We may be purchasing a new ERP system from a Canadian vendor.

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Q. (cont.)

Can you please confirm:
1) that the treaty we have with Canada is a 0% withholding on the payment(s), and
2) that the ERP/software purchase (being that it is used in the U.S.) would be considered U.S. Sourced income and a 1042-S reportable payment?

 

A.

Payment withholding and reporting on software is a complex area. The question regarding payment for software generally is whether it is leased, licensed for royalty or purchased. We’ll leave out royalty, as from your description, it does not apply here.

Generally if you purchase “packaged” software which you can use in perpetuity (e.g. Microsoft Excel), that is a purchase of merchandise and not reportable. If your use of the software is allowed by subscription (periodic payment), then it is classified as a lease; a lease payment sourced where it is used. You are using it in the U.S., so lease/rental/subscription payment to a Canadian vendor is reportable on 1042-S and withholdable at 30% unless they gave you the appropriate W-8 form claiming treaty exemption (which for Canada, would be zero withholding).

Refer to IRS Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities: https://www.irs.gov/pub/irs-pdf/p515.pdf.

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