Nonresident aliens for tax purposes and foreign entities, unlike U.S. persons and U.S entities, are only subject to tax withholding on income that is considered U.S.-sourced and not foreign-sourced.
Harvard is required to indicate the “location of activity” when paying income to foreign individuals and foreign entities to comply with IRS tax withholding and reporting regulations. Most often, this question arises when the departments are asked to provide the country of the activity when processing payments in Accounts Payable.
- Generally, the location of the activity would be where a service is being performed, property is being rented, or the location where fellowship income is expected to be utilized in support of one’s scholarship or research.
- Royalties, copyrights, and patents, such as those paid for the use of intellectual properties (i.e., industrial properties and software licenses), are always considered U.S.-sourced when utilized by Harvard due to our U.S. location. This income could be taxable up to 30% if a tax exemption or tax reduction claim has not been previously facilitated before the payment was issued.
- In general, payments for tangible goods or products for international purchases are not subject to U.S. reporting or tax withholding. Indicate where the tangible items are to be used or shipped to for the location of the activity.
A clear indication of the location of the activity (such as the country) is necessary on all supporting documentation for the payment to be correctly classified for tax purposes. This applies to both service and non-service income. If the source of income cannot be determined at the time of payment because the location of the activity is not clearly indicated, the payment must be treated as U.S. sourced under IRS Regulations. Incorrect or missing information may also result in payment delays or incorrect tax withholding.
Some scenarios commonly seen at Harvard:
- Spain would be the location of activity when paying a speaker located in Spain who participated on a Zoom panel.
- United States (U.S.) would be selected as the location of activity when processing a payment for services performed by a foreign entity that sent a consultant to the U.S. to work on a project.
- Germany would be selected as the location of activity when processing a summer fellowship to a fellow that will be traveling to and living in Germany over the summer to pursue additional scholarly activities.
- Select United States (U.S.) as the location of activity when paying rent income for property located within the U.S., even if the individual or entity you are paying resides or is established outside of the U.S.
- Select United States (U.S.) as the location of activity when processing a payment for books that were ordered from a library in Italy, to be shipped to and used at Harvard University.
- Select United States (U.S.) as the location of activity when paying a copyright fee to a photographer that resides outside the U.S., for use of their photo by Harvard University that will be published in a U.S. magazine.
For Harvard employees (individuals receiving a salary/dependent personal services income), payments must be processed as outlined in Harvard’s Payroll Policy and with the assistance of Harvard Global Support Services.