Withholding Tax (WHT) is an advance payment of income tax. In principle, it is a payment for the ultimate income tax liability of the taxpayer or company. It is not a separate tax and does not confer an exemption from the filing of yearly tax returns by the company which suffered WHT. The tax is deducted at source when a payment is to be made to the beneficiary.
Applicable Tax Law
Withholding Tax (WHT) is not a distinct tax type and therefore has no legislation of its own. It is only a mechanism for the collection of other taxes. Consequently, its application is provided for in the enabling law of other tax types i.e. Section 81 of Company Income Tax Act, Section 54 of Petroleum Profit Tax Act, Section 73 of Personal Income Tax Act and Section 13 of Value Added Tax (VAT) Act.
Tax coverage and income subject to WHT
It seeks to collect taxes that may have been lost through evasion and/or avoidance. It is to ensure that taxpayers are correctly taxed but it must be understood that transactions that are ordinarily not liable to tax in Nigeria are also not liable to WHT; thus, contracts and supplies of goods and services performed entirely outside Nigeria by non-resident taxpayers will not be liable to WHT. The residence of the taxpayer is not relevant for 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 tax.
The rate of tax applicable to the various goods and services is provided in later parts of this paper. The introduction of the WHT regime came about to address the problem of tax evasion although, there is the overriding objective of full disclosure, transparency, predictability and fairness. In the light of these objectives and bearing in mind that the tax is intended as an advance payment of tax, its operation should always be optimised to ensure that taxpayers are not overtaxed and Government does not lose revenue.
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 per cent 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.
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.
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 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.
Royalty:Refers to unearned income which accrues to the owner from past endeavors. Permission must be obtained before it can be used. It is payment of any kind as a consideration for the use of or the right to use any patent, trade mark or right/
Consultancy/professional/management/technical services-These are specialised 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 a 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 thatinvolve a transfer of technology should be classified as technical.
All types of contracts and arrangements, other than sale and purchase of goods and property. This classification is wide enough to capture every transaction, other than outright purchase/sale of goods and property. The revenue holds the view that majority of the activities carried on in the oil industry are done by way of contractions, and should properly fall under this category. The issue of contracts and transactions, not being conducted in the ordinary course of business has over the years been subjected to series of reviews and amendments, aimed at improving the WHT system to achieve efficiency as well as minimise the cost of doing business.
The aim of WHT is not to compound the problems of producers, manufacturers and those engaged in any activity, other than services. The definition of manufacturing activate as contained in the FIRS information circular No. 2002 appears to have further generated more controversy than expected. The following classification will assist in the understanding of circumstances where WHT will apply in relation to any production activity.
Where there is a dual relationship between parties in a
business transaction
An example of this contract is where a manufacturer/producer require raw materials from a supplier for its production. This is dual relationship between both parties and the transaction will not be liable to WHT. E.g., a farmer supplies groundnut to a manufacturer of groundnut oil; a manufacturer of glass supplies bottles to a bottling company or soft drink manufacturer or an oil marking company supplies diesel direct to a user.
Where there is a tripartite relationship between parties in a transaction
In a tripartite contract relationship involving a manufacturer, supplier and agent, there could be either two options, depending on the level of financial arrangement. For example, where manufacturer A, engages agent C to procure or source for raw materials from supplier, B, for his production line, there is a tripartite arrangement here. There is nothing preventing manufacturer, A from dealing directly with supplier B to achieve a dual contract relationship.
(a) If agent C is mobilised by manufacturer B with fund to source for materials for its operation, there will be need to segregate the service cost from the entire contraction, and only the service component will be liable to WHT.
(b) If the agent, C, finances the sourcing of the raw materials for Manufacturer A, the entire contract value will be liable to WHT at the time of payment.
Where a maufacturer delivers its normal products to its
distributors and dealers for sale
In this situation, the income accruing to the manufacturer will not be liable to WHT as it is regarded as transaction in the ordinary course of business, but the commission earned by the distributors/dealers will be subjected to WHT.
Agency transactions and arrangements
Agency arrangement implies a contract between a principal and agent. The reward for services by the agent is commission, which is subject to WHT of 10 per cent.
However, if the principal is a non-resident, any sales proceeds from the arrangement will attract fie per cent WHT, where any of the conditions in Section 26(1) (b) of CITA holds.
The organisations making the payments are required to withhold tax from such payments and pay over the withheld amounts to their respective relevant tax authorities within 30 days of receipt of payment or credit by the person or entity suffering the tax.
The relevant tax authorities to receive the WHT tax transactions made by companies is FIRS and for individuals and unincorporated bodies subject to rules of residence is SIRS or FIRS.
Person liable to deduct WHT
The payer of WHT for any activity under this tax shall include company (corporate or non-corporate), government Ministries and Department, Parastatals, statutory bodies, institutions and other established organisation approved for the operations of Pay As you Earn System (PAYE).
Who is taxable?
• All persons, companies etc. who’s incomes are liable to income tax, are subject to Withholding Tax.
• However, exempt entities, such as educational institutions, Government Ministries, Parastatals and other Agencies of government, are agents for the collection of WHT. They are required to deduct WHT on any payment made to a taxable body and remit same to the relevant tax authority.
