Who pays the retroactive withholding tax - the withholding agent or me?

Question

I am a non-US person and I have been receiving royalty payments from a US company since 2015.

In 2020 the US company started to collect W-8BEN forms from its authors (like me) and apply a withholding tax. In other words, the company will now withhold 30% from the amounts they pay me. Thankfully, my country of residence has a treaty with the USA so I will benefit from a 0% withholding rate.

So far, so good!

Now, the US company just asked me to fill in an "Affidavit of Unchanged Status - Retroactive Statement" which basically asks me to "hereby confirm that my residency was the same for years 2015-2019" as it is in 2020. I was actually a resident of another country back in 2015-2016 and that country did not have a tax treaty with USA which implies a standard 30% withholding rate.

Does that mean the US company will ask me to retroactively pay them 30% of the amounts I received back in 2015-2016? Or they have to pay it?

I wonder why the company did not start to collect W-8BEN forms in 2015 but now. I earned more back then.

Update: The company said they will not be retroactively withholding me any money. However, the question still remains - why they didn't start to withhold money back then, but now?

Answer 1

Aside from the question of why the royalty payer didn't withhold on time, we have to distinguish between three different matters that people tend to confuse: Tax liability, filing requirements and withholding.

Generally speaking, royalty and other passive types of US source income ("FDAP"), received by a non US taxpayer ("NRA"), are subject to a flat 30% US tax at the NRA level. That's the tax liability part. The tax liability may be reduced if the NRA is covered by a tax treaty between his country of residence and the US.

Also generally, a US payer of FDAP is required to withhold a flat 30% of the amount of FDAP, remit the 30% to the IRS and the rest to the NRA. Like the tax liability, the withholding rate may be reduced by an applicable tax treaty.

And, finally, while an NRA may be required to file US tax returns with respect to US source income earned by him, the filing requirement doesn't apply if the tax liability is discharged in full by way of withholding.

And now we come to your situation, if for whatever reason, the NRA's tax liability is not discharged by withholding, the NRA is still liable for the tax and a US tax return must be filed. Any reduction of the tax rate by virtue of a treaty is still available, but must be claimed on another tax form (Form 8833).

So, in principle, you still have to file US tax returns for the years you had FDAP but no withholding, claim the treaty benefits for the years for which you were eligible, and pay tax for the other years.

I haven't looked into that, by while the statute of limitations on tax assessment is generally 3 years from a return's due date, it usually doesn't start running if no return is filed - so it's possible that won't change the answer.

Finally, your countries of residence may (or may not) provide some form tax credit against domestic tax liability for foreign (in this case, US) taxes paid on the same income. So if you end up paying retroactive US taxes, you should look into that as well.

Depending on the amount of money involved, you should probably speak to tax professionals in both the US and your countries of residence.