A Closer Look at the New Withholding Tax (WHT) Rates: What Businesses and Contractors Need to Know

Margaret J Baio

Tax Associate

The Finance Act 2024 made several amendments to the Withholding Tax (WHT) rates. Notable amendments were made to the WHT rates for resident and non-resident contractors, dividends, and individual professional fees. These amendments to the law have a significant impact on contractors and businesses. Let’s break down what this means for you.

What is Withholding Tax (WHT)?

Withholding Tax (WHT) is a tax mechanism where a portion of income — whether it's service fees, dividends, interest, or professional fees — is deducted and paid directly to the Government. It's designed to ensure taxes are paid at the source, making it a crucial part of tax compliance for businesses and individuals. The rate of WHT can differ based on factors such as income level, residency status, and local tax regulations. In Sierra Leone, the deduction of WHT from various sources of income is mandated by Sections 116 to 125 of the Income Tax Act 2000 as amended (“ITA 2000”). The Finance Act 2024 introduced significant amendments to these rates, further impacting contractors, shareholders and businesses nationwide.

What are the new WHT amendments in the Finance Act 2024?

• Resident Contractors (Section 117 of ITA 2000): Increased from 5.5% to 6.5%
• Non-Resident Contractors (Section 117 of ITA 2000): Increased from 10.5% - 11.5%
• Dividends (Section 118 of ITA 2000): Increased from 10% - 15%
• Individual Professional Fees (Section 116A of ITA 2000): Increased from 10% - 15%

The revised WHT rate for resident and non-resident contractors includes the introduction of an educational levy of 1% in addition to the 0.5% national health insurance levy on contractors to support the free education Initiative, as the Finance Act 2024 amended Section 36 of the Finance Act 2016. This change increased the WHT rates for residents from 5.5% to 6.5% and non-residents from 10.5% to 11.5%. The Finance Act 2024 increased by 5%, the WHT rates on Dividends to 15%, and Individual Professional Fees to 15%.

Implications for Businesses and Contractors

The revised WHT rates in the Finance Act 2024 have several significant implications for contractors and businesses. The increase in the WHT rate for resident and non-resident contractors effectively raises the tax burden on contractors, certainly reducing their net income. This increase makes it more expensive for non-resident contractors to operate in Sierra Leone.

The significant increase in individual professional fees from 10% to 15% affects individual professionals as they have a higher tax deduction on their income. On the other hand, this affects individual professionals who provide professional and managerial services, as these professionals might increase their fees to offset the increased WHT tax rates. The increase in the WHT on dividends directly impacts investors and shareholders. Consequently, businesses that share profits with their shareholders are taxed at a higher rate, reducing shareholders' net income. This increased deduction may reduce the attractiveness of investors in Sierra Leone, especially foreign investors.

Filing and Payment Obligations

The WHT amendments also immensely impact the tax compliance of contractors and businesses. Taxpayers must ensure they accurately calculate and deduct WHT and remit to the National Revenue Authority (NRA). The deadline for contractors’ filings and payments is still the 15th of the month following the month they were deducted, and the WHT should be processed through the ITAS portal on time. Taxpayers should indicate the contractors' details, including the gross amount, date, description, WHT status, and the Taxpayer Identification Number (TIN). Proper WHT filing and documentation are essential for contractors to successfully claim their withheld amount and adhere to tax compliance laws. Contractors should note that the NRA no longer provides WHT certificates. WHT payments made on their behalf are automatically credited to their ITAS accounts if the person who withheld and paid on their behalf used their TIN.

In conclusion, while the Government aims to increase revenue through tax, the amendments introduced by the Finance Acts 2024 have significantly changed the Withholding Tax framework in Sierra Leone as it has a far-reaching implication for contractors, professionals and businesses' profitability and competitiveness and tax compliance.