Withholding
Withholding tax is a central feature of the modern income tax and a principal means of collecting it throughout the world. Withholding tax is most commonly applied to wages and salaries, and, in this context, it is often regarded as the backbone of the individual income tax. Withholding tax is also frequently used in connection with other types of income, such as interest and dividends and payments to non-residents. The essence of withholding tax is that the government collects the tax, not directly from the recipient of income, but from the source or payer who deducts the tax from the income paid to the recipient. Withholding tax enables the government to collect the tax on income currently as the income arises and also reduces evasion because the tax is collected from persons not directly interested in its payment.
The United Kingdom has a special form of withholding tax known as source at taxation which has been called the peculiar distinction of the British income tax. With taxation at source, tax is charged on the source or payer of income and he or she is authorized to recover the tax by deducting and retaining it when paying the income to its owner. Source at taxation is similar to withholding at source, as it is known today, but there are conceptual differences as well as differences in execution. The distinction between source at taxation and withholding is often not observed, however, and the terms are frequently used interchangeably. Other terms commonly used to denote source at taxation or withholding are deduction at source and collection at source.
Withholding tax holds a prominent and illustrious position in British tax history. Withholding tax has been a key feature of the British income tax and is recognized as one of the primary causes of its success. The effectiveness of withholding tax as a fiscal device has been widely acclaimed. The royal commission on the income tax considered withholding tax of paramount importance lying as it. For its part, the United Kingdom Inland Revenue described withholding tax as a principle which has been of incalculable benefit to the revenue of this country, and which remains the great buttress of income tax stability and efficiency.
Withholding at source is method for collecting tax at source, and the concept is similar in their essential respects. Under both, the government collects the tax from the source or payer of income and, in both cases, the owner of the income bears the burden of the tax because it is deducted from his income. Withholding, however, differ conceptually and in the mechanism for achieving these results.
In contrast to taxation at source, withholding is based on the agency principle, and the source or payer is in effect a conduit who collects tax from one person and pays it over to another. If withholding applies, the source or payer of income is designated a withholding agent and, as such, he or she must withhold tax from the income at the time of payment and remit the tax to the government. Withholding also involves two steps, but different from taxation at source: the payer (1) withholds or deducts the tax from income payable to another person and then (2) remits the tax withheld to the government at the times designated by law. There is a necessary connection between the time of withholding and the time of remittance in that the time specified for remitting the tax is generally determined by reference to the time of withholding. The responsibilities of a withholding agent as such are distinct from his or her responsibilities as a recipient of income, and the accounts to the government separately for the tax withheld and for the tax due on his or her own income. There is no recovery by the source, as there is under taxation at source, since the withholding agent is obliged to remit only the tax that he or she has already withheld.
As the legal obligations of the parties involved, specifies vary, and reference must be made to the particular provision for taxation at source or withholding. As a general rule, however, under taxation at source, the payer is legally obliged to pay the tax on the income with regard to which he or she is the source, and he or she is subject to the same enforcement procedures as other taxpayers. The government may collect the tax only from the payer and generally has no recourse against the recipient of the income. The payer is authorized to recover the tax he or she paid by deducting it from the payment made to the income recipient, and the latter is obliged to allow the deduction. Under withholding, the payer, as withholding agent, is required to withhold tax and remit it to the government, but the income recipient is in principle ultimately liable for the tax. The payer is liable for the tax that he or she withheld and may also be subject to penalties for failure to withhold or remit the tax on time. If the payer fails to withhold tax, the government may usually proceed against either the payer or income recipient. If however, the payer withholds tax but does not remit it to the government, the government may, in many cases, proceed only against the payer.
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