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Tax withholding, also known as tax retention, Pay-as-You-Go, Pay-as-You-Earn,
Tax deduction at source Tax deduction at source (TDS) in India India, officially the Republic of India (Hindi: ), is a country in South Asia. It is the List of countries and dependencies by area, seventh-largest country by area, the List of countries and depen ...
or a ''Prélèvement à la source'', is
income tax An income tax is a tax imposed on individuals or entities (taxpayers) in respect of the income or profits earned by them (commonly called taxable income). Income tax generally is computed as the product of a tax rate times the taxable income. Tax ...
paid to the government by the payer of the income rather than by the recipient of the income. The tax is thus withheld or deducted from the income due to the recipient. In most jurisdictions, tax withholding applies to
employment Employment is a relationship between two party (law), parties Regulation, regulating the provision of paid Labour (human activity), labour services. Usually based on a employment contract, contract, one party, the employer, which might be a co ...

employment
income. Many jurisdictions also require withholding taxes on payments of
interest In finance and economics, interest is payment from a debtor, borrower or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum (that is, the amount borrowed), at a particular rate. It is ...

interest
or
dividend A dividend is a distribution of Profit (accounting), profits by a corporation to its shareholders. When a corporation earns a profit or surplus, it is able to pay a portion of the profit as a dividend to shareholders. Any amount not distributed ...

dividend
s. In most jurisdictions, there are additional tax withholding obligations if the recipient of the income is resident in a different jurisdiction, and in those circumstances withholding tax sometimes applies to
royalties A royalty payment is a payment made by one party to another that owns a particular asset, for the right to ongoing use of that asset. Royalties are typically agreed upon as a percentage of gross or net revenues derived from the use of an asset o ...

royalties
,
rent Rent may refer to: Economics *Renting Renting, also known as hiring or letting, is an agreement where a payment is made for the temporary use of a good, service or property Property is a system of rights that gives people legal contro ...
or even the sale of
real estate Real estate is property consisting of land and the buildings on it, along with its natural resources such as crops, minerals or water; immovable property of this nature; an interest vested in this (also) an item of real property, (more general ...

real estate
. Governments use tax withholding as a means to combat
tax evasion Tax evasion is an illegal attempt to defeat the imposition of taxes by individuals, corporations, trust (property), trusts, and others. Tax evasion often entails the deliberate misrepresentation of the taxpayer's affairs to the tax authorities ...
, and sometimes impose additional tax withholding requirements if the recipient has been delinquent in filing tax returns, or in industries where tax evasion is perceived to be common. Typically the withheld tax is treated as a payment on account of the recipient's final tax liability, when the withholding is made in advance. It may be refunded if it is determined, when a
tax return A tax return is the completion of documentation that calculates an entity or individual's income earned and the amount of taxes to be paid to the government or government organizations or, potentially, back to the taxpayer. Taxation is one of ...
is filed, that the recipient's tax liability 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 tax withheld. In some cases, the withheld tax is treated as discharging the recipient's tax liability, and no tax return or additional tax is required. Such withholding is known as final withholding. The amount of tax withheld on income payments other than employment income is usually a fixed percentage. In the case of employment income, the amount of withheld tax is often based on an estimate of the employee's final tax liability, determined either by the employee or by the government.


Basics

Some governments have written laws that 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, rather than risk the possibility that the tax-payer might
default Default may refer to: Law * Default (law), the failure to do something required by law ** Default (finance), failure to satisfy the terms of a loan obligation or failure to pay back a loan ** Default judgment, a binding judgment in favor of eit ...
at the time when tax falls due in arrears. 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.


Income taxes


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 Canada is a country in North America. Its Provinces and territories of Canada, ten provinces and three territories extend from the Atlantic Ocean to the Pacific Ocean and northward into the Arctic Ocean, covering over , making it the world ...

Canada
, and others, the federal and most state or provincial 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 The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK) or Britain, is a country in Europe, off the north-western coast of the European mainland, continental mainland. It comprises England, Scotlan ...

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.
Australia Australia, officially the Commonwealth of Australia, is a sovereign country comprising the mainland of the Australian continent, the island of Tasmania, and numerous smaller islands. With an area of , Australia is the largest country by ...

Australia
operates a pay-as-you-go (PAYG) system, which is similar to PAYE. The system applies only at the federal level, as the individual states do not collect income taxes.


Other domestic withholding

Some systems require that income taxes be withheld from certain payments other than wages made to domestic persons.
Ireland Ireland ( ; ga, Éire ; Ulster Scots dialect, Ulster-Scots: ) is an island in the Atlantic Ocean, North Atlantic Ocean, in Northwestern Europe, north-western Europe. It is separated from Great Britain to its east by the North Channel (Grea ...

Ireland
requires withholding of tax on payments of interest on deposits by banks and building societies to individuals. The U.S. requires payers of dividends, interest, and other "reportable payments" to individuals to withhold tax on such payments in certain circumstances.
Australia Australia, officially the Commonwealth of Australia, is a sovereign country comprising the mainland of the Australian continent, the island of Tasmania, and numerous smaller islands. With an area of , Australia is the largest country by ...

