How to treat Withholding Tax (WHT) in Nigeria.
With the prevalent problem of assigning WHT to the various companies we deal with in my department. I thought it necessary to carry out a research on withholding tax in Nigeria, what percentage is collected, what it is collected on, and who collects it. Before going deep into it, let us first define what a withholding tax is. A withholding tax also called a retention tax is an advance and indirect source of taxation deducted at source from the invoice of a tax payer be it corporate bodies or individuals.
It is a government requirement for the payer of an item or income to withhold a certain percentage of the amount thereof. Withholding tax is an arsenal which the government uses to combat tax evasion; the withholding tax is just like an upfront payment for the income tax payable at the end of the assessment year. When goods or services are supplied, the purchaser receives an invoice which he is to settle, and upon payment would deduct a certain percentage which is usually 10 % and then remit it to the relevant authority.
In Nigeria, the withholding on corporate entities are collected by the Federal government while withholding tax on individuals is collected by the State Government. A withholding tax credit note is then issued by the government authority in charge to the party of whose income was withheld.
Withholding tax is not an end in itself, but a means to an end. The tax credit issued allows the party bearing it to claim it as part of its tax benefits when filing its year-end tax returns. This means that the tax payable by the company or Individual would be less the withholding tax. So we say that it is an advance payment of a taxable entity’s normal Income for set-off against the ultimately assessed tax.
Income Subjected to Withholding Tax in Nigeria
Some of the incomes subjected to withholding tax in Nigeria include the following:
- Interest: There is a distinction of interests; it can either be interest paid or interest received. Interest paid on loans are not subjected to withholding tax. Interest received from government securities like bonds or treasury bills are subjected to withholding tax.
- Rent: Rent is income received from letting out something which is usually property, car or land. Withholding tax is paid on both real and property in Nigeria.
So income on properties including rent, hire or lease payments, royalties etc. are subjected to withholding tax in Nigeria.
- Dividends: These are income from shares paid out to shareholders as a return on equity. Withholding tax is paid on dividends either by an indigenous firm or a foreign company. The tax imposed is regarded as final tax, although corporate bodies are allowed to recoup the withholding tax deductions if the dividend is to be distributed as Franked Investment Income.
Franked Investment income is income in the form of dividends paid to a company from earnings on which corporation tax has already been paid by the originating company. The petroleum profit tax act however exempts dividends payable by oil producing companies on petroleum operations from withholding tax imposition. Note : Petroleum profit tax rate is 85% after allowances allowed have been deducted and taxable profit has been arrived at.
- Consultancy Professional, Management or Technical services
- Agency Transactions & Agreements: In an agency transaction, there exists a principal and an agent, money earned by the agent is known as commission.
Commission is subjected to withholding tax in Nigeria. The prevalent tax rate on commission is 10% WHT , but if the principal is a non-resident, any sales proceed from the arrangement will attract 50% Wht
- All types of contract activities and arrangements other than outright sale and purchase of goods and property .
Penalties for late or non remittance of Withholding Tax
All withholding tax liabilities are required to be collected and paid over to the tax authorities within 30 days of their becoming due for payment. If there is a failure to remit tax, the penalty on conviction is 200% fine of the tax due in addition to commercial rates of interest until the entire amount accessed as withholding tax is fully paid.
Withholding tax rates in Nigeria
The prevalent withholding tax rates in Nigeria are :
|Types of Payment||Companies (%)||Individuals (%)|
|Bond, interest, royalty||10||5|
|Consulting & Technical fees||10||5|
|Income from all aspects of building & other civil work construction||5||5|
|Income from contracts other than outright sales and purchase of goods & Property in the ordinary course of business||5||5|
Jirinwayo Jude Odinkonigbo., Improving Tax Compliance in Nigeria: Challenges and Prospect
Ifueko Omoigui Okauru., Federal Inland Revenue Service and Taxation Reforms in Democratic Nigeria