CHAPTER II WITHHOLDING TAX The provisions of the Act of September 8, 1916, requiring the withholding of normal tax at the source of payment were maAmended terially amended by the Act of October 3, 1917. Under the present law withholding is not required Law. except as follows: (1) All persons, partnerships, corporations, joint-stock companies, associations or insurance companies, in whatever caNonresi- pacity acting, as lessees, mortgagors, trustees, dent Alien executors, administrators, receiver, or employers Individuals and all officers and employees of the United States, having the custody, disposal or payment of interest, rent, salaries, premiums, compensation or other fixed or determinable annual or periodical gains, profits or income of Nonresident alien individuals, except income derived from dividends or net earnings of corporations which are taxable upon their net income, are required to deduct and withhold the normal tax of 2 per cent. thereon (Law, Section 9 [b]); such withholding is required regardless of amount of income. (A nonresident alien is entitled to no personal exemption under present law, and no deductions except by making and filing a true and accurate return of income received from sources within the United States, by February 1st.) Income of dent Foreign Corporations. (2) The normal taxes of 6 per cent. (2 per cent. under Act of 1916 and 4 per cent. under Act of 1917) must be deducted and withheld from incomes derived from sources within the United States by: Nonresident foreign corporations not engaged in business or trade within the United States and having no office or place of business therein, from interest upon bonds and mortgages or deeds of trust or 60 similar obligations of domestic or resident corporations, associations and insurance companies. Section 13 (e) purports to include in the foregoing provision "nonresident alien firms, copartnerships and companies" but the tax subject to be withheld is limited to the normal tax on corporations in the following language: "shall be made applicable to the tax imposed by subdivision (a) of section ten." By reason of this defect in the law, the Commissioner of Internal Revenue has directed that there shall be no withholding against any form of income of foreign copartnerships, as indicated in the following ruling: "With reference to your telegram of October 15, 1917, and office reply of October 16, 1917, you are now advised that under the provisions of the Federal Income Tax Law of September 8, 1916, as amended by the War Revenue Act of October 3, 1917, no form of income derived from sources within the United States by a foreign co-partnership having no office or place of business in the United States is subject to the withholding of normal income tax at the source. Therefore, the Southern Pacific Company is not required to withhold normal income tax from any amount of interest paid on its bonds to such foreign co-partnership." (Letter to Gordon M. Buck, General Counsel, Southern Pacific Company, signed by Commissioner Daniel C. Roper, and dated October 26, 1917.) (Nonresident foreign corporations are entitled to no specific exemption, and no deductions unless returns are filed by February 1st.) to Non (3) The normal tax of 2 per cent. shall be de- Dividends ducted and withheld from incomes derived from sources within the United States by: Alien Nonresident alien companies, corporations, associations and insurance companies not engaged in business or trade within the United States and having no office or place of business therein, from dividends upon the capital stock or from the earnings of domestic or resident corporations, associations or insurance companies. [Law, Section 13 (f).] "Corporation is to pay dividend to non-resident alien corporations not engaged in business or trade within the United States and not having any offices or places of business therein. Shall paying corporation deduct two per cent or shall it deduct six per cent leaving foreign corporations to make returns on which credit for dividends for extra four per cent may be shown and then claim refund of extra four per cent? Please telegraph decision our expense." (Answer) "Domestic corporation paying dividend to foreign corporation having no office or place of business in United States should withhold two per cent only." (Telegram from the Corporation Trust Company to Commissioner Daniel C. Roper and his reply thereto dated October 29, 1917.) Tax Exempt Clause. (4) The normal tax of 2 per cent shall be deducted and withheld from payments of interest upon bonds and mortgages, deeds of trust or other similar obligations of corporations, joint-stock companies or associations or insurance companies "if such bonds, mortgages or other obligations contain a contract or provision by which the obligor agrees to pay any portion of the tax imposed. upon the obligee or to reimburse the obligee for any portion of the tax or to pay the interest without deduction for any tax which the obligor