Fact information sheet - 15% withholding tax in interest
WITHHOLDING TAX:
As from 1 September 2011 a withholding tax of 15 per cent will be imposed on interest paid by the Banks.
BACKGROUND
Individual’s interest income earned on Cook Islands bank accounts is currently not taxed in the Cook Islands.
Withholding tax (WHT) on interest will be implemented on 1 September 2011. The withholding tax will be a final tax for these taxpayers. The payment of the withholding tax eliminates the need for any further payments to be made even if the payers’ marginal rate of income tax is higher than the withholding tax rate.
Conversely, no refunds can be sought if the payer’s marginal tax rate is actually below the withholding rate. For the latter reason, the withholding tax, at 15 per cent, is set at a lower rate than standard income tax. (With the exception of companies and trusts where they will have to be declared for income tax purposes and a credit can be claimed for the WHT paid)
Frequently Asked Questions
What does it mean for me?
• Individuals will not be required to include interest income in
their annual individual income tax return.
This means that even if you are on a much higher tax rate
than 15 per cent you will not need to pay any more, the
15 per cent is a final tax.
• You will not be able to claim any credits from this tax against
other income.
• You will not be able to have it refunded if your marginal rate
is below 15 per cent.
Should I take my money overseas?
This is your choice, however, as a Cook Islands tax resident you are liable for tax on your worldwide income. This means any income that you earn anywhere in the world must be included in your tax return taxed at your marginal tax rate.
How does my withholding tax get paid to Revenue Management (MFEM)?
The bank will file a monthly WHT return and pay the money for you to MFEM; you are not required to do anything.
How will the withholding tax be calculated?
In the following example Teariki has invested $10,000 in the bank at an agreed interest rate of 4.5 per cent per annum. The bank pays Teariki non compounding monthly interest of $37.50. From 1 September Teariki is required to have 15 per cent WHT deducted from his interest.
Each month Teariki will be credited $37.50 in interest from the bank, the bank will then withhold $5.63 for the WHT, and $31.87 will be paid into his bank account.
How will it work for people with term deposits that have been entered into prior to 1 July 2011?
A transitional arrangement will be in place to accommodate those customers who entered into a term deposit prior to the announcement of the WHT on 1 July 2011. In these cases the WHT will be phased in. The following examples illustrate how this will occur.
Example A Term deposit is entered into pre-announcement i.e. before 1 July 2011. In this example a $10,000 term deposit will be placed on a 12 month term with 5 per cent p.a. to be paid on maturity on 31 December 2011.
How will it work for people with term deposits that have been entered into after 1 July 2011?
Example B Term deposits entered into post-announcement, i.e. after 1 July 2011. In this example a three month $10,000 term deposit will be deposited at 5 per cent p.a. for three months from 15 July 2011 with maturity at 15 October 2011.
Example C Term deposits entered into post-announcement, i.e. after 1 July 2011 but maturing before the date of commencement. In this example a six week $10,000 term deposit will be deposited at 5 per cent p.a. on 15 July 2011 with maturity six weeks later on 26 August 2011.
What about the overseas taxpayers?
Any interest paid to overseas taxpayers currently has 15 per cent withholding tax deducted by the payer from any interest they receive – unless it was paid by a Cook Islands bank. The new legislation ensures all interest earned in the Cook Islands or by Cook Islands residents is subject to tax.
• Overseas taxpayers will be subject to withholding tax on their interest received from the Cook Islands. (except in relation to International Business Banks registered under the International Companies Act)
• Withholding tax will apply at 15 per cent to all bank interest earned in the Cook Islands.
What about companies?
Any interest paid to companies by a Cook Islands bank will have 15 per cent withholding tax deducted. This will not be a final tax. The company will declare the interest income as usual, and claim a credit for the withholding tax paid. The company tax rates are higher than 15 per cent so a top up tax payment will be required.
Herald Issue 554 09 March
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