Foreign Artists and Athletes in the U.S. – July 13, 2009
Foreign Artists and Athletes in the U.S.
Increase Enforcement For Foreign Artists and Athletes
IRS recently launched an Issue Management Team focused on improving U.S. income reporting and tax payment compliance by foreign athletes and entertainers who work in the United States. The initial focus is on those engaged in tennis, golf and music. These individuals and those associated with arranging their appearances in the U.S. and managing their financial affairs are typically high income individuals. Because of this, it is important to ensure proper tax reporting and payment.
IRS is using a three pronged approach for this initiative:
improving the availability of information and guidance needed to help this group comply with income reporting and tax payment requirements
providing IRS enforcement personnel with information they need to identify and work compliance issues frequently encountered with this population and
conducting direct compliance and enforcement activity.
Many tax treaties contain a provision for pay to artists and athletes, and a separate category is assigned these payments for withholding purposes. This category may include payments made for performances by public entertainers (such as theater, motion picture, radio, or television artists, or musicians), athletes, or other persons as defined by the applicable treaty article.
As a general rule the tax treaty article dealing with artists and athletes must be applied before the articles on independent personal services and dependent personal services are applied to the income of the artists and the athletes.
Under many tax treaties, compensation paid to artists, entertainers, or athletes for services performed in the United States is exempt from U.S. income tax only when the services are performed during a limited period of temporary presence in the United States and the pay is within limits provided in the tax treaty.
Employees and independent contractors may claim an exemption from withholding under a tax treaty. Often, however, you will have to withhold at the statutory rates on the total payments to the artist, entertainer or athlete. This is because the exemption may be based upon factors that cannot be determined until after the end of the year.
As a general rule Form W-8ECI may not be used to exempt withholding on a payment for personal services provided by a foreign individual. In addition, special rules apply to artists and athletes who have formed partnerships or corporations as the beneficial owners of the income accruing to them.
You must withhold tax at a 30% rate on payments to artists and athletes for services performed as independent contractors. You must withhold tax at graduated rates on payments to artists and athletes for services performed as employees. However, in any situation where the nature of the relationship between the payer of the income and the artist or athlete is not ascertainable, you should withhold at a rate of 30%.
Payments to a U.S. Agent of a Foreign Person
Caution should be taken when payments are made to a U.S. agent of a foreign person. Withholding agents who have knowledge that the payee is an agent of a foreign person must treat the payment as made to a foreign person. An exception is made for a payee who is a “financial institution”.
Central Withholding Agreements
Nonresident alien entertainers or athletes performing or participating in athletic events in the United States may be able to enter into a withholding agreement with the IRS for reduced withholding provided certain requirements are met. Under no circumstances will a withholding agreement reduce taxes withheld to less than the alien’s anticipated income tax liability.
Foreign artists and athletes require must carefully plan and organize their entertainment activities in the US to avoid excessive withholdings. Also the use of the CWA arrangement may avoid many of the problems and complications of performing in the USA.
This information is a presentation of the general rules and should not be used or relied upon for any particular investment or transaction. We recommend you consult your tax attorney or advisor for your specific situation. If you would like more information on these matters we would be glad to visit with you.
As required by United States Treasury Regulations, you should be aware that this communication is not intended or written by the sender to be used, and it cannot be used, by any recipient for the purpose of avoiding penalties that may be imposed on the recipient under United States federal tax laws.