No, the country of “no taxation without representation” doesn’t take a 30% tax on payments to foreigners

A slightly abstruse tax issue affecting non-US contractors for US organizations is that sometimes such organizations ask for a W-8BEN form, but that form asks you to claim tax treaty benefits. What should you do if you live in a country which doesn’t have such a tax treaty, or are digital nomad, and are not a US citizen?

What is the original purpose of form W8-BEN? What are the laws pertaining non-US resident taxation?

The W8-BEN form withholding “is imposed on the gross amount paid and is generally collected by withholding under section 1441” (see purpose of form). But section 1441, withholding of tax on nonresident aliens, states:

Except as otherwise provided in subsection ©, all persons, in whatever capacity acting (including lessees or mortgagors of real or personal property, fiduciaries, employers, and all officers and employees of the United States) having the control, receipt, custody, disposal, or payment of any of the items of income specified in subsection (b) (to the extent that any of such items constitutes gross income from sources within the United States), of any nonresident alien individual or of any foreign partnership shall (except as otherwise provided in regulations prescribed by the Secretary under section 874) deduct and withhold from such items a tax equal to 30 percent thereof, except that in the case of any item of income specified in the second sentence of subsection (b), the tax shall be equal to 14 percent of such item.

Excluding the exceptions (which aren’t relevant here) to make the text clearer:

All persons, in whatever capacity acting having the control, receipt, custody, disposal, or payment of any of the items of income specified in subsection (b) (to the extent that any of such items constitutes **gross income from sources within the United States**), of any nonresident alien individual or of any foreign partnership shall deduct and withhold from such items a tax equal to 30 percent thereof.

But gross income is defined (see also on the IRS website 1, 2) as:

The following items of gross income shall be treated as income from sources within the United States:

• Interest
• Dividends
• Personal services. Compensation for labor or personal services performed in the United States
• except that compensation for labor or services performed in the United States shall not be deemed to be income from sources within the United States if (note: this doesn’t apply here, but might if you e.g., have a retreat or someone stays in the US for a bit).
  • 1. the labor or services are performed by a nonresident alien individual temporarily present in the United States for a period or periods not exceeding a total of 90 days during the taxable year,
    2. such compensation does not exceed $3,000 in the aggregate, and
    3. the compensation is for labor or services performed as an employee of or under a contract with
    4. a nonresident alien, foreign partnership, or foreign corporation, not engaged in trade or business within the United States, or
  • (another case)
• In addition, compensation for labor or services performed in the United States shall not be deemed to be income from sources within the United States if the labor or services are performed by a nonresident alien individual in connection with the individual’s temporary presence in the United States as a regular member of the crew of a foreign vessel
• Rentals and royalties
• Disposition of United States real property interest
• Sale or exchange of inventory property
• Amounts received as underwriting income
• Social security benefits
• Guarantees

So income is construed such that, if you aren’t performing the services in the United States, the 30% withdrawal doesn’t apply.

Why are organizations asking for a W8-BEN, then?

Organizations are asking for a W8-BEN to establish that the recipient is not a US resident, and to leave an audit trail. Most of the time, this isn’t a problem, because most people live in organizations that are reasonably close allies of the US, and reasonably enmeshed in its financial system, with tax treaties and such.

But when there is no such tax treaty, income for non-US residents isn’t taxed at 30%. Rather, the lack of residency in the US to avoid withholding should be established in some other way, or through an W-8 BEN without claiming tax treaty benefits, so with section II unfilled.

This has been confirmed with, for instance, Rethink Priorities, but readers are encouraged to do their own research. I am not your lawyer, etc. etc.