Who is required to deduct the 5% Provisional Tax (PT)?
A business making commission payment or payment under a contract for services where there is a formal contract is required to withhold 5% withholding tax (also known a provisional tax).
Formal contracts or formal service agreements include written agreements, but does not include letter of engagement issued by professionals to their clients e.g. Lawyers and Accountants.
Provisional Tax must not be withheld under the following:
Certificate of Exemption (COE)
COE is no longer issued to service providers (contractors) by FRCA effective from 1st January 2016. For COE’s issued in 2015 that has expiry dates lapsing in 2016 will all be automatically deemed revoked effective from 1st January 2016.
Computation of Provisional Tax
Assume service provider X has a formal contractual agreement with Company X to provide cleaning services. Service provider X is also registered for VAT and will issue VAT Inclusive invoice of $1090 monthly for cleaning services rendered.
Calculate provisional tax to be withheld by Company X from the monthly payment.
NB: Company X must withhold the provisional tax on the VAT exclusive amount.
Step 1: Calculate VAT
VAT = VAT Inclusive Price x Tax Fraction
= $1090 x 9/109
Step 2: Calculate VAT Exclusive Price (VEP)
VEP = VAT Inclusive Price – VAT
= $1090 – $90
Step 3: Calculate PT
PT = VAT Exclusive Price x 5%
= $1000 x 5%
Can the contractors claim this 5% provisional tax deducted when they lodge their return at the end of tax year?
Yes, the 5% Provisional Tax is an advance tax which will be allowed as a credit against any tax assessed on the business after the related year’s original income tax return is assessed.
Threshold for Provisional Tax Deduction
PT should only be withheld by a registered PT payer if the aggregate annual payment during any time of the year exceeds the threshold of FJD$1,000. If the aggregate annual payment is less than the threshold, then PT must not be withheld.
The onus is on the payer to ensure that once the contractual payments to a contractor exceed FJD$1,000, he/ she is required to commence withholding 5% PT from subsequent payments to the same contractor in future contracts.
Due Date for payment of Provisional Tax withheld
Provisional Tax withheld by a payer must be remitted to FRCA by the end of month following the month in which it was deducted from the contractual payment. For example, PT withheld in January 2016 must be remitted to FRCA by the end of February.
The payer will be penalized for late payment penalty (25% of the tax withheld) if the payer fails to remit the tax withheld to FRCA by the due date.
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