Having read through the above discussion and the original post / responses thereto, we need to consider two items in this scenario (a) the relationship between the US entity/person and the the foreign entity/person --i.e. is this a buyer service provider relationship or employer/employee relationship or a investor relationship? Taking the simplest relationship i.e. a US entity buys a service in a foreign land and pays for it on an agreed basis. Does this expose the foreign service provider to US taxation i.e. does this then make the foreign entity an earner of US sourced income. As an example would be an US business sells its product through on-line sales and ships products directly to the buyer in a foreign country. To improve the market exposure, the entity advertises in local news paper and agrees to pay a flat usual fee for advertising. Surely that local newspaper is not subject to US taxation. What if the newspaper was actually owned by another US entity ? Still NO. What if instead of a New Paper the US business does the advertising through a local "agent" -- assuming the agent is a local person. The answer would still be No.
(b) the other item to consider is whether a business constituted under US laws and subject to such, has a legal obligation to know or should know whether a service provider is subject to US tax laws. This is generally a requirement for all businesses when dealing with US persons, US entities, Non-resident aliens, Foreign entities -- by the mere fact that IRS expects the business to provide information returns for ALL payments as part of withholding requirements -- vide series 1099, W-8 forms.. Thus merely saying the service provider is in a foreign country does not exclude this requirement. At the same time the W-8 series of forms does not cover all situations --- W-8BEN specifically covers only Non Resident Aliens present in the USA and others in the series cover entities with a financial interest in the USA..
Therefore my suggestion would be to (a) ascertain that the service provider is not a US citizen/resident ( even though living abroad ) i.e. absence of a Tax ID ( SSN /EIN) and (b) document this finding and keep records on file that the business has indeed done due diligence on withholding requirement.
That is my opinion.
@TaxGuyBill ,
@TaxPro+40
