Tax and VAT

Withholding tax

Withholding tax is income tax that the buyer deducts from a supplier's invoice before paying and remits directly to the tax authority on the supplier's behalf, used most often for cross-border B2B payments and certain professional services.

Applies in: Global

Withholding sits at the opposite end of the tax mechanism from VAT or sales tax. Instead of the seller collecting and remitting, the buyer holds back a percentage of the invoice and pays it to the tax authority directly, crediting the supplier for the amount withheld. The supplier gets less cash than the invoice face value, and reconciles the withholding against their own income-tax bill later.

The most common case is cross-border services. A US company paying an Indian software contractor may be required to withhold 10% to 15% under Indian domestic law or the US-India tax treaty. A Brazilian buyer paying a foreign supplier withholds across several layers (IRRF, PIS, COFINS, CIDE) that can total 30% or more. The supplier gets the rest, plus a withholding certificate they can use to claim a foreign tax credit at home.

Withholding also appears domestically in specific industries. Australia's no-ABN withholding deducts 47% from any invoice that lacks a valid Australian Business Number. The UK's Construction Industry Scheme (CIS) deducts 20% or 30% from sub-contractor invoices.

Tax treaties are the main lever for reducing withholding. A US-UK treaty rate may cut withholding on royalties to zero, but the supplier has to file the right form (a W-8BEN or equivalent) in advance. Without the paperwork, the buyer applies the higher statutory rate by default.

Common questions about Withholding tax

Why was withholding deducted from my invoice?
Usually because you are invoicing across a border into a country whose domestic rules or tax treaty with your country require the buyer to withhold a percentage of certain payments (services, royalties, dividends). Sometimes because of a domestic withholding regime in the buyer's country covering construction, agriculture, or invoices without a valid local tax ID.
Can I reclaim withholding tax?
You reclaim it as a foreign tax credit against your home-country income-tax bill, using the withholding certificate the buyer provides. The credit reduces the tax you owe at home, not the cash you receive on the invoice. If the credit exceeds your home tax liability, the excess is usually lost (some countries allow carry-forward).
How do tax treaties affect withholding?
Bilateral tax treaties typically reduce the withholding rate the buyer's country can apply, sometimes to zero. To claim the treaty rate you have to file a form with the buyer (W-8BEN for US payers, equivalent forms elsewhere) before they pay. Without the form, the buyer applies the higher non-treaty statutory rate.

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Related terms

VAT Reverse-charge VAT TIN EIN ABN

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