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Royalty Income and Personal Service Income
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Date
2020-12-17
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Royalty Income and Personal Service Income

 

Most international treaties put limits on taxrate on royalty income. However, in terms of personal service income, they don’tstipulate tax rates but have provisions about whether taxation on source at theplace of origin is allowed. The differences between royalty income and personalservice income are as follows:

 

 

Personal service income

Royalty income

 

Withholding tax rate

20%

20%

20%(under tax treaty)

Where to levy tax

Taxation on source at the place where the personal service is performed

Taxation on source at the place where the royalty is used or offered

Tax treaty

taxation on source at the place of origin

Limited tax rate


 

Personal service income

Royalty income

Intangible value

Labor, function and technique with physical service

Taxation on source at the place where the personal service is performed

Taxation on source at the place where the royalty is used or offered

Compensation for created value

Compensation for service offered

Service provider should be responsible for the service provided

Service providers do not bear any responsibility for the service provided

Actual income is paid which is calculated by putting the expenses incurred on the process of offering the service in the pertinent business year and aggregated profits together.

 

Income is calculated based on the frequency and period of usage and also on profits generated on the process of using the royalty.

 

Income far exceeds the expenses incurred to create values and total profits generated by royalties

- specialized service offered by professionals like designers

- drawings designed by professional designers with using one’s expertise

- any rights to use, offer and copy design drawings designed for unspecified persons

- Information or know-how on industrial knowledge

Actual expense incurred on the process of offering human resources and materials

Expenses inevitably entailed on the process of offering expertise such as knowledge or know-how related to patent right

Where personal service and royalties are clearly separable and personal service is not incidental to royalties the service is subject to personal service income

Where personal service is incidental to the royalties and the fees for personal service is minimal the service is subject to royalty income

Design drawing which belongs to devices is regarded as personal service.

 


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