THE F WORD: A TAXING ISSUE

Generally and in accordance with local internal rules and regulations, the amounts payable by franchisee to franchisor under the franchise agreement are subject to withholding taxes on non-residents’ profits generated within the territory in compliance with the territoriality principle. Hence, the franchisee is required to deduct from such payments the relevant tax and remit it to the appropriate governmental agency. not well informed of such requirements and are subject whether to the first option or failure to properly secure documents enabling the franchisor to claim the refund or tax credit. Consequently, the franchisee shall be held responsible for indemnifying and holding the franchisor harmless against any taxes, penalties and expenses incurred by or assessed against the franchisor.

At any rate, franchisees shall be responsible and liable for the payment of all other indirect taxes such as VAT, sales, use and similar taxes.

As the US vies for tax transparency, multinational corporations are coming to the realization that FATCA laws may highlight US source payments in unpredictable places. This may be the case as cash exchanges hands between the franchisor and franchisee when up-front payments and royalty transfers take place.

Given all these forces at play, the recurring theme between a franchisor and franchisee has been the formation of a complex corporate and accounting structure in an effort to shift profits from countries where the actual business is taking place. While the US allows deferral of taxes to later years, this incentivizes both parties to abuse these laws and make it seem as though profits get shifted to countries where they won’t be taxed.