If you’re a U.S.-based business that pays foreign vendors, you may have considered using a U.S. bank to wire the payments. After all, it’s convenient and seemingly easy to do. However, there are some major drawbacks to using a U.S. bank for these types of transactions. In this blog post, we’ll outline some of the reasons why you should avoid U.S. banks when making payments to foreign vendors.
Reasons to Avoid US Banks
- Hidden Fees: When you use a U.S. bank to make a payment to a foreign vendor, you may be charged hidden fees that you’re not aware of. These fees can include things like currency conversion fees, international wire transfer fees, and more. As a result, the total cost of the transaction can be much higher than you anticipated.
- Poor Exchange Rates: Another downside to using a U.S. bank for these types of payments is that the exchange rate is often not as favourable as it would be if you went through a specialized international payments provider like MTFX. This means that your vendor will receive less money than they would have if you had used a different method of payment.
- Slow Payments: When you use a U.S. bank to make an international payment, the process can take several days to complete. This is because the payment has to go through multiple steps and intermediaries before it finally reaches your vendor’s account. If you need to make fast payments, using a U.S .bank is not the best option.
How Much Tax is Owed?
The amount of tax you must withhold from payments made to foreign vendors depends on two factors: the type of income involved and whether the vendor has provided you with a valid tax identification number (TIN).
If the income is considered “fixed or determinable,” such as interest, rent, royalties, or most annuities, you must withhold at a rate of 30%. For all other types of income—including wages, commissions, and certain types of fees—you must withhold at a rate of 14%.
However, if the foreign vendor can provide you with a valid TIN, you may be able to reduce or eliminate the withholding by claiming an applicable treaty benefit. For example, under the U.S.-Canada Income Tax Treaty, withholding on royalties paid to a Canadian resident is generally reduced to 5% if the recipient has provided a valid TIN.
All in all, it’s usually best to avoid using a U.S. bank when making payments to foreign vendors. There are hidden fees, poor exchange rates, and slow payments that can end up costing you more money and causing headaches down the road. Instead, consider using a specialized international payments provider that can help you save money and make fast, efficient payments.