may be required or permitted to pay thereon or to retain therefrom under any law of the United States." This provision of withholding is applicable to all interest payments on bonds and mortgages or deeds of trust of corporations containing the so-called "tax-free covenant" whereby the corporation agrees to pay the interest without deduction of tax. It applies to such interest whether the same is payable annually or at shorter or longer intervals and regardless of amounts, and is applicable to citizens, and residents of the United States and nonresident alien individuals. [Law, Section 9 (c).] Section 3 of the War Income Tax provides that the war income normal tax of 2 per cent. shall not be withheld until on and after January 1, 1918, and that thereafter only one 2 per cent. normal tax shall be withheld. The effect of this is that the obligor will pay 2 per cent. normal tax on all interest except where an exemption certificate is filed, and the obligee (Bondholder) receives credit for the 2 per cent. paid at the source and pays the additional taxes himself. As already observed nonresident alien individuals are entitled to no exemption. Individual citizens and residents of the United States may obtain the benefit of exemp- Exemption by filing with the withholding agent, on or tion. before February 1st, a signed notice thereof in writing. [Law, Section 9 (c).] Those required under the law to withhold taxes at the source of payment are required to make returns thereof Returns of on or before March 1st and to pay the amount Taxes withheld to the Collector on or before June 15th. Withheld. Those required to withhold taxes are made personally liable for the amount of the same, and they are, by Responsilaw, indemnified against all persons, corporations, bility and Indemnity partnerships, associations and insurance com- of Withpanies for deductions from income required to be holding made. Party. All taxes heretofore withheld on income of citizens or residents, except from interest on bonds containing a Release of "tax-free covenant" clause, by amendment of the Taxes Act of September 8, 1916, have been released and Withheld. directed to be repaid to those entitled thereto. By amendment of the provisions of Act of September 8, 1916, with regard to withholding the normal tax at the source, on payments of income to citizens and residents Informaof the United States, such withholding is no longer tion at required except as to income from bonds containing Source. the so-called "tax-free covenant" clause. There has been substituted in place of withholding in such cases a system of "Information at the Source," whereby it is required that all payments to taxable persons, partnerships or corporations during any taxable year, aggregating $800 or more for such year, must be reported to the Collector of Internal Revenue. Such return should be made for the calendar or fiscal year, as re quired in respect of the income tax return, and should be filed at the same time. "Information at the Source" is required in all cases where payments of rents, salaries and wages, commissions, interest, or any other fixed or determinable gains, profits and income aggregating $800 or more are made to a taxable person, partnership, corporation, or association. (Law, Section 28.) It has been held that such return must be made irrespective of the basis upon which wages are computed and will include wages paid at piece-work rates. "Receipt is acknowledged of your letter dated October 15, 1917, requesting that you be advised whether the provisions of Section 28 added to the Act of September 8, 1916, by Section 1211, Act of October 3, 1917, apply to employers of workmen paid by the hour or by the piece, stating in this connection as follows: "One of our clients employs some three thousand workmen who are almost all on piece work on an hourly basis and a large number of them will be paid more than $800 during the year. Their wages, however, are not fixed as would be a weekly or monthly salary, payments to them. being variable from week to week and even from day to day.' (Answer) "In reply you are advised that in accordance with the provisions of the law as stated in the Section referred to above each person, corporation, partnership, etc., is authorized and required to render a true and accurate return to the Commissioner of Internal Revenue setting forth the amount of salary or compensation and the name and address of each employee who is paid $800 or more during the year 1917, and subsequent tax years. The liability for such return attaches in all cases of payments of salary or compensation amounting to $800 or more during the year, without regard to the basis of payment or the period during the year in which it was earned and for which it was paid." (Letter to Palmer and Serles, New York, N. Y., signed by Commissioner Daniel C. Roper and dated October 25, 1917.) The required reports must state the name and address of recipient, and the total amount of payments. |