Table of Contents
What is Withholding Tax?
Withholding tax is a tax levied on income, such as wages, interest, or dividends, that is paid to a non-resident of the country where the income is earned. The company or individual making the payment must withhold a portion of the payment and remit it to the tax authorities. The amount of withholding tax can vary depending on the country, the type of income, and the tax treaty in place between the two countries.
In some cases, tax treaties may be in place between the country where the income is earned and the country where the non-resident taxpayer is based. These treaties often provide for a reduced withholding tax rate, or even exemption from withholding tax, in order to encourage cross-border trade and investment.
It is important for companies to accurately record and report their withholding tax obligations to avoid penalties and interest charges. In addition, companies should carefully monitor changes in tax laws and regulations to ensure compliance and optimize tax planning strategies.
Journal Entries for Withholding Tax
Journal entry for withholding tax on interest payment
Example: ABC Canada Inc. pays interest of $100,000 to its non-resident parent, ABC Switzerland AG. As the parties do not deal at arm’s length, and in accordance with the Canada-Switzerland Tax Treaty, the interest payment is subject to a 10% withholding tax. ABC Switzerland AG, therefore, receives a net payment of $90,000.
| Account | ||
|---|---|---|
| Interest expense | $100,000 | |
| Withholding tax liability | $10,000 | |
| Cash | $90,000 |
Journal entry for remittance of withholding tax
Example: ABC Canada Inc. must remit the withholding tax withheld on the interest payment to ABC Switzerland AG, to the Canada Revenue Agency.
| Account | ||
|---|---|---|
| Withholding tax liability | $10,000 | |
| Cash | $10,000 |
