The Production Accountant’s Guide to Foreign Taxation
Answers to common questions about tax treaties, tax codes and how paying foreign taxes can impact US taxation if your production is filming abroad.
It’s a big world out there. Filming in a foreign country opens up exciting opportunities to seek out unique scenery, take advantage of incredible incentive programs, and tap into top-notch talent. But before your production decides on where to roll cameras, it’s critical to understand how foreign taxes may impact your production.
As is most often the case with anything related to taxes, foreign taxes – or taxes paid to a foreign country – have the potential to get complicated quickly. In this post, we’ll look at some nuanced rules that will help productions plan ahead to accommodate successful international filming. We’ll also talk about special considerations that may impact decisions regarding the hiring of talent, managing the filming schedule and managing your payroll.
Foreign tax basics
Like the US, many countries collect taxes on employee wages, property rentals, purchases and other transactions. The first thing you need to learn about foreign taxes is where to look for answers. Enlisting the help of EP’s team of tax experts is the obvious choice, but if you’re striking out on your own, looking for your destination’s foreign tax treaty is a good place to start. Tax treaties will answer high-level tax treatment questions and will define basic terms (but won’t go into the fine print).
In addition to understanding what a tax treaty is and how it works, there are a few other things you should understand about how foreign taxes impact productions.
Below, I’ll explain:
- How tax treaties work
- What happens when tax treaties expire
- What to do when you’re in a country that doesn’t have a tax treaty
- How to find answers to tax questions that a tax treaty doesn’t address
- How foreign taxes impact US federal and state tax filings
- Using loan-out companies in foreign countries
Let’s get started!
Foreign taxation FAQs
What is a federal tax treaty, and how does it work?
The US has a federal tax treaty that covers working in a foreign country for less than 183 days. That means US productions filming in a foreign country for less than 183 days are exempt from having to pay employment related withholding and social security tax.
This treaty goes into effect when all the following are true:
- A company is employing people who are working for a US-based business
- That company’s employees are being sent to a foreign location to perform services for the US-based business (the production company)
- The US-based production company does not have a physical presence, meaning there are no employees or assets that exist or work full-time in that foreign location
When all of these conditions are met, there are typically no foreign withholdings required on those services while the tax treaty is active.
Of course, there are some exceptions:
- Some treaties have a clause stating that tax withholding is required for specific actors
- In-front of camera actors, stunt actors, directors, and sports athletes are commonly found in production related foreign tax clauses
- Some treaties include a film credit that requires withholding for non-citizen employees
What happens when you hit day 184?
At this point, tax treaties no longer apply. If a US production will be in a foreign country for more than 183 days in a rolling 365-day period, the rules of tax engagement will come from the foreign country’s internal tax code. Full employment taxation may be required in this case.
For budgeting purposes, it is important to notify EP in advance if your US production will be filming in a foreign country for more than 183 days, so the tax code rules are applied starting on day one. If foreign taxation is applied after the 183-day mark, the rules are retroactive.
What if the country you’re filming in doesn’t have a tax treaty?
Some countries, for example Argentina, don’t have a tax treaty in place with the US. In this situation, turn to the country’s tax code to learn how they handle foreign tax.
What are the tax implications for a US-based production filming in the UK?
A 20% withholding requirement exists for all US on-camera actors working in the UK. However, if the actor earns less than $20,000 USD they are exempt from paying any UK taxes. Actors can also apply for a tax variation to reduce the tax rate if they qualify.
It is important to note, there is no distinction between income received by an individual and income paid to a loan‐out company. If an actor is being paid as an employer (not using a loan-out), it is EP policy to cease US federal withholding for an individual working in a foreign jurisdiction with a withholding requirement, in order to eliminate double taxation of US taxes and foreign taxes.
There is no withholding for behind-the-camera crew members, so long as they are present less than 183 days. In that case, they would continue to be subject to US taxation.
What is a ‘foreign tax code’ and when I should use it?
Countries that have treaties in place simplify withholding questions, but there are nearly always additional factors that must also be considered. To address these factors, every country has an internal tax code – just like the IRS code in the US – which provides additional information on withholding requirements and tax credit qualifications and information.
Additionally, tax treaties typically only cover how to tax select employment pay types. To ensure proper taxation, look at the country's tax code to find out if and how they tax things like non-residents, box rentals, per diem, hotel, food and travel expenses. Most tax codes and forms are only published in the country’s native language and would best be interpreted by a local tax expert.
Examples of additional information you’re likely to find in the tax code include:
- Specific withholding rules for certain roles
- Details on what steps need to be taken to obtain tax credits (i.e., must withhold tax on both cast and crew)
- Waivers for specific people (i.e., a dual citizen or one who has a second home in a foreign location)
A word of caution: digging into foreign tax codes isn’t something you can confidently rely on Google to do. It's best to consult with a tax or legal advisor.
The impact of foreign taxes on US taxation
How does the US federal government handle foreign taxes?
The IRS code provides tax exemptions when paying foreign taxes if an individual is an expat -defined as being out of the US for 330 days in a rolling 12-month (365 days) time frame. If you’re out of the country for more than 183 days, but less than 330 days in a rolling 365-day time frame, and you’ve been subject to foreign taxation, you may be double-taxed.
The outcome of this situation really depends on each persons tax situation and the amount of foreign taxes paid versus the amount of US taxes owed.
How does paying taxes in a foreign country affect federal tax responsibility in the US?
US Citizens and Permanent Residents are required to report and pay federal taxes on their worldwide income. However, they may be able to apply a foreign tax credit to the total income on a US federal tax return, which would reduce US federal tax obligations.
The ability to use this credit will depend on each person's tax situation. You may or may not be able to use credit for the full amount of foreign taxes paid in a calendar year (January to December). Check with your tax advisor well before December 31 and make sure that your total foreign and federal tax withholding can adequately cover your full tax responsibility for the year.
How does foreign tax impact US state tax obligations?
Unlike the federal government, states do not have tax treaties with foreign countries. That means your resident state will expect taxes to be withheld from your worldwide income in most cases.
A handful of states – including Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming – don’t collect any income tax. Meaning employees who call one of the states listed above their resident state are not required to withhold state taxes when employed in a foreign country.
Many states are ‘silent’ on wages earned outside of the resident state – meaning they don’t have specific legislation or tax codes that address the topic. In this case, the state defaults to the IRS Code, which specifies that residents are taxed on worldwide income. On the flip side, some states do have a specific tax code that states residents only need to pay taxes on wages earned while physically working in the state. These residents will not owe taxes on worldwide income. Employees who are paid through EP will automatically have taxes withheld or not withheld based on current state legislation regarding how foreign taxation is handled.
Can you use a US loan-out in a foreign country?
Absolutely! But to do so, you need to ensure that the loan-out company is classified by the IRS as an S Corp, not a C Corp. Why? An S Corporation enables the individual working for the corporation to pass foreign taxes onto the owner’s personal tax return by using a credit against their federal tax liability. A C Corporation does not allow foreign tax to flow to a personal tax return—and worse yet, C Corps can’t use foreign tax to reduce US federal tax. Thus, they’re double-taxed.
Foreign tax best practices
To make sure your production is set up for success, please communicate all international production plans with the team at EP as soon as possible. Our tax experts will share the latest information on your shooting location’s tax requirements and will let you know if any changes are needed to best support your production. We’ll also let you know what, if any, foreign taxation is required, help you manage your international payroll, and more!
This blog contains general information we are providing on a subject that may be of interest to you. Nothing in this blog should be considered tax advice. You should consult with your tax or legal advisors regarding the applicability of any of these rules to your specific circumstances and how best to handle them.