The filing requirement for nonresidents depends upon the nature of the individuals conduct within the United States. Generally, if a nonresident is engaged in a U.S. trade or business, he or she must file a tax return even if there is no effectively connected income. This is true even where no income was earned from U.S. sources or where the income earned is exempt from U.S. taxation. A return must also be filed if or when a nonresident takes a position where a treaty of the United States overrules a U.S. domestic tax law. In such cases, a statement disclosing the treaty position shall be attached to the return. Besides these required filings, nonresidents may desire to file a return to claim a refund for over-withheld or overpaid tax, or claim the benefit of any deductions or credits. However, if a nonresident is not engaged in a U.S. trade or business, no return is needed if withholding at the source fulfills the tax liability.
For nonresidents that are subject to U.S. income tax withholding or otherwise required to file as well as corporations with an office or fixed place of business in the United States the return deadline is the 15th day of the 4th month after the end of the taxable year (April 15th for a calendar year taxpayer). For corporations without an office or fixed place of business in the United States, the deadline to file the tax return is the 15th day of the 6th month after the corporation’s taxable year (June 15th for a calendar year corporation). A six-month extension of time for filing a return, but not for paying tax, may be requested.
In its simplest form, withholding is a government requirement for the payor of an item of income to withhold or deduct tax from the payment. Generally, payments to nonresidents are subject to a 30 percent withholding tax (which applies to both FDAP and personal services income). Since foreign taxpayers may not have a business or assets in the United States, it might be impossible to enforce the 30 percent tax against a nonresident that does not voluntarily pay. Therefore, the Code contains a variety of withholding provisions. Any person (foreign or domestic) having control, receipt, custody, disposal, or payment of any item of U.S. source income is a withholding agent and responsible for withholding 30 percent tax from such payment and remitting it to the IRS. A withholding agent that fails to do this is personally liable for the requisite tax, penalties, and interest.
It is within the withholding agent’s authority to grant a reduced rate of tax in accordance with an applicable tax treaty. However, in claiming a treaty-based exemption of reduced rate, a withholding agent must consider Regulations designed to monitor the withholding tax implications of conduit financing arrangements. These Regulations permit the IRS to disregard the participation of one or more intermediate entities if those entities are acting as conduits between the true parties to a transaction. In such a case, the transaction is collapsed and re-characterized as one occurring directly between the non-intermediary parties.
In addition to the return and withholding requirements, taxpayers may also be subject to information reporting requirements that are imposed to provide the IRS with information needed to verify a taxpayer’s tax liability. The most common occurrence of this is when a U.S. subsidiary of a foreign corporation purchases inventory from its foreign parent and resells it in the United States. If the purchase price paid by the subsidiary is more than an arm’s length price, the taxable gain in the United States from sales to customers will be understated. Thus, the IRS requires certain foreign taxpayers doing business in the United States to provide a variety of information to enable the IRS to police arm’s length pricing between related entities.