2.5% Withholding Tax Rate: Who are the intended beneficiaries?


2.5% Withholding Tax Rate

Who are the intended beneficiaries?

The reduced WHT rate is stated to apply to companies involved in “all aspects of building, construction and related activities…“. Does this rate therefore have effect on such activities by companies in both non-oil and oil & gas sectors?

Taxes payable on income, transactions or other taxable activities are not due at the same time either because the taxable activities do not occur within the same time frame or the law itself has stipulated different timeframes for the tax to be paid. For planning purposes however, Government must be able to determine upfront the quantum of its tax take as well as manage the time value implications of receipts from tax. Obviously, Government cannot always wait till the end of a fiscal year for all its income from taxes to come in before it commences execution of programs that should have been executed in the preceding year.

This is what makes the operation and administration of withholding tax (WHT) critical to Government's fiscal and economic planning. The basic rule of WHT is that the duty to deduct at the applicable rate arises whenever payment is made or credited, whichever first occurs, by the payer in favour of the beneficiary.  After deduction, the payer is required to remit the amount deducted to the relevant tax authorities (RTA) within twenty-one days of the transactions occurring. The amount remitted is available to the beneficiary as a credit which can be set-off against its eventual tax liability for the relevant accounting period or year of assessment.

The operation and administration of WHT is not without its challenges some of which we have reviewed in previous InsideTax publications. One notable specific industry challenge was the applicability of WHT rate at 5% to the construction sector. To address this challenge, the WHT Amendment Regulations were issued and it introduced the WHT rate of 2.5% for the construction sector. This was in January 2015 when the Federal Government issued an official Gazette amending the Companies Income Tax (Rates etc., of Tax Deducted at Source (Withholding tax)) Regulations, 1997 (Regulations).

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2.5% Withholding Tax Rate: Who are the intended beneficiaries?
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