Section 7 of the Finance Act, 2019 provides that small companies are exempted from paying corporation tax. The Finance Act further defined small companies as companies that earn a gross turnover of N25, 000, 000.00 or less.
This provision amended the erstwhile section 23(1) (o) of the Companies Income tax Act (CITA) and replaced it with a new subsection (o) which will now read as follows:
Profits exempted
23 (1) There shall exempt from the tax:
(O) the profit of a small company in a relevant year of assessment.
The implication of the above new section 23(1) (o) of CITA is that companies that earn a gross turnover of N25, 000, 000.00 or less are exempted from paying companies income tax; in other words, income of small companies should not be subject to withholding tax.
However, while this provision is laudable as it means that small companies will be allowed to start operations on a big scale before being subjected to any form of income taxation, the implementation of this new section 23(1) (o) of CITA can occasion some difficulties.
A major challenge identified with implementation is how a person or company transacting with a small company will know that the company being transacted with is a small company such that a percentage of the income due to such company should not be withheld for tax purposes.
The Finance Act did not provide the yardstick for contracting parties to determine the company type they are contracting with under the classes introduced by the Finance Act. For instance, if ABC Ltd engages XYZ Ltd to supply diesel, how will ABC Ltd know the class which XYZ Ltd falls in order to decipher whether it should withhold a percentage of the income due to XYZ Ltd for tax purposes?
Apparently, from the definition of a small company in the Finance Act, the easiest way to know a small company is by checking their bank statements or audited statement of affairs. However, no law obligates a company to provide its contracting parties with its statements of account or statement of affairs just to consummate a transaction. Further, it is at the end of a relevant year of assessment that the determination of what class a company falls into can be accurately undertaken whereas the highlighted challenge would remain in respect of accruing revenue throughout the year, at the very least until such company passes the N25,000,000 threshold.
By implication, any company can claim to be a small company and there will be no medium for the other party to verify the size of the company it is contracting with in other to know if tax should be withheld from the income due to the receiving party.
It should be noted that Section 78 of the CITA requires that where a company makes a payment to another company or to an individual, either as interest (with interbank deposits and royalty excluded), rent, dividend, etc, such a company shall at the time of making such payment deduct an advance tax of ten per cent (10%) of the gross amount that is paid, and remit such deducted and withheld tax to the Federal Inland Revenue Service (FIRS) forthwith.
Furthermore, CITA provides sanctions for a party who derails in its obligation to withhold taxes. Some of the sanctions include payment by the defaulting party of the amount that ought to have been withheld plus interest at commercial bank lending rates and fines for failure to withhold.
Consequent on the above, companies are now left with a dilemma on how to balance their obligation to withhold under section 78 of CITA with the new provision of section 23(1)(o) of CITA that states that small companies are exempted from paying taxes.
A company that insists on full compliance with the provision of section 78 can run afoul of section 23(1)(o) of CITA that exempts small companies from taxation. While a company that is trying to comply with section 23(1)(o) of CITA does not have any feasible medium of differentiating between the various classes of companies created by the new Act.
A possible way of resolving this confusion is for companies to withhold in all transactions with other companies and pay over the withheld sum to FIRS. It is now left for any small company whose funds were wrongfully withheld to apply for a refund from the FIRS or be given a tax credit which can be used whenever they leave the bracket of small companies and will be liable to pay tax. Thankfully, FIRS has assured to improve their refund process and ensure that taxpayers get them timeously as against their erstwhile rigorous tax refund procedure.