The IRS requires that when you outsource to foreign companies/persons for services, you must withhold a percentage of payments as income tax unless you have proof that the entity to which you are outsourcing performs all of their services outside the United States.
This proof is in the form of properly executed IRS forms W-8BEN-E (for companies) or W-8BEN (for persons) that you must keep on file in case you are audited. The IRS says “The place where the services are performed determines the source of the income”. Basically, no withholding is required for services performed outside the US and no 1099 form is required.
If you are receiving services from a person outside the US, simply ask him or her to complete a Form W-8BEN. By signing Form W-8BEN, the foreign contractor is certifying that he or she is not a US person. In this circumstance there is no need for the foreign contractor to get a US taxpayer identification number or to complete Parts II or III of Form W-8BEN. All that the foreign contractor needs to do is to complete the basic information in Part I and sign in Part IV, attesting that the information is true, correct, and complete. No Form 1099 then needs to be filed for payments to foreign persons. Treas. Reg. §1.6041-4(a).
The Form W-8BEN is not filed with the IRS. It is kept on file with the US payor in case the US payor is audited. If audited, the Form W-8BEN supports why no Form 1099 was issued and why no tax was withheld.
Now that you know that the foreign contractor is not a US person, how do you know that he or she is not performing some or all of the services in the US? Perhaps he or she spends two or three months a year at his or her second home in the US and he or she works on your project while in the US.
You won’t know if the services are performed in the US, unless you ask. There is no special form for this. The easiest way is to get a signed statement from the foreign contractor that he or she will not perform any of the services for you in the US. It is typically best to attach this statement to the W-8BEN.
Say that you have some reason to doubt the veracity of the foreign contractor’s statements. Perhaps you know that he or she was born in the US (which would make him or her a US citizen, unless he or she renounced his/her US citizenship). Perhaps you know that the foreign contractor spends a good amount of time in the US and you believe some of the services may be performed in the US.
If you do not withhold tax on the payments to the foreign contractor but you are required to withhold, then you, as the payor (i.e., the “withholding agent”), can be held liable for the tax that you did not withhold. Treas. Reg. §1.1441-1(b)(7). Thus, if you are uncertain as to whether you need to withhold, it is generally better to withhold. If the foreign contractor does not owe US tax, then he or she can file a US tax return and claim a refund for the tax that was withheld.
If you are receiving services from a company outside the US, you should have on file a completed IRS Form W-8BEN-E. Only the following sections need to be filled out:
Part I, Lines 1-4, 6 & 7 (perhaps also Line 9b), and Part XXIX (an authorized individual signs and dates, and checks the certification box).
This form is kept on file by you to show that the authorized individual of the entity is certifying that (a) the entity is the beneficial owner of the income (b) the entity is not a US person, and (c) the income is not effectively connected income (“ECI”). Therefore, withholding and reporting to the IRS are not required. No Form 1099 then needs to be filed for payments to foreign companies. Treas. Reg. §1.6041-4(a).
(For additional information, please refer to the International Tax blog at http://intltax.typepad.com/intltax_blog/form-w-8-ben/ and our LinkedIn profile at https://www.linkedin.com/in/angelospandrio.)
Do you work with contractors outside the US? Are you a contractor outside the US? What has been your experience with international tax issues? Let us know in the comments below.