FOCUS on taxation


Andrew M. Bernard Jr., CPA, is managing director for Andersen in Philadelphia and a member of the Pennsylvania CPA Journal Editorial Board. He can be reached at andrew. bernard@andersen.com.


U.S. withholding tax on payments to foreign persons


By Andrew M. Bernard Jr., CPA


persons. Depending on the type of payment made, and whether it is U.S. sourced, there may be U.S. withholding tax imposed on the payment unless an exemption applies. Te reason for withholding U.S. tax at the


I


source is that the IRS does not want to allocate the time, energy and expense (e.g., the IRS agents travelling around the world) to collect U.S. tax from payees. Tus, the obligation to withhold and remit the U.S. tax to the IRS remains with the U.S. payor unless the foreign payee files and pays the U.S. tax. Tis column focuses on some of the withholding tax provisions that apply to more salient and common business payment situations that may arise when a U.S. person makes a fixed and determinable annual and periodic (FDAP) income payment to a foreign person.1


Determine if the payee is foreign Determining if the payee is foreign is generally made through a system of internal reporting, typically by the payor requesting a completed IRS Form W-9 (which would indicate the payee is a U.S. person with a U.S. tax identification number) or by obtaining a completed IRS Form W-8, which would indicate the payee is foreign.2


If, for example,


a foreign payee provides a Form W-8ECI, they are indicating that they will be reporting the income on their U.S. tax return. It will include their U.S. tax ID number on the form for IRS reporting purposes, so no U.S. withholding would be required. Te payee may also complete the treaty section of IRS Form W-8


6 CPAFOCUS July/August 2022


n the ever-expanding globalization of the economy, it is more common than ever for a U.S. person to make payments to foreign


indicating that they qualify for a reduced treaty rate of withholding (or just provide proof that they are foreign for purposes of service-fee payments). U.S. payors can rely on these forms unless they have reason to believe that the payee is not accurately representing who and what they are on these documents.3


Te forms


are retained by the payor and are not sent to the IRS, but they must be provided to the IRS as support for U.S. withholding or reduced withholding if the IRS audits the payor.4


Character and sourcing – key determinations Generally, U.S. withholding applies to payments that are U.S. sourced. Tere are different sourcing rules depending upon the type of FDAP payment made: • Services – Where the service is provided5 • Interest – Residence of the borrower • Royalties – Where the intangible property is exploited


• Rents – Where the property is located • Sale of property – Residence of the seller


Compliance considerations In addition to obtaining completed W-9s


or W-8s from the payment recipient to internally document who the payee is and what their status and residency is, there are also U.S. tax withholding and payment reporting provisions. Generally, the U.S. withholding tax rate is 30% on the gross payment, but this may be reduced or eliminated pursuant to an income tax treaty that the U.S. may have with the recipient’s home nation.6


When the tax is


required to be remitted to the IRS depends upon the size of the payment. Te larger the payment, the sooner the tax must be deposited


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