Invalid Arguments for Not Withholding of Federal Taxes

Foreign artists and/or their agents may use one of several arguments to attempt to not withhold federal taxes from their payments. Below is a list of some arguments that artists and agents have put forward in the past.

U.S. company claims that withholding or reporting is required under the domestic rules.  This is incorrect.  If the artist(s) is not a U.S. person, Section 1441(a) General Rule of the IRS code states "... any person having the control, receipt, custody, disposal, or payment of any item of taxable income payable to a nonresident alien or other foreign person is subject to the requirement to withhold 30% U.S. federal income tax on the payment of such an item. Contracting for rentals from the performing arts building which is just another form of gross receipts.

Income earned by foreign artists for their personal services performed within the US is considered income effectively connected to a trade or business in the US.  Section 1331(c)(1) Income Connected with US Business states that no deduction or withholding under subsection (a) shall be required in the case of any item of income (other than compensation for personal services) which is effectively connected with the conduct of a trade or business within the United States and which is included in the gross income of the recipient under Section 871(b)(2) for the taxable year.

Foreign artists who have US agents may rely on their agents to file the appropriate tax forms and therefore should not be taxed by the theaters who book their performances.  Treasury Regulation Section 1.1441-1(b)(2)(ii) reads in part, "a withholding agent making a payment to a US person ... who has actual knowledge that the US person receives the payment as an agent of a foreign person must treat the payment as made to the foreign person."

UR bought the show from and contracted with a US entity (agent.) so tax exempt based on Treasury Reg. 1.1441-5(b)(1) "Withholding is not required on payment of an amount subject to withholding that a withholding agent may treat as made to a US payee. Therefore, if a withholding agent can reliably associate a payment with a Form W-9 properly provided by a US partnership, the withholding agent may treat the payment as made to a US payee and the payment is not subject to withholding under Code Sec. 1441 even though the partnership may have foreign partners."  The treasury regulation is not talking about an agency relationship, but rather a U.S. partnership that has foreign partners. (Always possible, but not likely.)

Artist or agent claims the Business Profits provision of a tax treaty.  This provision may not be used for personal service income.  Also, this provision is not for individuals.

Artist is an individual engaged in a US trade or business and can provide a Form W-8ECI to avoid the withholding.  Instructions on this form (and the regulations) say that the form may not be used for personal services.  The reason for this ruling is that often individuals fail to submit their required tax returns and pay their US taxes voluntarily.

The portion of the payment to the US agent is subject to US taxation rules and should not be taxed at 30%.  IRS rulings dictate that taxation is on the gross payment not the net after deducting the US agent's fee.  This is true even if the agent asks for a separate payment.  This is based on Treasury Regulation Section 1.1441-1(b)(2)(ii) which reads in part, "a withholding agent making a payment to a US person ... who has actual knowledge that the US person receives the payment as an agent of a foreign person must treat the payment as made to the foreign person."