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Compliance and administration considerations, as much as revenue, may influence the tax policy of a jurisdiction with respect to income derived by non-residents. Countries that wish to encourage investment in their jurisdiction may look at tax policy options that reduce the compliance burden on foreign investors. Administrative simplicity, and ease of collection of tax, may also influence how jurisdictions structure their tax rules.

Some countries, such as Belgium, minimise the compliance burden on non-resident SPs by exempting income derived in the absence of a local establishment (similar to a PE). However, even where exemption is provided, there may still be significant compliance obligations, e.g. where the non-resident is required to obtain a certificate of exemption from the tax authorities (e.g. to preclude withholding tax collection by the payer) and/or to file a tax return in order to claim the exemption or for information purposes.

Where there is no exemption or where the threshold for source taxation has been met, many countries will tax the income on a net basis. Non-resident SPs in this situation are frequently required to meet similar compliance obligations as residents.

In jurisdictions where non-resident SPs without a PE are taxed on their services income on a net basis, the SP is usually required to file an annual tax return in respect of income derived in the jurisdiction. Prepayment of tax may also be required. In practical terms, however, it can be difficult to enforce these obligations.

Some countries address the enforcement problem by imposing a non-final withholding tax on some or all services income of a non-resident SP (generally excluding cases where the income is attributable to a PE). This withholding tax is then credited against tax assessed on a net basis upon lodgement of a tax return, often with a refund being available for any excess tax withheld over the tax assessed. This imposes compliance obligations on both the payer (to withhold) and the SP (to file a return).

 

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