Withholding Tax is also known as Retention Tax or Prepaid Tax. It is a government requirement for the payer of an item of income to withhold or deduct tax from the payment and pay that tax to the government. Governments use withholding tax as a means to combat tax evasion and sometimes impose additional withholding tax requirements on some recipients who have been delinquent in filing tax returns or in industries where tax evasion is perceived to be common. It helps the tax authorities to collect taxes that would have been lost through evasion and/or avoidance by ensuring that those taxes are paid up front.
WHT is governed by three laws in Nigeria which are the Personal Income Tax Act, the Companies Income Tax Act (Section 81) and the Petroleum Profits Tax Act. These laws empower corporate bodies, individuals and other entities to withhold taxes from payments made to them at specified rates and remit these taxes back to the relevant tax authorities within a period of 30 days from the date the amount was deducted. Due to an amendment in the Companies Income Tax Act 2007, the time for remittance of taxes collected by companies to the relevant tax authority has been reduced to 21 days. The deduction is made in the currency of the transaction. Also penalties for default would be charged in the same currency.
The penalty for default for companies is 200% of the tax not remitted plus interest at the prevailing commercial rates and, for individuals and other organizations, a fine of the higher of N5,000 or 10 per cent of the amount of tax due, plus the amount of tax plus interest at the prevailing commercial rate.
The two relevant tax authorities in Nigeria are the State Internal Revenue Board and the Federal Internal Revenue Service (FIRS).
The State Internal Revenue Board collects WHT on behalf of the State government from Individuals, Partnerships or Sole Proprietors under the Personal Income Tax Act.
The FIRS collects tax on behalf of the Federal Government under the Company Income Tax Act and Personal Income Tax Act but only for the following category of people:
- Persons who are resident in the Federal Capital Territory,
- Members of the Armed Forces, Nigerian Police Force or anyone who is not a civilian,
- Persons not residing in Nigeria but who derive income or profit from Nigeria and
- Officers of the Nigerian foreign service.
WHT is only applicable to the following kinds of transactions-
- Rent – Money made from the rent or lease payments for land, houses and other real property located in Nigeria is liable to WHT.
- Dividends – All income from shares is subject to WHT with the exception of dividends payable by oil producing companies on petroleum operations. This exemption is made by the Petroleum Profit Tax Act.
- Interest – This is money made from investments.
- Professional/Consultancy/Management services – Services that require special training or skills e.g. Medical Services, Legal Services, Audit etc are also subject to WHT.
- Royalties & Commission – Royalties are payments made to the legal owner of an intellectual property, patent or trademark while commissions are payments made to a negotiator or broker of a deal. Both are also subject to WHT.
- Director’s fees/salaries.
- Contracts for construction including building and other related activities.
- All other contracts including contracts for supplies with the exception of contract for outright sale of goods or property and sales done during the normal course of one’s business.
WHT is deductible by the person who pays for a transaction (the buyer) on behalf of the relevant tax authority but payable in the name of the taxpayer who bears the burden of withholding tax (the seller).
Persons who deduct WHT are known as withholding agents/agents of WHT. A withholding agent includes any of the following:
- Corporate bodies;
- Individuals, firms and sole traders;
- A statutory body, a public authority and other institutions or organizations;
- Governments Ministry, Department or Agency and Local Government.
The scenario below would aid better understanding. When an individual or company A supplies goods to another individual or company B for N100,000 and the relevant tax rate is 5%. Company B would deduct N5,000 from the total sum and remit to the relevant tax authority. Company B has an obligation to collect a withholding tax credit note on behalf of Company A. Presentation of this tax credit note by Company A to the tax authority at the end of the year can reduce the amount of tax Company A is to pay. This is dependent however on the amount that the tax authority has assessed should be paid at the year’s end.
A WHT credit note should contain the name of the individual or company deducting the tax, the name of the individual/company whose fee the tax is deducted from, a credit number which is specially assigned to the taxpayer, the date and the nature of the transaction.
The current rates by which WHT is calculated are as follows:
|Transactions||Companies %||Individuals %|
|Rents, Dividends, Interests & Director’s Fees||10%||10%|
|Consultation/Professional/Management Service Fees- Legal, Medical, Mechanical, Technical, Audit, Advisory etc.||10%||5%|
|Royalties & Commission||10%||5%|
|Contracts for construction & Building Related activities||2.5% (excluding contracts for survey, design and deliveries which remain 5%)||5%|
|All other contracts with the exception of those mentioned above||5%||5%|
This article only serves as a guide. Contact us via email or our phone numbers for tax consultation.