Withholding tax is an amount withheld by the party making a payment to another (payee) and paid to the taxation authorities, depending on the nature of the product or service being paid for. Local WHT is often used to counteract tax evasion and tax avoidance whereas overseas WHT is often used to collect tax from payers within the boundries rather than payees who may be outside the boundries.
WHT tax is often applied to
- Dividends and Interest payments: Tax may be deducted at source from dividend payments, in addition to Corporation tax.
In India, tax is not withheld at source from dividends since tax is paid by company on the profits (excluding dividends) and hence dividend income is tax free in hands of payee.
UK has imposed a 20% withholding tax on distributions from Real Estate Investment
- Payroll payments to employees: In most countries, employers are required to deduct tax from salary.
- Contract and consultancy work payments: Payments to contractors, consultancy firms, realty business etc are subjected to tax deducted at source Withholding Tax is applied as a part of local regulatory requirement, to reduce the final payment made to the supplier. WHT is then paid to the local tax authority as per the local regulations.
Sometimes WHT is applied to cross country payment, based on country-to-country relations. At other times, it is applied on Invoices from all Foreign Suppliers, to boost local business or to make them subjected to local VAT, which otherwise would be applicable for local suppliers. In few
countries, WHT is applied also on certain types of local vendors as well (eg. consultants).