we are a canadian based real estate broker and we introduced a real
estate developer to a california based real estate broker who agreed
to compensate us in the event they completed a deal with the
developer. they did and now compensation is payable to us.  the
introduction was made from canada over the phone, we provided no
further services for this compensation will the compensation be
subject to US witholding tax and what forms are required to protect
the US broker from not having collected witholding tax?

Hi cassio15,

1) "will the compensation be subject to US witholding tax"

No, payments made to nonresident aliens for services performed outside
the U.S. are not taxable and are not subject to any withholding.

US TAX FOR ALIENS: Publication 519: US Tax Guide for Aliens:
Chapter 2, page 11:
"A nonresident alien usually is subject to U.S. income tax only on
U.S. source income."
Table 2?1, page 11: 
Summary of Source Rules for Income of Nonresident:
 A. Factor Determining Source:
  1. Salaries, wages, other compensation: Where services performed
  2. Business income: Personal services:  Where services performed
Chapter 2, page 12: 
"All wages and any other compensation for services performed in the
United States are considered to be from sources in the United States."
"If your compensation is for personal services performed both inside
and outside the United States, you must figure the amount of income
that is for services performed in the United States."
http://www.irs.gov/pub/irs-pdf/p519.pdf

Pay for Personal Services Performed: Withholding Tax:
"You generally must withhold tax at the 30% rate on compensation you
pay to a nonresident alien individual for labor or *personal services
performed in the United States*..."
http://www.irs.gov/pub/irs-pdf/p515.pdf

*The place where you perform the services is what defines your income
as foreign, not where or how you are paid. For instance, income
received for personal services performed in France is foreign earned
income, even if the employer is American and your pay is deposited in
an American bank."
http://www.irs.gov/taxtopics/tc855.html

2) "what forms are required to protect the US broker from not having
collected witholding tax?"

The US broker will be filing information concerning the business
expense using forms 1042, 1042-T, and 1042-S (Box 6, Exemption Code
03) to explain the withholding exemption. He will send you a copy of
the 1042-S for your income reporting.

Form 1042 Annual Withholding Tax Return for U.S. Source Income of Foreign Persons
Use Form 1042 to report tax withheld on certain income of foreign
persons, including nonresident aliens, foreign partnerships, foreign
corporations, foreign estates, and foreign trusts.
 * Form 1042, Annual Withholding Tax Return for U.S. Source Income of
Foreign Persons (PDF)
 * Form 1042-T, Annual Summary and Transmittal of Forms 1042-S (PDF)
 * Form 1042-S, Foreign Person's U.S. Source Income Subject to Withholding (PDF)
 * Instructions for Form 1042-S, Foreign Person's U.S. Source Income
Subject to Withholding (PDF)
When Due
The Forms 1042 and 1042-S must be filed by March 15 of the year
following the calendar year in which the income subject to reporting
was paid. If March 15 falls on a Saturday, Sunday, or legal holiday,
the due date is the next business day. Form 1042 is a calendar year
tax return. There are no provisions for filing a fiscal-year Form
1042.
You no longer attach paper Forms 1042-S with your Form 1042. Form
1042-T is now used to transmit the filing if Forms 1042-S. Form 1042
could be filed separately and does not have to be accompanied by Form
1042-T with attached paper Form(s) 1042-S.
http://www.irs.gov/businesses/small/international/article/0,,id=102325,00.html

Form 1042: Annual Withholding Tax Return for Source Income of Foreign Persons:
http://www.irs.gov/pub/irs-pdf/f1042.pdf

Form 1042-S: Foreign Person?s U.S. Source Income Subject to Withholding:
Box 6, Exemption Code 03: Income is not from U.S. sources:
* "Non-U.S. source income received by a nonresident alien is not
subject to U.S. tax. Use Exemption Code 03 when entering an amount for
information reporting purposes only."
http://www.irs.gov/pub/irs-pdf/i1042s.pdf

3) Income Tax

Add the income (in Canadian currency)  to your Canadian Income and
Expenses form and attach a copy of the Form 1042-S.

Additional Links:

International Taxpayer - Effectively Connected Income (ECI)
http://www.irs.gov/businesses/small/international/article/0,,id=96409,00.html

Pay for Personal Services Performed:
http://www.irs.gov/businesses/small/international/article/0,,id=105085,00.html

Summary:

1. Source income = Canada
"Non-U.S. source income received by a nonresident alien is not subject
to U.S. tax."

2. Residency = Canada
"A nonresident alien usually is subject to U.S. income tax only on
U.S. source income."

So briefly, you should receive full payment (no tax withheld) and at
tax time, you should receive a copy of Form 1042-S, which you will
attach to your Canadian income tax form.

I hope this helps. If you have any questions, please post a
clarification request and wait for me to respond before closing/rating
my answer.

Thank you,
hummer

Search strategy:
None needed. I know this subject well.

The referal fee will be taxable on your Canadian return(s), however.