We have two foreign vendors we paid in 2014; one was an individual, so we withheld 30%, and the other is a Canadian Corp., and because of the treaty, don't think we have to withhold. I'm not sure if services were provided on U.S. soil. How to file?


Foreign payments are a complex area, made more so by FATCA (chapter 4).  You sound familiar with the concept of an active non-financial foreign entity (active NFFE) —a payment to an active NFFE relieves you of chapter 4 worries. However, you should familiarize yourself with the FATCA/Chapter 4 withholding/reporting requirements. But most of the usual accounts payable payments do not hit chapter 4 requirements.

Under chapter 3, you have to know exactly what you paid for and then determine “source.” When you are paying a foreign vendor, the source of that income (your payment to them) determines whether you have to withhold and report (source varies according to type of payment, e.g. services, rent, royalty). If the payment is non-U.S. source income, then you do not have any withholding or reporting obligation, but if it is U.S.-source income, you do.

If payment was for lease of software, then that qualifies as rent. If you paid for consulting services, of course, that is service payment. It sounds as though you might have a couple considerations.

For services, source is determined by where the services were performed. So you have to know whether the vendor performed any services for you in the U.S. or only in Canada (or outside the U.S.). Payment for services performed in the U.S. are U.S.-source payments. You must withhold 30% unless the vendor claimed a treaty exemption. Payment for services performed outside the U.S. are non-U.S. source and not subject to withholding or reporting.

For leases/rents, source is determined by the location of use, which in this case apparently would be in the U.S., making the lease payments subject to withholding & reporting.

As you noted, the U.S. does have a treaty with Canada, which if claimed on the W-8, means you don’t have to withhold, but you do still have to report U.S.-source income on form 1042-S. For services, if all services were provided in Canada, you do not have to withhold nor report.

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