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| Sunday, 21 September 2003 |
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| News Business Features Editorial
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Withholding Tax on interest income and related issues Continued from last week by P. Guruge, Advisor, Fiscal Policy, Ministry of Finance If a person entitled to Withholding Tax (WHT) credit has not declared the relevant interest income accrued to him/her on which WHT has been deducted wholly or partly in any year of assessment, the relevant WHT credit will be allowed only in proportion to the interest declared in the return. Such credit may be claimed in proportion to the income declared even in future years. Corporate Debt Securities The interest paid (which includes discounts allowed or other guaranteed income) on corporate debt security on or after November 1, 2002 (whether the subscription to the security has been made prior to or on or after November 1, 2002) is chargeable with WHT at 10 per cent. The interest or discount on those corporate debt securities specified in the Act is liable to WHT. These are securities issued by a company * Which is a limited liability company listed on the Stock Exchange; * The security of which is listed on the Stock Exchange; or * The paying agent of such company is a i. Licensed commercial bank or a financial services subsidiary thereof; ii. Licensed specialised bank or a financial services subsidiary thereof; or iii. A non-bank financial institution. Note should be taken of the following: * The threshold applicable to interest on savings, fixed and time deposits is not extended to interest on corporate debt securities. * The deduction of WHT on the interest paid on any corporate debt security which is not liable to WHT, even on a request made by the debenture or other security debt holder, should not be made. When the interest or the guaranteed income is paid or credited, WHT should be deducted. Treatment of Tax Credit A company or person in receipt of interest as business income could claim tax credit in proportion to the relevant interest income declared by such company or person in the tax returns, if a tax deduction certificate is available. However, where the corporate debt security on which WHT has been deducted at the time of issue on the basis of discount is traded subsequently, the WHT benefit cannot be transferred to the buyer of the security. Since the seller can claim total tax credit (if a company), in such a situation, irrespective of the amount of income accrued to such person, the sale price may be adjusted in consideration of such tax credit available. Corporate Debt Security Issued at Discount When a corporate debt security is issued at a discount exceeding 50 per cent of the nominal value of debt security, there will be no liability to WHT. However, the holders of such debt securities will be liable to tax at 10 per cent on the interest arising out of, or in relation to, the said debt security including any secondary market transaction involving such security. Such debenture holders will have to declare such interest in their tax returns and pay tax at 10 per cent. In the case of corporate debt security issued at a discount of less than 50 per cent, WHT at 10 per cent will be made up-front on the entirety of the discount. Where the debt security is traded in the secondary market, "notional tax credit" is not available to the subsequent holders of the debt security. Co-operative Societies For the purpose of WHT, co-operative societies are considered companies and, therefore, WHT is not the final tax. Such societies are entitled to tax credit on WHT paid and to obtain a refund of any excess WHT paid if such interest income subject to WHT has been included in the assessable income. Issue of Directions The Commissioner General is empowered to issue a direction to a withholding agent only in a situation where the tax deducted would exceed total tax payable by such person, provided * Interest subject to WHT will form part of the assessable income of the relevant person, and i. Excess deduction of income tax would arise as a result of allowable losses as at the commencement of the year of assessment exceeding the estimated total statutory income for the relevant year on the basis of the previous year, excluding the relevant interest income which is subject to the deduction of WHT, or ii. Such interest otherwise subject to the deduction of WHT is exempt from income tax. The effect of the direction would be to reduce the amount of WHT to be deducted or to stop such deduction. Refund of Income Tax Already Paid If any person has already declared and paid the tax on any interest which is liable to WHT as well, such person can claim a refund of such tax paid within one year from the date of enactment of the amended Act - 09.05.2003. Such refund applications should be made to the Commissioner General of Inland Revenue. Exemptions WHT need not be deducted from the following: * Any interest exempt from income tax under Session 10 of the Act * Any interest paid on an account maintained by any ministry or department, local government institution or a provincial council * Any interest paid on an account maintained by any foreign government * Any interest paid to any person who is exempt on such interest income under Section 8 (a) of the Act. Penalties on relevant Financial Institutions and Companies If any financial institution or company has not deducted tax due in the normal manner, the CGIR is empowered to impose a penalty amounting to 500 per cent of such tax not deducted in addition to other measures such as the recovery of the defaulted amount under the Inland Revenue Act. Other Withholding Taxes on Interest Income under Inland Revenue Act (A) Interest due on compensation payable by the government, local government or a public corporation on the acquisition of property. When such interest is paid, WHT is deductible at 10 per cent on the total amount of interest paid at the time of such payment. Such WHT paid will be the final tax payable on such interest income by the recipient whether such person is liable to pay income tax or not. The WHT should be deducted by the relevant authority who pays such interest and remitted to the Commissioner General of Inland Revenue (CGIR). (Section 33) (B) Interest on "extended deposits" approved by the CGIR- These are long-term deposits (normally between five to 25 years) introduced by certain commercial banks and the National Savings Bank. Interest on such deposits is payable when such contracted period is completed and WHT at 10 per cent (earlier 15 per cent) is deductible on the total interest paid or credited. The relevant bank will have to remit such WHT to the CGIR and the deposit holder can claim credit on such WHT against the income tax payable by such persons if such interest is included in the assessable income. (Section 34) (C) Interest payable to persons "outside" Sri Lanka The term used is "outside" Sri Lanka and not "non-resident". Therefore, if at the time of payment, the recipient is outside Sri Lanka, then the WHT has to be deducted. This may create practical problems in ascertaining whether the relevant person is out of Sri Lanka. Interest on debentures, mortgages, loans, deposits or advances will be liable to the WHT at 20 per cent. However, the CGIR may change this rate in appropriate cases. Further, this rate will be subject to any relief of double taxation under an agreement. However, WHT is not deductible if such interest is not paid out of income from Sri Lanka or from interest on any loan or advance made by a banker or any interest paid on any FCBU account. (Section - 90) |
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