Withholding Tax is basically an advance payment of income tax. It is an advance payment to be applied as tax credit to settle the income tax liability of the years of assessments to which the income that suffered the deduction relates. There are varying rates of WHT ranging from 2.5% to 10% for companies and 5% to 10% for individuals depending on the transaction.
The introduction of the WHT regime came about in order to address the problem of tax evasion although, there is the overriding objective of full disclosure, transparency, predictability and fairness.
The Companies Income Tax Act and the Personal Income Tax Act provides for withholding of tax from payments due to companies or individuals whether resident in Nigeria or not, that provides goods and services to individuals or companies in Nigeria.
Key Points:
1. The period for filing WHT is 21 days after the duty to deduct arose for deductions from companies.
2. Companies filing monthly WHT returns are required to submit, in electronic form, a schedule of all their suppliers for the month showing the tax identification number (TIN), address of the suppliers, the nature of the transaction, WHT deducted, and invoice number.
3. The rates of withholding tax in Nigeria varies among individuals, companies, and corporate bodies. It can be 2. 5%, 5% or 10% depending on the type of transaction and the tax authority responsible for the collection of the tax (Federal Inland Revenue Service or State Inland Revenue Service).
4. The penalty for failure to deduct or remit tax will result in 10% of the amount, either not deducted or remitted.
5. WHT for individual & partnerships are remitted to the State Internal Revenue Service, while WHT for companies are remitted to the Federal Inland Revenue Service (FIRS).
It is imperative for companies to submit in electronic form a schedule of all their suppliers for the month showing the tax identification number (TIN), address of the suppliers, the nature of the transaction, WHT deducted, and invoice number.
Relevant Documents Required for Filing Withholding Tax Returns
1. Evidence of payments to an authorized banks – e-ticket.
2. Schedule of WHT deducted showing:
– Period covered.
– Name of supplier.
– Addresses.
– Nature of supply.
– Gross amount.
– WHT rate.
– WHT amount.
– TIN of agent making remittance.
– TIN of beneficiary (taxpayer).
Withholding Tax Coverage
The withholding tax (WHT) deduction covers the following transactions or areas:
– All aspect of the building, construction, and related services.
– All types of contracts and agency arrangement, other than outright sale and purchase of goods and property in the ordinary course of business.
– Consultancy, Technical and Professional services
– Management services
– Commissions
– Interest and Royalty
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Dividends, interest, and rents
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Commission, consultancy, technical, service fees
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Construction (roads, buildings, and bridges)
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Contracts other than sales in the ordinary course of business
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Income Subject to Withholding Tax
The WHT provisions seek to collect taxes that may otherwise have been lost through evasion and/or avoidance. The aim is to ensure that taxpayersare correctly taxed but it must be understood that transactions that are ordinarily not liable to tax in Nigeria are also not liable to WHT.
The residence of the taxpayer is generally not relevant for the purpose of determining liability to tax or the application of WHT, but it is important to consider whether the provider/supplier of the goods or services is liable to Nigerian tax.
The FIRS provides direct explanations in respect of incomes that are and not liable for WHT, which are explained below.
1.Rents: This includes rental income on both real and personal property. As a general rule, income on a property (rent, hire or lease payments or rights (royalties) situated in Nigeria is liable to tax in Nigeria, the place of payment notwithstanding. Where a person rents or hires property/services from another, WHT at the rate of 10% will apply. But where a person provides services to another for e.g. air/land transport service, using its own equipment/facilities, the transaction becomes a contract of services rather than rental or hire.
2. Interest: This is income from investments of every kind. WHT is applicable to income from government securities and income from bonds or Treasury bills. Interest on loans paid by a Nigerian company is often not subject to WHT.
3. Dividends: Refer to income from shares. The income is subject to tax whether it is received by a Nigeria company or a non-resident company. The tax imposed is regarded as a final tax, but corporate bodies are allowed to recoup WHT deduction where the dividend is to be redistributed as Franked Investment Income (FII). The Petroleum Profit Tax Act (PPTA) however exempts dividends payable by oil-producing companies on petroleum operations from WHT imposition.
4. Royalty: This refers to unearned income which accrues to the owner from past endeavors. Permission must be obtained before it can be used. It is the payment of any kind as a consideration for the use of or the right to use any patent, trademark or right.
5. Consultancy/Professional/Management/Technical Services: These are specialized services rendered by persons with the required knowledge and skills. The mere fact that services are provided by a company which has consultancy as part of its name does not by itself render such service as consultancy. The real content of the services being provided must be examined and if it amounts to a consultancy service, then the appropriate rate would apply; the same treatment applies to Professional/Management services. For instance, if an engineering company is carrying out construction activity, the proper classification for the services would be ‘‘construction’’ as opposed to Professional/Technical services; similarly, the use of industrial machinery/equipment to provide a service does not render it to be ‘‘Technical’’ because the industry position requires that only arrangements that involve a transfer of Technology should be classified as technical.
