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US Tax Witholding Rules for Foreign Vendors

by OrangeBull
11 replies
I must admit this is a tax question that I only think I have the answer to, in this scenario a US company is acting as a broker and an agent holding a payment recieved for a foreign company's product, and 30 days after payment they need to pay the foreign source vendor.

Essentially the US Company recieves money here in the US for the purchase of the foreign company's product, but the sale could be made to anyone anywhere in the world, although mostly to US customers, with some sales from other jurisdictions mostly because the US company has the best storefront for products from numerous vendors in the particular industry.

I think that the US company must withold not only their fee from the foreign company, but also 30% for "US sourced sales," and pay the tax withheld to the IRS along with a Form 1042-S and possibly a Form 1099 for the foreign client using their brokerage service.

The question is, A) does this sound right to others, B) does anyone have any experience with this kind of issue, and C) does anyone know how to get around this especially considering the fact that the IRS has just made rules for Foreign Controlled Entities tougher and it is becoming almost impossible to get a foreign bank account as a US citizen.
#foreign #rules #tax #vendors #witholding
  • Profile picture of the author kindsvater
    This doesn't seem to be "US Source Income" since the product is outside the US. All that is happening is the purchaser is in the US and routing payment via a US broker, but what is being paid for does not involve any activity inside the US.

    For instance:

    Jack in New York orders a $100k BMW from Germany that is made in Germany. Jack pays Jill as an international broker and Jill is to forward the money to BMW in Germany after confirming Jack's payment is good.

    The BMW product is made in Germany and any services by BMW in making the car are in Germany. I do not see Jill paying $30k to the IRS and only forwarding $70k to BMW and telling Jack he needs to come up with an additional $30k if he wants his car shipped.

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  • Profile picture of the author SunilTanna
    I have no knowledge of the us tax system, and am not a tax advisor eiher, but in many years trading with the us (from the uk), i have only encountered withholding in 2 situations ( and never for simply selling a product to the us).

    Most recently for kindle royalties, on kindle book sales to us customers by amazon usa - according to amazon, copyright royalties are subject to withholding. However, the usa has reciprocal tax treaties with lots of other countries, including the uk, so once I did the paperwork, I was subject to a reduced rate of wihholding, which in he case of the uk, was a rate of 0.

    Really though, shouldn't you be talking to a professional tax advisor about these kinds of issues?
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  • Profile picture of the author Bisturi
    Originally Posted by OrangeBull View Post

    I must admit this is a tax question that I only think I have the answer to, in this scenario a US company is acting as a broker and an agent holding a payment recieved for a foreign company's product, and 30 days after payment they need to pay the foreign source vendor.

    Essentially the US Company recieves money here in the US for the purchase of the foreign company's product, but the sale could be made to anyone anywhere in the world, although mostly to US customers, with some sales from other jurisdictions mostly because the US company has the best storefront for products from numerous vendors in the particular industry.

    I think that the US company must withold not only their fee from the foreign company, but also 30% for "US sourced sales," and pay the tax withheld to the IRS along with a Form 1042-S and possibly a Form 1099 for the foreign client using their brokerage service.

    The question is, A) does this sound right to others, B) does anyone have any experience with this kind of issue, and C) does anyone know how to get around this especially considering the fact that the IRS has just made rules for Foreign Controlled Entities tougher and it is becoming almost impossible to get a foreign bank account as a US citizen.
    Hi, have a read through these 2 links, they answer your questions and are extremely helpful for foreigners wanting to get the 30% withheld by the US on sales.

    Non-US Self-Publisher? Tax Issues Don’t Need to be Taxing « Catherine, Caffeinated

    http://www.hlspublishing.com/an-easier-way-for-uk-authors-to-get-a-us-tax-identification/

    For what is worth, the US now doesn't give back the historical 30% they've withheld from your sales. It is once you sort your paperwork that you no longer are subject to the 30%, but you don't get back the amounts subject to the 30% prior to the date you sorted out your paperwork and are no longer subject to the 30%.

