Withholding Tax in Nigeria (Administration and Rates) Simplified
Explanatory Notes on Withholding Tax Administration in Nigeria.
A withholding tax is a tax required by law to be withheld by a party from each payment made to another contracting party from the income or services rendered.
Such tax withheld must be added upon a monthly basis and remitted directly to the Federal Inland Revenue Service (for withholding tax on limited liability companies) or State Internal Revenue Service (for withholding tax on individuals and enterprises).
All Withholding tax remittances must be accompanied by the schedule of the payees/contractors in order to obtain the certificate of payment for them. Please note that you are paying withholding tax on behalf of another contracting party. Therefore, you must ensure you collect the certificate of payment for them. The certificate automatically becomes a tax credit to the other party from whose income the tax was deducted. This allows them to claim it as part of their tax benefits when filing their year-end tax returns.
Read Also: Understanding Taxation in Nigeria
It is important to mention that Withholding tax is not another type of tax, but a mode of tax payment. It is an advance payment of a taxable entity’s normal income tax since it is available for set-off in form of a tax credit against the ultimately assessed tax. This credit will be available for you only when the party making the payment actually remits the tax collected with a schedule containing information about your TIN. That is the main reason it is advisable that you include your TIN on your invoices so that any withholding tax deducted from the payment due to you can be credited to your account.
Withholding Tax is an advance payment of income tax. In principle, withholding tax is a payment on account of the ultimate income tax liability of the taxpayer or company. Withholding tax is not a separate tax on its own and does not confer an exemption from the filing of annual tax returns by the company which had suffered withholding tax. The tax is normally to be deducted at the source when payment is to be made to the beneficiary. The introduction of the withholding tax 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.
Unfortunately, many entrepreneurs are ignorant of this. This accounts for reasons some companies pay double tax unnecessarily. If you have your withholding tax credit, you can use it to offset your income tax liability. Unutilized withholding tax credits in a particular year are however available for transfer to subsequent tax years.
In the same way, it is your responsibility to remit withholding tax deducted from your suppliers’ invoices to the relevant tax authority and obtains the withholding tax payment certificate on their behalf so that they can use it to offset their income tax liability.
Read Also: How to Obtain Tax Identification Number (TIN) in Nigeria
WHT Coverage
The withholding tax (WHT) provision was introduced into the tax system in 1977 with limited coverage to rent, dividends, and directors fees. Tax deduction at source has since been expanded to include:
- All aspects of building, construction, and related services.
- All types of contract 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
Income subject to Withholding Tax
The withholding tax provisions seek to collect taxes that may otherwise have been lost through evasion and/or avoidance. The aim 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 withholding tax; thus, contracts and supplies of goods and services performed entirely outside Nigeria by non-resident taxpayers will not be liable to withholding tax. The residence of the taxpayer is generally not relevant for the purpose of determining liability to tax or the application of withholding tax, but it is important to consider whether the provider/supplier of the goods or services is liable to Nigerian tax. The incomes that are liable to WHT are discussed hereunder.
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, withholding tax 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.
Interest:
This is income from investments of every kind. withholding tax 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 withholding tax.
Dividends:
Refer to income from shares. The income is subject to tax whether it is received by a Nigerian company or a non-resident company. The tax imposed is regarded as a final tax, but corporate bodies are allowed to recoup withholding tax 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 withholding tax imposition.
Read Also: Value Added Tax (VAT) in Nigeria
Royalty:
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/
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 that 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.
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.
| Note: This is just for information purposes. It is advisable that you get a tax co0nsultant. |
All types of Contract Activities and Arrangements, other than Outright 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 the 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 withholding tax system in order to achieve efficiency as well as minimize the cost of doing business. The aim of withholding tax is not to compound the problems of producers, manufacturers, and those engaged in any forms of activities, other than services.
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 withholding tax of 10%. However, if the principal is a non-resident, any sales proceeds from the arrangement will attract 5% withholding tax, where any of the conditions in Section 26(1) (b) of CITA holds.
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 withholding tax. 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.
Double Taxation Agreement (DTA)
Transactions that are ordinarily not liable to tax in Nigeria are not liable to withholding tax in Nigeria. Thus contracts and supplies of goods and services performed entirely outside Nigeria by non-resident individuals are not liable to withholding tax. 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 withholding tax rate. 7.5%. These countries include UK, Northern Ireland, Canada, France, Belgium, the Netherlands, Pakistan, and Romania.
Read Also: Company Income Tax in Nigeria
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.
Nigerian tax laws do not exempt the income of branches from tax. A branch is seen as a permanent establishment and its income is taxable in Nigeria. It, therefore, has withholding tax obligations.
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 transactions are also not liable to Nigerian taxes.
Other Types of Income Not Liable to WHT
Insurance premium
From practice, there are some incomes that do not attract withholding tax, by virtue of their nature. These incomes include:
Insurance Premium received by Insurers or Stockbrokers will not be liable to withholding tax, although the Commission earned by Insurance brokers is liable to withholding tax.
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 withholding tax, but the Commission paid to them by the companies they represent will be liable to withholding tax.
Telephone Bills are not subject to withholding tax
Rates of withholding tax in Nigeria
The applicable rates of withholding tax are as follows:
| Types of payment |
Applicable rates for |
|
| Companies | Individual | |
| Dividends, Interest, Rent | 10% | 10% |
| Directors Fees | 10% | 10% |
| Royalties | 15% | 15% |
| Commission, Consultation, Technical, Service Fees | 10% | 5% |
| 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% |
What is the difference between withholding tax and VAT in Nigeria?
