The Finance Act, 2019 includes a provision in Section 81 (2) of the Companies Income Tax Act Cap C21 LFN 2004 (as amended) that the Withholding Tax (WHT) rate on roads, bridges, building and power plant construction contract shall not exceed 2.5 per cent. Before the signing of the Finance Act into law by President Muhammadu Buhari in February 2020, the WHT rate on these contracts use to be 5 per cent.
However, for the purpose of clarity and appropriate interpretation of this reduction, the Federal Inland Revenue Service has issued an Information Circular. The Circular gives the following clarifications:
- Other forms of construction contracts are not affected. This means that the WHT rate for other contracts not covered by the reduction in rate remains at the specified rates in the relevant laws and regulations.
- WHT rate of 2.5% is applicable to construction work only. Any part of the construction works (other than the actual construction work) subcontracted shall attract WHT at the rate specified in the law. For example, subcontracts for supply of materials, equipment, labour, etc. or services such as survey, architectural design, soil test, environmental impact assessment, structural design etc., shall not qualify for 2.5% WHT rate, but shall attract WHT at the rate specified for such supplies or services in the law.
- Where construction work and other activities that are preparatory, incidental or ancillary to that construction (e.g. survey, architectural design, soil test, environmental impact assessment, structural design, etc.) are embedded in a construction contract, the applicable WHT rate on the entire contract sum shall be 2.5%. However, any subcontract thereof shall attract WHT at the applicable rate in line with paragraph 2 above.
The Service may, at any time, withdraw or replace this Circular or publish an amended or updated version.