How Global Companies Can Successfully Address Threats to Withholding Tax Compliance

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Withholding Tax How Global Companies Can Successfully Address Threats to Withholding Tax Compliance

How Global Companies Can Successfully Address Threats to Withholding Tax Compliance

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Agenda

Foreign Withholding Framework

– Complexities

– Determining the Appropriate Rate

Identifying Risks

– Internal v. External Risks

– Focus on Internal Risks

– Types of Internal Risks

Risk Mitigation

– Understanding Sources of Risks

– Implementing Solutions

Risk Mitigation Overview

Conclusion


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Foreign Withholding Framework

Acme Subsidiary

Third Party

Acme Branch Acme Headquarters

Payments

Business Profits

Dividends – Intercompany or Third Party

Royalties – Intercompany or Third Party

Interest – Intercompany or Third Party

Services – General, Technical, etc.

3. Payment Type 1. Countries Involved Tax Treaty in Force

Payee Country Law

Payor Country Law

2. Relationship of Payor and Payee Payments from Foreign Branch to Parent

Payments from Third Party

Payments from Foreign Subsidiary to Parent

Vice Versa

4. Third-Party Withholding Agent

Layers of Complexity

Acme Subsidiary

Third Party

Acme Branch

Acme Headquarters


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Identifying Risks

Internal Risks v. External Risks

– Internal risks within a business’ s organizational structure

– External risks within unrelated business, foreign tax authority, and third-party withholding agent

Internal Risks Are Easier to Mitigate – Control and Verify Accuracy of Internal Processes

– Internal Mitigation Helps Identify Errors by External Sources

Types of Internal Risks – Ineffective Collaboration Between Business Units – Poor Recordkeeping Practices – Poor Institutional Knowledge of Withholding Tax Law


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Risk Mitigation: Ineffective Collaboration and Communication Between Business Units (1 of 2)

Situation: Invoices for payments are often not shared between relevant business units – Poor Organization – Other Priorities

Risk: Without necessary documentation, withholding accuracy is examined too late or not at all – Overpayment – Underpayment – Interest and Penalties

Solution: Transmit all documentation related to foreign withholding between business units as it is received to enable real-time verification of withholding accuracy


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Risk Mitigation: Ineffective Collaboration and Communication Between Business Units (2 of 2)

Situation: Treasury, accounting, or tax departments receive documentation after withholding has been imposed – Unavoidable consequence of payment and

withholding process – Only backend verification is possible

Risk: Delay of accuracy verification or no verification whatsoever – At year’s end, filing deadlines takes precedent – Documentation may be lost by the time any effort is made – Overpayment, Underpayment, Interest & Penalties

Solution: Require real-time verification of each withholding payment as information is made available – Use invoices to establish “expected withholding” baseline for each payment – Compare baseline against final withholding amount


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Risk Mitigation: Poor Recordkeeping Practices (1 of 5)

Situation: Chronological Paper Trail Created by Foreign Withholding is Robust

– 1) Invoice – Issued by Treasury or Accounting department for Payment Owed

– 2) Withholding Certificate – Issued by Withholding Agent; It Documents Amount of Withholding

– 3) Receipt – Issued by Treasury to Payee Once Payment is Received

Risk: Documentation Overload Increases Potential for Inaccuracies and Complicates Verification

– The paper trail comes in three or more waves

– Partial payments increase the amount of documentation

– Foreign currency fluctuations alter the amount of final payment and/or withholding


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Solution: Ensure that Tax Departments Receive Each Piece of Documentation as it is received and/or created

— Receiving invoices before payment allows a tax department to establish expected withholding

— Establishing expected withholding allows a tax department to detect inaccuracies immediately


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Situation: To facilitate withholding verification,

documentation must contain considerable detail

Risks:

(1) Documentation lacks critical information

necessary for withholding accuracy verification

– At a minimum, documents should contain:

Type of transaction (royalty, service payment, etc.)

Foreign exchange rates at time of transaction and final payment

Consistent use of currency between documents

Unique identifiers for each transaction and line item


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(2) Withholding agent applies incorrect rate

– Some withholding agents do not segregate

invoice line items by payment type and impose

highest rate among them

– If critical information is missing, some withholding agents simply impose

highest applicable rate

Solution: Work with treasury and accounting to ensure documents have

sufficient detail

– Establish necessary components for each invoice and receipt

– Ensure that invoices and receipts contain each component

– If necessary, issue separate invoices when amounts owed are of multiple

payment types


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Situation: Volume of documentation complicates

recordkeeping practices

Risk: Lack of recordkeeping protocol results in

missing documentation, inaccurate withholding,

delinquency, interest and/or penalties

– Invoices, withholding certificates, and receipts are often not matched or stored together

– Documentation becomes lost or is never stored

Solution: Store relevant records of each transaction together, and in chronological order

– Match all records for each transaction and store them in one place

– Store all payment documentation in chronological order, so that any one payment and its corresponding documents may be easily located and verified


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Risk Mitigation: Poor Institutional Knowledge of Withholding Tax Law (1 of 2)

Situation: Ensuring that internal tax personnel

know and understand applicable withholding tax

law is an enormous, labor-intensive undertaking

Risk: Insufficient knowledge results in missed

opportunities for relief

Solutions:

(1) Create and maintain an internal knowledge warehouse

– Repository of applicable withholding rates by:

Type of payment

Statutory rate applicable to payment

Any rate designated by applicable tax treaty

– Foreign tax codes and treaties are usually publicly available, and English

translations are frequently provided


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Risk Mitigation: Poor Institutional Knowledge of Withholding Tax Law (2 of 2)

(2) When necessary, consult a local expert

– Developing countries

No publicly available tax code

No specific law on point

– Translation issues

Official translations are trustworthy

Others are not

– Consulting a local expert ensures that the proper withholding rate is

established


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Risk Mitigation Overview

1. Business Transaction with Foreign Payer

2. Detailed Invoice Sent to Foreign Payer

3. Payment and Withholding Certificate

Received from Withholding Agent

4. Receipt for Payment Issued to Foreign Payer

Verification Step 1. Send Copies to all

Relevant Business Units

Verification Step 4. Send Copies and

Match/Store with Invoice

Verification Step 5. Send Copies & Match /

Store with Invoice and Cert.

Verification Step 2. Consult Knowledge Warehouse for WHT

Rate

Verification Step 3. Determine Expected

Amount of Withholding

Verification Step 6. Compare Expected and Actual

Withholding Rates and Amounts

Verification Step 7. File for Refund as Necessary


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Conclusion – Keys to Success

Get Ahead of the Verification Process

Streamline Business Unit Communications

and Document Transmission

Include Comprehensive Detail of Payments on

Documentation

Establish Robust Recordkeeping Practices

Mandate Real-Time Withholding Verification

Create and Maintain Up-to-Date Knowledge Warehouse

Consult Local Experts as Necessary


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Contact Information

Ian Boccaccio

Principal

Ryan

International Tax Practice

[email protected]

212.847.0124

Patrick Roach Consultant

Ryan


[email protected]

929.276.9414

Michael Minihan

Principal

Ryan


[email protected]

914.733.7737

mailto:[email protected]



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