FOREIGN WITHHOLDING TAX
If you’re performing overseas it is highly likely that you will be considered to be ‘carrying on a business’ in that country and will therefore be required to register with the relevant tax authorities and lodge a tax return. Foreign tax compliance need not be a tricky area, but without a little bit of planning and forethought it can easily become a costly nightmare.
The following is written from the perspective of a musical act touring in the United States, but applies to a lot of work performed overseas and in most countries.
The first thing to think about is what registrations might be required in the foreign country. You’ll need to speak with an accountant in that country that is familiar with dealing with international businesses in your industry. This is especially true of the entertainment industry as there are very particular rules that apply.
Once your registrations are sorted out you’ll be able to tackle the issue of withholding tax. This is the money the person paying you is obligated to withhold from your payment and send on to their tax department. What follows is a simple example.
The U.S. promoter, or whomever is paying you, is legally obligated to withhold an amount equal to 30% of your gross fee and hand it over to the IRS. So, if you were booked to play a venue with a $10,000 guarantee, $3,000 will go straight to the U.S. tax man and you’ll only get $7,000. So, what happens with the $3,000?
First, we need to consider the obligation to lodge a tax return in the U.S. If you have expenses to claim against the tour income the $3,000 will likely be too much tax and you can get the difference refunded when you lodge the tax return. Remember the U.S. tax year ends 31 December and not 30 June like it does here in Australia.
Second, back in Australia when preparing your tax work you can use any amount that you’re still out of pocket (i.e. the difference between the $3,000 and whatever amount, if any, you got refunded) as a tax credit. But wait! There is a catch. This foreign tax withheld can only be used as a credit, back here in Australia, to offset tax payable on profits from foreign activities – i.e. you can’t use the amount to offset tax on Australian profits.
One of the major issues that entertainers face is the cash-flow difficulty of losing 30% of their fee as they had budgeted using all of it to cover the costs of the tour. You can avoid having the 30% withheld by applying for a CWA (central withholding agreement) – well, more likely, you need to employ a U.S. accountant to apply for one on your behalf. This notifies the IRS that the work being performed will have costs associated, therefore the withholding percentage should be reduced down from 30%, maybe down to 0%. This means less of a cash-flow burden and a reduced chance of losing your tax credits altogether.
However, organising a CWA can be relatively expensive if you’re doing small shows, so you’ll need to weigh up the costs of having one prepared on your behalf with the cash-flow impact of having the higher amount of withholding applied by the person paying you.
Bottom line? If you’re going to perform overseas you need to do the following:
- Speak with your local accountant
- Organise a foreign accountant
- Get registered overseas
- Look into reducing the withhodling amount if practical/possible
- Lodge a foreign tax return
- Lodge your local tax return
If you have any questions about the above, please get in touch. We work with countless performers who travel the globe and we’d love to help. We can also recommend some great accountants we work with over in the U.S. who would be happy to help.