Significance of the Withholding Tax System
The income tax system is founded on the principle of the “self-assessment system,” whereby an income earner calculates his/her income for the year and the corresponding amount of tax by submitting a return.
For certain types of income, the payer of the income is required to pay income tax withheld at the time the income is paid under the “withholding tax system.”
Under the withholding tax system, (1) a payer of certain types of income, such as salary, interest, dividends and tax accountants’ fees, (2) calculates the amount of income tax payable pursuant to prescribed methods at the time the income is paid, and (3) withholds the amount of income tax from the income payment and pays it to the government. Income tax withheld under this system is settled through a year-end adjustment or by filing a final tax return for the year, except forms of income such as income from interest subject to “separate withholding tax” that tax payment is completed only by withholding.
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