handbook-tb

Wei Cuiamount required to be withheld the personal tax liability of the transfereeif it fails to withhold. Note that when the transferee is made personallyliable for failing to withhold a tax that was in the first instanceimposed on the transferor, the implicit penalty of the no-basis-stepuptreatment (which is possible even under transferor reporting) hasmerely been made explicit.In countries with weak legal norms, a view may be held thatthe failure of the transferor to pay tax on a transfer creates a de factopersonal liability for the transferee anyway, as the tax authority couldalways “go after” the asset located in the country and therefore expropriateits value from the present owner of the asset. Unless the transferee(new owner) is legally made liable for the tax that the transferorfails to pay, however, this kind of expropriation is against the rule oflaw (and is both unnecessary and unproductive for tax administration).Moreover, even when transferees are made liable for failures towithhold, it is important to observe legal distinctions. For example, ifit is the tax on the capital gains realized on the alienation of a domesticcompany’s shares that is at stake, it makes little sense to demand paymentfrom the domestic company itself. To do so would erase the distinctionbetween shareholder and corporate liabilities that lies at thecore of an indefinite range of transactions (for example, with creditors,customers and employees) that the company may be engaged in. Thiswould clearly be counterproductive. 49Several limitations of the withholding approach should benoted, however. First, if the transferee is a non-resident, the impositionof a withholding obligation alone does not necessarily enhance thetransferee’s likelihood of compliance. And delinquent non-residentcollateral with the government based on the amount of capital gains. SeeIncome Tax Act, R.S.C. 1985, c. 1. The Indian rule, Section 195 (1) of theIncome Tax Act, 1961, requires withholding simply of the amount of the taxowed, without addressing the issue of how the transferee would know howmuch tax is owed. See Income Tax Act (195/1961) (India).49For these reasons, several administrative suggestions made in the IMFSpillovers Report, that is to say, treating the target resident company as theagent of the non-resident, so that it will be liable if the tax is not paid by thenon-resident, or deeming the resident company to have made the transfer, sothat it is liable for the tax, should be viewed with caution.130