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Withholding tax and gross-up: Difference between revisions
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{{a|boilerplate|{{image|Rickroll|jpg|I'm [[never gonna gross you up]].}}}}==Withholding tax== | {{a|boilerplate|{{image|Rickroll|jpg|I'm [[never gonna gross you up]].}}}}==Withholding tax== | ||
A form of [[tax]] in which the payer of an amount of money (often interest payment or a dividend) is must withhold a portion of that payment and remit it to the tax authorities on the payee's behalf. | A form of [[tax]] in which the payer of an amount of money (often interest payment or a dividend) is must withhold a portion of that payment and remit it to the tax authorities on the payee's behalf. | ||
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==Gross-up== | ==Gross-up== | ||
==== What are they? ==== | |||
Tax gross-ups are designed to shift tax liability from the payee so payer bears the full cost of the tax and payee suffers no loss of income. You might expect this in cross-border transactions, where the source country withholds on payments to nonresidents, thereby preventing tax avoidance. But if the recipient’s country also taxes the income there may be a double taxation scenario. A tax gross-up can compensate the recipient where there is no tax treaty between the countries to provides an exemption. You may see a gross-up in a domestic deal where the payee requires a certain level of income regardless of the tax consequences. | |||
==== How they are articulated ==== | |||
You will often see time-tested, careworn tax language along the following lines: | You will often see time-tested, careworn tax language along the following lines: | ||
{{quote|“Payments must be made without [[set-off]], counterclaim, deduction or [[Withholding tax|withholding]] unless required by law in which | {{quote|“Payments must be made without [[set-off]], counterclaim, deduction or [[Withholding tax|withholding]] unless required by law in which case 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=== | ===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. | 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. | ||
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*Interest withholding tax on loans and deposits | *Interest withholding tax on loans and deposits | ||
*Taxes on royalties | *Taxes on royalties | ||
Interestingly, Americans particularly see withholding taxes as specifically taxes imposed on non-residents that are “clipped on their way out the door” to stop foreigners making off with US tax revenues and never paying them back later. So some don’t consider income tax a withholding tax as such. But it is. | |||
Other payment types, such as purchase and sale amounts, fees for services and so on, tend not to be withheld at source, basically because they are too irregular, too unpredictably, and whether a tax is due at all will depend on other things in the taxpayer’s life. For example, a shareholder that sells one share at a profit and another at a loss will, net, owe no tax, and seeing as tax collectors aren.t in the habit of rebating tax losses at source — what a utopian world we would live in if they did! — the intellectual argument for withholding taxes on realised profits is hard to make out. | |||
=== Gross-up === | |||
Gross-up language is designed to put payees in the position they would be in if | |||
===Set-off=== | ===Set-off=== | ||