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Robin D.
Robin D., Senior Tax Advisor 4
Category: Tax
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Experience:  15years with H & R Block. Divisional leader, Instructor
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May I have a question for withholding tax for a California

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May I have a question for withholding tax for a California company, pls?

If a CA company hires a subcontractor outside of USA, and the service would be performed outside of USA as well, I understand that no withholding tax for US federal tax. Would it not be subject to CA state withholding tax, either? Could you provide the guide, pls?

Thanks,

Robin D. :

Hello and thanks for trusting me to help you today. I am a tax adviser with over 15 years of experience.

Robin D. :

You would not need to withhold any tax for federal or CA.
The state has prepared a page that shows this exactly
https://www.ftb.ca.gov/individuals/wsc/self_test/selftest.asp

Robin D. :

As you will see ifthe service is not performed in CA the tax does not apply.

Robin D. :

I really enjoyed working with you – please feel free to request me again when you come back to ask another question.
You will find the request feature when you come back under your MY QUESTIONS section.

Robin D. and other Tax Specialists are ready to help you
Customer: replied 3 years ago.

Hi: Robin


 


May I have a further question, pls?


 


If the US company (level 1) hires a Canadian Company (level 2) as its subcontractor and paid 50k, and the Canadian company hires a US subcontractor (level 3) for part of the contract job needs to be done in US and paid him 10k. All other services (worth 40k) provided by the Canadian company was done in Canada. In this case, should US company (level 1) withhold tax on the payment of 10k to the Canadian company (level 2) for both federal and California?


 


Thanks again,

Hello,
The taxation falls on the place of the service. If any service is performed in the US (or if just a CA situation )or California then that would be US and CA sourced income. This would require withholding unless (and this really is more for US fed tax) a tax treaty applied to allow for no or less withholding rate.
Robin D. and other Tax Specialists are ready to help you
Customer: replied 3 years ago.

I think it's logical. Thanks!

You are most welcome.
Customer: replied 3 years ago.

Hi: Robin


 


Could I ask for the above case, if the Canadian Co. is exempted from US tax, would 1042 (to be withheld for tax first) and 1120F (to claim refund for withholding tax paid) filing still needed or tax filing can be completely eliminated?


 


Thanks again!

The Canadian company would not have a tax filing requirement if they are not physically in the US providing a service or doing business.
A foreign business that is supplying a product or a service to a US company is not doing business in the US unless the foreign company has a physical presence in the US.
Customer: replied 3 years ago.

But as mentioned in the previous post, the Canadian Co's subcontractor will perform service in US and your answer is that the Canadian Co should be subject to withholding tax, right?


 


The reason that Canadian is exempted from US tax is because of the treaty benefit.

Payments made to the Canadian corp are "business profits" and are taxable in each country on a basis proportional to the activity carried out through a permanent establishment in each country. This change in the US/Canada tax treaty affected the taxability of Canadian corporations and individuals providing services in the U.S. and U.S. entities providing services in Canada.
The US company would be required to have the Canada Corp complete the W8 and claim the tax treaty benefits. Article XV states that personal services performed by an employee working in the other country is exempt if the total payment is under $10,000. If earnings exceed $10,000, the income may be exempt if the nonresident is present in the other country for less than 183 days in any 12-month period and the payment is not received by or on behalf of a resident of that country or borne by a permanent establishment in that country.
The temporary service of the Canadian worker in the US for the Canadian company would be exempt from withholding based on the W8 filing and claiming the tax treaty benefit.
Customer: replied 3 years ago.

I think the Canadian company can file W8 ECI to apply for treaty exemption. If so, do you mean 1042 and 1120F are not required?

That is correct by virtue of the tax treaty
Customer: replied 3 years ago.

Sorry, Robin. By checking 1042 instruction, I found it's still required even W8ECI is filed.


 


"You must file Form 1042 if any of the following applies.

You are required to file Form(s) 1042-S (whether or not any tax was withheld or was required to be withheld)."
So sorry, I did not see your 1042S above I was looking at the part of the question for 1120F.
Customer: replied 3 years ago.

Thank you for your reply, Robin. Sorry, I think f1120F is required as well, per 1120F instruction:


 



Who Must FileUnless one of the exceptions underExceptions From Filing, below, applies or a special return is required (see Special Returns for Certain Organizations, later), a foreign corporation must file Form 1120-F if, during the tax year, the corporation:



Was engaged in a trade or business in the United States, whether or not it had U.S. source income from that trade or business, and whether or not income from such trade or business is exempt from United States tax under a tax treaty.

I would not think they are doing business in the US. Of course I am basing my opinion on only the limited info I have.

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