    Hope that was of help

    Edit: apologies, I inserted the first link twice, please see the 2 links now
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  • Profile picture of the author OrangeBull
    The scary truth is I have 18 credits of tax law and two law degrees behind me and this particular issue is possibly THE MOST confusing tax issue I've seen, but the one thing I've always found in regards to international issues dealing with web related business is that people on warrior forum always have some experience or insight that will let you get a new perspective on the issue.
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  • Profile picture of the author OrangeBull
    I'm in complete agreement with you kindsvater, COMPLETE, but my reading of IRS rules still suggest a 1042 and withholding of tax would be involved which would not be good for potential clients of the business I'm exploring and I'm trying to find the way to AVOID short changing those potential clients, and a method to make the IRS happy all at the same time with the least headaches for potential clients and the business.
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    • Profile picture of the author Myles Sinclair
      Originally Posted by OrangeBull View Post

      "......I'm trying to find the way to AVOID short changing those potential clients, and a method to make the IRS happy all at the same time with the least headaches for potential clients and the business.
      Maybe I'm misunderstanding your post, but I don't see how you could short change clients? If you're talking about buying products from overseas vendors, then unless you pay them what they are asking for, they won't send you the merchandise.
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      • Profile picture of the author OrangeBull
        Originally Posted by Myles Sinclair View Post

        Maybe I'm misunderstanding your post, but I don't see how you could short change clients? If you're talking about buying products from overseas vendors, then unless you pay them what they are asking for, they won't send you the merchandise.
        And I'm not giving away the trade secret that makes your question moot, but what I will say is that the vendors will want to do business with the brokerage because they won't be able to make the sale themselves. They will accept the taxes being withheld if necessary because they can't sell the product without the broker's assistance. And if they did sell, they would sell for less than what the product is worth. The broker makes them A LOT more money.
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        • Profile picture of the author Myles Sinclair
          Originally Posted by OrangeBull View Post

          And I'm not giving away the trade secret that makes your question moot,
          I didn't know we were talking about trade secrets, I thought it was about US Tax Witholding Rules for Foreign Vendors.

          "..but what I will say is that the vendors will want to do business with the brokerage because they won't be able to make the sale themselves. They will accept the taxes being withheld if necessary because they can't sell the product without the broker's assistance. And if they did sell, they would sell for less than what the product is worth. The broker makes them A LOT more money.
          I export merchandise to the U.S., and as my business is in the U.K that would make me a foreign vendor. I sell mainly to wholesalers, but also to the consumer.

          I know that tax and duty is levied on the goods I supply, which the importer pays, but so far no one has suggested that I should be paying the IRS a percentage. Do you have any legislation or online references you can point to? You've got me curious!
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  • Profile picture of the author theaccountant
    Originally Posted by OrangeBull View Post

    I must admit this is a tax question that I only think I have the answer to, in this scenario a US company is acting as a broker and an agent holding a payment recieved for a foreign company's product, and 30 days after payment they need to pay the foreign source vendor.

    Essentially the US Company recieves money here in the US for the purchase of the foreign company's product, but the sale could be made to anyone anywhere in the world, although mostly to US customers, with some sales from other jurisdictions mostly because the US company has the best storefront for products from numerous vendors in the particular industry.

    I think that the US company must withold not only their fee from the foreign company, but also 30% for "US sourced sales," and pay the tax withheld to the IRS along with a Form 1042-S and possibly a Form 1099 for the foreign client using their brokerage service.

    The question is, A) does this sound right to others, B) does anyone have any experience with this kind of issue, and C) does anyone know how to get around this especially considering the fact that the IRS has just made rules for Foreign Controlled Entities tougher and it is becoming almost impossible to get a foreign bank account as a US citizen.
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  • Profile picture of the author drbrucehoag
    Your best bet is to talk to a US tax accountant - one that is an Enrolled Agent (EA). An EA can represent you in any sort of an audit from IRS.

    I'm PM-ing my accountant's email to you.
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