Withholding tax and gross-up
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Boilerplate Anatomy™
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You will often see time-tested, careworn tax language along the following lines:
“Payments must be made without set-off, counterclaim, deduction or withholding unless required by law in which event the payer shall pay such additional amounts as will result in the receipt by the recipient of the amounts which would otherwise have been payable by payer to recipient under this Clause in the absence of any such set-off, counterclaim, deduction or withholding.”
Set-offs versus withholding
The first thing to note is that this mixes two quite distinct ideas: tax on one hand — one’s liability to The Man, as it were — and set-off on the other: whether and if so how one should flatten out one’s aggregate liability to a payee who might already own you something on account of some other business.
These things are worth looking at separately.
Tax
Everyone knows one is liable to tax on one’s income: this is in the “rice-pudding” category of “things that are deducible from first principles”.[1]
But the taxperson has ways of extracting its slice of the action. It can wait till you file your tax return, or it can deduct at source — pay as you earn — or it can oblige your counterparties to deduct as they pay you. This is called “withholding” — the payer remits the tax and pays it on your behalf.
Certain types of payments are natural candidates for withholding. These are broadly characterised as income payments: compensation for your investment, capital, or the fruits of your labours as it were. So:
- PAYE income tax.
- Dividend withholding tax on the share investments (or manufactured equivalents)
- Interest withholding tax on loans and deposits
- Taxes on royalties
Set-off
See also
- FATCA Amendment - ISDA Provision
- Withholding tax
- Indemnifiable Taxes
- Gross-Up in the ISDA Master Agreement
- Deduction or Withholding for Tax in the ISDA Master Agreement
- ↑ Gratiutious The Hitch-Hiker’s Guide to the Galaxy ref, that. Sorry.