Withholding Tax In Brief

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.