October 22, 2019
The Federal Inland Revenue Service (FIRS) recently issued a Public Notice (PN) on the deduction at source of Withholding Tax (WHT) and Value Added Tax (VAT) from compensations paid to agents, dealers, distributors and retailers by companies. The compensation can be in the form of cash payment, credit note or even goods-in-trade. Based on the PN, companies, especially those in the Fast Moving Consumer Goods (FMCG) industry, are required to deduct and remit WHT and VAT on compensations such as commissions, rebates, etc. which are due to their distributors and customers. This FIRS’ directive was supposedly hinged on the Companies Income Tax (Rates, Etc. Deduction at Source (Withholding Tax)) Regulations S.1 10 1997 and Paragraph 3.8 of the FIRS’ Information Circular No. 2006/02 issued in February, 2006 which provides that “commission earned by distributors/dealers will be subjected to WHT”.
The PN expectedly generated a lot of concerns for the taxpayers, especially concerning its legality and practicability. This is particularly so as rebates and discounts are not necessarily payments for goods or services on which VAT and WHT should typically apply. Further, FMCG companies are not required by law to deduct VAT at source from commission paid to agents, dealers, distributors and retailers. This article examines the common customer compensation schemes, the legality of the PN and makes suggestions to tax authorities and industry players.
Customer compensation schemes are marketing techniques aimed at increasing product demand, product visibility and brand awareness. They are also targeted at enlarging product’s market segment penetration and improving product’s total sales in proportion to competition. These compensation schemes are generally in the form of discounts, rebates and commissions.
According to the Black’s law dictionary, discount is “a reduction from the full amount or value of something especially price” while the Merriam- Webster’s dictionary defines discount as “reduction made from the gross amount or value of something”. On the other hand, rebate is defined as “a return of part of a payment, serving as a discount or reduction” according to the Black’s law dictionary while the Merriam-Webster’s dictionary defines rebate as “return of a part of a payment”. Following from the definitions above, it is clear that discount and rebates are mere reductions in the price and refund of a part of the payment made for goods and services supplied to customers. Hence, the agents, dealers, distributors and retailers would not have provided any goods or service to the seller/manufacturer nor earned any income from the transaction.
Commissions are however different as they are payments to agents, dealers, distributors and retailers for services rendered or products sold. The Black’s law dictionary defines commission as “a fee paid to an agent for a particular transaction” while the Merriam-Webster’s dictionary defines commission as “a fee paid to an agent or employee for transacting a piece of business or performing a service”.