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.

What are Customer Compensation Schemes?

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".

Legal Basis for VAT and WHT Deduction on Customer Compensation Schemes

Based on Section 2 of the VAT Act, VAT is applicable on the supply of goods and services, except those specifically exempted. Further, the VAT Act defines the value of taxable goods and services. Specifically, Section 5(1) and (2) of the VAT Act posit that the value of a supply is equal to the total consideration received, less the VAT. Therefore, where there is a reduction in the monetary consideration for a supply; either by way of discounts or rebates, VAT should be applied on the adjusted consideration received for the supply.

Furthermore, the VAT Act does not impose the obligation to deduct VAT at source on FMCG companies. Specifically, Section 13 of the VAT Act imposes the obligation to deduct VAT at source on only three categories of taxpayers namely; Government ministries, statutory bodies and other agencies of government; Companies operating in the oil and gas sector; and Nigerian companies that are carrying on VATable transactions with non-resident companies within the country. Therefore, there is no legal basis for deduction of VAT at source from any transaction whatsoever by FMCG companies.

The Companies' Income Tax Act (Rates, Etc. Deduction at Source (Withholding Tax)) Regulations provides for deduction of WHT on commission payments. However, this provision cannot be extended to discounts, rebates and other forms of compensation schemes as intended by the FIRS. Based on Section 81(1) and (5) of the CITA, WHT is deductible from payments to be made to another company and such WHT can be used to offset the other company's final income tax liability. Hence, it is clear that WHT deduction is applicable only where payments have been made. As such, where no payment is made, there is no basis for the deduction of WHT at source. This is the case for discounts and rebates, as the companies granting these incentives do not make any form of payments to the agents, dealers, distributors and retailers. Rather, the companies only granted mere reductions in the selling price or refunded a part of the payment made for the goods and services supplied to the agents, dealers, distributors and retailers, based on certain pre-agreed commercial terms.

Practice in other Jurisdictions

Unlike WHT, the VAT consideration for discounts and rebates has been extensively debated in many jurisdictions. Most of the considered countries have specific sections in their VAT Act providing for the treatment of discounts and rebates for tax purposes, but the prescribed treatment varies. In some jurisdictions, VAT is applicable on the net sales price of goods and service after deducting discount and rebate while in others, VAT is applicable on the gross sales price before considering discount and rebate.

In India for instance, Section 15 of the Central Goods and Service Tax Act provides that the value of any supply will not include any discount or rebate granted i.e. VAT also known as Goods and Service Tax (GST) will apply on the net sales price after discount and rebate. Similarly, in Singapore, GST is chargeable on the net sales price after deduction of discount and rebates. This also applies in United Arab Emirates and Kenya.

However, in Australia, the GST implication of discount and rebate is slightly different. In a situation where a company receives or grants a discount or rebate, there is the requirement to adjust the amount of GST claimed or paid, or treat the rebate as a separate sale, depending on the circumstances. A rebate is treated as a separate sale when it is paid to incentivize, reimburse, compensate or subsidize a buyer for activities performed for or on behalf of the seller. These type of rebates do not reduce the price of the goods and services sold, but are payment for a separate service to the seller. In this situation, the rebate is treated as payment for a separate sale.

In the United Kingdom, VAT is applicable on net sales price of goods and services, However, Her Majesty's Revenue and Customs (HMRC) published a guideline on how to account for VAT on specific schemes such as business gifts, samples and other promotional schemes. For example, money-off coupons are also commonly referred to as discount vouchers and they are issued for no payment or consideration. Even where the issue is linked to the purchase of goods, there is no VAT implication. But if the money-off coupons, discount coupons or discount cards, which entitles the holder to discounts are traded, a standard-rated supply will be said to have occurred and the company will be required to account for the VAT.

Based on the above practices in other jurisdictions, it is apparent that Nigeria needs to update its existing laws and accommodate the changes intended for taxpayers' treatment of VAT and WHT on such transactions. The PN is not sufficient for this purpose and may end up confusing taxpayers who are willing to comply with the extant provisions of the tax laws.


The provisions of the tax laws on VAT and WHT applicable to commissions are quite clear. However, the application of VAT and WHT on rebates and discounts granted to agents, dealers, distributors and retailers remains contentious. This is because rebates and discounts do not necessarily involve payments to the supplier/ seller nor constitute income/revenue in the hands of the agents, dealers, distributors and retailers. Thus, the directives to account for VAT and WHT on customer compensation schemes other than commission is bound to be controversial.

It is expected that the FIRS will provide further clarifications on the PN so that taxpayers can be properly guided. The FIRS, if it so wishes, can push for the necessary amendments to the tax laws to give effect to the taxation of customer compensation schemes in Nigeria as practiced in other climes as a PN does not have a force of law and therefore cannot impose tax on any item. In the meantime, it is important for taxpayers to proactively review their existing customer compensation schemes to ensure that all those that are taxable are properly subjected to tax, so as to forestall any unintended tax consequences.

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.