Payments to foreign vendors that have been determined to be FDAP (fixed or determinable annual or periodical) income can be sourced as U.S. or foreign based on specific sourcing rules applicable to each type of FDAP income. Here is a detailed process to determine the source of such payments:
- Review Applicable Documentation: Examine all relevant documentation, such as invoices, engagement letters, and contracts, to determine the nature of the services or goods provided and where the activities related to the income were performed.
- Identify the Type of FDAP Income: Different types of FDAP income have specific sourcing rules. Common types of FDAP income include:
- Interest
- Dividends
- Rents
- Royalties
- Compensation for services
- Apply Specific Sourcing Rules:
- Interest: Generally, interest is sourced based on the residence of the payer. If the payer is a U.S. resident, the interest is U.S. sourced.
- Dividends: Dividends are sourced based on the residence of the corporation paying the dividend. Dividends paid by a U.S. corporation are U.S. sourced.
- Rents and Royalties: These are sourced based on the location of the property or the place of use of the intellectual property. If the property is located in the U.S. or the intellectual property is used in the U.S., the income is U.S. sourced.
- Compensation for Services: The source of compensation for services is determined by where the services are performed. If the services are performed in the U.S., the income is U.S. sourced.
- Determine the Source Based on Documentation:
- For services, review contracts and invoices to determine where the services were performed. If services were performed in the U.S., the income is U.S. sourced.
- For royalties, check the location where the intellectual property is used. If used in the U.S., the income is U.S. sourced.
- For rents, verify the location of the rented property. If the property is in the U.S., the income is U.S. sourced.
- Presumption Rules: If the source of an amount cannot be determined at the time of payment, the payment will be treated as U.S. sourced. This is a default rule to ensure compliance when documentation is insufficient.
By following these steps and applying the specific sourcing rules, you can accurately determine whether payments to foreign vendors that are FDAP income are sourced as U.S. or foreign.
Sources:
§ 861. Income from sources within the United States
§ 862. Income from sources without the United States
IRM Part 4. Examining Process. Chapter 10. Examination of Returns. Section 21. U.S. Withholding Agent Examinations - Form 1042
IRM Part 4. Examining Process. Chapter 61. International Examination Guidelines. Section 10. Foreign Tax Credit
Rev. Rul. 91-32
FAA 20051001F