Australia
requires payers of interest, dividends and other payments to withhold an amount when the payee does not provide a
tax file number A tax file number (TFN) is a unique identifier issued by the Australian Taxation Office The Australian Taxation Office (ATO) is an Australian statutory agency and the principal revenue collection body for the Australian Government. The ATO ha ...
or
Australian Business Number The Australian Business Number (ABN) is a unique 11-digit identifier issued by the Australian Business Register (ABR) which is operated by the Australian Taxation Office (ATO). The ABN was introduced on 1 July 2000 by John Howard's Liberal Party ...
to the payer.
India India, officially the Republic of India (Hindi: ), is a country in South Asia. It is the List of countries and dependencies by area, seventh-largest country by area, the List of countries and dependencies by population, second-most populous ...

India
enforces withholding tax also on payments between companies and not just from companies to individuals, under the
Tax Deducted at Source Tax deduction at source (TDS) in India India, officially the Republic of India (Hindi: ), is a country in South Asia. It is the List of countries and dependencies by area, seventh-largest country by area, the List of countries and depen ...
(TDS) system. (Since April 2016, the
United Kingdom The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK) or Britain, is a country in Europe, off the north-western coast of the European mainland, continental mainland. It comprises England, Scotlan ...

United Kingdom
has discontinued withholding tax on interest and dividends, though in some cases this income will become liable for taxation through other means).
Rwanda Rwanda (; rw, u Rwanda ), officially the Republic of Rwanda, is a landlocked country in the Great Rift Valley of Central Africa, where the African Great Lakes region and Southeast Africa converge. Located a few degrees south of the Equator ...

Rwanda
charges withholding tax on business payments unless the paying company obtains proof that the recipient is registered with the tax administration and that they have a recent income tax declaration.


Social insurance taxes (social security)

Many countries (and/or subdivisions thereof) have social insurance systems that require payment of taxes for retirement annuities and medical coverage for retirees. Most such systems require that employers pay a tax to cover such benefits. Some systems also require that employees pay such taxes. Where the employees are required to pay the tax, it is generally withheld from the payment of wages and paid by the employer to the government. Social insurance tax rates may be different for employers than for employees. Most systems provide an upper limit on the amount of wages subject to social insurance taxes.


International withholding

Most countries require payers of interest, dividends and royalties to non-resident payees (generally, if a non-domestic postal address is in the payers records) withhold from such payment an amount at a specific rate. Payments of rent may also 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 A tax treaty, also called double tax agreement (DTA) or double tax avoidance agreement (DTAA), is an agreement between two countries to avoid or mitigate double taxation. Such treaties may cover a range of taxes including income taxes, inheritance ...
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. imposes a 15% withholding tax on the amount realized in connection with the sale 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. The European Union has issued directives prohibiting taxation on companies by one member state of dividends from subsidiaries in other member state, except in some cases, interest on debt obligations, or royalties received by a resident of another member nation. 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 A foreign tax credit (FTC) is generally offered by income tax systems that tax residents on worldwide income, to mitigate the potential for double taxation. The credit may also be granted in those systems taxing residents on income that may have be ...
in the payee's home country.


Remittance to tax authorities

Most withholding tax systems require withheld taxes to be remitted to tax authorities within specified time limits, which time limits may vary with the withheld amount. Remittance by
electronic funds transfer Electronic funds transfer (EFT) is the electronic transfer of money from one bank account to another, either within a single financial institution or across multiple institutions, via computer-based systems, without the direct intervention of b ...
may be required or preferred. Penalties for delay or failure to remit withheld taxes to tax authorities can be severe. The sums withheld by a business is regarded as a debt to the tax authority, so that on bankruptcy of the business the tax authority stands as an unsecured creditor; however, sometimes the tax authority has legislative priority over other creditors.


Reporting

Nearly all systems imposing withholding tax requirements also require reporting of amounts withheld in a specified manner. Copies of such reporting are usually required to be provided to both the person on whom the tax is imposed and to the levying government.See, for example, IRS Form W-2 and CRA Form T4 with respect to employees, and IRS Form 1042 and CRA Form NR4 with respect to payments to foreign persons. Reporting is generally required annually for amounts withheld with respect to wages. Reporting requirements for other payments vary, with some jurisdictions requiring annual reporting and others requiring reporting within a specified period after the withholding occurs.


See also

*
International tax International taxation is the study or determination of tax on a person or business subject to the tax laws of different countries, or the international aspects of an individual country's tax laws as the case may be. Governments usually limit the ...
*
European Union withholding tax The European Union withholding tax is the common name for a withholding tax Tax withholding, also known as tax retention, Pay-as-You-Go, Pay-as-You-Earn, Tax deduction at source or a ''Prélèvement à la source'', is income tax paid to the g ...
*
Tax withholding in the United States Three key types of withholding tax are imposed at various levels in the United States: *Wage withholding taxes, *Withholding tax on payments to foreign persons, and *Backup withholding on dividends and interest. The amount of tax withheld is based ...
*
Pay-as-you-earn tax A pay-as-you-earn tax (PAYE), or pay-as-you-go (PAYG) in Australia, is a withholding of taxes on income payments to employees. Amounts withheld are treated as advance payments of income tax An income tax is a tax imposed on individuals or entit ...
*
Tax deduction at source Tax deduction at source (TDS) in India India, officially the Republic of India (Hindi: ), is a country in South Asia. It is the List of countries and dependencies by area, seventh-largest country by area, the List of countries and depen ...


References


External links


Withholding Tax Rates in European Countries
{{DEFAULTSORT:Withholding Tax International taxation Tax terms