The Federal Inland Revenue Service (FIRS) recently issued a public notice calling out the failure of some companies to deduct and remit withholding tax (WHT) and value added tax (VAT) from compensation, including commissions, paid to their distributors contrary to the Companies Income Tax [Rates, Etc. of Tax Deducted at Source (Withholding Tax)] Regulations 1997 (the “Regulations”).
FIRS consequently informed all companies, particularly those in the Fast Moving Consumer Goods (FMCG) Sector, that compensation due to their distributors and customers in the form of commission, rebates and the likes, 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 applicable rates and remitted to FIRS on or before the 21st of every month.
Under the Regulations, the rate at which WHT is to be deducted from payments to companies for commissions is 10% and 5% for individuals. WHT deduction rate for companies and individuals for all types of contracts and agency arrangements, other than sales in the ordinary course of business is 5%. The VAT rate under the Value Added Tax Act is 5%.
What is significant in this public notice, is FIRS’ clarification that rebates are regarded as compensation for which WHT/VAT should be deducted and remitted. This is presumably to capture within the tax net, situations in which companies, particularly those in the FMCG Sector, offer discounts to distributors and customers (which would before now, not incur WHT/VAT), rather than pay them commissions which would incur WHT/VAT.
Until the directive in the public notice is tested and overturned by the tax appeal tribunal or courts, it would be prudent for companies to comply to avoid incurring penalties.