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By Turner D. Madden, Esq.
Recently, the Internal Revenue
Service sent out 253 notice letters to arenas and stadiums with more than
8,000 seats informing them of their “responsibility and potential liability”
as a tax withholding agent for payments to foreign entertainers performing
in their venues. The letters state: “Payments to foreign entertainer(s) who
participate in events held in the United States are payments subject to
Internal Revenue Code (IRC) §1441 (Withholding of Tax on Nonresident Aliens)
and the corresponding Income Tax Regulations.”
According to Cecile Glunt, an IRS senior tax specialist from the IRS, the
purpose of these letters is to make sure that, as venue managers, we raise
the question, “Who is responsible for withholding the tax?” Is it the
promoter, an agent or a U.S. corporation, or does the foreign entertainer
have a Central Withholding Agreement (CWA) in place with the IRS?
The ultimate purpose of the letters is, of course, to make sure the U.S.
government receives the taxes. Withholding taxes, especially at the source,
is an important part of collections when the taxpayer is a foreign person or
entity because one country generally will not assist another in tax
collection. The IRS places the legal burden of tax collection on a U.S.
company or person that deals with the foreign entertainers or foreign
athletes.
Following are answers to questions you may have regarding your possible tax
withholding obligations.
What determines if a facility is a withholding
agent? Under §1441, a withholding
agent is any U.S. or foreign person (including a corporation or other
entity) that has control, receipt, custody, disposal or payment of any item
of income of a foreign person subject to withholding. Consequently, §1441 is
extremely broad and could include anyone that collects the proceeds or funds
from the concert or event. For example, if the venue has control of the box
office receipts for the event, the IRS may consider the venue a withholding
agent. Therefore, until we have further discussions with the IRS and come up
with some clear, concise guidance on the withholding obligations, venues
should seek written assurances from the promoter or the agent that they are
withholding the taxes.
Furthermore, the IRS states in the letter: “Venues may have an erroneous
belief that they are not a withholding agent if the contract that they have
entered into is not with the foreign entertainer but rather, with a promoter
or agent. If the personal services of a foreign entertainer are contracted
for, the withholding rules under IRC 1441 apply. … If a withholding agent
fails to withhold the proper amount of taxes, the withholding agent is
liable for payment of such taxes, interest and penalties. Even if the
foreign entertainer pays the tax, the withholding agent is liable for
interest and penalties under IRC 1463.”
If the tax is not withheld by the promoter or agent, because of the fixed
assets (the building), the IRS considers the assembly facility a good
alternative withholding agent, if the facility has control or custody of the
funds from which payment will be made to the entertainer. The IRS has
enforced “at the source” withholding obligations for more than 65 years.
If the
facts determine your facility is a withholding agent, how much should you
withhold? If determination of the income’s source or the amount
subject to tax depends on facts unknown at the time of payment after the
event, the promoter, agent or facility that has control or custody of
receipts must withhold an amount sufficient to ensure that at least 30% of
the amount subsequently determined to be subject to withholding is withheld.
In no case, however, should anyone withhold more than 30% of the total
amount paid for services.
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For More Information
Want more information about
your possible obligations when foreign entertainers perform in your
facility? You can reach Cecile Glunt at the IRS by phone at (803) 315-
9154 or via e-mail at cecile.glunt2@irs.gov.
You may also refer to IRS Publication 515, Withholding of Tax on
Nonresident Aliens and Foreign Entities, on the IRS Web site at
www.irs.gov/businesses/small/ international/
article/0,,id=129240,00.html.
In addition, Glunt plans to have an IRS Telephone Forum the third week
in June 2006 to let IAAM members hear a short presentation from the IRS
and ask specific questions about theses issues. IAAM will post a notice
on its Web site about the date and time, and you can participate.
Finally, the author, Turner D. Madden, serves as the outside general
counsel for IAAM. You can reach him at Madden & Patton, LLC, 1700
Pennsylvania Ave., NW, Suite 400, Washington, D.C. 20006; via phone at
(202) 349-2050; or by e-mail at tdmadden@verizon.net. |
What are Central Withholding Agreements? According to the
IRS, foreign entertainers and athletes making a tour of the United
States may wish to enter into a Central Withholding Agreement with the
IRS. The CWA is signed by a withholding agent, the foreign entertainer
and a representative from the IRS. The IRS indicates that such
agreements generally reduce the amount of taxes withheld on the U.S.
source gross receipts of the foreign athlete or entertainer. A request
for a CWA should be created at least 90 days before the agreement is to
take effect. For additional information on obtaining a CWA, contact the
IRS at cwa.program@irs.gov.
What can the facility do to protect itself from
liability under the IRS Code? Until the IRS develops clear,
concise guidance on the withholding obligations for public assembly
facilities, if you have foreign entertainers performing in your facility
you may want to ask the promoter and agent in writing who is the
withholding agent under §1441 of the Internal Revenue Code. If they do
not have a CWA in place with the IRS and you do not regularly deal with
the promoter or agent, you may want to request a bond to cover the tax
as part of your facility lease agreement — or if you, in fact, control
the box office receipts, withhold the appropriate amount as indicated by
your accounting personnel.
Turner D.
Madden, Esquire, serves as the outside general counsel for IAAM. |
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