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Policy – 2% Resident Contractor Withholding Tax

Policy – 2% Resident Contractor Withholding Tax

July 26, 2019

The Guyana Revenue Authority continues to sensitize taxpayers, the general public and other stakeholders on matters pertaining to the various legislation it administers in order to promote voluntary compliance. In this regard, the following information seeks to give clarity on the statutes, rules and procedures which would apply to the application of the 2% resident contractor withholding tax.

DEFINITION OF CONTRACTOR

Section 39 (14) of the Income Tax Act Chapter 81:01 states that for the purpose of subsection (13), “contractor” means any person who is a resident and who has been awarded a contract for providing or supplying independent personal services for reward, other than as an employee.

Section 2 of the Income Tax Act Chapter 81:01 defines ‘resident in Guyana’

DEFINITION OF ‘RESIDENT IN GUYANA’

When applied to an individual means an individual who:

  1. Resides permanently in Guyana except for such temporary absences as to the Commissioner-General may seem reasonable and not inconsistent with the claim of such individual to be resident in Guyana; or
  2. Resides in Guyana for more than 183 days in the year.
When applied to a body of persons means:
  1. Any, body of persons the control and management of whose business are exercised in Guyana.
DEFINITION OF ‘NON-RESIDENT COMPANY’ AND ‘RESIDENT COMPANY’

Section 2 of the Corporation Tax Act, Chapter 81:03 defines a ‘non-resident company’ as a company, the control and management of whose business are exercised outside of Guyana. This section also defines a ‘resident company’ as a company, the control and management of whose business are exercised in Guyana.

 

NEW LEGISLATION AND APPLICATION

The Provisions of Section 39 (13) and (14) of the Income Tax Act, Chapter 81:01 provides the legal basis under which the tax is being administered. Sub-section 13 states the following:

  1. Where a person makes any payment in excess of five hundred thousand dollars (G$500,000), either directly or indirectly, to a contractor for the supply of labour or for the hiring of equipment, that person shall deduct tax from the gross amount of that payment, excluding value-added tax, at the rate of two percent (2%).
  2. Any contractor may apply to the Commissioner-General for an exemption of compliance with paragraph (a), which may be granted where the Commissioner-General is satisfied that receipts of that form of income have been regularly disclosed in the returns of income of the contractor and any tax on that income has been paid to the satisfaction of the Commissioner-General.
  3. Production of evidence of exemption by the contractor to a person making any such payment shall be sufficient authority for the payer to make payment of the gross amount without deduction of tax.
  4. In the case of contractors in operation for less than one year, the Commissioner-General may request a deposit representing an advance payment of the tax payable under paragraph (a) and calculated in accordance with information made available to the Commissioner-General by the contractor.
  5. The withholding tax in respect of any payment in any year of income shall be given credit in computing the tax payable by the contractor for the year of assessment following the year of income.

Sub-section (14) defines the term ‘contractor.’ This definition is at the beginning of this policy.

The following also applies in the application of the 2% withholding tax:

    1. The 2% withholding tax is not a new tax. It is an initial payment of income tax that can be offset against quarterly advance taxes or in the final computation of income tax for a particular year. This tax is deducted by the contractee from the payment made to the contractor. The amount withheld should be remitted to the GRA by the contractee within 30 days from the date the deduction was made.
    2. The deduction of this tax applies to RESIDENT CONTRACTORS only.
    3. The tax is applicable only for the supply of labour (other than as an employee) and the hiring or rental of equipment as stated in (a) above.
    4. Where there is a written contract or sub-contract pertaining to the supply of labour or for the hiring of equipment, the tax would be applicable. However, the tax would also be applicable even in the absence of a contract between the two parties.
    5. Where several disbursements are made for the provision of labour or the hiring of equipment for a particular contract, the 2% would apply on any payment made after the first disbursement exceeding $500,000.00, notwithstanding the value of the disbursement or contract.
      However, the value of small written contracts should be aggregated for the purpose of applying the 2%. For example, if a contractor has five (5) contracts with a contractee and each contract is valued $200,000 then, on the full payment of the first contract sum of $200,000 the 2% would not apply. Similarly, on the full payment of the second contract sum of $200,000 the 2% would not apply. Notwithstanding, before payment is made for the third contract, 2% is calculated on the aggregate of the three (3) contracts and withheld from the third contract sum. Therefore, the 2% will be calculated on $600,000, that is, $600,000 x 2% = $12,000. Hence $12,000 will be deducted/withheld from the value of the third contract and the difference of $188,000 paid to the contractor. Thereafter, on the value of every contract or partial disbursement therefrom, 2% will be withheld.
    6. The tax is deducted only when the payment/disbursement by the contractee to the contractor exceeds $500,000 whether that payment is the entire contract sum or a partial disbursement.
    7. Where the contractee is charged VAT on the contract sum the 2% withholding tax is applied to the value of the contract, excluding VAT. For example, if the contract sum and payment/disbursement payable is $590,000.00 and VAT of $72,456.00 is included in the sum, the 2% will be withheld on the amount that does not include the VAT, that is, the cost before VAT is added. Hence, $590,000.00 less VAT of $72,456.00 is equal to $517,544.00. Therefore, the 2% will be withheld from the $517,544.00. To summarize, the 2% should be withheld from the sum payable, EXCLUSIVE OF VAT. When the VAT is deducted and the amount remaining is $500,000. 00 or less, the 2% withholding tax would not apply since the actual payment to be made does not exceed $500,000.00.
    8. A signed letter issued by the Commissioner-General would be sufficient proof that the contractor is exempted from the payment of this tax. However, the entity/person making the payment should retain a copy of such letter as proof that no 2% withholding tax should be deducted.
    9. Any contractor who may wish to be exempted from the payment of this tax should make such a request in writing to the Commissioner-General and such request should be supported by documentary evidence that they have regularly disclosed such income in their returns and have paid the applicable tax.
    10. The tax is applicable to payment(s) made on contracts that spans more than one calendar year or further periods.
    11. Where there is a variation in a contract, the extended period for the contract would form part of the original contract.
    12. A contractee who fails to remit tax deducted shall be held accountable for the outstanding tax.
    13. This tax will be offset against the quarterly advance taxes payable to the GRA by the resident contractors. Also, the total 2% withholding tax deducted in any year of income would be credited to the final tax payable by the taxpayer in the year of assessment following the year of income.
    14. If in the opinion of the Commissioner – General there is any indication that contractors and/or contractees do anything to avoid deducting and remitting the tax, including but not limited to contract splitting, the Commissioner – General can demand that the contractee deduct the tax and remit it to the Guyana Revenue Authority.

Contact Us:
Tax Advisory Services Section
Communications & Tax Advisory Services Division
Guyana Revenue Authority
200 -201 Camp Street
Georgetown
Guyana
Tel: 227-6060 | 227-8222 Ext: 1201-1204
Email: gravat@gra.gov.gy
Website: www.gra.gov.gy

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