Withholding Taxes and Branch vs Subsidiary Taxes .

WITHHOLDING TAX

A withholding tax, also called a retention tax, is a government requirement for the payer of an item of income to withhold or deduct tax from the payment, and pay that tax to the government. 

In most jurisdictions, withholding tax applies to employment income. 

Many jurisdictions also require withholding tax on payments of interest or dividends.

In most jurisdictions, there are additional withholding tax obligations if the recipient of the income is resident in a different jurisdiction, and in those circumstances withholding tax sometimes applies to royalties, rent or even the sale of real estate. 

PURPOSE

• Governments use withholding tax as a means to combat tax evasion, and sometimes impose additional withholding tax requirements if the recipient has been delinquent in filing tax returns, or in industries where tax evasion is perceived to be common.

TREATMENT

• Typically the withholding tax is treated as a payment on account of the recipient's final tax liability. It may be refunded if it is determined, when a tax return is filed, that the recipient's tax liability to the government which received the withholding tax is less than the tax withheld, or additional tax may be due if it is determined that the recipient's tax liability is more than the withholding tax. 
• In some cases the withholding tax is treated as discharging the recipient's tax liability, and no tax return or additional tax is required.
• The amount of withholding tax on income payments other than employment income is usually a fixed percentage. 
• In the case of employment income the amount of withholding tax is often based on an estimate of the employee's final tax liability, determined either by the employee or by the government.

RULES OF PAYMENT

• Some governments have written laws which require taxes to be paid before the money can be spent for any other purpose. This ensures the taxes will be paid first, and will be paid on time as the government needs the funding to meet its obligations.
• Typically, withholding is required to be done by the employer of someone else, taking the tax payment funds out of the employee or contractor's salary or wages. The withheld taxes are then paid by the employer to the government body that requires payment, and applied to the account of the employee, if applicable. 
• The employee may also be required by the government to file a tax return self-assessing one's tax and reporting withheld payments.

TYPES OF TAX WITHHOLDING

1. Wage withholding

• Most developed countries operate a wage withholding tax system. 
• In some countries, subnational governments require wage withholding so that both national and subnational taxes may be withheld.
• In the U.S., Canada, and Switzerland the federal and most state, provincial or cantonal governments, as well as some local governments, require such withholding for income taxes on payments by employers to employees. 
• Income tax for the individual for the year is generally determined upon filing a tax return after the end of the year.
• The amount withheld and paid by the employer to the government is applied as a prepayment of income taxes and is refundable if it exceeds the income tax liability determined on filing the tax return. 
• In such systems, the employee generally must make a representation to the employer regarding factors that would influence the amount withheld.
•  Generally, the tax authorities publish guidelines for employers to use in determining the amount of income tax to withhold from wages.
• The United Kingdom and certain other jurisdictions operate a withholding tax system known as pay-as-you-earn (PAYE), although the term "withholding tax" is not commonly used in the UK. 
• Unlike many other withholding tax systems, PAYE systems generally aim to collect all of an employee's tax liability through the withholding tax system, making an end of year tax return redundant. 
• However, taxpayers with more complicated tax affairs must file tax returns.

2. Other domestic withholding

• Some systems require that income taxes be withheld from certain payments other than wages made to domestic persons. 
• EXAMPLE- The UK requires withholding of 20% tax on payments of interest by banks and building societies to individuals.
• A similar requirement is imposed in Ireland for deposit interest. 
• The U.S. requires payers of dividends, interest, and other "reportable payments" to individuals to withhold tax on such payments in certain circumstances.

3. International withholding

• Most countries require that payers of certain amounts, especially interest, dividends, and royalties, to foreign payees withhold income tax from such payment and pay it to the government.
• Payments of rent may be subject to withholding tax or may be taxed as business income.The amounts may vary by type of income. 
• A few jurisdictions treat fees paid for technical consulting services as royalties subject to withholding of tax.
• Income tax treaties may reduce the amount of tax for particular types of income paid from one country to residents of the other country.
• Some countries require withholding by the purchaser of real property. The U.S. also imposes a 10% withholding tax on the gross sales price of a U.S. real property interest unless advance IRS approval is obtained for a lower rate.
• Canada imposes similar rules for 25% withholding, and withholding on sale of business real property is 50% of the price, but may be reduced on application.
• Procedures vary for obtaining reduced withholding tax under income tax treaties. Procedures for recovery of excess amounts withheld vary by jurisdiction. In some, recovery is made by filing a tax return for the year in which the income was received. Time limits for recovery vary greatly.
• Taxes withheld may be eligible for a foreign tax credit in the payee's home country.

BRANCH VS SUBSIDIARY TAXES

BRANCH TAX

• In addition to the tax payable in respect of income from a business carried on in a country, a non-resident corporation which carries on business in country directly is subject to a tax in respect of after-tax branch profits of the corporation which are remitted outside its country.
• Foreign company fully liable to creditors, etc.
• Losses are included in the head office's income statement.
• Public filing of parent company accounts is usually required, depending on the law in the country of origin. 

SUBSIDIARY TAX

• A subsidiary, subsidiary company or daughter company is a company that is owned or controlled by another company, which is called the parent company, parent, or holding company.
•  The subsidiary can be a company, corporation, or limited liability company. In some cases it is a government or state-owned enterprise.
• A separate legal entity so liabilities arising within the company can not be claimed against another company in the group. 
• Tax paid by company effectively controlled by another company (i.e. the parent company).
• A variety of criteria, including share ownership ratio, may be employed to determine whether one company is a subsidiary of another company for tax purposes. 
• Repatriation of profits can take various forms and is therefore flexible. Timing of the repatriation of profits can be arranged to suit the group tax position. No withholding tax on dividends