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 optimized 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 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 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 that involve 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 minimize 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 mobilized
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 manufacturer
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 organizations 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 organization 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 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.
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 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 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 Service
|
Invoice
Date
|
payment
Date
|
Amount
|
Rate @ Y%
|
Tax
|
• 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 organization. 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 unutilized
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 organizations
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.
