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Strategies for Taxing Foreign Performers and Athletes

Central Withholding Agreements (CWAs) serve as a crucial resource for non-resident athletes and entertainers performing or competing in the United States (U.S.). By allowing foreign individuals to negotiate a fixed withholding rate with the Internal Revenue Service (IRS), these agreements streamline the management of U.S. income tax obligations. Often, this negotiated rate is lower than the standard non-resident withholding tax rates, which not only maximizes the take-home earnings of international artists and athletes, but also ensures their compliance with U.S. tax laws.

The basics of CWAs

  • Who benefits? Primarily designed for non-resident athletes, entertainers, and related support personnel who earn income from activities within the U.S.
  • Purpose: To simplify tax obligations by pre-determining a fair and often reduced amount of tax withholding based on estimated net income.
  • Process: The individual or their representative must apply for a CWA before the commencement of the activities in the U.S. The agreement details specific events and the income associated with each, taking into account allowable deductions such as travel, accommodation, and management expenses.

Integration with withholding obligations

CWAs are especially significant within the broader framework of U.S. tax laws, specifically under IRC Chapter 3 withholding requirements. This chapter is a critical component of the U.S. withholding tax system on payments to foreign persons, including nonresident aliens, foreign entities, and financial institutions.

Chapter 3 withholding

  • Scope: Chapter 3 pertains to payments made to nonresident aliens for the performance of services within the U.S. It mandates the withholding of tax on payments of U.S. source income.
  • CWA impact: By setting up a CWA, foreign entertainers and athletes can reduce the mandatory default withholding rate of 30% to a rate that reflects their actual tax liability based on net income. This pre-negotiated rate not only ensures compliance with Chapter 3 but also enhances financial predictability and planning for the beneficiaries.

CWA process

  1. Application: Interested parties should submit the CWA application along with a detailed itinerary of U.S. engagements and a budget for expenses at least 45 days prior to the start of a U.S. tour.
  2. Negotiation: The IRS reviews the submission and negotiations typically follow to arrive at an equitable withholding amount.
  3. Compliance: Upon agreement, the IRS issues a letter of authorization, enabling promoters and payers to withhold tax at the agreed upon rate.
  4. Final settlement: After the end of the tax year, the individual files a U.S. tax return, at which point any overpayment is refunded or additional tax due is paid.

CWA analogues for U.S. resident actors and entertainers performing abroad

Various countries have implemented similar mechanisms to manage the taxation of foreign performers and athletes more efficiently. These international programs share certain similarities with the CWA program and are useful for resident entertainers performing abroad when determining their final foreign tax liabilities and calculating the amount of foreign taxes available as a credit against their U.S. liability. Citrin Cooperman's International Tax Services Practice has a team of leading professionals, business managers, and accountants who can help nonresident actors and entertainers apply for and receive CWAs. While only a part of the overall compliance obligations, CWAs can greatly help maximize cash flow and simplify tax compliance for nonresident actors and entertainers.

If you have any questions regarding CWAs or other matters related to international taxation, please reach out to our International Tax Services Practice’s Managing Partner Leon Dutkiewicz or Partner Connor Southwell.

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