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.