Nigeria: FIRS Demands Deduction Of WHT/VAT At Source On All Forms Of Commission And Rebates Paid To Distributors And Customers

Federal Inland Revenue Service (FIRS) on Wednesday, 14 August 2019, issued a public notice informing taxpayers that commission and rebates earned by distributors and customers are subject to Withholding Tax (WHT) and Value Added Tax (VAT) and that these taxes should be deducted at source by companies making such payments.

The notice is hinged on the provisions of the Companies Income Tax (rates, etc. of tax deducted at source (withholding tax)) Regulations (The Regulations) and FIRS Information Circular No. 2006/02 (the Circular). Paragraph 3.8 of the Circular states that income accruing to a manufacturer will not be liable to WHT as it is deemed as transacted in the ordinary course of business. However, any commission earned by distributors and agents will be subject to WHT.

While the above regulation and circular support the deduction of WHT on payment of commission to distributors and dealers, it does not provide a basis for deduction of VAT at source on such payments. Also, no provision of the VAT Act mandates, generally, the deduction of VAT at source on commission paid to distributors and dealers. This therefore begs the question of whether the public notice is in line with the provisions of the law, especially with respect to the deduction of VAT at source on commissions or whether FIRS has the power to issue such directive.

The public notice further made a general reference to rebates irrespective of the mode of payment – whether by cash, credit note or good-in-trade. No distinction was made as to the type of rebates that may be subject to the application of WHT and/or VAT.

The public notice, therefore, raises some practical issues for consideration. For example, the applicability of VAT or WHT on rebates and discounts granted to distributors and customers where such distributors are actually wholesalers that are merely getting bulk purchase discounts. It is a subject of debate if the extant laws intend to subject rebates of all kinds and forms to WHT and VAT.

While the public notice appears targeted at the Fast-Moving Consumer Goods (FMCG) sector, the impact of this notice is far-reaching as it will be applicable to virtually all sectors.

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