Global freelancers and taxation

Question

Does anyone have experience freelancing for a company located outside their own country where they are legally authorised to work? What is the best way to handle taxes in this circumstance? For e.g., a freelancer located in India works for a company located in the United States. The worker must pay taxes in the country where they work, in this case India. But do they also have to pay taxes in the US? The worker does not have a US work permit and works out of their home office in India. Is it sufficient to file a Form-W-8BEN with the US-based employer? It is my understanding that freelancing marketplaces such as Odesk follow this method.

Are there similar workarounds for EU-based employers?

Answer 1

The majority of countries only charge taxes on people for either (1) the time that they were working there, or (2) who have been physically present in the country for a significant period of time ("tax residents"). This is residency based taxation. Most countries have a physical presence test for this kind of thing.

Even though the US is even more strict about who pays taxes, as a non-resident alien, you still need to be physically present in order to pay taxes.

A quote from the irs website about non-resident aliens elaborates (emphasis mine):

If you are any of the following, you must file a return:

• A nonresident alien individual engaged or considered to be engaged in a trade or business in the United States during the year.

,,,

So even in the case of the US, it is necessary to be physically present in the US at the time that you're working in order to pay taxes there (as long as you're a nonresident alien)

The rest of the countries operate under a territorial taxation system, notably Singapore and Hong Kong. Residents of these countries only pay tax on local income.

Additionally, for the USA in particular, tax is only applied to us-sourced income. The source of the income is tied to the contractor location. See here. This means that for anyone outside the USA, no W-8BEN and no tax withholding is required. If you were to visit the USA and perform work there for a few weeks, then this paperwork would be required and you would subject to witholding tax.

Answer 2

Since tax and trade agreements differ widely between different countries, the only thing we can address directly is your example - USA and India.

The United States charges a 30% flat tax rate for all foreign entities receiving income from a US entity. This rate may be lower if the foreign country has a tax treaty with the United States, which India does (10-15% is the tax rate in this case). In order to qualify for this treaty tax rate, a foreign person or corporation submits a W-8BEN to the US entity paying the income. The foreign entity must also file Form 8233 with the withholding agent to claim a tax treaty exemption on any personal service income. “Dependent Personal Services” or “Government Services” articles may provide an exemption for wages. The foreign employee may also be required to file a W-4.
Description of US flat tax rate and the purpose of the W-8BEN
US-India treaty tax rate and additional information specific to outsourcing to India
MUST READ - IRS PDF describing employer/employee responsibilities for witholding taxes on wage payments to foreign persons

The payer (in this case, the US company employing the foreign individual) pays the specified taxes directly to the IRS; as near as I can tell, this is withheld from the paycheck the same as with a US employer and US employee. The foreign recipient is also still liable for tax in India.

As the foreign employee, your employer would typically be very meticulous about filing all of the appropriate tax documents, so as an employee you can probably rely on the US employer to make sure it's all done correctly.

Not all kinds of outsourcing are subject to this tax information. Certain kinds of employment, contracts, purchases, our outsourcing may qualify as trade or some other international agreement rather than employment, for which other tax laws will apply.

For employers located in countries other than the USA, you'll have to research their particular tax laws. The same for employees located in countries other than India. EU countries may not have consistent tax laws and there may be EU taxes in addition to, for example, France or UK taxes. Likewise for the USA, different states may also have applicable tax laws.