Galaxy Inc. (“Galaxy”), a U.S. corporation, is engaged in the business of render
ID: 2547801 • Letter: G
Question
Galaxy Inc. (“Galaxy”), a U.S. corporation, is engaged in the business of rendering engineering and project management services in Country A. Galaxy also licenses certain Country A patents to clients for use in connection with projects in which Galaxy is involved. Country A has no generally applicable income tax. It does, however, impose a withholding tax of 20% on gross royalties and a withholding tax of 25% on gross fees for services rendered in Country A which such royalties and fees are paid by residents of Country A to foreign persons. The gross royalties and gross service fees are independent tax bases on which each withholding tax is separately computed. No deductions are permitted.
(a) Galaxy receives royalties and engineering and project management fees from clients in Country A from which the 20 and 25% taxes are withheld, respectively. Are the withholding taxes creditable by Galaxy?
(b) Would the results in part (a) be different if Country A has a generally applicable income tax that is not imposed on royalties and fees paid by Country A residents to foreign persons, which are subject to the withholding taxes described?
Explanation / Answer
A) Yes. Galaxy Inc., can very well take the WHT subject to below
1. Valid WHT certificate for deduction of taxes been substantiated by Country A
2. Galaxy Inc., disclose the Royalty and Project Managent fees in its tax return filed with revenue authorities
B) if royalty and Management fees are not taxable in the receipint County, then NO need to WHT tax by County A. However most of the countries have a Double Taxation Avoidance Agreement there by mandate to deduct tax generally in the range of 10% to 15%.
Since it is cross border transaction, very well country A has to withhold taxes before remittance of proceeds to Galaxy Inc.,
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