The Tax Times: Only 13% of US Source Payments are Subject to US Withholding Tax!

The IRS has issued 2 tabular presentations of data for Tax Year 2012 from Form 1042-S, Foreign Person's U.S. Source Income Subject to Withholding. The table for 2012 shows that:

Only 13.10% of all US source payments are subject to US withholding tax and

Of this 13.10%, which is subject to US withholding tax, the average withholding tax rate is 25.37%.

Effectively what this means is, that for 2012 the effective rate of withholding tax on all US tax payments was roughly 3.33% as compared to the statutory 30% withholding tax rate on US income not otherwise exempt or reduced by tax treaty.

The tables include statistics for the number of returns, total income, tax withheld, income subject to withholding, income exempt from withholding, and income by category. Data are available by selected countries and recipient types.
What is the Foreign Recipients of U.S. Income Study?

Nonresident aliens and other foreign persons who earn U.S.-source income are required to report this income on Form 1042-S, Foreign Persons' U.S.-Source Income Subject to Withholding. This income is subject to a flat, statutory tax rate of 30 percent.

However, this rate is frequently reduced or eliminated by an income tax treaty or statutory exemption. Income that is exempt from taxation because of a tax treaty or certain other exemptions must still be reported. U.S. individuals, corporations, or other entities paying U.S.-source income to foreign persons are required to withhold taxes on this income (except where statutory or treaty exemptions apply) or to appoint a withholding agent (normally a U.S. financial institution) to do so.

Foreign financial institutions that enter into an agreement with the Internal Revenue Service, known as qualified intermediaries (QIs), may also serve as withholding agents. A withholding agent or qualified intermediary is fully liable for all taxes owed by a foreign beneficial owner and also reports the income paid to each recipient on a Form 1042S.

Without this withholding requirement, there would be no effective way to enforce taxpayer compliance because foreign recipients are generally not required to file U.S. tax returns to report this income.

Foreign Recipients of U.S. Income Table 1. Forms 1042S: Number, Total U.S.-Source Income, and U.S. Tax Withheld, by Tax Treaty Countries and Total Non-Tax Treaty Countries, 2012 [Money amounts are in thousands of dollars]




Treaty status and country	Number of Forms 1042S		U.S.-source income		U.S. tax withheld
		Total	Exempt from withholding	Subject to withholding
		Total	Exempt from withholding	Subject to withholding
	(1)	(2)	(3)	(4)	(5)
Total	4,104,057	672,880,582	604,900,490	67,980,092	10,816,357

Tax treaty countries, total	3,178,442	544,205,556	493,090,961	51,114,596	6,537,869
Armenia	584	7,866	7,194	672	144
Australia [1]	204,802	12,766,337	8,903,174	3,863,163	486,890
Austria	20,940	1,297,806	875,645	422,162	81,185
Azerbaijan	412	1,694	1,033	661	120
Bangladesh	2,653	16,152	14,171	1,981	328
Barbados	3,231	6,982,319	6,912,568	69,751	13,458
Belarus	1,152	8,950	6,637	2,313	595
Belgium	33,542	21,659,443	21,092,824	566,619	98,364
Bulgaria	2,689	19,587	11,562	8,025	913
Canada	604,196	51,081,777	41,041,017	10,040,760	985,901
China	142,985	24,479,563	24,234,056	245,508	40,871
Cyprus	2,206	222,503	116,078	106,426	12,923
Czech Republic	9,667	213,318	190,501	22,818	3,299
Denmark	20,240	5,746,576	5,372,681	373,895	55,776
Egypt	6,280	62,594	33,461	29,132	4,400
Estonia	2,902	78,806	73,003	5,803	1,353
Finland	8,375	5,404,385	5,335,241	69,144	11,259
France [2]	81,018	29,332,160	28,235,525	1,096,635	105,679
Georgia	694	8,475	6,935	1,539	340
Germany	409,803	50,410,815	48,615,998	1,794,817	278,378
Greece	18,216	207,820	149,699	58,121	15,161
Hungary	5,968	2,934,349	2,071,141	863,209	45,820
Iceland	2,368	68,862	55,813	13,049	2,631
India	74,305	2,947,133	2,634,995	312,138	51,458
Indonesia	9,436	68,838	58,385	10,453	2,055
Ireland	61,655	17,402,600	14,931,536	2,471,064	565,875
Israel	42,707	1,423,557	742,779	680,779	114,254
Italy	68,682	2,694,682	1,277,869	1,416,813	105,313
Jamaica	4,466	160,270	144,817	15,453	3,056
Japan	160,337	60,696,753	58,815,604	1,881,149	163,863
Kazakhstan	1,254	14,896	13,040	1,856	332
Korea, Republic of (South)	35,924	4,645,041	2,228,162	2,416,879	332,435
Kyrgyzstan	275	1,747	1,159	588	89
Latvia	3,235	37,156	30,265	6,891	1,544
Lithuania	3,361	17,379	13,699	3,680	718
Luxembourg	14,247	39,502,750	35,095,342	4,407,408	817,317
Mexico	171,905	8,760,308	6,398,651	2,361,658	305,874
Moldova	548	4,056	3,101	955	198
Morocco	1,271	6,493	4,436	2,057	421
Netherlands	66,789	29,258,466	26,823,794	2,434,672	210,381
New Zealand	23,281	644,567	475,495	169,072	24,427
Norway	13,998	6,715,619	6,571,472	144,147	23,563
Pakistan	4,525	29,336	14,036	15,300	2,654
Philippines	23,740	1,056,687	878,792	177,895	49,676
Poland	22,437	1,130,840	273,069	857,771	55,698
Portugal	11,195	171,386	64,828	106,558	15,236
Romania	4,729	19,692	9,900	9,791	1,844
Russia	20,355	438,436	323,891	114,545	13,321
Slovak Republic	2,797	46,532	37,613	8,918	2,097
Slovenia	5,210	23,487	8,717	14,769	3,646
South Africa	13,213	263,633	189,870	73,762	13,998
Spain	54,546	6,250,552	5,590,569	659,983	81,422
Sri Lanka	783	43,024	41,046	1,978	313
Sweden	32,282	6,576,751	5,592,027	984,724	131,527
Switzerland	63,841	46,740,409	43,108,236	3,632,173	288,619
Tajikistan	294	2,050	1,305	745	97
Thailand	13,822	183,143	131,297	51,847	8,123
Trinidad and Tobago	5,611	530,083	161,965	368,118	5,206
Tunisia	683	15,213	14,127	1,086	214
Turkey	8,816	78,080	47,664	30,415	4,955
Turkmenistan	100	668	352	316	40
Ukraine	5,653	48,738	35,716	13,021	2,259
United Kingdom	490,443	91,884,997	86,726,999	5,157,998	858,314
Uzbekistan	374	2,310	1,279	1,031	216
Venezuela	50,394	655,042	217,108	437,934	29,438
Non-tax treaty countries, total [3]	925,615	128,675,026	111,809,530	16,865,496	4,278,487
[1] Includes Ashmore and Cartier Islands, Christmas Island, Cocos (Keeling) Islands, Coral Sea Islands Territory, and Norfolk Island. [2] Includes Guadeloupe, French Guiana, Martinique, and Reunion. [3] Includes Puerto Rico and U.S. possessions. The U.S. and Bermuda have had a tax treaty in effect since 1986, however, this treaty provides no reduction of withholding rates. Notes: Detail may not add to totals because of rounding. Form 1042S is entitled "Foreign Person's U.S. Source Income Subject to Withholding." Source: IRS, Statistics of Income Division, Foreign Recipients of U.S. Income, August 2014.