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International tax withholding


#1

Any tips for dealing with international tax withholding?

I have had a couple of instances where companies want to withhold a portion of the payment as they believe they are required to withhold local tax (so far, in Argentina and Thailand). I think they are mistaken. It looks like they are treating software licenses as royalties, whereas the usual tax definition of royalties seems to be for rights to the copyright, e.g. if they were to reproduce and sell the software themselves. Licenses for simple use of software doesn’t usually count as royalties and should not be taxed as such.

However, different countries might have different interpretations in their law, so it is difficult to argue that point of view remotely.

To make things more complex, it appears that there are double tax treaties in place that mean I can claim a tax credit for the tax paid. However, I would rather get the full payment, and pay tax locally where required.

If I just add the tax amount on top I probably end up overcharging them due to the tax credit, as well as jeopardizing the sale.

Is there any easy way to deal with this, other than find a tax expert to review the rules each time I sell into a different country? Other companies selling internationally must have been down this path before.


#2

In my view, it all comes down to have much you care about making the sale. If it were me, I’d treat a foreign withholding as partial payment: you asked for $X, you got $X-$Y in your bank account, so you just need another $Y to complete the sale. You’ve got no way of knowing if the withholding is legitimate, nor should you need to care. The whole point of international tax treaties, in general, is to let people pay the taxes in the location they’re familiar with, and avoid this need to know every country’s tax code.

It does help somewhat if you’re dealing as a legal person (company), rather than as an individual, though. Things get weird with payments to individuals (even behind a d/b/a) because of the dance of doom regarding “employee or not?”; even then, though, you should be able to wave “tax treaty” at them and get them to back down, but companies are generally more comfortable dealing with companies than individuals (one more benefit of incorporation).


#3

With respect @mpalmer thats a pretty niaeve view IMHO. The reality is that to make sales in any jurisdiction you have to know some of the rules. It might not be right, it might not be fair, but it just is.

Seems that only us internet entrepreneurs think we are above all this - someone selling physical products wouldn’t.

Case in point - if you’re selling into the EU you should know about EU VAT. I know that a lot of companies are then choosing to ignore the rules (and I have sympathy with that) but at least you should know what you’re ignoring.


#4

Can’t help you with Argentina and Thailand but deal with this all the time in the US and occasionally some other countries (Singapore / Portugal).

I think the rules are broadly similar but am in no way an expert. The forms you use are also very different.

The key terms for avoiding withholding tax are (as per my understanding).

  • they are purchasing a license for a software product, not issuing a royalty, nor payments for services like custom development.
  • You have no ‘nexus’ in the country in question (staff / offices)
  • You don’t have anyone travel over there to provide a service (onsite support/training etc).
  • You are a company in your home country (not paying an individual).
  • There are double taxation treaties between the two countries.

Yeah its complicated…

For selling in the US you normally need to provide a monster of a form called W-8BEN-E to the customer (they will often ask for a W9 or similar but thats for a domestic company/person) and to fill that in you will need to organise getting a EIN from the IRS. Its a royal PITA to navigate all this but you only have to do it once. Find some other software company that operate in your country and copy the wording (but not EIN #) and boxes they have filled in on the W-8BEN-E.


#5

Or you could use a payment provider who acts as your reseller and avoid all of this? We use Fastspring for this reason.


#6

Good point re: Reseller payment processor.

However I’ve had a few instances where a customer was insistent that they wanted to deal direct.


#7

Not naive, just realistic. The transaction is taking place in my home jurisdiction, there is no reason for anyone else’s laws to apply, taxation or otherwise. If the buyer’s local laws prohibit them from entering into such a transaction, that’s on them, not me.


#8

The US and EU might be big enough to ignore foreign customers, but most other countries are not.

The US also has withholding taxes. I suspect a US company wouldn’t be too impressed if you insisted on the full payment on an invoice where the IRS required them to withhold tax e.g. if you don’t supply the W8.

Also, if I do it right in most cases I think tax treaties mean I get a tax credit for the tax withheld. Hopefully I the rest of the payment “appears” when I do my tax. Asking the customer to make up the full value of the invoice would just be overcharging the customer or hiding the fact that I’m paying more tax than I need to. If the customer is willing to pay x% more I’d rather build that into the price anyway :slight_smile:

Payment Processors

I have discussed this with FastSpring, but it isn’t really something they are set up to handle. They can handle tax when it is added on to the price, but not when it is deducted from the payment. They could take the payment of course, but essentially throw away the tax credit.

Also, I did use payment processors for a while but my customers (large companies) found that confusing. When the process is evaluate software - make request - get quote - get approval - order - receive invoice - make payment, switching companies part way through the process causes confusion.

The best I have come up with is just to go along with the requests from the Accounts Payable departments. If they say all software licenses are considered Royalties in Argentina I’m not in a position to argue. I have queried some local accounting companies, but despite claiming they specialize in international tax they seem to have less idea than I have after a couple of hours of Googling.


#9

I’ve sold a lot of stuff into the US, and the couple of times the question of a W8 (or any other tax-related paperwork) comes up, I politely point out that we’re a foreign company, and the problem goes away.


#10

It depends on the customer I suspect. My customers tend to have departments dedicated to making sure I’m not paid if I don’t supply the W8. I sell often enough to the US (and information is available enough) that providing a W-8BEN-E isn’t an issue. Other countries where I might do a sale a year are more difficult to figure out.


#11

If you do it right then you won’t pay withholding tax in the first place - you will get the full amount paid.


#12

In the US, no problem.

Other countries, I don’t know…

I guess that’s the gist of the original question - how do you find out what it you need to “do it right” in various different countries? Is it just being big enough to spend kilodollars on international accountants?