Withholding Tax hike to hurt construction sector

Construction companies should brace up for more challenges as the increase in the Withholding Tax (WHT) rate on construction activities and other services by government will hurt operations, strain cash flows and undermine expansion plans.
“Recently, the FIRS announced its plan to return 5% WHT on construction firms from the current 2.5%,” said an industry player who does not want his name mentioned because he feels the matter is sensitive.
“This returns the burden of excessive taxes on construction firms in an economy under recession with most construction companies incurring huge losses. For example, Julius Berger announced at its AGM recently, a 70.4% drop in profit, to N2.440bn,” said the expert.
The Minister for Finance, on the recommendation of the Federal Inland Revenue Service (FIRS) increased the WHT rate to 5 percent from 2.50 percent previously held as the Federal Government is aggressively seeking to bolster non oil revenue with a view to financing capital projects.
A withholding tax (WHT) is an advance payment made by companies to the government at source from the invoices of the tax payer. Its main purpose is to deduct payment in advance of annual filings by companies and individuals.
It will be recalled that due to the inherent losses experienced by most construction firms, the immediate past Minister of Finance and the former Coordinating Minister of the Economy, Ngozi Okonjo-Iweala, granted an appeal by construction industry operators to reduce Withholding Taxes on construction business from 5 percent to 2.5 percent with effect from January, 2015.
Experts are of the view that the recent hike will further deal a blow on most firms operating in the sector, as many of them are mulling mass workforce downsizing on the back of a weak naira, foreign exchange shortages, dogged inflation and the delay in the passage of the budget.
Taiwo Oyedele a renowned tax expert with PricewaterhouseCoopers (PWC) says considering the difficulty in obtaining tax refunds and the huge cash flow impact on players in the construction industry, the retraction of the reduced rate will leave the perennial excess withholding tax credits problem unresolved.
“At a corporate income tax rate of 30%, a minimum net profit margin of 16.7% is required for a business to fully utilise its WHT credits of 5%. In the case of a company that suffers 10% WHT, a net profit margin of 33% is required. Where the level of profitability for tax purposes is less than these thresholds, the affected business will perpetually be in an excess WHT credit position,” said Taiwo Oyebade, renowned tax experts with PWC.
Tola Olamigu, a tax expert with DK-Bas, a firm of chartered accountants, said, most companies in the industry are not making much profit as people think, that informed the decision of the former minister to lower the rate.
With regard to refund, Olamigu said, “refund in our country is very difficult because of the paper work. “What the relevant tax authorities do most times is that they offset the tax overpaid with future liabilities.
According to a recent second quarter GDP report by the National Bureau of Statistics (NBS), the construction sector declined by 6.28 percent from 5.38 percent in the previous quarter.
Construction activities in Africa’s most populous nation have been tepid, given the sudden drop in oil, which accounts for two-thirds of government revenue and nearly all of foreign exchange earnings.
The dwindling oil revenue means both government and households will be cash strapped and unable to undertake capital projects.
Nigerian’s economy contracted by 2.1 percent in the second quarter of 2016. The International Monetary Fund (IMF) forecasts the economy will contract by 1.8 percent for the full year 2016.
Despite the challenges stifling the growth of the sector, analysts see an uptick in construction activities culminating in job creation and driving Nigeria’s economic growth, if government increases incentives for the sector.
“We see construction leading to job creation in many areas,” said Melissa Cook, CEO at African Sunrise Partners LLC, an investment strategy firm focused on the sub-Sahara African market.
“Housing and commercial construction are well known for having a multiplier effect on local job creation”, “said Melissa.