When a corporate counsel negotiate for a cross border transaction with a customer from an uncharted territory, it is important to understand the withholding tax (WHT) requirements of the customer’s residence country.
In short, WHT is imposed on non-residents (seller) who has business dealings within a tax jurisdiction. The law will require the customer to withhold a portion of the payment and pay it to the tax authorities before remit the balance to the seller.
The application Of WHT
WHT is varied from one jurisdiction to another – the scope of WHT, (which business dealing is WHT-taxable) and the rate of holding, (the tax rate of WHT-taxable category).
Most of the countries imposed WHT on contractual payment.
In general, the WHT rate is in the range between 10% and 25%. Thus, without considering and factoring this cost, a cross border transaction may turn from profit to loss.
Incoterms and WHT
In some instances, the seller may pass the WHT cost for the customer to absorb, or using Incoterms E-type or F-type to trade.
Generally, E-type and F-type trade term will be treated as a business dealing off-shore, thus WHT is not invoked.
Meanwhile, if there is a Double Taxation Agreement (DTA) between the customer’s country and seller’s country, the WHT may be exempted or able to set-off seller’s income tax liability in the home country.
Thus, even though corporate counsel is not a tax expert, but he must have some knowledge on it in.
Posted on 20 April 2015
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