FIRS Issues Public Notice on Applicability of VAT & WHT on Compensations to Distributors, Agents, Others.

In its Public Notice of 14 August 2019, the Federal Inland Revenue Service (FIRS) has asserted that compensations/ commissions paid to agents, distributors, dealers and retailers by Principal Companies [with particular reference to those in the Fast Moving Consumer Goods (FMCGs) sector] are subject to Value Added Tax (VAT) at 5% (payable in addition to the compensation value) and Withholding Tax (WHT) deduction (by the principal companies).

In practice, companies in the aforementioned sector (and companies in general who frequently make use of middle men to sell their goods or services) usually give out incentives and compensations to their dealers/ distributors/ retailers/ business partners etc. in the form of commissions, rebates; by cash, credit notes and goods in trade. The FIRS is saying by this Public Notice, that all such compensations, whether in cash or kind, must be quantified and subjected to the requirements of the laws on VAT and WHT.

For reference, Value Added Tax (VAT) is a tax charged by the supplier of VATable/ taxable goods or service (in this case, the distributors/ retailers/ agents are the suppliers of this service) at 5% of the value of the VATable/ taxable supplies (goods and/ or services).

Withholding Tax (WHT) on the other hand, is basically an advance payment of income tax which may be used to offset or reduce annual income tax liabilities. It is to be deducted by every taxpayer (who mandatorily becomes an agent of WHT once they are contracting with suppliers/ distributors/ agents/ dealers of goods/ services) at the point of paying or compensating the supplier/ dealer/ distributor/agent as the case may be.

For further clarifications, agents of WHT include;

  1. Corporate bodies (companies).
  2. Individuals, firms, partnerships and sole traders.
  3. A statutory body, a public authority and other institutions or organizations.
  4. Government Ministry, Department or Agency and Local Government.

Not all transactions are however subject to WHT. Certain transactions are exempted such as;

  1. Direct purchase across the counter.
  2. Direct purchase of raw materials from supplier as distinct from contract of supplies.
  3. Sale in the ordinary course of business.
  4. All imported goods.
  5. Inter-bank interest.
  6. Income exempted from income tax.
  7. Claims in insurance business.
  8. Interest on bonds.
  9. Dividends redistributed by Holding Companies.

Rates of WHT for corporate and individuals on transactions are as follows: –

TRANSACTIONSCOMPANIES (%)INDIVIDUALS (%)
Royalties105
Contract of Supplies55
Contract of Construction55
Dividend1010
Technical Service105
Professional Service105
Consultancy105
Management Service105
Commission105
Rent1010
Interest1010
Hire, Charter, Lease1010
Directors fees1010

For help with WHT and VAT compliance issues, please do not hesitate to send us an email via clients@vi-m.com, and we will get to you shortly.