Cross-border taxation is a complex topic. Under the new regulatory setup tax will be withheld at the source for most loan investments. We’ve prepared this Q&A guide to help investors understand the tax implications under the new setup and answer frequently asked questions.
Disclaimer: Afranga does not provide tax or legal advice. It is up to investors to consult with their local tax authority or a tax consultant.
Key takeaways:
- Withholding tax, if any, will be applied on income earned from loan investments on Afranga at the source.
- The loan originator, as the payer of income, has the obligation to withhold and report tax to local authorities in accordance with applicable tax laws.
- Investors on Afranga receive net interest income after tax has been withheld from the gross interest income.
- Afranga does not share investors personal or tax information with loan originators.
What is withholding tax?
Withholding tax (WHT) is a common tax practice and a way for countries to manage income generated in one country and paid out to someone in another country. The entity that manages the tax withholding process is usually the one that pays out income to investors who have earned it. For example, it can be a company that makes interest payments to its investors. In the case of Afranga, and under the new regulatory setup, the issuer of the loan (the loan originator) is the subject that will be paying out the interest, hence the one who will be managing the tax withholding process.
The economic rationale behind tax withholding is that governments tax the income generated in their countries. Tax withholding is a government instrument to tax income made in their country by non-residents.
Does Afranga report investors’ income information?
Afranga does not report investors’ earned income to local tax authorities. In the current regulatory setup Afranga is not a party to the loan investment process but merely facilitates the transactions. The investor invests directly into a loan issued by a company and the company pays interest income to the investor.
Who has the obligation to report earned income for tax purposes?
The loan originators are a payer of the interest income, and each loan originator has an obligation to withhold tax on the paid interest income and report it to the local tax authorities, subject to their local tax laws. In some instances, the withholding tax rate may be 0% while in others up to 20% of the earned income.
Investors will be provided with the applicable withholding tax rate in the Loan Details page for each loan. For improved transparency Afranga will report both the gross and net interest percentage.
Do I have to report my earned income to my local tax authority?
The income which you earn on Afranga will be net income after tax has been withheld by the loan originator. Depending on your local tax laws you may be subject to a tax credit and pay reduced or no tax on your income from Afranga.
Afranga does not provide any tax advice, and it is up to investors to consult with their local tax authority or a tax advisor.
Will the loan originator report my information to tax authorities?
No, the loan originator will not report your individual earnings to their local tax authority. Instead, the loan originator will withhold the tax, if any, by applying the full withholding tax rate on the aggregate interest earned. The loan originator will report the aggregate tax amount to their local tax authority but will not provide your personal details to it.
Is this necessary?
Cross-border taxation is a very complex topic. To simplify the process and make Afranga accessible to a wider investor audience we’ve adopted a streamlined approach. The loan originator will apply the full tax rate, if any, to the gross interest earned by all investors.
How this helps?
Afranga will not share investors’ personal and tax information for each individual investor with the loan originator. Other key benefits:
- Investor protection: Your personal data and financial information remain safe and secure.
- Reduced administration: Afranga will not be required to collect, process, administer and provide to the loan originators tax information about each investor. While this seems like an easy process, doing so for multiple jurisdictions both for loan originators and investors, will quickly render it an impossible task.
- Streamlined reporting: The loan originator will not be required to report the withheld tax for thousands of investors. This makes Afranga an attractive platform for loan originators and increases diversity.
- Removes potential tax issues: The loan originator will withhold the tax at the full rate without exemptions or tax reductions. This will ensure no additional claims can be made from their local tax authority down the line.
While this approach has many upsides, the downside is that investors will not be able to benefit from Double Tax Treaties signed between their country and the loan originator’s country. More information on this is provided below.
Will Afranga share my personal information with the loan originator for tax purposes?
No, Afranga will not share your personal information with the loan originator for tax or any other purposes.
My country has a DTT signed with the loan originator’s jurisdiction. Why can’t DTT be applied to reduce the withheld tax?
As described above, the loan originators will not report the withheld tax at an individual level, but at aggregate level. Since loan originators will not have visibility who the investor is, they will not be able to apply for a tax reduction or exemption for a particular investor.
Other platforms allow reduction of tax using DTTs. Why can’t you do it?
This is determined both by the local laws with which the platform has to comply and with the regulatory setup which the platform has in place. In some instances platforms collect tax information from investors and apply DTT with regard to withholding tax. This is usually in the cases when the platform operator has an obligation to report the withheld tax directly to the tax authority.
In the case of Afranga this is not applicable, since it is the obligation of the loan originator to withhold and report tax, if any, on the earned income.
Is Afranga going to collect and report the WHT?
No, Afranga is not involved in the process of collecting and reporting the WHT. It is the loan originator’s obligation to apply the local laws and regulations.
I have other tax related questions
Afranga cannot provide you with any legal ot tax advice as we don’t specialise in tax law. We have created a list of common questions on tax related topics to give you a general overview. If you have questions specific to you and your tax obligations, we advise you to consult your local tax authority or a tax advisor.