As a follow on from our last week's edition of Inside Tax, other areas of concern with the operation and administration of WHT in Nigeria are:
Appropriate WHT rates to apply to transactions
Quite a number of corporate taxpayers are confused on the WHT rates to apply with respect to certain contract arrangements. A common example is transportation service versus "car hire". Hitherto, FIRS' default position was to regard such a transaction as a form of "hire" (which attracts 10% WHT) and seek to recover under deduction of WHT from the payer for such services who may have applied 5% on the premise that it is a contract for services. Another example is whether interior floral decoration is a contract for services, supply of flowers or provision of professional service.
Penalty for failure to deduct tax
Registered taxpayers, who in the first instance act as "collection agents", are often penalized for failure to deduct/remit WHT. The law requires taxpayers to pay the following where they fail to perform their duties as "collection agents" for government:
- Amount not deducted
- Amount deducted but not remitted
- Shortfall in deduction (where the rates applied are established to be less than the appropriate rates largely due to the controversies in '1' and '2' above
- Penalty at 10% and interest at the prevailing commercial rate (21% is usually applied even though this is not consistent with the Central Bank of Nigeria's minimum rediscount rate) to apply on items 'a' to 'c' above.
Section 82 of CITA provides that, "any person who being obliged to deduct any tax under section 78, 79, 80 or 81 of this Act fails to deduct or having deducted fails to pay to the Board within twenty-one days from the date the amount was deducted or the time the duty to deduct arose, shall be guilty of an offence and shall be liable to a penalty of 10 per cent per annum of the tax not withheld or not remitted as the case may be in addition to the amount of tax deducted plus interest at the prevailing commercial rate.
A review of these provisions would suggest that taxpayers should not be made to pay the taxes not withheld. Only a penalty of 10% on the amount not withheld should be payable by the taxpayer. Secondly, neither penalty nor interest should apply on any shortfall in amount deducted (the subject here is 'deduction' not wrong deduction). Thirdly, interest and penalty plus the amount deducted but not remitted shall apply in case of unremitted deductions.
This is only rational as a vendor whose payment has not suffered WHT deduction would have filed its tax returns and paid resultant tax liability in full. It is thus tantamount to double dipping by FIRS and a double-whammy to the taxpayer when the tax authorities assess the taxpayer to the amount not withheld. It also makes sense that interest should apply only on amounts deducted but not remitted since the taxpayer here is technically applying government funds (or cash flow) in running its business for the period of non-remittance.
The foregoing notwithstanding, FIRS Establishment Act prescribes that "upon conviction, the taxpayer is liable to pay the tax withheld or not remitted in addition to a penalty of 10% of the tax withheld or not remitted per annum and interest at the prevailing Central Bank of Nigeria minimum re-discount rate and imprisonment for period of not more than 3 years". Given that FIRS hardly processes/obtains a conviction before it applies penalty and interest on the amount due and payable to it, the question is whether this provision should remain extant in our law and tax system? In addition, does the clause 'withheld or not remitted' cover instances of deduction without remittance and non-deduction? Or does it flow from the description of 'failure to deduct or having deducted, failure to remit' in the preceding sentences of the same section? Can a taxpayer remit what he has not deducted?
Time value of money
WHT deducted and remitted ensures that government is able to meet its cashflow requirements all year round. The flipside of this benefit to government is the concomitant adverse impact on the cashflow of the taxpayer who suffers the deduction on its fee or income. Also whilst government is quick to impose penalty and /or interest on the amount deducted but not remitted, the following questions become similarly germane:
- Shouldn't the government be paying interest at the end of the year on the taxpayer's unutilized WHT credit?
- Shouldn't all WHT rates, with the exemption of dividend, interest, royalties and rents, be harmonized to avoid ambiguities in determining the right amount to deduct?
- Should harmonized rate be a lower rate of say 2.5% or 5% to avoid instances where companies are in perpetual tax refund situation because their profit margins are less than 33%, which is the minimum margin required to fully utilize WHT credit of 10% on turnover?
- Should there be a threshold as to companies obliged to deduct tax (say all companies filing tax returns at MTO and LTO) to ensure capacity to deduct and remit same and reduce incidence of companies deducting without remitting?
- Should refund of unutilized credit notes not be encouraged and even reduced to a 30 day cycle?
We are aware that FIRS is spearheading a plan to revisit the administration and operation of WHT in the Nigerian tax system. We expect that the outcome of such exercise would result in a more friendly and compliance enabling tax system.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.