Provisional Tax – Contract for Service
Who is required to deduct the 5% Provisional Tax (PT)?
A business making a commission payment or payment under a formal contract for services is required to withhold 5% withholding tax (also known a provisional tax). The payer (person withholding the tax) is required to pay the tax collected and also file a EPT File, monthly.
Section 1149 applies to contracts for services. A contract or an agreement may be either express or
implied in form.
Express contracts may include written or oral contracts. Under express contracts, there is a clear
indication that the parties intend to be bound by a legally enforceable contract.
How is PT collected accounted for?
The Electronic Provisional Tax (EPT) is a new reporting system which allows a Payer to file monthly details of Provisional Tax (PT) withheld, electronically to FRCS. Under the EPT system, deductions are credited to the Payee’s income tax ledger once the EPT Files are successfully uploaded and the PT payments have reconciled with EPT file.
Registration for Electronic Provisional Tax Lodgment
Since the introduction of NTIS system, all the Contractees are to register for Provisional Tax via the Portal.
Conditional requirements on the Application of Provisional Tax In determining whether or not PT applies, the CEO provides that the following conditional requirements must be met;
- The service provider must be an “independent contractor” for tax purposes;
- a contract (express or implied) exists;
- the contract for service is a legitimate one and promotes arm’s length principle, meaning
that the contract price between associates must be based on the fair market value;
- the total payments paid to any one person is more than FJD$1,000 in a tax year.
Certificate of Exemption (COE)
The Provisional Tax system was amended in the Covid-19 Response Budget 2020 and is applicable to Payers who engage in contracts for services in Fiji.
Hence, there was a reintroduction of COE from 1st April 2020 as per the COVID -19 Budget allows the recipient of the service to receive the gross contractual payment without any Provisional Tax (PT) deducted from the payment.
Computation of Provisional Tax
Assume service provider X has a formal contractual agreement with Company Y 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 Y from the monthly payment.
NB: Company Y 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%
Monthly Electronic Provisional Tax (EPT) File
The EPT File must be lodged on or before the last day of the following month in which the 5% PT was deducted from the Contractor. The EPT file must be in an approved format that meets the requirements for Validation and Reconciliation for FRCS purposes. The EPT must have the following details:
- TIN and Name of Contractee
- PT Branch Number of Contractee
- Year and Month of the EPT File
- TINS and Names of all Contractors receiving contract payments for the month
- Gross Contract Amount (VEP) and 5% PT for each Contractors
- Total Sum of Gross Contracts Amount (VEP) and 5% PT for all Contractors during the month.
A Contractee is still required to submit EPT file even if there was no Provisional Tax deducted during a month.
Annual Withholding Tax Summary
A Contractee is required to lodge with FRCS an Annual Withholding Tax Summary for Year 2016 and prior if the Summary has yet not been lodged with FRCS.
Since the introduction of Electronic Provisional Tax (EPT) filing from Year 2017 the PT Annual Summaries is not required to be lodged.
Advance Tax Payment
In the new electronic system, the PT paid will be credited to the Contractors Income Tax ledger account and will be recognized as Advance Tax payment on Contractors Income Tax ledgers. The new process will ensure efficient and timely reconciliation of monthly PT payments at FRCS. In other words, the 5% PT 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.
Due Date for payment of Provisional Tax withheld
Provisional Tax withheld by a Payer must be remitted to FRCS by the end of the month following the month in which it was deducted from the contractual payment. For example, PT deducted in January 2020 must be remitted to FRCS by the end of February 2020.
Failure to comply with filing and payment obligation will incur 20% and 25% penalties under Section 43 & 44 of the Tax Administration Act 2009, respectively.
Since the due date for remitting and filing Electronic Provisional Tax (EPT) is on a monthly basis, “It is compulsory that PT payments should be remitted to FRCS prior to filing EPT”.
In other words, the EPT files would be rejected if the EPT Files are uploaded prior to remitting the PT payments.
Contractor’s Provisional Tax Withholding Certificate
Contractees must first be registered as Provisional taxpayers with FRCS before they can withhold any Provisional Tax. The Contractees withholding the Provisional Tax needs to issue a Provisional Tax Withholding Certificate to the provider of the service after deducting the 5% Provisional Tax. The Contractee must provide to the Contractor a stamped and signed Provisional Tax Withholding Certificate. The Provisional Tax Withholding Certificate is a critical documentary evidence to the Contractor showing gross contract payment and the Provisional Tax deducted. This certificate must be issued every time a deduction is made.
For more information, please contact Mr. Dhineshwaran Gounder on 3243503 or Ms. Anjani Nand on 3243580 or email email@example.com, or visit any of our Fiji Revenue and Customs Offices nearest to you.