Q. (cont.) Normally, we would pay the vendor from the U.S. and withhold appropriately. There were unforeseen issues with sending payment, so a local office in Chile made the payment to the Chilean doctor for performing services in the US. How would we handle the withholding for this?
A. We contacted Cokala Tax Information Reporting Solutions, LLC, on this one, and received this response:
We can’t provide precise tax technical information because we don’t have knowledge of the specific facts and circumstances, but in general a U.S. payer should think about the following:
- A payment for performance of services in the U.S. by a non-U.S. individual is subject to 30% withholding of U.S. income tax (under chapter 3 of the Code) and Form 1042-S reporting
- The U.S. doesn’t have an income tax treaty with Chile so if the payee is non-U.S. and a tax resident of Chile he/she has no opportunity to claim a reduced rate of withholding below the standard 30%.
- If there’s no certification or documentation of the payee’s classification and tax residency (Chile, U.S. or some other country) upon which to rely, apply the presumption rules for status (you could start by reviewing reg. sec. 1.1441-1(b)(3)(ii)(B) and 1.1441-1(b)(3)(iii)(A)(1)) and determine any withholding liability according to the presumptions.
- If a U.S. withholding agent’s related foreign entity acts as paying agent for the U.S. withholding agent, the U.S. withholding agent still has the obligation for its own withholding and reporting compliance. Be alert that the specific payment isn’t lost in netting transactions between the U.S. and related foreign entity.
- If there was a failure to withhold U.S. tax when required, the amount that should have been withheld is a tax liability of the U.S. withholding agent entity, which needs to deposit the amount to the IRS as a 1042 deposit if it was determined the payee was non-U.S., or a 945 deposit if presumed a U.S. person. Interest and penalties for underwithholding and late deposit can be required. Follow the IRS instructions for including the late deposit on Form 1042 or 945. Follow the instructions for Form 1042-S or 1099-MISC reporting depending on whether the payee was determined or presumed foreign or U.S.
This question was answered by COKALA Tax Information Reporting Solutions, LLC, a 3rd party, independent advisory services firm offering experienced and practical help for tax regulatory compliance for Forms W-9, W-8, W-2, 1099, 1098, 5498, 945, 1042, 1042-S, and state reporting. You can learn more about them at www.cokala.com.