Info You Can Use

Information You Can Use: Tax Treaties and 30% Withholding

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I was recently fortunate enough to get into a conflict with my disbursing office on the subject of the 30% withholding for foreign performers.

Well, admittedly, I didn’t feel lucky at the time. The whole issue is very confusing and time consuming. However, the outcome is such that I am a good deal wiser and more informed about the process. And more importantly, I managed with the help of the artist’s agent and the IRS to secure full payment for the foreign performers.

For those of you who may not be familiar with the issue, count yourself lucky but also be aware that you may become embroiled in a situation requiring you to withhold 30% of an artist’s fee in the future in the absence of a treaty or the proper tax paperwork. I did a couple entries about five years ago which you may want to take a look at to gain some background.

The group we were looking to bring is coming from New Zealand. Their agent was on the ball and sent me the requisite tax paperwork claiming exemption back this summer. Not wanting to have any problems crop up when it came time to send the deposit, at the end of July I sent a memo accompanying the paperwork which included the details of the engagement asking if the 30% would be withheld. I was told it wouldn’t be. It wasn’t until the check was cut and on its way over to me that the decision was made to cancel that check and issue another one less 30%.

At question was Article 7 of the US-New Zealand Tax Treaty which reads:

“The business profits of a Contracting State shall be taxable only in that state unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the business profits of the enterprise may be taxed in the other State but only much of them as is attributable to that permanent establishment. “

The agent provided an interpretation where the first Contracting State was NZ. Our disbursing office interpreted the first Contracting State to be the U.S. and deemed the performance to be goods “created” in the U.S.

In came the IRS to the rescue! You won’t see that phrase too much in life so let me say it again. In came the IRS to the rescue!

The Central Withholding Agreements office provided the following guidance which they have given me permission to reprint for your edification. Be aware that all countries have different tax treaties, but many of them are very similar to the one the US has with New Zealand so this information can be applicable in many cases.

In the following, “business entity” refers to a production company or other type of operation which owns the rights to the production and performances being presented. The presumption here is that the artists/performers are either employees or contract players for the business entity, having no ownership interest or risk from loss in the production, thus making the business entity, rather than a venue or other payer, the withholding agent for payments to the artists. Payments to these performers would be subject to rules, regulations, and treaty considerations for the individuals as artists. The business entity may apply for a tax treaty benefit with regards to payments made to the business entity if the business entity is permanently located in a country that has a tax treaty with the United States.

A valid withholding certificate, W-8BEN, presented by the business entity to the venue is used to claim a tax treaty benefit for Business Profits. CAVEAT: The business entity MUST have a US Employer ID Number on the form W-8BEN to qualify for the exemption, otherwise 30% of gross income is required to be withheld and deposited with the US Treasury on behalf of the business entity.

Tax Treaties between the US and other countries are worded so that each country reads it and approaches it as a reciprocal agreement. In each case, the “Contracting State” is the country of residence of the business entity and the “other Contracting State” is the country in which they are performing services for remuneration.

Therefore, a US business entity applying Article 7 of the US-NZ tax treaty would use the US as “Contracting State” and New Zealand as the “other Contracting State” thereby claiming exemption from tax in NZ but being subject to full taxation in the US. The business entity could not claim exemption if they had a permanent establishment in NZ.

SIMILARLY, the NZ business entity would flip-flop the terminology taking NZ as the “Contracting State” and the US as the “other Contracting State” thereby claiming exemption from US taxation and subjection to full taxation in NZ. The business entity could not claim exemption if they had a permanent establishment in the US.

As a result, a non-resident alien business entity as described above will provide to the venue a Form W-8BEN claiming the business profits tax treaty provision. The venue is relieved from any withholding responsibilities for payments to the business entity.

The business entity is still required to withhold and deposit on any payments made to or for the benefit of the actual performers.

For the withholding requirements on the individual non-resident alien artists or athletes, you may contact the IRS at CWA.Program@IRS.gov

It should be noted, that while the payment may be exempt from the 30% withholding, the foreign company must still deduct U.S. taxes from payments made to their performers. More information on this may be found on the Artists from Abroad website.

Stuff You Can Use: Board Ponderables and Resources

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There were a couple board related pieces I marked on the old Google reader I wanted to share.

First was an excerpt from a talk Gene Takagi of Non-Profit Law Blog recently gave for an American Bar Association seminar this month. The portion posted on the blog site deals with common governance problems boards engage in. The six points he makes deal with how boards misunderstand their role in the organization and the laws governing non-profit organizations.

Part of the third point caught my eye because it is a common practice but I have really never heard it discussed as a problem. (My bold emphasis.)

