The Internal Revenue Service (IRS) requires that all payments made to foreign vendors be made in accordance with IRS regulations. These regulations require that, when services (as defined elsewhere) are provided inside the U.S., taxes are withheld from payments made to foreign vendors unless the income is exempt under a provision of a tax treaty between the foreign vendor's country and the U.S.
To avoid withholding, foreign vendors that are business entities must have a U.S. employer identification number (EIN) and must submit a properly completed IRS Form W-8BEN, W-8ECI, W-8EXP, or W-8IMY, as appropriate. Foreign vendors that are individuals who wish to avoid withholding must be eligible to claim a tax treaty exemption by having a social security number (SSN) or individual taxpayer identification number (ITIN) and must submit for certification a completed IRS Form 8233.
Payments made to foreign vendors will be subject to U.S. federal income tax withholding of 30 percent unless:
1. The appropriate IRS forms have been completed and accepted by Shaw Industries as valid, and
2. Payments made to the foreign vendor are
a. Exempt (or subject to a lower withholding rate) due to a tax treaty
b. Effectively connected with the conduct of a trade or business in the U.S. (i.e., the vendor files a U.S. income tax return. This applies to payments to foreign business entities only), or
c. Made to a foreign entity with U.S. tax-exempt status.
Payments made to foreign vendors under this policy are required by the IRS to be reported annually on IRS Form 1042-S (Foreign Person's U.S. Source Income Subject to Withholding). Reporting is required regardless of whether or not withholding is required. A copy of the form is sent to the foreign vendor at the time it is filed with the IRS. The IRS requires that Form 1042-S be filed by March 15 following the calendar year in which payments were made.
IRS Publication 515 has additional information about these tax requirements.