Experts tackle FIRS, say booking WHT/VAT at source ambiguous

Experts tackle FIRS, say booking WHT/VAT at source ambiguous

Some tax experts in the country have fingered the fiscal arm of the government responsible for tax revenue collection; pointed at lack of detail in the recent public notice on deduction at source of withholding tax (WHT) and value added tax (VAT) on compensation paid to agents, dealers, distributors and retailers by principal companies.

Federal Inland Revenue Service, FIRS, recently issued a public notice informing taxpayers that commission and rebates earned by distributors and customers are subject to Withholding Tax (WHT) and Value Added Tax (VAT) and that these taxes should be deducted at source by companies making such payments.

Experts tackle FIRS, say booking WHT/VAT at source ambiguous

However, tax expert at PwC noted that the notice will have implications on the tax treatment of trade incentive plans to distributors and agents.

Such plans usually include buy-one-get-one free (BOGOF), two-for-the-price-of-one, rebates, discounts, and commissions.

“Given the lack of details and clarity regarding the notice, we recommend that you review your specific circumstances within the context of existing tax legislation before implementation.

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You should consult where necessary”, Taiwo Oyedele, a Partner at PwC stated.

Deloitte, also one of the big four global accounting firms added that the notice demands deduction of withholding tax and VAT on compensation paid to agents, dealers, distributors and retailers by principal companies.

The firm stated that while the regulation and circular support the deduction of WHT on payment of commission to distributors and dealers, it does not provide a basis for deduction of VAT at source on such payments.

The notice hinged on the provisions of the Companies Income Tax (rates, etc. of tax deducted at source (withholding tax)) Regulations and FIRS Information Circular No. 2006/02.

Paragraph 3.8 of the circular states that income accruing to a manufacturer will not be liable to WHT as it is deemed as transacted in the ordinary course of business.

However, any commission earned by distributors and agents will be subject to WHT.

“While the above regulation and circular support the deduction of WHT on payment of commission to distributors and dealers, it does not provide a basis for deduction of VAT at source on such payments”, Deloitte stated.

Deloitte thus reminds that no provision of the VAT Act mandates, generally, the deduction of VAT at source on commission paid to distributors and dealers.

“This therefore begs the question of whether the public notice is in line with the provisions of the law, especially with respect to the deduction of VAT at source on commissions or whether FIRS has the power to issue such directive”, the accounting firm stated.

It also observed that the public notice further made a general reference to rebates irrespective of the mode of payment – whether by cash, credit note or good-in-trade.

No distinction was made as to the type of rebates that may be subject to the application of WHT and/or VAT.

“The public notice, therefore, raises some practical issues for consideration. For example, the applicability of VAT or WHT on rebates and discounts granted to distributors and customers where such distributors are actually wholesalers that are merely getting bulk purchase discounts.

It is a subject of debate if the extant laws intend to subject rebates of all kinds and forms to WHT and VAT.

“While the public notice appears targeted at the Fast-Moving Consumer Goods (FMCG) sector, the impact of this notice is far-reaching as it will be applicable to virtually all sectors”, Deloitte reckoned.

The experts observed that the public notice is not well defined, and there is ambiguity in its application. PwC however advised target companies to consult professionals on the issue.

Other tax consultants who spoke with MarketForces Africa said that FIRS is under pressure, and as much as it tries to plug loopholes, the tax authority has failed to assess impacts of its policies on business environment as whole.

Experts tackle FIRS, say booking WHT/VAT at source ambiguous