Definition
Withholding tax is an amount a client deducts from an invoice payment and pays directly to the tax authority on the supplier's behalf. It is common in cross-border payments and in some countries for domestic contractor payments. The supplier receives the net amount and claims credit for the tax withheld on their own return.
Also called: Tax withheld at source, Retention tax
Withholding tax in practice
If withholding applies, your invoice total stays the same, but you receive less. Agree in advance whether the price is gross or net of withholding, and ask the client for a withholding certificate so you can claim the credit.
Frequently Asked Questions
Why did my international client pay less than the invoice?
Often because their country requires withholding tax on payments to foreign suppliers. Request the withholding certificate and check whether a tax treaty reduces the rate.