A lack of attention paid to the internal laws of the organization. Is the organization operating in furtherance of the exempt purpose stated in their governing documents? Do the directors really know, understand, and govern consistent with their bylaws and other governance policies? This problem often results when a board adopts bylaws that it copied from another organization without careful thought and consideration about how they work under different circumstances. It’s far too common for nonprofits to ignore membership requirements they’ve inadvertently created, elect a different number of directors than is authorized, and not maintain officer positions and/or committees required under the bylaws.

Not knowing where to start with bylaws, a lot of organizations use those of others as a template. I suspect that people choose to leave in elements that sound important and potentially useful when they really aren’t that important to the organization. I say this because a board I sit on tasked one of the vice presidents with a bylaws review and he essentially reported this very situation. The bylaws had originally been copied from a closely associated sister organization and there were portions that really did not apply to our activities. Advances in technology made other portions unnecessary.

To be fair, it is likely a group starting from scratch would include rules dealing with anticipated situations in their bylaws that proved to be extraneous. Time and experience is about the only thing that will reveal this to be the case which is why it is helpful to periodically review bylaws.

The other bit of information I wanted to draw attention to was a entry on The Nonprofiteer noting the availability of BoardSource videos on “the ten responsibilities of nonprofit Board members.” She also links back to her earlier entry on the Board Member’s Bill of Rights which bears reading.

Admittedly, the entry I link to is from February. I hadn’t the time to review the BoardSource videos until now. The video’s short, episodic structure make them faster to review than I thought. The way I see it though, many boards have likely taken a hiatus over the summer due to a lack of enough members to establish a quorum. This is probably an advantageous time for me to urge people to revisit the NonProfiteer’s entry to review the materials in preparation for an increase in board activity.

Stuff You Can Use: Tech Soup

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Ah, technology! Today I was sitting in my theatre attending a meeting. A few rows ahead of me was a woman who I was supposed to meet in my theatre after the meeting. About a half hour before the meeting was schedule to end, the woman texted her assistant asking her to call me and let me know she couldn’t make our meeting. I am not quite sure why she didn’t just get up and talk to me. The room was only 1/4 full so it wouldn’t be hard to find me. People were moving in and out to use the restrooms so there was no unstated prohibition against getting up during the meeting. But I suspect this is the sort of technology use I need to expect in coming years.

With that in mind, I wanted to point out a webinar Arts Presenters held in June about non-profits using technology. Arts Presenters had a representative of Tech Soup, Becky Wiegand, talk about non-profits using technology.

Tech Soup is a non-profit which, among other things, administers technology donations and reduced fee programs to non-profit organizations for companies like Microsoft and Adobe. If a company has conditions like only wanting materials to go to health services and after school programs for kids, Tech Soup distributes the products to people who qualify. Registration with Tech Soup gives you access to these programs and require you verify your tax status and purpose.

Once your organization is set up, you can go “shopping” for software. Their web interface apparently advises you if are eligible to receive the software or not. If you don’t qualify or don’t see something you would like, you can make a request for a donation.

Tech Soup also offers articles and webinar classes to help you discover how to use technology and what the potential value might be. So you can learn about low cost donor management software and what an effective use of Facebook might be for your organization. The site also has forums upon which you can ask other members things like their experiences using software you might have or be considering.

I strongly suggest investigating Tech Soup’s site to learn more. It is probably worth listening to the webinar. It is an hour long, but this particular piece actually has a video of the slideshow/web navigation that accompanies the talk. You can see where to look on the Tech Soup site to find various resources. Ms. Wiegand also mentions a lot of other technology resources that provide information, services and software either for free or more affordably than generally available and visits some of those sites as well.

Info You Can Use To Keep Your Employees

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If you aren’t already aware, part of the federal recovery package that applies to the arts provides funding to protect jobs threatened by the economic downturn.

What is really helpful is that you can apply for funding through the NEA, your regional arts organization (New England Foundation for the Arts, Mid Atlantic Arts Foundation, Southern Arts Federation, Western States Arts Federation) and your state arts council (each state may vary). I don’t see anything on the Arts Midwest or Mid-America Arts Alliance sites, but there isn’t anything on the Western States site either and I know they are distributing funds so it is worth an inquiry if you are served by those groups.

If you get awarded by more than one entity, you can only accept one. But the ability to submit to three different places does increase the opportunities for getting an award and choose among the best funding.

The regional and state arts groups have different criteria for awards within the umbrella of the NEA guidelines. If you are interested in applying, you better move quickly. Of those I have seen, the deadlines are end of May/first week of June.