6. All aspects of Building, Construction and Related Activities: Under this heading are all types of construction contracts, including laying of pipelines, maintenance activities and service charges. Drilling and related activities properly fall under this classification.
7. All types of Contract Activities and Arrangements, other than Outright sale and Purchase of Goods and Property.
8.Where there is a dual relationship between parties in a business transition. An example of this contract is where a manufacturer/ producer requires raw materials from a supplier for its production. This is a dual relationship between both parties and the transaction will not be liable to WHT.
Examples
– A farmer supplies groundnut to a manufacturer of groundnut oil.
– A manufacturer of glass supplies bottles to a bottling company or soft drink manufacturer.
– An oil marking company supplies diesel direct to a user.
– Where there is a tripartite relationship between parties in a transaction.
9. Agency Transactions & Arrangements: Agency arrangement implies a contract between a principal and an agent. The reward payable for services rendered by the agent is Commission, which is subject to WHT of 10%. However, if the principal is a non-resident, any sales proceeds from the arrangement will attract5% WHT, where any of the conditions in Section 26(1) (b) of CITA holds.
Withholding Tax Implication on Foreign Transactions.
1. Non-Resident Companies/Enterprises: The Revenue practice in Nigeria is that non-resident companies are not empowered to deduct any type of WHT. These categories of enterprises are practically outside the regulatory monitoring and control of the FIRS. It will be impracticable for the Revenue office to inspect the accounting books of these companies in order to confirm due deduction and remittance of WHT.
2. Double Taxation Agreement (DTA): That are ordinarily not liable to tax in Nigeria are not liable to WHT in Nigeria. Thus, contracts and supplies of goods and services performed entirely outside Nigeria by non-resident individuals are not liable to WHT. Nigeria has treaty agreements with about eight (8) countries and these countries are granted a reduced rate of WHT deduction, usually at 75% of the generally applicable WHT rate. 7.5%. These countries include the UK, Northern Ireland, Canada, France, Belgium, the Netherlands, Pakistan, and Romania.
Permanent Establishment Principle Exists Under Nigeria Taxation
The rules construe a PE where:
– The company has a ‘‘fixed base’’ in Nigeria.
– The company operate in Nigeria through a dependent agent authorized to conclude contracts or deliver goods on its behalf,
– The company is executing a turnkey project in Nigeria, or
– The operation between the company and its Nigeria affiliate does not appear to be at arm’s length.
‘‘Fixed base’’ implies some degree of permanence and will include:
– Facilities, such as a factory, office, branch, mine, oil, or gas well
– Activities, such as building, construction, assembly or installation.
– Provision of services in connection with the activities listed above.
Nigeria tax laws do not exempt the income of branch from tax. A branch is seen as a permanent establishment and its income is taxable in Nigeria. It, therefore, has WHT obligations.
3. Companies Operating within the Free Trade Zones/EPZ: These companies are granted exemption from the payment of Nigerian taxes by virtue of their status as operating outside the country. Even where they make purchases outside the Free Trade Zones such companies that they deal with are presumed to be resident within the Nigeria Customs Territory and such transaction are also not liable to Nigerian taxes.
Other Types of Income Not Liable to WHT
Insurance premium: By law, there are some incomes which do not attract WHT, by virtue of their nature. These incomes include:
Insurance Premium received by Insurers or Stockbrokers will not be liable to WHT, although the Commission earned by Insurance brokers is liable to WHT.
Turnover/Income from Dealership or Distributive trade: The income earned by distributors or dealers from their trading activities is regarded as arising from transactions in the ordinary course of business and such income is not liable to WHT, but the Commission paid to them by the companies they represent will be liable to WHT.
Telephone Bills are not subject to WHT
Pros of Withholding Tax in Nigeria
1. Withholding tax will help in boosting the revenue of the government that would be used in the development of the country.
2. Withholding tax can help to reduce the total amount of tax liability to be paid at the end of the year.
3. Withholding tax prevents tax evasion as withholding tax is paid before income is spent.
4. Withholding tax will help in the growth of businesses that has to do with contract of purchase.
Cons of Withholding Tax in Nigeria
The problem of withholding tax in Nigeria is the poor administration that leaves a loop hole in the system.
Conclusion
1. Withholding tax generate revenue for the government as well as reduce the rate of tax evasion or tax avoidance. It is a tax liable to income earners and it is collected by the purchaser in a contract of purchase.
2. Withholding tax enhances the collection efforts of Tax Authorities and it ensures that revenue is generated in advance. The deduction of the withholding tax does not relieve any company or individual the obligation of paying income tax.
Finally, a company or individual whose deduction of WHT is greater than the taxable amount when the tax obligation becomes due, is entitled to a refund.
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