2023 Marcum Year-End Tax Guide

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NAVIGATING THE COMPLEXITIES OF US TAX LAW: STRATEGIES FOR CROSS-BORDER FEES AND SERVICE ARRANGEMENTS BY FIORELLA BELARDI

In an era of increasing globalization and international economic expansion, businesses and entrepreneurs worldwide are seeking opportunities in new markets, often choosing the United States as an ideal platform to launch services, products, establish branches, or relocate their headquarters. However, international operations bring forth many challenges and opportunities, particularly when navigating the intricate landscape of American tax law. The complexity of US tax regulations directly impacts a business’s core objectives, short- and long-term profitability, and the potential for development. In this context, it is imperative that companies engaging in transactions with the United States establish comprehensive service agreements between their American and foreign offices, considering cross-border fees and tax issues such as withholding requirements and IRS documentation.

CROSS-BORDER TAXATION IN THE UNITED STATES Taxation of Certain Fixed Income One of the most significant tax considerations for international entities or individuals earning income from US sources is the US statutory withholding tax of 30%. This tax applies to various types of income, known as Fixed or Determinable Annual or Periodical Income (“FDAP”), including dividends, interest, and royalties. It applies to both for-profit and non-profit orga nizations. However, it is important to note that the standard 30% tax rate can often be reduced or eliminated

provide services, the income received is considered foreign source income. Foreign source income earned by non-US taxpayers for services performed outside the US is not subject to US income taxation, nor is such income subject to US withholding tax. Conversely, the income is considered US source income if the services are performed in the US. In this context, the term trade or business within the US includes the performance of personal services within the US at any time within the taxable year. However, it does not include the performance of personal services by a non-resident alien individual temporarily present in the United States for a period or periods not exceeding a total of 90 days during the taxable year

and whose compensation for such services does not exceed in the aggregate $3,000. Forms for Compliance To facilitate compliance with US withholding tax regulations, en tities or individuals engaging in cross-border transactions must be aware of the forms that need to be completed. Key forms include: Form W-8 Series: The W-8 forms (W-8BEN, W-8BEN-E, W-8ECI, W-8EXP, W-8IMY) will be requested by payers prior to payment being made. These forms are generally valid for the year they are signed and three full calendar years after that. Therefore, it is imperative for entities that make payments to non-US persons to routinely update these forms and review transactions to ensure continued compliance.

by income tax treaties. Taxation of Services

For US tax purposes, services income is sourced to where the service is performed. As a result, if a US entity pays a non-US person to

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