What tax reporting obligations does a corporation that engages foreign entities (companies and individuals) to do application development?

Your milage may vary, but from our experience, in short (please verify with a Tax-accountant, I have one I can refer you to): if you're paying people to do work for you that do not have a U.S. Tax ID #, it's a complete write-off and you do not require a W9 from them.

When hiring an overseas entity or individual to perform work for your U.S. company, you should be mindful of both U.S. law and the laws of the local jurisdiction where the developer lives or operates. First, you should establish whether you want the relationship to be an employer/employee relationship, or do you prefer to hire these developers as subcontractors. Generally a subcontract relationship is easier. When you hire a subcontractor in the U.S., you collect a signed Form W-9 from the contractor, which lists the contractor's name, address, taxpayer type and U.S. tax identification number (either an SSN, ITIN, or EIN). You may also be required to file a Form 1099 at year end to report the amount of gross payments made to the subcontractor. When hiring a non-U.S. contractor, you still collect an IRS withholding certificate in order to verify the individual or company is not a U.S. tax resident. Foreign individuals sign a Form W-8BEN, a foreign corporation would complete W-8BEN-E, while a foreign partnership would complete a Form W-8IMY. So long as the foreign contractor is performing the work outside of the U.S., there should not be any U.S. tax withholding issues. It can become complicated if, on occasion, you have the developers travel to the U.S. to perform work. The nonemployee compensation could be considered U.S. source earnings and subject to federal and state taxes in the USA.