On the basis of your facts, the trade or business appears to
be the provision of "personal" services (i.e., referring
third parties to clients' websites). As such, the source of
the income therefrom under U.S. tax principles will
generally be the place where the services are performed,
see, e.g., Reg 1.861-4) - in this case most likely the place
where the servers are located (but don't quote me on that as
I'm unfamiliar with the intricacies of e-commerce taxation).
If you are providing your services via servers located in
Canada, then your income is Canadian source income. If
you're a nonresident alien with respect to the U.S., then
you're not subject to tax by the U.S. on your
Canadian-source income for personal services (as a general
rule).

Further, having a bank account and/or a mailing address is
generally not sufficient by itself to constitute the conduct
of a trade or business in the U.S., so there should be no
question of "effectively connected income." Additionally,
even if such were to be treated as a U.S. trade or business,
such would not constitute a "permanent establishment" under
the U.S.-Canada Income Tax Treaty, meaning that the U.S.
cannot tax you on any income connected with a U.S. trade or
business if it is not attributable to a "permanent
establishment." The virtue of the treaty exemption is that,
provided you do not have a "permanent establishment," the
source of the income becomes (more or less) irrelevant -
even if it's U.S. source it's not taxed by the U.S.

That being said, there is a difference between whether or
not you're taxable by the U.S. on non-U.S. source income and
whether U.S. payors (i.e., the U.S. companies making
payments to you) must withhold on those payments. The
withholding rules are broader than the substantive tax rules
and require withholding in certain cases where no tax is due
- the policy being a prospective measure to protect the
revenue against cheaters and rationalized by the fact that
an NRA subject to overwithholding can always file a claim
for refund.

Since the payment is compensation for personal services, and
is (apparently) made to a U.S. bank account, the payor must
assume, in the absence of proper certification, that the
payment is to a U.S. person (see Reg 1.1441-1(b)(3)(iii)),
and as such it would be a "reportable payment" under Code
Section 3406 and subject to backup withholding in the
absence of a proper taxpayer identification number (TIN).

The end-result of this is that, while you should not be
subject to the 30% Withholding Tax because the income is
foreign-source, you will be subject to backup withholding in
the absence of acceptable proof to the payor of either (i) a
TIN, or (ii) that you are not a U.S. person and the payments
are therefore non-U.S.-source income.

The better route would be to provide proof that you are not
a U.S. person, which is generally done by filing a Form
W-8BEN with the payor. For this form, do not use your U.S.
mailing address/agent - use your permanent business address
in Canada (otherwise, the payor will not be able to rely on
your form and will have to treat the payment as made to a
U.S. person). Also, since there is a treaty for which you
should qualify, fill out the section on claiming treaty
benefits as well.

Once the completed Form W-8BEN is provided to your payors,
there should be no U.S. tax and no U.S. withholding.

<< ================================================== ===== > << The foregoing is intended for educational purposes only > << and does NOT constitute legal OR professional advice. > << > << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org. > << Copyright (2005) - All rights reserved. > << ================================================== ===== >

Robert Daniels wrote:
- quote -

Thanks for your reply.

(These first 3 paragraphs are in regards to the apparently
bad wording in the IRS's publication - which you may prefer
to skip over.)

I'm going to have to disagree that "not effectively
connected with your U.S. trade or business" is equilavent to
"*not* from a US 'trade or business'."

It says "your U.S. trade or business." That means you have
one. The exception to the defition of "effectively
connected" immediately follows the definition and is called
"investment income," and it then says even this can be
"effectively connected" under the "business activities
test."

The 30% rule I quoted does not use the term "investment
income," which you seem to be saying they are talking about.
It says "certain items of income or gains," which leaves one
to conclude they are again talking about regular income, and
not the two exceptions they listed - investment income and
certain foreign source income. If someone is talking about
an exception, they usually point that out, because otherwise
someone will conclude they are talking about the general,
regular cases. If you read the 30% rule that way, the
logical impossibility I pointed out disappears. However, you
are also saying "*not* from a US 'trade or business,'
meaning the 30% rate would apply to foreigners with no US
presence. This also is not in the defintion. This class of
people is not covered by the defition I quoted. It says
"your" US business.

You may very well be correct as to what they intended to
say. Perhaps it should be worded like this: "Tax at a 30%
(or lower treaty) rate applies to certain items of income or
gains DESCRIBED IN THE EXCEPTIONS TO EFFECTIVELY CONNECTED
INCOME, AND TO ANY U.S. SOURCE INCOME EARNED BY A NON-U.S.
BUSINESS OR PERSON." Again, this is quite different from
what they actually said.