A lot of people usually confuse withholding tax and VAT to mean the same. The truth is that withholding tax and VAT are not the same. In fact, they are governed by different tax laws. I will explain this in detail later.
Some people have been saying that their customers did not pay the VAT, that the customers deducted VAT billed on their invoices before making payment. Well, this can be true to some extent. If your customer happens to be an oil company or government agency, this category of customers has been empowered by law to deduct VAT at the source. But if you noticed, they don’t only deduct VAT only, they also deduct withholding tax as well. This is to tell you that withholding tax and VAT are two different taxes.
For other companies that are not empowered to deduct VAT at the source, they will only deduct withholding tax. Notwithstanding, people still don’t understand the basis for the deduction especially when the VAT rate was five percent and most of the Withholding tax rates are also five percent.
For you to understand how withholding tax and VAT are administered, it’s better to give example.
Example 1.
Let’s assume the following transaction when VAT rate was still 5 percent
Repairs of machinery 100,000
VAT at 5% 5,000
Total 105,000
When the customer wants to pay you, he will only pay N100,000 having deducted 5 percent WHT. Please note that what he deducted was withholding tax and not VAT.
The withholding tax is usually charged on the invoice amount (excluding VAT). In this case, the withholding tax of 5 percent on N100,000 is N5,000. This gives us the net amount of N95,000. Then, the customer will still need to pay you the VAT of N5,000. When you add this VAT to the net amount of N95,000, you will be paid N100,000. However, if the customer is an oil company or a government agency, you will be paid N95,000. The company would have deducted N5,000 withholding tax and another N5,000 VAT.
I know it sounds confusing. Well, the second example will throw more light on how the WHT and VAT actually work.
Example 2.
Let’s assume the same transaction as above but this time around under the new VAT rate of 7.5 percent.
Repairs of machinery 100,000
VAT at 7.5% 7,500
Total 107,500
In this case, the WHT is still 5 percent. Therefore, your customer will deduct 5 percent from N100,000. This gives us N95,000. He will then add the VAT amount of N7,500 to this net amount (that is, N95,000 + NN7,500). This will give us N102,500.
So under the new VAT rate of 7.5%, what you will get from your customer is now N102,500 instead of N100,000 when the VAT rate was 5 percent.
Meanwhile, before you start celebrating the increase, you should understand that the VAT does not belong to you. You are a VAT agent. You are collect VAT on behalf of the government. Therefore, you have the responsibility of remitting the VAT to the Federal Inland Revenue Service.
So, how much VAT goes to Federal Inland Revenue Service?
In the two examples above, N5,000 goes to Federal Inland Revenue Service while you pay N7,500 in the second example. (Please note that I didn’t take input VAT into consideration in this case). So, in the two instances, the only money that belongs to you is N95,000. But if the customer is an oil company to a government agency, it must have deducted the VAT of N7,500 from the source. That means you will only receive N95,000. In this case, you don’t need to pay any VAT to the government again.
It is the responsibility of the company that deducted WHT and VAT to remit the taxes to the relevant tax authority. If anybody deducted your money, you can follow up to ensure that the person or the company didn’t just deduct to keep. You need to ascertain the remittance. That is the only way you can benefit from the withholding tax credit. The same thing applies to you. If you deduct WHT from your supplier’s invoices, you should not just withhold, you should remit the tax to the government. If the customers are more than one, you can batch the payment while you attach the schedule stating the names of the suppliers, their addresses, TIN, invoice date, Invoice amount, applicable WHT rate, and the WHT amount. The tax authority will use the schedule to post the WHT to the individual supplier’s account so that they can enjoy the credit.
So, let me go back to the difference between WHT and VAT.
Just as explained before, withholding tax is an income tax that you are paying in advance. Therefore, at the end of the year, you can offset your income tax with the withholding taxes you have paid during the course of the year. For instance, if your computed income tax liability at the end of the year is N35,000, and you have paid N5,000 as WHT. You will not need to pay the entire N35,000 to the government again. You can safely deduct the N5,000 WHT you have suffered from the N35,000. Therefore, the amount of tax payable will just be N30,000. A lot of people pay double taxation ignorantly as they don’t know about this. That is why I usually encourage individuals or companies to hire a tax consultant. What a tax consultant will save you will be much more than what you throw out on double taxation. Withholding tax is administered under Personal Income Tax Act (for individuals and enterprises) and Company Income Tax Act (for companies)
On the other hand, VAT is a consumption tax. It is indirect direct payable on the goods and services consumed by any person. A person can be an individual, company, or government agency.
There are certain goods and services that are exempted from VAT. This means that VAT will not be paid on the consumption of such items. Examples are educational items and medical services. For clarification, the fact that the products or services you sell are exempted from VAT does not exempt you from paying VAT. If you buy a VATable item, you need to pay VAT on such item.
It is painful to see many organizations paying double taxes. Well, that is the price for failure to engage a tax consultant. The need to get a tax consultant cannot be over-emphasized. You don’t need to wait till you run into trouble before you get one. Therefore, if you are yet to have one, it is suggested that you get a tax consultant now.
This article is made available by OTN Consulting. The firm helps companies plan and file their taxes such as VAT, Withholding Tax, PAYE, Company Income Tax, and Educational Tax. The firm can also help you sort out your tax back duty and ensure you obtain your Tax Clearance Certificate.
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