The Income Tax Act levies a 3 percent withholding tax on payments made in respect of construction contracts. The tax is supposed to be deducted by any payer of amounts arising from a construction contract, whether written or verbal. The payer is then required to pay the tax to BURS and subsequently issue a tax certificate to the payee, as proof of withholding. In practice, the tax is not deducted on mobilisation fees as most taxpayers treat it as some sort of an advance and not a real payment for services rendered. Whilst this is true to some extent, that does not take away the fact that the payment is made in respect of a construction contract, which automatically triggers tax. In this article, words importing the masculine shall be deemed to include the feminine.
THE 3 percent TAX
The 3 percent tax is supposed to be deducted in all instances in which someone makes payments to a contactor in respect of construction operations. Whilst the phrase ‘construction operations’ is not defined in the Act, it is commonly accepted among taxpayers that the tax must be deducted on payments for the construction of offices, houses, roads, warehouses, sewerage works, bridges, among others. In practice, only persons in business can deduct such tax as individuals not in business cannot be tasked with the duty of collecting tax on behalf of government. The tax is not deductible when payments are made for contracts exclusively for architectural designs, engineering, survey works and related professional services. Further, the tax cannot be deducted in instances where the payment is made to someone registered with the PPADB under classes A, B and OC in respect of contracts which do not exceed P2million.
THE INCIDENCE OF THE TAX
It is critical to fully comprehend the way withholding taxes work in order for a proper determination to be made regarding mobilisation fees. The first thing to note is that all withholding taxes in Botswana are triggered by payment. For example, section 57 of the Act prescribes that, ‘every person who makes any payment to any person under a contract relating to construction operations shall deduct tax from such payment…’ Further, paragraph 1 of the Sixth Schedule to the Act states that, ‘where any person enters into a contract under which payments will be made to which this Schedule applies, and where the total of such payments will exceed P5,000, that person shall notify the Commissioner General in writing within 30 days from the date of entering into the contract…’ What is evident from both extracts from the Act is that the tax is closely linked to and inseparable from the ‘payment’ of moneys due to the construction operations. In fact, the term ‘payment’ was used four times in the above extracts, which is an indication that one cannot separate payment from withholding taxes. Having made the above analysis, it is now critical to turn to the tax treatment of mobilisation fees.
Most contractors request their clients to pay them a mobilisation fee before commencement of the construction works. That fee is used to, among others, cover the costs of site preparation and purchase of key materials which allows the contractor to commence construction. The mobilisation is usually paid way before the actual construction works commence. On the other hand, most taxpayers are used to deducting the 3% tax on certified works, which results in them not deducting the 3% tax from mobilisation fees.
Having noted that the Act undoubtedly levies withholding taxes on payments, it is therefore paramount to state categorically that the tax is also applicable on mobilisation fees. The Act does not state that the tax is deductible only when works have commenced or on certified works but it repeatedly uses the word payment, which is a clear sign that the legislature wanted all forms of payments made in respect of construction works to be subjected to the 3 percent tax.
It is also critical to note that if a payer does not deduct the 3 percent tax on the said fees, BURS may levy late payment interest on them at the rate of 1.5 percent per month or part of a month. The payer will not lose anything by deducting the tax butactually creates exposures by not deducting the 3 percent withholding tax as prescribed by the Act.
Jonathan Hore is the Managing Tax Consultant of Aupracon Tax Specialists and feedback can be relayed to firstname.lastname@example.org or 7181 5836. This article is of a general nature and is not meant to address particular matters of any person.