As far as I can tell, the IRS (US tax collecting agency) requires a tax withholding on anything a US company pays an employee/contractor abroad. By default this is 30%, but if the person in question files US tax returns (despite never setting foot in the country) I think it goes down to 10%, and if the employee's country has a double-taxation agreement with the US, the 10% can be offset against the home income tax. Still, having to deal with that kind of paperwork is a huge burden on both employer and employee. I would not be surprised if this also caused extra hassle when you do visit the US on occasion as they'll assume you're trying to work there illegally.
Of course, making this kind of thing not worth your while is the whole point of protectionism. IIRC, India has a similar arrangement.
One way around this is presumably to open a branch office in another country, and have contractors work for the branch.
As far as I can tell, the IRS (US tax collecting agency) requires a tax withholding on anything a US company pays an employee/contractor abroad
That can't be true for contractors, or sites like Elance and oDesk would not be able to operate as easily as they do. A contractor is responsible for paying his own taxes, whether that is to the IRS in the US, or the tax authority in his own country.
You'd think so. Read up on W-8BEN if you don't believe me. I've been on the receiving end of this for doing a tech review of a book for a major US tech publisher. The amount of paperwork required on my end to satisfy the IRS meant I just gave up and effectively told the publisher to keep the money. (I did it for fun/experience anyway - tech reviewing books isn't a way to make a living.)
The burden is on the foreign person, not the US company. The US company can pay you as a contractor and not withhold any tax (just as they could with a US citizen 1099 contractor). The foreign contractor would have to file the W-8BEN (or not, since the US likely can't prosecute offenders in their home country).
The burden is indeed on the foreign person to fill out the W8-BEN etc. and pay any taxes due. However, as the withholding agent[1], the US company is liable for any unpaid taxes. So in practice, until the contractor proves to the company that they've sorted the situation, the company will need to withhold that portion of the payment as they may have to pay it to the IRS.
In any case, the whole thing is a pretty arduous procedure in international comparison.
If you are employing people, that may be true, but if you're paying a corporation, even if it's a one-person corporation, I can't see why income tax would come into it. It's one company paying another for services. I imagine the parent was thinking of contractor companies, not individual contractors working as short-term employees, in which case income tax wouldn't apply.
If "setting up an offshore subsidiary company for the purposes of employing remote workers" fits your definition of "it's extremely easy", then yes, I can't argue with you.
That's not at all what I was suggesting. I'm not suggesting setting up subsidiaries or anything of the kind.
It's easy to subcontract work out to other countries if you're not tied to the idea of having employees, but instead hire companies (companies which already exist, like say small design shops, packaging firms for apps, or tech firms) to perform services for you, rather than individuals.
Take 37 signals for example, when they were a consulting company. A company in say Paris could have hired them to work remotely, without worrying about paying income tax - that's all handled on the subcontractor end if it is a company.
That's a bit of a different beast to what the original commenters were suggesting. Engagements of that caliber usually involve outsourcing whole projects or subprojects (web presence for product X, whatever). Of course, there's overlap between what you can get a remote employee/contractor do vs. what you can "outsource". Note that levies might still be due on services performed across certain countries' borders. (much like customs duties on goods)
I could also imagine a kind of "talent agency" model, though that doesn't seem to have caught on in tech. (Yet? I'd sign up for that if it provided me with a steady-ish flow of high-quality gigs and sorted out all the legal/tax paperwork for me.)
Back on topic, that's exactly what the original commenter (zura) suggested. You can hire a foreign company for contract work without needing to hand over an entire project - you'll be paying for deliverables/features instead of time, but the end result is the same. AFAIK you have to report it to the IRS, but don't owe any taxes on it.
There are limits to how much you can do this as a US-based company, and if you overstep the bounds the IRS will come a-knockin'. I imagine it's much easier to hire someone as a real employee inside the US, and based on the size of many of the companies, they probably don't have the accounting or legal resources necessary to deal with real international employees.
Certainly possible but remember that "contractor" and "employee" have legal definitions. You can't "just" call an employee (by the legal definition) a contractor.
(Edit: I see ljoshua beat me to the possibility for issues here but it's important to emphasize that it can be done, just play by the rules to avoid trouble down the line.)
Actually there are. And it would be great if there was just a checklist that you could go against, but the best we've got is this page [1] from the IRS and some legal interpretation. I agree that the positions could more clearly state that it was a contracting position, but it looks like more of an employer-employee type job board than an eLance type deal to me. So they just have to be careful.
Of course, making this kind of thing not worth your while is the whole point of protectionism. IIRC, India has a similar arrangement.
One way around this is presumably to open a branch office in another country, and have contractors work for the branch.