Can you recover Withholding Tax deducted?

Imagine you rented out your residential premises to an organisation that was willing to use it as an office. After signing the contract, they then pay you less a certain percentage, the difference, in their explanation being withholding tax (WHT) or “Tax.” Is this tax conclusive? Is it a final tax? Can it be claimed? These questions linger in the minds of many taxpayers and many of them often never get to know the answers. It is only when they get additional assessments from Uganda Revenue Authority (URA) or any similar audit queries that many taxpayers realise that their position of ‘The tax was already paid’ is not conclusive.

Taxpayers are expected to make a full declaration of all transactions made during the tax year. This also includes transactions on which the WHT was not deducted. After the computation of the tax payable for the tax year, the withholding tax deducted (WHT credit) is then deducted from the tax payable to determine whether the tax payer is in a claimable or payable position. Therefore, the WHT credit is not always conclusive. You can either claim it or make additional payments on top of it.

Withholding tax is applicable on payments made by non-individual taxpayers such as government agencies, gazetted NGOs and companies. In respect of payments to resident companies or individuals, WHT credit is an advance tax.

Withholding tax which is regulated by the Income Tax Act 1997 is deducted by the WHT agent upon making a payment to their suppliers. It is paid on the TIN of the WHT agent who in turn files a WHT tax return by the 15th of the next month. Upon approval of the WHT return, they then generate a Tax Credit Certificate (TCC) for the benefit of the supplier. This then becomes a tax credit for income tax purposes. This applies to all payments whose aggregate total exceeds Shs1 million in a particular tax year. It does not apply to taxpayers who are exempted from WHT during the period of the transaction.

Although there are several forms of Withholding tax, the most common is the Withholding tax on payment for goods and services under section 119 of the income tax act at 6 per cent.

As withholding tax is only an advance payment, it is therefore upon the taxpayer (supplier) to file their final return and determine their income tax position. If the WHT deducted is less than the computed income tax, then the taxpayer liability due is the difference. But if the WHT credit is more than the income tax computed, then the taxpayer is expected to apply for a refund of the difference. There may be many taxpayers who have failed to claim for refund as a result of WHT credit. Many of them are reluctant to claim refund because of the fear of scrutinising their records or thinking the refund process takes long.

WHT credit in most affects the working capital of the business which affects daily operations.

Withholding Tax refund

Assume John buys a Toyota Harrier at Shs45 million. This is inclusive of the total tax paid of Shs19.6 million (Including withholding tax of Shs1.03m). If John sells the car at Shs44 million, his selling price is less than the purchase price and thus has sold the car at a loss. Assuming there are no other transactions for the tax year, then John would be entitled to a refund of the withholding tax of Shs1.03 m paid at importation. To put it simply, a person who is withholding tax exempt would not suffer this tax as it was simply an advance tax.

After filing his return for the tax year, John is then expected to fill in the URA tax refund claim form DT 3008 stating the reason for the refund. Section D of this form contains the bank account details of the claimant where the refund amount will be deposited by URA once the claim is successful. This form should be submitted to John’s nearest tax office. URA is expected to process this refund within 30 days of receipt of this application. Hopefully, in the future, URA could automate the process for application for WHT refund (as they did with the previously tedious process of WHT exemption application) and other taxes.

For those in gainful employment whose employers deduct and declare their right amounts of PAYE, the cash refund process of withholding tax suffered at importation for example on a motor vehicle should be easier; as long as these individuals have only employment and no other source of income. For non-individual taxpayers (like companies) and other trading business entities, they are expected to submit their income tax returns at the end of the year, declaring all income sources. They are expected to submit the details of the withholding tax deducted under the section of withholding tax paid. The details of the tax credit certificate should be provided in the return.

Thereafter, the process of refund claim can then begin by filling the URA manual form DT3008. The taxpayers are also expected to furnish URA with documents to support their claim in time.

But for most taxpayers, withholding tax can only be used to offset income tax liability and not any other tax heads such as PAYE, VAT.

The author is a tax consultant at Leighton Meridian.