New Visa Regulations: Problems for Webmasters Without a Presence in the United States
As many of you know, Visa USA has issued new regulations that require sites using certain independent processing companies to have a presence in the same country as the processor. This regulation has caused significant confusion for many Webmasters who are citizens of countries other than the United States. Importantly, this article is intended to only address Webmasters residing in such countries, not Webmasters based in the United States.
The immediate reaction of many foreign Webmasters to the Visa regulations is to run out and form a business entity in the United States. Once they have the entity in place, the general plan is to then transfer money from the bank account of the entity to their local account. The most popular jurisdiction for using this strategy is Nevada. This strategy, however, carries significant practical and tax risks.
In light of the terrorist attacks on September 11, 2001, many banks located in the United States will not open bank accounts for business entities that are owned by foreign citizens. It is difficult to ascertain whether this is a random decision made by the banking industry or one undertaken at the "suggestion" of federal authorities. Regardless, Webmasters should be aware that they might have significant difficulty opening a bank account for their new business entity. If the company has no bank account, then obviously the forming of a US-based business entity is of little use in overcoming the hurdles created by the new Visa regulations.
Once a Webmaster is successful in locating a US bank, he may be surprised to learn that he will be required to make a W-8 filing with the Internal Revenue Service before being given an account. This filing appears harmless on its face, but serves the practical purpose of creating a record of the Webmaster in the IRS database. While the actual filing of this document does not cause immediate problems for the Webmaster, it can have serious implications once a tax return is due for the entity.
The primary problem with forming a business entity in the United States is the issue of tax withholding. "Tax withholding" arises from a federal requirement that companies retain a certain percentage of any payment made to a second party to cover taxes that may ultimately be due from the second party. In the United States, a domestic business entity is often required to withhold a certain percentage of dividend, income and business service payments made to a foreign person or entity. For instance, if a company in Nevada hires a Canadian Webmaster to design a site, the company may be required to withhold a certain percentage of the fee paid to the Webmaster. According to one accountant, the withholding percentage is 30% for payments that fall within the withholding requirement. If the business entity does not withhold this amount, it will be liable for the taxes at the end of the relevant tax year as well as potential penalties. Failure to satisfy the tax liability may ultimately lead to an IRS inquiry and the seizure of the company assets and bank accounts. The IRS may also track the transactions to the processing company and seize any money held by the processor.
Importantly, foreign Webmasters must understand that the IRS will also associate the tax liability with the individual that filed the W-8 form required for the bank account. The practical effect of such an association is that a foreign Webmaster will have significant difficulty in forming business entity or opening a bank account in the United States. With the new Visa regulations, that person will effectively be precluded from continuing to use his current processor and will lose all reoccurring billings with that processor.
Obviously, this scenario creates a very difficult situation for foreign Webmasters. At a minimum, the 30% withholding creates a significant cash crunch. If the Webmaster ends up being taxed in both the United States and his own country, the resulting high tax rate will effectively bankrupt most sites. In short, Visa has unintentionally or intentionally placed foreign Webmasters in a major bind.
Unfortunately, there are few options available to foreign Webmasters confronted with the new Visa regulations. Initially, a foreign Webmaster should have an accountant review his particular situation to determine if the above tax risk applies to the Webmaster. If the accountant cannot provide a positive opinion, relief might be found in tax treaties between the United States and the Webmaster's country of citizenship or residency.
A tax treaty is an agreement between two countries that typically is intended to increase trade between the countries. One of the primary elements of such an agreement is language designed to avoid situations where an individual or entity is taxed twice because he is located in one country while doing business in the other. If your country has entered into a tax treaty with the United States, and many have, you are strongly advised to consult with an accountant on the impact of such a treaty. If you are fortunate, you may be able to avoid paying tax or having a withholding on any payments you receive from a business entity in the United States.
For Webmasters in Canada, we are currently awaiting an opinion from an accountant on a tax treaty signed by the United States and Canada. We intend to submit an article to YNOTMasters.com as soon as we have that opinion. Regardless, all foreign Webmasters should consult with an accountant before forming an entity in the United States for the purposes of complying with the new Visa regulations.
The above discussion is intended to be a general commentary on tax and banking issues. Each situation is different and this article is not intended as legal advice for your specific situation. Further, nothing in this article is intended to create an attorney-client relationship. If you have additional questions, please contact J. D. Obenberger at AdultInternetLaw.com.
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