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 return, monthly.
Formal service agreements include written agreements, but does not include letter of engagement issued by professionals to their clients e.g. Lawyers and Accountants.
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 payees income tax ledger once PT payments have reconciled with ePT file.
Registration for Electronic Provisional Tax Lodgment
Payers are required to register and provide details by completing the TIN registration forms. For sole-trader businesses they are required to complete Section E of the TIN application form(IRS001) whilst for Partnerships & Companies they are required to complete Section D of the TIN application form(IRS003). All completed forms must be submitted at any FRCS office nearest to you.
Provisional Tax Not Applicable
Provisional Tax must not be withheld in the following situations:
- the payer is not conducting a business
- the payee is an employee
- the payee is a non-profit organization
- the payee is a Government body
- the total payments in a year to a payee will be less than $1000
- there is no formal or written agreement for the supply of services
Certificate of Exemption (COE)
COE is no longer issued to service providers (contractors) by FRCS effective from 1st January 2016.
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 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 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 Contractor
- PT Branch Number of Contractor (if any)
- Year and Month of Contractor’s 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 or Provisional Taxpayer is required to lodge with FRCS an Annual Withholding Tax Summary either on or before the last working day of February – of every year. For Example, PT summary for 2017 must be lodged on or before 28th February 2018. Responsible persons must inform FRCS in writing if they fall out of the registration requirements
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 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 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 2018 must be remitted to FRCS by the end of February 2018.
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 payments should be made prior to filing ePT”. In other words,the ePT system will not accept ePT files lodged if payment is not received.
Contractor’s Provisional Tax Withholding Certificate
Contractees must first be registered as Provisional taxpayers with FRCS before they can withhold any Provisional Tax. Section 120 of the Income Tax Act requires that 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 Ms. Anjani Nand on 3243580 or Mr. Dhineshwaran Gounder on 3243503 or email firstname.lastname@example.org, or visit any of our Fiji Revenue and Customs Offices near you.