In regards to the three issues you pointed out, 1) There is
no U.S. presence, other than mail forwarding and check
deposit - all the work done placing and maintaining the ads
is done from Canada; 2) 100% of the commissions for internet
sales referrals are from sources in the U.S.; 3) assume no
treaty applies - I'll look that up later. Under these
conditions, you seem to be saying the 30% tax would apply.
It also seems that if the person in the US doing the mailing
forwarding/check deposits started helping with the
advertising, then the 30% tax would not apply (that person
is a "U.S. person") and instead there would be a "U.S.
business" and graduated rates and deductions would apply.
Correct?

<< ================================================== ===== > << The foregoing is intended for educational purposes only > << and does NOT constitute legal OR professional advice. > << > << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org. > << Copyright (2005) - All rights reserved. > << ================================================== ===== >

<tanya_s19[at]mail.com> wrote:

- quote -

The US international tax rules are complicated, and you have
to read them carefully. Statement #3, above, is not correct.
The 30% flat tax applies to certain types of US income of
non-resident aliens (NRA) that is *not* from a US "trade or
business" -- things like interest, dividends, rents and
royalties. [There are *lots* of exceptions, and specific tax
treaties often override these default rules.] The tax is
generally withheld by the US person who is paying these
items to the NRA. NRA's who have US business income pay tax
at graduated rates on that income as well as income that's
"effectively connected" with that business.

In your case, the basic issues are (1) are you engaged in a
US business -- i.e. are your commissions are earned by
performing personal services in the US (by yourself or thru
agents)? (2) how much of the commissions are from sources
within the US?, and (3) does the US-Canada tax treaty have
provisions that affect how your activities are taxed?

Bob Daniels ("International tax is like playing
three-dimensional chess without a chessboard.")

<< ================================================== ===== > << The foregoing is intended for educational purposes only > << and does NOT constitute legal OR professional advice. > << > << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org. > << Copyright (2005) - All rights reserved. > << ================================================== ===== >

When is the 30% tax on aliens due? Can someone give me ONE
example? It seems it is impossible it would ever be due, by
the IRS's own defitions in the very publication saying it's
due (my related question follows):

---------------------- Publication 519 (2004), U.S. Tax Guide for Aliens

4. How Income of Aliens Is Taxed

Effectively Connected Income

If you are engaged in a U.S. trade or business, all income,
gain, or loss for the tax year that you get from sources
within the United States (other than certain investment
income) is treated as effectively connected income. This
applies whether or not there is any connection between the
income and the trade or business being carried on in the
United States during the tax year.

The 30% Tax

Tax at a 30% (or lower treaty) rate applies to certain items
of income or gains from U.S. sources but only if the items
are not effectively connected with your U.S. trade or
business.

-----------------------
Going by the above definition, the 30% rule applies when
three conditions are met: 1) the income comes from a U.S.
source, 2) it is not "effectively connected income" and 3)
you have a U.S. trade or business ("... connected with your
U.S. ..."

But the definition of "effectively connented income" has two
conditions: 1) you have a U.S. trade or business, and 2) it
is income from sources within the U.S.

So, going back to the 30% rule, how can you have U.S. source
income, a U.S. business, and have that U.S. source income
not be "effectively connected income" - when those are the
two conditions that define "effectively connected income?"

In a logical diagram we have the following:
ECI = effectively connected income
TPR = thirty percent rule
A = U.S. business
B = U.S. source income
& = AND, + = OR, -> = therefore, := = logical equivalent

A & B -> ECI
A & B & ~ECI -> TPR
- - - -
(A & B -> ECI) := (~A + ~B -> ~ECI)
- - - -
A & B & (~A + ~B) -> TPR
--------------
A & ~A -> impossible to satisfy
B & ~B -> impossible to satisfy

The related question:

I was reading the above IRS publication to determine what
U.S. tax would be owed by a Canadian resident who earns
commissions by sending buyers to U.S. web sites. I came
across the 30% tax rule, which I can make no sense of. In
my scenario the business has a U.S. mailing address/agent,
and a U.S. bank account (and is sole proprieter having an
ITIN). Money paid out by U.S. companies goes to the U.S.
mailing address, and is deposited in a U.S. bank account.
Other mail is forwarded to Canada. The agent/mailing
address serves no other purpose, and is not necessary to
carry on the business, and therefore seems to be disregarded
as an entity, and does not give the business a U.S.
presence. My question is what tax rate applies, and what
forms to fill out. In reading non-IRS documents, it seems
the U.S. tax would be 30%, and I would need to fill out a
W-8BEN, and the U.S. companies paying commissions would file
a 1099-MISC. Please confirm. (Also, the non-IRS documents
say having a U.S. business presence would give the benefit
of being taxed like U.S. citizens with deductions and
graduated rates - but I assume this entails having a legal
permanent resident/right to work status.)

Thanks

<< ================================================== ===== > << The foregoing is intended for educational purposes only > << and does NOT constitute legal OR professional advice. > << > << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org. > << Copyright (2005) - All rights reserved. > << ================================================== ===== >