Q. (cont.) According to our office, we would hire the certified subcontractors in the Philippines and have a project manager fly to the Philippines to set up the installation. Question - if we hire subcontractors in the Philippines, do we require a Form W8 Ben from the subcontractors? Can we (US office) transfer funds to the local Philippines company to pay the subcontractors?. Do we withhold 30% from invoice amount? Please advise how we should proceed and what documentation is required to ensure we are in compliance.
Additional information that may help in ensuring we report the payment correctly:
We are selling a complete package (includes equipment and installation) in the Philippines through a local Philippines subcontractor. The equipment is sold locally in the Philippines. The subcontractor is purchasing the equipment and we are reimbursing the subcontractor (resides in the Philippines, non-US). Once the project is complete we will not have any on-going monitoring or ownership of the contract. There may be a service agreement (possibly that we will contract the service to local subcontractors in the Philippines to provide service on the equipment.
We will invoice the client in Maryland (US office).
A. I managed to get through to the IRS Foreign Reporting line this afternoon. I spoke with Mr. Stern (IRS information agent ID# 1000199318).
He said first of all, yes, you need to collect W-8BEN forms, but as these are foreign subcontractors, they do not need US TINs. (You should, of course, first do an SDN search on them to make certain they are not prohibited entities: https://www.treasury.gov/resource-center/sanctions/SDN-List/Pages/fuzzy_logic.aspx). These W-8 forms will provide proof that they are foreign entities, not U.S. individuals. And because the services are being performed in the Philippines, it is not considered to be U.S.-sourced income. (It doesn't appear to matter where you pay them from.) Therefore, because these are not U.S. individuals and it is not U.S.-sourced income, these payments are not reportable, and you have no reason to withhold. Mr. Stern referred us to Publications 515 and 519 (https://www.irs.gov/pub/irs-pdf/p515.pdf and https://www.irs.gov/pub/irs-pdf/p519.pdf.)
If you end up with a service agreement for this client and you pay individuals in the Philippines to fulfill the contract, the same situation would hold; it is not U.S-sourced income and not reportable. As far as the client in Maryland that you'd be billing, that's U.S. sourced income, because the payments are being made to you, a U.S. entity; however, I'm assuming Securitas is a corporation and therefore the client would not report payments to you on a 1099.
Mr. Stern did point out that there are tax laws in the Philippines, however, with which you should become familiar. He was only able to provide information about what the IRS requirements are in this situation.
We also received a response from tax consultants, Cokala (http://www.cokala.com/), which basically says the same thing I was told by Mr. Stern from the IRS, although in greater detail. Here's what they said:
The payer could start by consulting the Regulations cited in the following notes:
1) Payments for equipment are not I.R.C. chapter 3 FDAP income and for that reason, not subject to the 30% withholding rule or the Form 1042-S filing requirement. See Reg. sec. 1.1441-2(b)(2)(i). This excludes the portion of the payment identified as purchase of the equipment.
2) If services are performed entirely outside of the United States by a foreign person (either foreign individual or foreign entity), the payment for those services is non-U.S.-source income. Non-U.S.-source income, if paid to a non-U.S. person, is not I.R.C. chapter 3 FDAP income and for that reason is not subject to the 30% withholding rule or the Form 1042-S filing requirement. See Reg. sec. 1.1441-2(a). IF the service provider is a foreign person, this excludes the portion of the payment identified as for services performed in the Philippines. To document that the services were performed in the Philippines, the payer should have that fact stated in documents such as contracts/agreements, purchase orders/work orders, and invoices. There isn't an IRS form for income sourcing, so examiners ask to see contracts, purchase orders, invoices and relevant communications.
2a) How can the payer know whether a service provider is a foreign person for U.S. tax purposes? It's unclear from the payer's message whether the payer is contracting with (and paying) only an entity in the Philippines, or directly contracting with (and paying) individual workers in the Philippines (payer said "hiring") -- but whichever is the case, the payer should ask for certification of tax status on the appropriate IRS form. Maybe the entity in the Philippines is actually a U.S. entity that will furnish a Form W-9. Maybe one or more of the individuals (if contracting with individuals directly) is a U.S. citizen or U.S. permanent resident either of whom would furnish a Form W-9. Maybe the status of the firm and/or individuals is foreign tax status, in which case the appropriate type of W-8 form is requested (W-8BEN for individuals, but not including anything in the treaty benefit portion of the form; or the appropriate type of other W-8 for the firm. If no forms are obtained to certify whether tax status is U.S. or foreign, the payer applies the presumption rules of the tax Regulations. For information about presumption rules, see Reg. sec. 1.1441-1(b)(3)(iii).
3) The payer should obtain advice on whether the fact situation is going to create any employment tax obligation to the Philippines: either for "hiring" individuals to work in the Philippines (if the payer will be paying them directly), or for the payer's own employee who will be working in the Philippines for a period of time to supervise the project (will that employee be there enough days to create a Philippines employment situation?).
4) Cross-border transfer of funds for payment isn't an information reporting or withholding question, so we don't have information about that.
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.