Withholding Tax
About the author: Christian Wunderley, LL.M. is an international tax consultant and Managing Partner of the U.S tax firm, CD Tax Associates. He has several years of experience working in both financial services and international tax, including firms such as PricewaterhouseCoopers, BDO, and Citigroup. His specializations include withholding tax, particularly for non-U.S. businesses and investors that want to invest in the United States.
INTRODUCTION
THE RIGHT TO TAX
THE CONCEPT OF TAX JURISDICTION
WHAT IS WITHHOLDING TAX?
TYPES OF WITHHOLDING TAX
- Dividends
- Royalties
- Technical Services
- Personal Services
- Branch Remittances
- Business Income
THE CONCEPT OF PERMANENT ESTABLISHMENT
APPLICATION OF A DOUBLE-TAX TREATY
PRACTICAL APPLICATION
- US FIRM SENDING CONSULTANTS TO CHINA
- US RECRUITMENT FIRM PLACES WORKERS IN SAUDI ARABIA
- UK FIRM PROVIDING TECHNICAL SERVICES TO TANZANIA
WHEN A LOCAL ALTERNATIVE MAKES SENSE
- LOCAL SUBSIDIARY OR BRANCH
- OUTSOURCING TO A LOCAL PROVIDER
INTRODUCTION
Governments can and will levy taxes to raise revenues and pay for services. There is no escaping this point and particularly for individuals, the reality is that it has become an accepted part of life. The consensus is that governments have the right and ability to impose a tax on income sourced in their country and often, without regard for residency.
The purpose of this article is to provide you with an understanding of some of the major concepts that underscore international tax, particularly as it relates to conducting business in other countries. The article will begin with a theoretical discussion on the right to tax and jurisdiction, as well as go into detail on the types of withholding tax (“WHT”). From this, the article will continue with some practical examples of common scenarios with international consulting firms. Finally, the article will close with some simple solutions for saving your consulting firm the cost and hassle of dealing with international tax problems.
As a disclaimer, it is important to note that no practitioner can become an expert in each system of tax law. This article draws from my own experiences in tax planning in both the US and European Union, but must be understood that each jurisdiction has its laws that can change based on the tax treaties and jurisprudence applicable to those two specific countries.
THE RIGHT TO TAX
A central point in understanding whether a government has the right to tax is to understand that absent any restrictions, a government would take an absolute right to tax. A government would tax all income from every person in the world simply because it has the power to do so. This makes sense: governments generate revenues and pay for services largely through their ability to apply and collect taxes. However, this reality does not exist. National governments are restricted on the income and the people in which they can apply and collect taxes. Despite there not being a body of international tax law that is codified and binding in all countries, domestic tax laws seem to apply the same concepts to international transactions around the world. [1] International organizations such as the Organization for Economic Cooperation and Development (“OECD”) help to create a sense of harmony and cooperation between governments and their domestic tax systems, as will be discussed in the following subsection related to Double Tax Treaties.
[1] See generally Avi-Yonah, Reuven S. “International Tax as International Law”. 2006. Cambridge University Press.