The consequences of failure to deduct Withholding Tax from service providers

The new Inland Revenue Act No 24 of 2017 requires persons who are engaged in a business to deduct 5% as withholding tax when making payments to resident individual service providers. 

 Ambiguous situations 

The consequence of the failure to withhold on both the withholding agent and recipient emphasises the importance of understanding and complying with the obligation to withhold accurately. However there may be circumstances where diligent withholding agents may be faced with uncertainty in identifying the persons from whom they should withhold due to the manner in which the law is worded. There are several categories of persons listed in the Gazette in addition to the service providers enumerated in the Act. 

(a) Independent service providers such as lawyers, accountants, doctors, software developers, engineers, researchers, academics and “similar service providers”

(b) Specifically identified service providers and persons who are providing “similar services or connected work”

The specifically identified service providers listed under this limb are construction, security, janitorial, caterers, event organisers, catering, designers, dress makers, tour guidance, entertainers, agency functions.

(c) Management services 

(d) Any type of vocational services provided as an independent service providers 

All categories have been stated in an inclusive manner with examples, leaving room for other types of service providers also to be attracted into withholding tax net.  The wording in law may cause great inconvenience in practice to diligent withholding agents as the law leaves room for speculation and judgement. 

For instance actuaries, architects, surveyors, investment managers, health care service providers such as therapists, dieticians, transport service providers, supply management services, free lance journalists, recruiters and head hunters, real estate brokers, beauticians, certified professional managers, pleaders at labour tribunals, comperes at events, TV talk show hosts, film and teledrama actors, labourers, etc are not expressly mentioned in the Act or the Gazette. 

Of course on application of “Ejusdem Generis” rule one may deduce that payments to architects, actuaries, surveyors & other professional service providers would attract 5% WHT. (In case of statutory constructions “Ejusdem Generis” rule dictates that when general words follow a series of specific words of kind or class, such general words should be construed to restrict its meaning to persons or things of the same kind or class)

The application of “Ejusdem Generis” to the provision itself is a challenge due to the manner of drafting the same as it also includes researchers and academics who are not exactly professionals though they may possess a higher intellectual ability in the same category as others specifically identified. 

Who would fall within “connected or similar service providers” in the limb (b) of the Gazette ? Would transport service providers, recruiters and head hunters, real estate brokers, casual workers who are not employees, labourers, trainers fall within the ambit of it? 

On the other hand what would fall within the scope of vocational services? The Inland Revenue Act doesn’t provide for a definition. Wikipedia refers to the term as an occupation to which a person is specially drawn or for which they are suited, trained or qualified. 

If the purpose and rationale of the withholding mechanism is to ensure that all resident individuals are within the income tax net, would some of the above mentioned categories also be subject to withholding? In the exercising the judgement to withhold are withholding agents called upon to do so in the context of the purpose and rationale enacting the rule? The penal provision on the withholding agents who default on their obligation carry a tax cost to themselves. On the other hand withholding agents would also be under pressure from the service providers who would insist that their payments should not be subject to 5% WHT due to not being listed in the Act or the Gazette. 

Registration, Remittance, WHT Certificates and Annual Statements 

 A person who is liable to deduct WHT must first register with the tax office. The person who deducts the WHT has the obligation of remitting such tax deducted within 15 days from the end of each calendar month. 

a) Withholding tax certificate 

The withholding agent has the obligation to issue a Withholding Certificates to each recipient of payments within 30 days from the end of each calendar month in which such payments are made. The period of coverage of a withholding certificate is a calendar month. It should include the following content. 

•  The amounts of payments made by the withholding agent to the recipient during the month 
• The amount of tax withheld 

b) Annual Statement 

The person also has the legal obligation of furnishing an Annual Statement covering the period year ending 31 March within 30 days (i.e. prior to 30 April) to the CGIR. This Annual Statement must set out: 

• Total payments subject to WHT during the year
• The name, address and Taxpayer Identification Number (TIN) of the recipients
• The Act also empowers CGIR to specify any other information to be included in the certificate to be issued by the withholding agent

c) Claiming WHT credit

An inequitable rule from the perspective of the recipient withholdee, pertaining to claiming credit for WHT suffered at source is contained in the Act. As per the inequitable provision a withholdee may claim credit for WHT, only if the withholding agent has remitted the WHT deducted to the IRD. It is certainly inequitable to penalise a withholdee who has suffered WHT at source for the delinquency of a withholding agent who does not comply with the provisions of the Act. It’s beyond the control and powers of a withholdee to compel a withholding agent to remit the WHT that has been deducted from him/her. 

A withholdee is entitled to claim credit for WHT deducted at source, if such WHT has been remitted to the IRD by the withholding agent. In addition where the withholding agent has failed to deduct, but within 15 days of receipt of such payment if the recipient pays such amount equal to WHT to IRD, the recipient obtains the legal right to claim tax credit for such amount. For the purpose of claiming tax credit, as there would not be a WHT Certificate, the recipient would have to rely on the paying slip for this purpose. 

The Act also provides the recipient of a payment to claim WHT credit, even if the payer has “pocketed out” WHT, without deducting the WHT from the quantum of payment due to the recipient. But an issue arises as to the procedure to be followed for claiming such credit as the recipient would not be in possession of a WHT Certificate in this scenario. 

d) WHT Directions 

Under certain circumstances the income tax liability of a recipient may sometimes be lower than the amount withheld as WHT. In order to address such circumstances if the Act contained a mechanism for the CGIR to provide directions to withholding agents to refrain from deducting all together or deduct WHT at a lower rate, such a provision would have provided much relief to affected withholdees. The withholding agents should refrain from deduction of WHT under two circumstances under the Act. i.e. a certificate issued by CGIR being produced by tax payers who are registered for Economic Service Charges and where the payment is being exempt from income tax. 

Consequences of failure to withhold 

i) On the ‘payer’ 

Payer (withholding agent) must pay the amount that should have been withheld at the time WHT is due to the tax office, even if the withholding agent has failed to deduct the tax. Unlike the previous Act, the new Act expressly empowers and provides a legitimate right to such a withholding agent who pays to IRD from its own pocket to recover the same amount from the recipient. 

A withholding agent who fails to account for withholding taxes to the tax office is subjected to a disadvantage by the new Act. A person who defaults in remitting WHT to the tax office is not entitled to obtain a deduction for such payments made to the recipients, at the time of computation of the taxable income of such person. This new rule has been designed to ensure that all withholding agents would comply with their withholding obligations as failure would result in an increase of their tax cost. 

ii) On the ‘recipient’ 

The Act imposes joint and several liabilities on both the payer and the recipient with regard to the amount of withholding taxes not deducted. The recipient of a payment where WHT has not been deducted has the legal obligation to pay the amount of WHT not deducted to the tax office within 15 days of receiving the payment. As the law expressly permits right of credit for such payments the recipient may have to rely on paying slips as evidence for exercising the right to claim such credit.