BUSI­NESS Ad­min­is­tra­tion of with­hold­ing tax (1)

Daily Trust - - TAXATION - By Frank Obaro Kabir Mashi, Act­ing Chair­man, FIRS

With­hold­ing Tax is an ad­vance pay­ment of in­come tax. In prin­ci­ple, WHT is a pay­ment on ac­count of the ul­ti­mate in­come tax li­a­bil­ity of the tax­payer or com­pany. With­hold­ing tax is not a sep­a­rate tax on its own and does not con­fer an ex­emp­tion from the fil­ing of an­nual tax re­turns by the com­pany which had suf­fered WHT. The tax is nor­mally to be de­ducted at source when a pay­ment is to be made to the ben­e­fi­ciary.

Ap­pli­ca­ble Tax Law

With­hold­ing Tax (WHT) is not a dis­tinct tax type and there­fore has no leg­is­la­tion of its own. It is only a mech­a­nism for the collection of other taxes. Con­se­quently, its ap­pli­ca­tion is pro­vided for in the en­abling law of other tax types i.e. Sec­tion 81 of Com­pany In­come Tax Act, Sec­tion 54 of Petroleum Profit Tax Act, Sec­tion 73 of Per­sonal In­come Tax Act and Sec­tion 13 of Value Added Tax Act

Tax cov­er­age and in­come sub­ject to with­hold­ing tax

The WHT pro­vi­sions seek to col­lect taxes that may other­wise have been lost through eva­sion and/or avoid­ance. The aim is to en­sure that tax­pay­ers’ are cor­rectly taxed but it must be un­der­stood that trans­ac­tions that are or­di­nar­ily not li­able to tax in Nigeria are also not li­able to WHT; thus, con­tracts and sup­plies of goods and ser­vices per­formed en­tirely out­side Nigeria by non-res­i­dent tax­pay­ers will not be li­able to WHT. The res­i­dence of the tax­payer is gen­er­ally not rel­e­vant for the pur­pose of de­ter­min­ing li­a­bil­ity to tax or the ap­pli­ca­tion of WHT, but it is im­por­tant to con­sider whether the provider/sup­plier of the goods or ser­vices is li­able to Nige­rian tax.

The rate of tax ap­pli­ca­ble to the var­i­ous goods and ser­vices is pro­vided in later parts of this paper. The in­tro­duc­tion of the WHT regime came about in or­der to ad­dress the prob­lem of tax eva­sion al­though, there is the over­rid­ing ob­jec­tive of full dis­clo­sure, trans­parency, pre­dictabil­ity and fair­ness. In the light of these ob­jec­tives and bear­ing in mind that the tax is in­tended as an ad­vance pay­ment of tax, its oper­a­tion should al­ways be op­ti­mized to en­sure that tax­pay­ers are not over­taxed and Govern­ment does not lose rev­enue.

Rents: This in­cludes rental in­come on both real and per­sonal property. As a gen­eral rule, in­come on a property (rent, hire or lease pay­ments or rights (roy­al­ties) sit­u­ated in Nigeria is li­able to tax in Nigeria, the place of pay­ment notwith­stand­ing. Where a per­son rents or hires property/ser­vices from an­other, WHT at the rate of 10% will ap­ply. But where a per­son pro­vides ser­vices to an­other for e.g. air/land trans­port ser­vice, us­ing its own equip­ment/fa­cil­i­ties, the trans­ac­tion be­comes a con­tract of ser­vices rather than rental or hire.

In­ter­est: This is in­come from in­vest­ments of ev­ery kind. WHT is ap­pli­ca­ble to in­come from govern­ment se­cu­ri­ties and in­come from bonds or Trea­sury bills. In­ter­est on loans paid by a Nige­rian com­pany is of­ten not sub­ject to WHT.

Div­i­dends: Re­fer to in­come from shares. The in­come is sub­ject to tax whether it is re­ceived by a Nigeria com­pany or a non-res­i­dent com­pany. The tax im­posed is re­garded as fi­nal tax, but cor­po­rate bod­ies are al­lowed to re­coup WHT de­duc­tion where the div­i­dend is to be re­dis­tributed as Franked In­vest­ment In­come (FII). The Petroleum Profit Tax Act (PPTA) how­ever ex­empts div­i­dends payable by oil pro­duc­ing com­pa­nies on petroleum op­er­a­tions from WHT im­po­si­tion.

