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Tax.appeal.168
Tax.appeal.168, Accountant
Category: US Tax
Satisfied Customers: 3729
Experience:  3+ decades of various tax experience, including ex-pat, tax prep and accounting as a business owner.
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I am a UK based (small) company that has 1 contractor working

Resolved Question:

I am a UK based (small) company that has 1 contractor working for me in the US. There might be potential for a few more but I need some simple, straightforward advice on what the implications are in terms of handling US tax liabilities. We bill and are paid by a UK company but the services are delivered in the US. I was hoping that by inserting a clause into the individuals contracts along the line of “you confirm you are responsible for reporting all payments received under this contract and for payment of all local applicable taxes to the Internal Revenue Service. Neil Ross Associates Ltd shall not, in any way, be responsible for your local taxation responsibilities” that it would mean the responsibilities fall on the individual but need this clarifying.
Submitted: 2 years ago.
Category: US Tax
Expert:  Tax.appeal.168 replied 2 years ago.
What type of service is it that will be provided? As for the individual, the clause will be fine. As a foreign business outside of the U.S., and these are not employees, there is no tax responsibility on your part for the individuals that you hire as contractors. As a U.S. person, they are required to report their worldwide income and it is their responsibility to do that. However, from the IRS side of things, as your company is providing a service in the U.S., there might be some tax responsibility, as the company may be considered to be conducting business in the U.S. This is why I need to know the type of service that is physically performed in the U.S.
Customer: replied 2 years ago.

Thanks for the response ... it is project management, marketing program execution that sort of thing ... basically marketing program execution.

Expert:  Tax.appeal.168 replied 2 years ago.
Hello again,
You are welcome. As the contractor or contractors will be performing the services in the United States, the income derived from their services is considered U.S. sourced income and your company will be required to pay tax on the U.S. sourced income. For tax purposes, U.S. sourced income is determined by where the services are performed. Refer to the following link for more detailed information.
http://www.irs.gov/Individuals/International-Taxpayers/Nonresident-Aliens---Source-of-Income
--------------------------------
(a) Imposition of tax
(1) In general
A foreign corporation engaged in trade or business within the United States during the taxable year shall be taxable as provided in section 11, 55, 59A, or 1201(a) on its taxable income which is effectively connected with the conduct of a trade or business within the United States.
(b) Gross income
In the case of a foreign corporation, except where the context clearly indicates otherwise, gross income includes only—
(1)gross income which is derived from sources within the United States and which is not effectively connected with the conduct of a trade or business within the United States, and
(2)gross income which is effectively connected with the conduct of a trade
or business within the United States.
REFERENCE SOURCE:
www.law.cornell.edu/uscode/text/26/882
Let me know if yo require further assistance with this matter.
Customer: replied 2 years ago.

I am getting there but still confused ... so because the service is being delivered in the US my UK company needs to withhold tax from the contractors and then pay that to the IRS ... can't I just have them do it themselves as they are not employees just contractors providing a service ? If they had their own US company I could transact with them and it would be their company that would then be responsible for ensuring the IRS get their money ?

Expert:  Tax.appeal.168 replied 2 years ago.
The taxation is not on an individual level, but on a corporate level. You can refer to the document at the following link for more detailed information.
http://www.steptoe.com/assets/attachments/4409.pdf
Customer: replied 2 years ago.

Thanks I have read this and the US - UK tax treaty and am none the wiser ... it stats "In general, under the United States' tax treaties, a
foreign corporation that earns income from services per-
formed in the United States is generally subject to US tax
on that income only if the foreign corporation has a "per-
manent establishment" in the United States. Further, only
the business profits attributable to the permanent estab-
lishment (PE) are subject to US tax." as I don't have a PE in the US does this mean that I (my co. is not liable) and I can just tell them they are responsible for it. I would pay Corp Tax in the UK on any profit I make from them (the difference between what I am paid for their services and what I pay them) ... Sorry for all the points of clarification I am just trying to get clarity.

Expert:  Tax.appeal.168 replied 2 years ago.
I totally understand the need for clarification. As not all countries have a tax treaty with the U.S., the general information is pretty broad. However, based on the treaty information, as you do not have a PE in the U.S., then your corporation will not be taxed on the U.S. sourced income and the contractors are responsible for their own taxes. SEE BELOW:
Permanent Establishment Tax Risks
What is a “permanent establishment”?
Income tax treaties of developed countries typically include standard language defining the term permanent establishment that is based on the OECD Model Income Tax Convention. An enterprise of one country generally will have a permanent establishment in the other country if it has either a fixed place of business (e.g., a place of management, a branch, office, factory, etc.) in the other country or it has a dependent agent in the other country that has the authority to conclude contracts binding the enterprise and the agent habitually exercises that authority.
REFERENCE SOURCE:
http://www.us.kpmg.com/microsite/taxnewsflash/Corporate/2011/TNFCorpExec11_10.html
Let me know if this clarifies matters for you.
Customer: replied 2 years ago.

Great so to close this down (and pay you Smile) if I put a clause like the one in the original question in their contract this will suffice, they will be responsible for their taxation affairs and there is no liability on me (my co) ?

Expert:  Tax.appeal.168 replied 2 years ago.
You don't have to put the clause in their contracts, however, so that there won't be any confusion, you can put the clause in the contract. Foreign companies are not required to provide tax related documentation to U.S. persons who perform services for them. Again, it is the U.S. person's responsibility to report the income on their tax returns even if they receive no documentation.
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