On Wednesday, August 14, 2019, Nigeria's Federal Inland Revenue Service ("FIRS") issued a Public Notice ("FIRS Notice") directing principal companies, especially those in the fast-moving consumer goods ("FMCG") industry, to ensure that "compensation due to their distributors and customers in the form of commission, rebates, etc. and by whatever means of payment, whether by cash, credit note or even goods-in-trade must be subjected to WHT/VAT at the appropriate rates as applicable and remit same to the FIRS ..." In this piece, we take a look at the FIRS Notice and examine its policy thrust and legality. We conclude with relevant questions worth pondering on by both FMCG businesses and FIRS.
On the nature of Commissions payable to Agents, Distributors, Customers et.al
The FMCG business space is fiercely competitive with low margins on unit sales. Turnover or mass sale is often at the heart of the profitability of businesses in this space. A vast network of agents, distributors and customers are required to ensure such turnover. These agents or distributors are typically independent businesses, who may choose to either have an exclusive or non-exclusive relationship with an FMCG business. Whether exclusive or non-exclusive, the relationship between the FMCG business and its agents or distributors is largely denoted by the margins that the agents or distributors stand to gain from their distribution services. With low margins, save for large volume, there is just as much as FMCG businesses can pass on to their agents or distributors, given the volumes being moved by each distributor or agent. The global figures are those of the FMCG business.
It is within this context that the concepts of commissions, rebates, incentives, compensation, discounts et.al. arise. To the extent that they are measurable in monies worth, they typically are considerations given by FMCG businesses to their agents or distributors to reward the agents or distributors for their performance, likely based on pre-agreed metrics.
The Laws of FIRS' new squeeze:
The Companies Income Tax (Rates, Etc. Deduction at Source (Withholding Tax) Regulations 1997 (the "Regulation") is the legal basis of the FIRS Notice. The Regulation expressly mentions "Commissions" and does not for such other categories of rewards as rebates, incentives, compensation, discounts et.al. The FIRS Notice has interpreted "Commission" to also mean "rebates, etc. and by whatever means of payment, whether by cash, credit note or even goods-in-trade...". In other words, FIRS will treat any reward that falls into the category of this clause as a "commission". The tax treatment is a withholding tax ("WHT") surcharge of 10% for every incorporated agent or distributor and 5% for the unincorporated ones. The former category is FIRS' remit while the latter is typically for the Revenue Services of States (SIRS). SIRS typically follows FIRS' lead in tax administration in Nigeria.
While the Regulation does not define or describe what will constitute "Commission" so as to expressly include 'rebates' or 'incentives' within its scope, Paragraph 3.9 of the FIRS Information Circular No. 2006/02 of February 2006 describes "commission" as "... The reward payable for services rendered by the agent is Commission..." This is similar to the Black's Law Dictionary's definition: "A fee paid to an agent or employee for a particular transaction, usually as a percentage of the money received from the transaction." In these contexts, what underlies 'Commission' is the concept of a reward paid or given for performance by the payee; in which case, the nomenclature or characterization of the reward may not be as important as the substance of the transaction. In other words, the concepts of 'commission', 'rebate', 'compensation', 'discount', 'incentives' or related expressions may easily be construed as same where their substance is same. Thus, where in practice, the concepts of 'rebate', 'incentives', 'compensation', or 'discounts' refer to value, measurable in monies worth, given or paid to agents or distributors for their performance, such value may easily be referred to as 'commission'.
The FIRS Notice only conforms with the Regulation to the extent that it requires WHT to be deducted from the commissions, rebates, discounts, incentives and other value of monies worth (now altogether "Commissions") paid or given to agents or distributors. This is because such Commissions constitute taxable income in the hands of such agents or distributors. Accordingly, it is expected that the Commissions are properly accounted for by FMCG businesses such that the relevant agents or distributors that receive them are identifiable and the income tax withheld and remitted to the relevant tax authority ("RTA") is easily credited to the agents or distributors. FMCG businesses are expected to correctly keep a Commissions account, sufficient enough to identify the beneficiaries of such Commissions and ensure that applicable WHT is deducted from such Commissions prior to the payment of the net-Commissions to the beneficiaries.
The Value Added Tax Act, 1993 (as amended and currently compiled as Cap. V1, Laws of the Federation of Nigeria 2004) ("VATA") currently places no obligation on FMCG businesses to deduct Value Added Tax ("VAT") at source from payments due to their agents or distributors as the obligation to deduct VAT at source, also known as the Reverse Charge System, is currently limited to the following organizations or transactions: (i) Ministries, Departments and Agencies of Government; (ii) Companies operating in the Nigerian oil and gas sector; and (iii) Nigerian companies that undertake vatable transactions with non-resident companies within Nigeria. Section 7 of VATA however gives the FIRS Board, as established under Section 3 of the FIRS (Establishment) Act 2007 ("FIRS Act") the power to "... do such things as it may deem necessary and expedient for the assessment and collection of the tax [VAT] ..." Accordingly, the FIRS Board may require FMCG businesses to deduct VAT at source from payments due to their agents or distributors.
The FIRS Notice is however not a directive of the FIRS Board but FIRS' and will accordingly not suffice in law as legal authority for the FIRS' current request to FMCG businesses. Accordingly, it is arguable that there is currently no valid obligation on FMCG businesses to Reverse Charge VAT on payments made to their agents or distributors, save in the case of vatable transactions with distributors and customers that are non-resident in Nigeria.
Much as the pressure on FIRS in recent times has challenged it to increase its rate of tax collection, FIRS remains an administrator that is absolutely subject to the laws it was created to administer. FIRS cannot be lawless; it is a product of the law. It needs laws, both present and in the future, to do its job. Certainty of tax laws is one of the Smithsonian canons of taxation and unless tax laws are expressly and certainly laid, they will fail the scrutiny of litigation. The FIRS' attempt to play around "Commissions" is not without questions, even in the face of these authors' brief above. The subsisting +21years old Regulation could simply have been re-issued. The inapplicable VATA could have since been amended, particularly in light of its so many other inadequacies. The FIRS Notice will likely generate more controversies than taxes, while dancing to corporate Nigeria's perennial message to the Nigerian Government – get your acts right. The twist is a dance-move that outdated Oliver.
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