August 22, 2019
On 14 August 2019, the Federal Inland Revenue Service (FIRS) issued a Public Notice (PN) on deduction of tax at source from compensations paid to agents by principal companies. The PN directs companies to deduct and remit Withholding Tax (WHT) and Value Added Tax (VAT) on compensations such as commissions and rebates, which are due to their distributors and customers.
According to the FIRS, the issuance of the PN is aimed at providing guidance to the public and in particular, taxpayers and advisers on WHT and VAT, which is deductible from the compensations or commissions due to distributors, agents and customers.
In the PN, the FIRS stated that compensations and commissions earned by distributors/dealers are to be subjected to VAT and WHT. According to the PN, its position is based on its Information Circular No. 2006/02 issued in February, 2006 and the Companies Income Tax Act (Rates, Etc. Deduction at Source (Withholding Tax) Regulations. The FIRS, however, stated that a number of companies have failed to deduct WHT and VAT from such compensations and commissions.
The PN, further requires companies (specifically those in the Fast Moving Consumer Goods (FMCG) Sector) to apply WHT and VAT on any compensation due to their distributors and customers. The FIRS stated that the duty to deduct and remit WHT or VAT will not be affected by the mode of payment (i.e. cash, credit notes, goods-in-trade or any other means payable). Based on the PN, such WHT/VAT must be charged at the appropriate rate and remitted to the FIRS on or before the 21st of every month.
The FIRS further stated that it will commence the monitoring of compliance on relevant companies/transactions.
This PN implies that companies are to subject all forms of compensation payments including commissions and rebates granted to dealers, agents, distributors and general customers to WHT and VAT and remit same to the FIRS. The PN has some far-reaching implications especially for companies in the FMCG sector.
The FIRS’ directive to companies to deduct VAT at source is not in line with the express provisions of the VAT Act. Except for transactions with non-resident companies or transactions with companies in the oil and gas sector, companies are not ordinarily required to deduct VAT at source under the existing VAT Act.
Moreover, the applicability of VAT on rebates and discounts issued to distributors and customers remains a contentious issue given that they do not necessarily constitute income/revenue in the hands of the companies that enjoy it. Thus, the requirement to account for VAT and WHT on compensation payments and sales-incentives is unclear because giving a blanket directive without specifics as to the practical application of VAT and WHT on such category of transaction simply creates more ambiguities.
Based on the above, we expect the FIRS to issue further guidance to provide additional clarity on the PN. Taxpayers are however advised to seek professional advice in order to review their existing business arrangements to ensure compliance with the provisions of the tax laws.
We would continue to monitor developments in this regard.