Many countries require people paying non-residents to collect the tax due from a non-resident with respect to particular income by withholding such tax from such payments and remitting the tax to the government. Such levies are generally termed withholding taxes. These requirements are induced due to potential difficulties in collecting the tax from non-residents. Withholding taxes are often levied at rates differing from the prevailing Income Tax rates. Further, the withholding rate may vary by type of income or type of recipient. Generally, withholding taxes are charged on the gross amount of income. If the tax withheld from the payment to a person is more than the actual tax payable by such recipient, then the excess tax withheld can be claimed as a refund by filing the Income Tax return.

Many nations have entered into tax treaties, also called Double Tax Avoidance Agreements, with other countries to avoid or mitigate double taxation on an income.They tend to have “tie-breaker” clauses for resolving conflicts between residency rules and mechanisms for resolving double taxation disputes on the taxability of incomes.

The practice of charging prices for transferring goods or services between related parties is commonly referred to as transfer pricing. Many countries have become sensitive to the potential for shifting profits with transfer pricing and have adopted rules regulating prices or allowance of deductions or inclusion of income for related party transactions.

It is a fundamental concept of most transfer pricing rules that prices levied for a transaction between related enterprises should be those which would be charged for a similar transaction between unrelated parties dealing independently. Different rules prescribe methods for testing whether prices charged for transactions between related parties are at arm’s length price. Examples of such methods include comparable uncontrolled transaction prices, resale prices based on comparable markups, cost plus a markup, and an enterprise profitability method. Such rules generally involve the comparison of related party transactions to similar transactions of unrelated parties.