When you earn income by providing services inside the U.S., section 1441 of the Internal Revenue Code lays down that payer needs to withheld tax from payments made to foreign vendors unless the income is exempt under a tax treaty between the foreign vendor’s country and the U.S.A. That is the reason, a US establishment, be it Amazon or Smashwords or any other US entity, informs you about the need to update and fill your tax information form -8Ben-failing which they will deduct U.S. federal income tax at 30 percent from payments.
Why Form 8Ben?
IRS has devised a form 8Ben which basically informs it about payments made to a foreign entity. So when you fill the form 8ben, you basically inform the payer US entity that you are a non-resident alien and what is the country of your residence. The properly filled form also gives you the opportunity to claim the lower rate of tax deduction due to tax treaty between your country and USA. Once, the payer gets that it can deduct the tax as per the rates settled between your country and USA. Here is the list of tax treaty rates applicable as per US double taxation avoidance treaty with various countries. Please note that even if your country does not have a treaty with the US, the form is used to establish that you are not a U.S. person.
Types of Payments Where Tax is Withheld by US entities
Foreign persons are subject to U.S. tax at a 30% rate on income received from U.S. sources.The tax is withheld on the gross amount for following types of payments under IRC 1441.
- Interest (including certain original issue discount (OID));
- Compensation for, or in expectation of, services performed;
- Substitute payments in a securities lending transaction; or Other fixed or determinable annual or periodical gains, profits, or income.
How Filing Form 8-Ben Saves You From Higher Tax?
For understanding how the filing of Form-8 to US entities by any non-resident helps everyone and prevent tax withholding at a very high rate ii.e 30 %. In following cases, a USA establishment ( payer of any sum) to a non-resident alien payee may not deduct tax at source from the payments.
1. The payee ( non-resident alien) fills an appropriate declaration form and submits to the payer ( US establishment)
2. Such Payments are
a. either exempt due to a tax treaty between USA and the country of non-resident alien payee OR,
b. effectively connected with the conduct of a trade or business in the U.S. , OR
c. to a foreign entity with U.S. tax-exempt status.
How to Fill Form W-8Ben?
Filling out the form is easy except one field that will pause your effort . This is Tax Identity Number which is must , otherwise tax withholding rate of 30% on your US sales will apply . Now this tax identification number can be any one of the following :
- Foreign Tax Identification Number (TIN) issued by country of residence.
- ITIN -Individual Taxpayer Identification Number
- EIN -( Employers Identification Number )
If tax identification number allotted by your country works ( not all countries’ identification is accepted by USat present ) , you can apply for ITIN and EIN .Getting an EIN is easier than getting anITIN which is having a lengthy verification process . Here is how to apply for an EIN -excerpt from IRS website
Apply by Telephone – International Applicants
International applicants may call 267-941-1099 (not a toll-free number) 6:00 a.m. to 11:00 p.m. (Eastern Time) Monday through Friday to obtain their EIN. The person making the call must be authorized to receive the EIN and answer questions concerning the Form SS-4 (PDF), Application for Employer Identification Number. Complete the Third Party Designee section only if you want to authorize the named individual to receive the entity’s EIN and answer questions about the completion of Form SS-4. The designee’s authority terminates at the time the EIN is assigned and released to the designee. You must complete the signature area for the authorization to be valid.