WHT implication on foreign transactions
Non-resident companies/enterprises
The revenue practice 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 revenue office to inspect the accounting books of these companies to confirm due deduction and remittance of WHT.
Double Taxation Agreement (DTA)
Transactions 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 countries and these countries are granted a reduced rate of WHT deduction, usually at 75 per cent of the generally applicable WHT rate. 7.5 per cent. These countries include UK, Northern Ireland, Canada, France, Belgium, the Netherlands, Pakistan and Romania.
Permanent Establishment (PE) principle under Nigeria’s taxation
The rules construe a PE where:
• The company has a ‘fixed base’ in Nigeria.
• The company operates in Nigeria through a dependent agent authorised 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.
Principles of PE
• The rules construe a Permanent Establishment where:
• The company has a ‘fixed base’ in Nigeria.
• The company operate in Nigeria through a dependent agent authorised 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 based on the above-listed activities.
Other types of income not liable to WHT
• Companies operating within the Free Trade Zones/Export Processing Zones.
• Insurance premium.
• Turnover/income from dealership or distributive trade
• Telephone bills are not subject to WHT.
Application of WHT
Sections of CITA and PITA that provide for the deduction of withholding tax at the applicable rates below.
Types of payment Applicable rates
Companies Individual
Dividends, Interest, Rent 10% 10%
Directors Fees 10% 10%
Royalties 15% 15%
Commission, Consultation, 10% 5%
Technical, Service Fees
Management fees 10% 5%
Construction/Building
Contracts 5% 5%
Contracts, other than outright sales
and purchase of goods in the
ordinary course of business 5% 5%
Returns & Remittance
Tax Returns are filed monthly with evidence of remittance and a detailed schedule of taxable transactions.
Submitted schedule should show the following details:
Name of supplier Address Nature of Invoice payment Amount Rate @ Y% Tax
Service Date Date
• Returns for corporate suppliers should be filed within 21 days from end of month of transactions.
• Returns for non –corporate suppliers should be filed within 30 days from end of month of transaction.
• In practice, tax returns are filed in the same month they occur.
• Tax deducted should be remitted to the revenue in exchange for a receipt of payment.
• Tax is payable in the currency of the qualifying transaction.
Following payment and filing of returns, the revenue processes credit notes for the suppliers on whose income tax was deducted.
• Credit notes can be used in applying for tax credit against current and future tax liabilities (i.e. where it is not final tax)
• Remittances are due to either federal or state tax authorities.
Remittances due to Federal Inland Revenue Service (FIRS):
• Corporate entities,
• Nonresident individuals,
• Members of the armed forces and police,
• Resident of Abuja,
• Foreign officers.
Remittances due to state internal revenue service (SIRS):
• All other individuals / partnerships resident in the state.
Payment of currency
Section 64B of CITA empowers the tax authority that withheld tax must be remitted to the tax authority in the currency in which the deduction was made. This means that transactions made in foreign currency are to be remitted in the same currency and that the tax so withheld is to be remitted in the same currency. Simultaneously penalty for default would also be calculated in the same currency.
How to claim WHT credit (Credit notes)
A taxpayer from whom tax has been withheld is expected to gain withholding tax credit notes from the relevant tax authority via the deducting organisation. All withheld taxes are forwarded to the tax authority, which in turn records the credit against the tax payer’s account, with a schedule containing details of the contract or service, on which basis the tax authority issues a credit note. Assessed tax and related charges are usually entered as debits in the taxpayer’s tax account, while he is expected to pay only the difference between his assessed tax and withholding tax credit at the time of filing their own returns.
• It is this credit note that a taxpayer uses as a set off against tax assessed within that year or if unutilised within that year can be applied based on the taxpayer request to transfer the credit balance in that year to offset or reduce debit balance of another year.
• In cases where there is an excess charge of WHT on a taxpayer, the 2007 amendments to CITA (Section 63 (7)) have even further empowered FIRS to refund proven excess withholding tax to any taxpayer within 90 days of filing a claim.
Offences and penalties
Offences
• Failure to withhold tax or
• Failure to remit or late remittance of the tax withheld
• Non remittance of the tax withheld within the time limit stipulated by the Revenue.
Penalties
a. For companies
A fine of 200 per cent of the tax not withheld or withheld but not remitted, plus interest at the prevailing commercial rate.
b. For Individuals & other organisations
A fine of the higher of N5,000 or 10 per cent of the amount of tax due, plus the amount of tax deductible, or withheld but not remitted, plus interest at the prevailing commercial rate.
- Interest on savings account of less than N50, 000 paid by a Bank, is not subject to WHT.
The WHT system has come to stay since it is a veritable source of revenue to government. It enhances the collection efforts of tax authorities and it ensures that revenue is generated in advance. It is therefore imperative that the system should continue to be improved upon in the light of modern tax administration procedure. Usually, an advance payment of tax provides information that an income source has been identified through a third party. Such information being provided by the payer should be readily available for use in accessing a potential taxpayer. Field officers should always be ready to follow up on such information.
