What is the process for setting up an international vendor? Do foreign vendors have federal numbers? If so how do I know by looking at the invoice?


To answer your question precisely, we would need specific detail on the vendor, what you are purchasing from them and where services are being provided. We offer some general information here.

A foreign vendor may have an ITIN, i.e. individual tax identification number, which is what persons or entities that are not qualified for a social security number must obtain. For more on ITINs, see Individual Taxpayer Identification Number (ITIN), and Taxpayer Identification Numbers on the IRS Web site.

As for withholding and reporting, the fundamental question is whether your payments to a foreign vendor represent U.S.-source income. U.S.-source income is reportable and may require backup withholding. U.S. source income to non-resident alien independent contractors providing services is taxable; generally you must withhold 30 percent of payments unless the vendor is in a country that has a tax treaty with the U.S. that exempts them from withholding. However, if you are simply paying a foreign vendor that is incorporated and located in another country and doing their work in that country, there is no withholding or reporting (1042S) obligation on your payments to the vendor.

The IRS says "A non-resident alien is subject to tax only on U.S. source income. Every U.S. and foreign withholding agent must file Form 1042-S to report amounts paid to foreign persons from sources in the United States. This includes interest, dividends, rents, salaries, wages, payments to independent contractors, or other gains, profits or income unless specifically exempted under the Internal Revenue Code or a tax treaty. Residents of certain foreign countries having tax treaties with the United States may be entitled to reduced rates of, or exemptions from, tax under the applicable tax treaty."

Furthermore, "If payments for independent contractor services made to a nonresident alien individual[s] are exempt from withholding under a tax treaty or for other reasons, the payor must obtain a signed Form 8233, Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual, from the recipient before the payment is made."

See IRS Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities. Page 14 defines source of income and provides a helpful table. When paying for services, source is determined by where the services are performed. Services performed outside the U.S. are not taxable (or reportable) to the IRS, though there may be a requirement to report payment to the foreign government.

When payment is U.S.-source income, you want the vendor to provide the appropriate form W-8 (comparable to a W-9), and you report payments on form 1042S. For more on forms W8, see AP Answers – 1099 - W-9s, W-8s. See TAPN's Forms and Publications of Interest to Filers of 1099-MISC under 1099 Information--1099 Basics. You can learn more about Form 1042 on the IRS website.

You can call the IRS directly and talk with an agent about your specific situation at 866.455.7438. (Because occasionally different agents offer different interpretations, you should always document the agent's name and ID number. The IRS will honor answers provided by its agents.)

Note that if you are purchasing tangible goods from the foreign vendor, while there are not federal withholding and reporting obligations, there may be sales & use tax obligations to your state. Also ask if the price includes VAT or not--generally it should not, but if it does, you can reclaim it. More on VAT.

Regarding set up of the foreign vendor, you want to be sure the mailing address conforms to standards so that correspondence does not get lost in the mail. International address guidelines for most countries are available on the www.upu.int.

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