Withholding tax refers to a form of advance collection of income tax obligations where a withholding agent deducts tax from payments made and remits this to the tax authority on behalf of the ultimate taxpayer.
Key Features:
- Common types include dividend tax, interest tax, and payments to non-residents for services rendered in a country.
- Withholding agents include employers, banks, companies distributing dividends or making rent/royalty payments.
- Rates vary per jurisdiction but are often set lower than the recipient’s marginal tax rate to avoid double taxation.
- Tax withheld can then be used as credit against the final tax liability or refunded if excess payments were made.
Example:
A national telecom company remitted withholding taxes deducted from circuit lease payments to a foreign supplier providing networking equipment.
Takeaway:
While imposing compliance burdens, withholding tax systems boost collection efficiency by leveraging third-party payors to promptly forward tax revenues on a wide base of dispersed taxpayers.