This is especially true in Liberia because the tax administration system has a very drastic way of dealing with those who have not complied fully, intentionally or unintentionally. The penalty and Interest regime is very harsh and could drive anyone out of business.
It is against this backdrop that The Capitol Times thought it would be a good idea to provide some very basic and elementary information about the tax administration in Liberia. What this piece seeks to do is to open the investor’s eyes to certain hard facts that he/she needs to watch out for. But more importantly that the investor should seek detailed tax advice from professional accountants, tax lawyers and the Liberia Revenue Authority (LRA) in other to ensure that they get the right tax advice and guidance.
In this particular issue, the emphasis in hereby placed on “tax withholding”. Usually, folks tend to confuse “tax withholding” with “withholding tax”. There is no tax in the Liberian system called “withholding tax”. However, the Liberian tax system does utilize “withholding” as a major means of ensuring compliance.
The tax system places a lot of responsibilities on “payors” to withhold whenever they make payments of certain kinds. In such a case, the tax liability is not the payor’s but rather the payee’s but it is the payor who MUST withhold and remit to the Government. However, if the payor refuses to withhold and remit within the time frame specified, they bear the full weight and responsibility of payment. They will have to pay “interest” and “penalty” on the full amount that should have been paid because they failed to perform their “withholding agent” role under the Liberian Revenue Code (LRC).
This can become very painful and appear as being unjust and unfair because the Government should be able to catch and punish the person whose actual liability it is. What most people miss here is that they failed to uphold the Code by “withholding” on the payments they made and therefore have to bear the penalty.
Here are few, very important areas of the Code to consider when doing business in Liberia. Seek further guidance and advice on how to fully comply:
Section 806: Tax Withholding on Payments to Non-residents
It is important to read and keep a close watch on this section of the Code. Whenever you make a payment to a “non-resident” person, please ensure that the necessary withholdings are done because the Code treats you as a “withholding agent”, especially when payment is for any one of the following:
1. Interest, Dividends, Royalties, License Fees, and Similar Payments.
A payor who makes a payment to a non-resident of Liberia-source non-exempt interest, dividends, royalties, license fees, a payment in respect of mineral rights, or other income (except rent) derived from rights in property (including any form of intellectual property) is required to withhold tax at a rate of 15 percent of the amount of the payment.
Here is another interesting piece to be careful about. This means that when you borrow money from non-resident entities, you are to withhold on the interest payment to those parties or the tax system will penalize you. Additionally, you need to inform your foreign shareholders that whenever Dividend is declared and paid on the Liberian operations tax.
2. Gaming Winnings. A payor who makes a payment to a non-resident of winnings from gaming within Liberia is required to withhold tax at a rate of 20 percent of the amount of the payment. This withholding is on the gross amount; no consideration is made here for losses that the winner may have incurred when gambling. This is highly impractical but it is written in the Code, and so, investors need to consider this because huge liabilities could result from not implementing this provision.
3. Payers of Rent. A payor who makes a payment to a non-resident of Liberia -source rent is required to withhold tax at a rate of 15 percent of the amount of each payment. This is an area where most people are usually caught and penalized for non-compliance. Whenever you make a rent payment, either for your dwelling or office, you are under obligation to withhold and remit to the Government.
This is a place where people try to argue that Government should be able to go after the property owner and collect their taxes rather than punish the tenants, but the Code again is very clear that the payor (tenant in this case) is required under the Law to withhold and remit to the Government.
4. Payments for Services Rendered. A payor who makes a payment to a non-resident for services rendered is required to withhold tax at the rate of 15 percent of the amount of the payment if payment is of a sort that, if made to a resident, would be includible in gross income under Section 201 (including Board fees, management fees, commissions, and the like).
It gets tricky here again: for the tax authority, payor and payee. If the payment is for materials and works, on what portion should the withholding be made? If applied wrongly, small service providers or contractors with huge material costs may not survive after taxes. However, it is just worth noting that a withholding obligation exits in this area as well.
5. Special Rule for Payments by Mining Projects, Petroleum Projects, and Renewable Resource Projects.
In lieu of the rates otherwise applicable under this section, in the case of the following types of Liberian source payments to a nonresident, which for the purpose hereof is considered a Liberian-source for the payee, payments made to a non-resident by a mining project producer, petroleum project producer, or renewable resource project contract holder, the withholding rates stated below apply to the following withholding obligations.
(1) Interest, 5 percent.
(2) Dividends, 5 percent.
(3) Payments for services, 6 percent.
6. Payments of Acquisition Price. Upon the payment to a non-resident of the acquisition price for an interest in an “investment asset” in Liberia, the payor is required to withhold tax at the rate of 15 percent of the amount of the payment and pay it over to the Government of Liberia.
This is an equally important area of concern as most investors contemplate or construe this withholding as “capital gain” tax. This is not a capital gain tax and therefore considers no “cost basis” in the calculations, especially if the tax payer (not the payor or withholding agent) is a non-resident person.
The way the Code is written, it doesn’t matter whether you have invested any amount in developing the asset to make it attractive for sale; once you sell the asset, the Code requires that 15% be withheld and remitted to the Government. Even if you are losing money on the sale of the asset, you have to take a further loss of 15%.
It is worth mentioning that the 15% is on the gross sale; adjusted for no cost basis.
It is very important to note that in any of the cases above where a payment has been withheld on behalf of the Government, the payment MUST be remitted within 10 days after the last day of the month in which the withholding was done. Each remittance must be accompanied by a statement specifying the name and address of each non-resident to whom a payment was made, the type and amount of each payment, and the amount of tax withheld. If the withholding agent is a resident, the place for remittance is the withholding agent’s filing location. If the withholding agent is a non-resident, the place of remittance is the Liberia Revenue Authority central office.