The Small Company That Forgot Withholding Tax

Conclusion: On the turnover figure, Sabona appears to fall within the small-company band for companies income tax and may qualify for the 0% rate, but that does not mean it has no compliance obligations.

Reasoning: Under the Finance Act small-company regime, a company with turnover of N25 million or less may be treated as a small company and taxed at 0% on its profits. Sabona's turnover of N18 million is below that threshold, and it is a private Nigerian company. However, the exemption is not a licence to ignore the tax system. The company must still file its annual returns, keep proper records and respond to the FIRS audit. It should also confirm that it is not excluded from the small-company definition - for example, by the nature of its activities or by any group relationship - because the definition and exclusions have changed over time.

Loss point: The accountant's argument that the management fee need not be at arm's length because the company made a loss is wrong. Transfer pricing rules apply to controlled transactions regardless of profit. If the fee is excessive, the FIRS can adjust it and reduce the loss carried forward, which affects future tax. The loss does not make the transaction immune from scrutiny.

Obligations: Sabona is a withholding tax agent. It must deduct at source and remit to the FIRS within the prescribed time.

Payment	Amount	Likely WHT treatment
Management fee to Ghanaian affiliate	N6.0m	Deduct WHT at the rate for management or technical services to a non-resident (generally 10%) and remit. Check the applicable double tax agreement, but a treaty does not remove the obligation to deduct unless the conditions are met.
Director fees	N1.2m	Deduct WHT on director fees (generally 10%).
Rent to Nigerian landlord	N2.4m	Deduct WHT on rent (generally 10%).
Consultancy to an individual	N0.9m	Deduct WHT at the rate applicable to consultancy services for an individual; this may differ from the company rate, so the current schedule must be checked.

Who bears the liability? The company, as agent, is liable for the tax it failed to deduct. It cannot recover the tax from the payee by simply refusing to pay; it must account to the FIRS and may have to bear the cost itself. It is also exposed to penalties and interest for late deduction and remittance.

Key point: The small-company CIT status does not exempt Sabona from WHT obligations. WHT is a separate collection mechanism.

Risks:

1. Arm's length principle. The Ghanaian affiliate is a connected person. The management fee must be comparable to what an independent party would pay for the same services. A 'group charge' is not automatically deductible.
2. Benefit test. Sabona must show that it actually received the services and that they provided a commercial benefit. Invoices and board minutes describing the services are essential.
3. Documentation. The company has no transfer pricing documentation and has never filed a declaration. It should prepare contemporaneous documentation showing the nature of the services, the cost base, the mark-up and the benchmarking.
4. Adjustment risk. If the FIRS finds the fee excessive, it can disallow the excess and adjust the loss carried forward. Penalties and interest may follow.
5. Loss position. The fact that the company made a loss before the fee does not help; it makes the deduction more sensitive because it increases the loss.

Response to FIRS: Cooperate, provide the contracts, ledgers, invoices, evidence of services and WHT schedules. Do not submit fabricated documents. Consider a voluntary disclosure of the WHT failures and the transfer pricing position, and take professional advice on whether to request a mutual agreement procedure if a treaty applies. The board should also adopt a transfer pricing policy and ensure future related-party charges are reviewed before payment.