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How is the tax calculated when receiving services in tax-exempt areas?
How is the tax calculated when receiving services in tax-exempt areas?
According to Article 125-1 of the Tax Code, payments made to individuals established (registered) in preferential tax jurisdictions or territories, and payments made to preferential tax jurisdictions or territories, are subject to withholding tax at the payment source as follows: Regardless of other provisions of the Tax Code, payments specified in Article 13.2.16.14-1 of this Code are subject to a withholding tax rate of 10%. But should this tax be withheld from the initial amount or from the remaining amount after the 10% tax is withheld according to the other requirements of the Code? Tax expert Anar Bayramov clarifies this issue through examples:
Suppose an Azerbaijani resident company receives project design services worth 100,000 USD from an international company for an administrative building to be constructed in Baku. The income derived by the non-resident company for providing this service to the Azerbaijani company is considered income from Azerbaijani sources according to Article 13.2.16.18 of the Tax Code. In this case, this income is subject to withholding tax at a rate of 10% based on Article 125.1.5 of the Tax Code. That is, the Azerbaijani company will withhold 10,000 USD from the 100,000 USD income of the non-resident and pay it to the budget:
100,000 x 10% = 10,000 USD.
It is also revealed that the non-resident company is registered in Hong Kong, and the company’s bank account is also in Hong Kong. In this case, based on Article 125-1 of the Tax Code, an additional 10% tax should be withheld from the non-resident’s income and paid to the budget.
However, there is a specific point that needs attention. When payments are made to preferential tax jurisdictions or territories, according to Article 125-1 of the Tax Code, should the 10% withholding tax be deducted from the total service fee of 100,000 USD, or, in accordance with Article 125.1.5 of the Code, should the tax be withheld from the remaining amount of 90,000 USD after the 10% withholding tax is deducted?
In response, we would like to state that, clearly, when payments are made to offshore areas, the withholding tax should be deducted from the 90,000 USD that will be transferred to the non-resident after the 10% withholding tax is deducted, based on Article 125.1.5 of the Tax Code. This is because Articles 13.2.16.14-1 and 125-1 of the Tax Code indicate that payments made to taxpayers established (registered) in preferential tax jurisdictions or territories, or payments made to preferential tax jurisdictions or territories, are subject to withholding tax at the payment source.
Let’s assume the non-resident company is registered in Turkey. The Turkish company demands that, based on Article 125.1.5 of the Tax Code, after the 10,000 USD equivalent tax is withheld, the remaining 90,000 USD should be transferred in such a way that 85,000 USD is sent to the bank account located in Turkey, and 5,000 USD is transferred to the bank account located in Hong Kong. In this case, according to Article 125-1 of the Tax Code, the 10% withholding tax should be deducted not from the total service fee of 100,000 USD, but from the actual 5,000 USD transferred to Hong Kong, i.e., 500 USD should be withheld and paid to the budget:
5000 x 10% = 500 USD.
According to Article 125-1 of the Tax Code, payments made to individuals established (registered) in preferential tax jurisdictions or territories, and payments made to preferential tax jurisdictions or territories, are subject to withholding tax at the payment source as follows: Regardless of other provisions of the Tax Code, payments specified in Article 13.2.16.14-1 of this Code are subject to a withholding tax rate of 10%. But should this tax be withheld from the initial amount or from the remaining amount after the 10% tax is withheld according to the other requirements of the Code? Tax expert Anar Bayramov clarifies this issue through examples:
Suppose an Azerbaijani resident company receives project design services worth 100,000 USD from an international company for an administrative building to be constructed in Baku. The income derived by the non-resident company for providing this service to the Azerbaijani company is considered income from Azerbaijani sources according to Article 13.2.16.18 of the Tax Code. In this case, this income is subject to withholding tax at a rate of 10% based on Article 125.1.5 of the Tax Code. That is, the Azerbaijani company will withhold 10,000 USD from the 100,000 USD income of the non-resident and pay it to the budget:
100,000 x 10% = 10,000 USD.
It is also revealed that the non-resident company is registered in Hong Kong, and the company’s bank account is also in Hong Kong. In this case, based on Article 125-1 of the Tax Code, an additional 10% tax should be withheld from the non-resident’s income and paid to the budget.
However, there is a specific point that needs attention. When payments are made to preferential tax jurisdictions or territories, according to Article 125-1 of the Tax Code, should the 10% withholding tax be deducted from the total service fee of 100,000 USD, or, in accordance with Article 125.1.5 of the Code, should the tax be withheld from the remaining amount of 90,000 USD after the 10% withholding tax is deducted?
In response, we would like to state that, clearly, when payments are made to offshore areas, the withholding tax should be deducted from the 90,000 USD that will be transferred to the non-resident after the 10% withholding tax is deducted, based on Article 125.1.5 of the Tax Code. This is because Articles 13.2.16.14-1 and 125-1 of the Tax Code indicate that payments made to taxpayers established (registered) in preferential tax jurisdictions or territories, or payments made to preferential tax jurisdictions or territories, are subject to withholding tax at the payment source.
Let’s assume the non-resident company is registered in Turkey. The Turkish company demands that, based on Article 125.1.5 of the Tax Code, after the 10,000 USD equivalent tax is withheld, the remaining 90,000 USD should be transferred in such a way that 85,000 USD is sent to the bank account located in Turkey, and 5,000 USD is transferred to the bank account located in Hong Kong. In this case, according to Article 125-1 of the Tax Code, the 10% withholding tax should be deducted not from the total service fee of 100,000 USD, but from the actual 5,000 USD transferred to Hong Kong, i.e., 500 USD should be withheld and paid to the budget:
5000 x 10% = 500 USD.