal/es May be subject to a reduced treaty rate explained on line 10 of a Form W- 8BEN Required because rates vary with type of property (patent, copyright, mo-on picture/tv rights, natural resources) Applicable ar-cle varies by treaty Royalty Ar-cle covers con-ngent gains on intangible personal property (such as patents) Business Profits Ar-cle covers royal-es that are ECI Some trea-es deem certain royal-es to be ECI (mo-on picture and television rights) 20

21 Rents Rents on real property in the US are US- source Owner may elect ECI treatment under the Code and list rent on a Form W- 8ECI Trea-es do not reduce withholding on income from real property but may allow an ECI elec-on Rents on tangible personal property are US- source if the payer used (or has the right to use) the property in the US If ECI, exempt from withholding if listed on a Form W- 8ECI 21

22 Rents May be subject to a reduced treaty rate explained on line 10 of a Form W- 8BEN, ar-cle varies Many trea-es treat equipment rentals as royal-es Some trea-es treat all tangible personal property rents as royal-es (e.g. Canada) Some trea-es deem personal property rents to be Business Profits and exempt if not axributable to a US PE Some trea-es only treat rents as Business Profits if they are ECI under the Code rules and cover non- ECI rents under the Other Income Ar-cle 22

23 Pay to an Individual for Services US source if from services performed in the US Source of some payments is based on geographic loca-on (IRC Reg ) Foreign source if services performed outside the US Regardless of the residence of the payer, currency paid, or loca-on of payment Deemed to be ECI under the Code But may not provide a Form W- 8ECI to avoid withholding (because recipients would not submit a return voluntarily) Collect a Form W- 8BEN as a cer-ficate of foreign status to avoid 28% backup withholding 23

24 Pay to an Individual for Services To make a treaty claim, the service provider must be Both a US nonresident alien (i.e., tax nonresident) and A tax resident of the treaty country when the services are performed To claim exemp-on from withholding, the service provider must provide a Form 8233 Must be presented annually (i.e., each calendar year that services will be performed) Residency status of service providers may change from year to year 24

25 Pay to an Individual for Services Form 8233 rules for the payer May accept based on an applica-on for an ITIN but payer will be liable for underwithheld tax plus penal-es and interest if not provided before S/1042 is due Must review and sign the form Must send form to the IRS within 5 days of acceptance Must wait 10 business days to hear from IRS May release payment without withholding if you do not hear from IRS within 10 days 25

26 Pay to an Individual for Services Treaty claim by an individual might have to consider the following ar-cles Independent Personal Services (Self- employment Income) Ar-sts and Athletes Ar-cle - IRS does not allow exemp-on from withholding if: The recipient is an entertainer or athlete and The treaty includes an Ar-sts and Athletes Ar-cle with a maximum gross receipts Directors Fees - Most trea-es do not allow exemp-on for directors fees 26

27 Pay to an En/ty for Services Services are performed by an en--es employees, contractors, or owners (service partnerships) US source if performed in the US Foreign source if performed outside the US ECI if performed in the US May provide a Form W- 8ECI (EIN required) to claim an exemp-on from withholding May not use for a personal holding company (see IRS Pub 515) 27

28 Pay to an En/ty for Services Treaty claim by an en-ty Form W- 8BEN that includes an EIN and descrip-on on line 10 that the income is not axributable to a US PE Cau-on: Some services can create a US PE under the defini-on of PE in some trea-es Long- term project PE - length and condi-ons vary by treaty New key- man provision under trea-es with Canada and Bulgaria 28

29 Form S Informa/on Returns Exemp-on Code described reason for withholding exemp-on 01 Effec-vely Connected Income (W- 8ECI) 02 Exempt under the IRC (Form W- 8EXP) 04 Exempt under a Tax Treaty (W- 8BEN or 8233) But use 00 if a reduced rate under the treaty 07 Withholding foreign partnership or trust (W- 8IMY) 29

30 Form S Informa/on Returns Recipient Code describes the recipient 01 Individual (W- 8BEN box 3 or 8233) 02 Corpora-on (W- 8BEN or W- 8ECI box 3) 03 Nonwithholding foreign partnership (W- 8IMY) 04 Withholding foreign partnership (W- 8IMY) 06 Foreign government or interna-onal organiza-on (W- 8EXP) 07 Tax- exempt organiza-on (W- 8EXP) 08 Private founda-on (W- 8EXP) 09 Ar-st or Athlete (use if Income Code 20, 42 or 43) 30

31 Form S Informa/on Returns Income Code (IC) see IRS Pub 515, Table 1 and 2) Interest and royal-es (Table 1) Royal-es IC 10 through 13 (Table 1) IC 09 for gains but IC 10 if con-ngent gains exempt under a treaty? Rents IC 13 for real property rents No IC for personal property rents use IC 10 or 50 depending on treaty ar-cle exemp-on? 31

32 Pay for Services 16, 17, 18, 19, 42 or 43 for compensa-on paid to individuals (see IRS Pub 515 Table 2) No IC for pay for services by an en-ty so use 50(?) 32

33 Questions? Copyright Thomson Reuters 33