As discussed below, certain withholdable tax payments made during 2017 must be reported to the IRS by March 15, 2018.
The U.S. withholding tax rules generally require a person making certain payments to a foreign person to withhold 30% of the gross amount of U.S. source withholdable payments. For example, certain dividends, interest, royalties, and payments for services performed, paid to foreign persons may be subject to annual reporting and withholding tax payments.
The foreign persons to which withholding tax may apply include a nonresident alien individual, foreign partnership, nonresident alien or foreign fiduciary of a trust or estate, or foreign corporation. And the relevant rules impose the reporting and withholding tax payment obligations on the U.S. person making such payments. Such person is known as the withholding agent.
For example, a U.S. company involved in sales and distribution activities may license software from a foreign person for sublicense or sale to customers. Payments to a foreign licensor characterized as royalties may be subject to a 30% withholding tax. A pharmaceutical company engaging a foreign company to administer clinical trials in the U.S. may be obligated to withhold on payments for those services. Interest payments on intercompany or third-party loans made to a foreign person may also be subject to withholding. When deposits must be made depends on the amount withheld, but in any event is generally within a short time after the taxes are withheld.
With respect to compliance, a withholding agent must request and receive a properly completed Form W-8BEN prior to making payment to a foreign person, and a withholding agent must file an annual return of the tax required to be withheld on Form 1042, which is generally filed on or before March 15 of the year following the calendar year in which the tax was required to be withheld.
There may be instances where the withholding agent must file Form 1042 with respect to payments made during the year, even if no tax was required to be withheld, such as in those instances where the applicable tax withholding rate is reduced by a provision of a U.S. income tax treaty with a foreign country. For example, the U.S. tax treaty with Canada reduces the applicable U.S. tax on software license royalties to 0% subject to certain provisions. Keep in mind, however, that even if a treaty reduces the applicable foreign person tax withholding rate to zero, the U.S. licensee is still required to file Form 1042 and obtain Form W-8BEN from the foreign licensor.
A withholding agent can be held personally liable for any unpaid withholding taxes and applicable penalties.
If your company makes payments to foreign persons, including payments for services, royalties or license fees, or interest expense, filing and withholding tax payment obligations should be evaluated immediately.
BPM is Here to Assist You
We encourage you to work with BPM’s international tax professionals to understand whether your company or you are required to make withholding tax payments and file Form 1042. For additional information, please contact Javier Salinas, Managing Director, International Tax Services,
at (415) 288-6291.
Learn more about BPM’s full range of International Tax and Transfer Pricing services by clicking here.