Foreign Withholding

[MarkCTX]

Client is a US corporation. That US corporation pays a UK corporation for services rendered in the UK. Corporations are not related in any way. The questions becomes is withholding required from that payment? If so to whom? There is all kinds of literature and language in the tax treaty concerning dividends, interest and royalties paid and the related withholding for same. But what about just services rendered? Anybody have any experience with this?

Mark

[Roland Slugg]

Your uncertainty is understandable. An article published by the AICPA says the following on the subject:

The United States asserts a ... limited tax jurisdiction over nonresident alien individuals and foreign corporations (collectively referred to as “foreign persons”). Under Secs. 871(a) and 881(a), foreign persons are subject to U.S. gross basis withholding tax on U.S.-source fixed, determinable, annual, or periodic income (FDAP). Under Secs. 871(b)(1) and 882(a). FDAP income is generally subject to a 30% gross basis tax.

Including a wide variety of income, FDAP income is defined under Sec. 871(a)(1)(A) as “interest, . . . dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, or emoluments.” The associated regulations are more expansive and generally state that FDAP income includes virtually all gross income, with certain exceptions. For example, gains from the sale or exchange of property are not FDAP income.

(Emphasis added.)

I believe the payments you described would be considered "compensations" or "remunerations," but I am far from certain of that. Those terms are not clearly defined in any of the several sources I consulted. Something else that's not clear, and may be the deciding factor, is the matter of where the services are performed. There might be a difference between payments made to a foreign corporation for services performed in the United States versus payments made to a foreign corporation for services performed in the foreign country ... the UK in your case.

The entire article referred to above may be found here: http://www.aicpa.org/publications/ta...-story-05.aspx

Added information:

Found an additional source that may be very helpful: http://www.pacificorp.com/sup/sp/utiffv.html

It says that "when services (as defined elsewhere) are provided inside the U.S., taxes be withheld from payments made to foreign vendors unless the income is exempt under a provision of a tax treaty between the foreign vendor's country and the U.S."

The article contains additional links that may lead you to the answer you're looking for.

Good luck with this.

[mastertaxguy]

Payments made to foreign entities

Check the tax treaty(ies) between US and Great Britain.

[MarkCTX]

The treaty between the US and UK is 39 pages long with nothing concerning withholding. The treaty seemed to be mainly to protect from double taxation. There is all kinds of literature on services provided inside the US and the W-8 series of documents for withholding, but nothing I could find on payments made for services provided in a foreign country.

Thanks for your thoughts, however.

Mark

[mastertaxguy]

Oh my. 39 pages, eh? Did you also read any related explanations?

Generally if a foreign person is subject to tax in their home country on income received from a US person or entity for services NOT performed in the United States there would not be (in my view) a requirement to make any US income tax withholding. That is the point of preventing double taxation.

Posting for myself, and only myself, from the facts you presented I do not see a need for US income tax withholding on payments to a Great-Britain named entity that is providing services outside the United States for a US based taxpayer. You and others are, of course, entitled to different views and practices. I do not read the regulations or IRS Publication 515 as requiring such witholding in the scenario submitted.

[MarkCTX]

It stands to reason that there is no US withholding as the income to the UK corporation is not US source income. It is UK income. Consequently no US income tax liability for this transaction. Is there a requirement to withhold and remit any amount withheld to UK taxing authorities?

[mastertaxguy]

Uk withholding

Your facts do not suggest sufficient nexus with Great Britain/United Kingdom to require withholding (at least as I read them). There might be something in the US-Great Britain tax treaty requiring this, or there may be a provision of British tax law requiring such but I suspect any such requirements do not apply to your client. The US/United Kingdom tax treaty, like all the ones I have read before, contains provisions requiring exchange of information between the parties to the agreement.

International Taxation is a great issue to study. But it changes more quickly than US tax issues. And it seems to encourage extreme paranoia amongst tax professionals such as our selves which is often baseless. (International Taxation Might be a good title for a TTB handbook (payable in Euros or Yen, I suspect): sort of like an all-state for common US/foreign country tax topics, such as US/Canada, US/Mexico, US/United Kingdom, US/Australia, etc. and of course, covering NR issues in depth).

By comparison, there is no requirement for US companies to withhold foreign income taxes for those resident aliens who also have tax obligations in other nations, absent the company having a physical presence. It is a great way to general non-billable and non-collectible time.

[mastertaxguy]

Foreign income tax withholding--great britain?

Client is a US corporation. That US corporation pays a UK corporation for services rendered in the UK. Corporations are not related in any way. The questions becomes is withholding required from that payment? If so to whom? There is all kinds of literature and language in the tax treaty concerning dividends, interest and royalties paid and the related withholding for same. But what about just services rendered? Anybody have any experience with this?

Mark

IRS issued instructions for form 8966, the FATCA report. True, this applies to foreign (i.e. non US) financial accounts.

The instructions do, however, bring up IRS form 1042, Annual Withholidng Return for US source Income of Foreign Persons. This issue is probably covered by the Tax Treaty and technical explanations. Depending on how much time you want to devote to this issue/problem you may want to explore both forms/instructions to determine if the taxpayer's payee is subject to US tax.