Royalty: Refers to un­earned in­come which ac­crues to the owner from past en­deav­ours. Per­mis­sion must be ob­tained be­fore it can be used. It is pay­ment of any kind as a con­sid­er­a­tion for the use of or the right to use any patent, trade mark or right/ Con­sul­tancy/ Pro­fes­sional/ Man­age­ment/ Tech­ni­cal Ser­vices-These are spe­cial­ized ser­vices ren­dered by per­sons with the re­quired knowl­edge and skills. The mere fact that ser­vices are pro­vided by a com­pany which has con­sul­tancy as part of its name does not by it­self ren­der such ser­vice as con­sul­tancy. The real con­tent of the ser­vices be­ing pro­vided must be ex­am­ined and if it amounts to a con­sul­tancy ser­vice, then the ap­pro­pri­ate rate would ap­ply; the same treat­ment ap­plies to Pro­fes­sional/ Man­age­ment ser­vices. For in­stance, if an en­gi­neer­ing com­pany is car­ry­ing out a con­struc­tion ac­tiv­ity, the proper clas­si­fi­ca­tion for the ser­vices would be ‘‘con­struc­tion’’ as op­posed to Pro­fes­sional/Tech­ni­cal ser­vices; sim­i­larly, the use of in­dus­trial ma­chin­ery/equip­ment to pro­vide a ser­vice does not ren­der it to be ‘Tech­ni­cal’’ be­cause the in­dus­try po­si­tion re­quires that only ar­range­ments that in­volve a trans­fer of Tech­nol­ogy should be clas­si­fied as tech­ni­cal.

All types of Con­tract Ac­tiv­i­ties and Ar­range­ments, other than Out­right sale and Pur­chase of Goods and Property This clas­si­fi­ca­tion is wide enough to cap­ture ev­ery trans­ac­tion, other than out­right pur­chase/sale of goods and property. The Rev­enue holds the view that ma­jor­ity of the ac­tiv­i­ties car­ried on in the oil in­dus­try are done by way of con­trac­tions, and should prop­erly fall un­der this cat­e­gory. The is­sue of con­tracts and trans­ac­tions, not be­ing con­ducted in the or­di­nary course of busi­ness has over the years been sub­jected to se­ries of re­views and amend­ments, aimed at im­prov­ing the WHT sys­tem in or­der to achieve ef­fi­ciency as well as min­i­mize the cost of do­ing busi­ness. The aim of with­hold­ing tax is not to com­pound the prob­lems of pro­duc­ers, man­u­fac­tur­ers and those en­gaged in any forms of ac­tiv­i­ties, other than ser­vices. The def­i­ni­tion of man­u­fac­tur­ing activate as con­tained in the FIRS in­for­ma­tion cir­cu­lar No. 2002 ap­pears to have fur­ther gen­er­ated more con­tro­versy than ex­pected. The fol­low­ing clas­si­fi­ca­tion will as­sist in the un­der­stand­ing of cir­cum­stances where WHT will ap­ply in re­la­tion to any pro­duc­tion ac­tiv­ity.

Where there is a dual re­la­tion­ship be­tween par­ties in a busi­ness trans­ac­tion

An ex­am­ple of this con­tract is where a man­u­fac­turer/ pro­ducer re­quire raw ma­te­ri­als from a sup­plier for its pro­duc­tion. This is dual re­la­tion­ship be­tween both par­ties and the trans­ac­tion will not be li­able to WHT. E.g. a farmer sup­plies ground­nut to a man­u­fac­turer of ground­nut oil; a man­u­fac­turer of glass sup­plies bot­tles to a bot­tling com­pany or soft drink man­u­fac­turer or oil mark­ing com­pany sup­plies diesel di­rect to a user.

Where there is a tri­par­tite re­la­tion­ship be­tween par­ties in a trans­ac­tion.

In a tri­par­tite con­tract re­la­tion­ship in­volv­ing a man­u­fac­turer, sup­plier and agent, there could be ei­ther two op­tions, depend­ing on the level of fi­nan­cial ar­range­ment. For ex­am­ple, where Man­u­fac­turer A, en­gages Agent C to pro­cure or source for raw ma­te­ri­als from Sup­plier, B, for his pro­duc­tion line, there is a tri­par­tite ar­range­ment here. There is noth­ing pre­vent­ing Man­u­fac­turer, A from deal­ing di­rectly with sup­plier B in or­der to achieve a dual con­tract re­la­tion­ship.

(a) If Agent C is mo­bilised by man­u­fac­turer B with fund to source for ma­te­ri­als for its oper­a­tion, there will be need to seg­re­gate the ser­vice cost from the en­tire con­trac­tion, and only the ser­vice com­po­nent will be li­able to WHT.

(b) If the Agent, C, en­tirely fi­nances the sourc­ing of the raw ma­te­ri­als for Man­u­fac­turer A, the en­tire con­tract value will be li­able to WHT at the time of pay­ment.

Where a man­u­fac­turer de­liv­ers nor­mal prod­ucts to dis­trib­u­tors and deal­ers for sale

In this sit­u­a­tion, the in­come ac­cru­ing to the man­u­fac­turer will not be li­able to With­hold­ing tax (WHT) as it is re­garded as trans­ac­tion in the or­di­nary course of busi­ness, but the Com­mis­sion earned by the dis­trib­u­tors/deal­ers will be sub­jected to WHT.

Agency trans­ac­tions and ar­range­ments

Agency ar­range­ment im­plies a con­tract be­tween a prin­ci­pal and agent. The re­ward payable for ser­vices ren­dered by the agent is Com­mis­sion, which is sub­ject to WHT of 10%.

How­ever, if the prin­ci­pal is a non-res­i­dent, any sales pro­ceeds from the ar­range­ment will at­tract5% WHT, where any of the con­di­tions in Sec­tion 26(1) (b) of CITA holds.

Obaro is an Abuja-based tax and fi­nan­cial an­a­lysts

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