An Overview of Withholding Tax in Nigeria

What is a Withholding Tax?

Withholding tax is a way of deducting tax from the source of an
income rather than from the income-earner since it might be
difficult to tax every income from their earner, the taxing
authorities take advantage of this to collect as much taxes as
possible from income sources.

In Nigeria, withholding tax rates range between 5 and 10
percent. The percentage deducted depends on the type of traction
involved and the taxing authorities in charge. The type of
organization involved also determines to which authority a
withholding tax is paid. There are two authorities in charge of
this: the Federal Inland Revenue (FIRS) and the State Internal
Revenue Service (IRS). The FIRS is in charge of withholding taxes
from Limited Liability Companies while withholding taxes on
individuals and enterprises go to the State IRS.

Income Subject to Withholding Tax in Nigeria

First, it is worth noting that any income in Nigeria that is not
liable to tax is also not subject to withholding tax. However, here
are incomes subject to withholding tax:

• Interest
• Rents
• Dividends
• Royalty
• Construction activities
• Consultancy services
• Professional services
• Management services
• Technical services, etc.

1. Interests: income generated from every kind of
   investment is subject to withholding tax. This part also covers
   income from bonds. However, the interests on loans paid by
   companies are usually not subject to withholding tax.
2. Rents: these are incomes generated from
   personal physical properties. When a person hires out his
   properties, the income generated is liable to withholding tax.
3. Dividends: these are income generated on shares. Not minding
   whether a resident or a non-resident company earns a dividend, such
   an income is subject to withholding tax. However, the dividends
   generated from oil companies are exempted from withholding
   tax.
4. Royalties: Royalties are income generated where the owner of
   work releases his work for use. In Nigeria, the royalties paid to
   use copyrighted works or intellectual property are subject to
   withholding tax charge.
5. Construction and related activities: Incomes
   generated from construction-related activities and supplied
   materials fall under this category and are liable to tax. Such
   activities include laying of pipes and drilling.

Withholding Tax Rates in Nigeria

Are All Transactions Subject to Withholding Tax?

All transactions involving supply is subject to withholding tax.
If your business requires that you supply goods to your customers,
your customer must deduct the withholding tax from your invoice.
However, companies that are not involved in the supply of goods and
services are exempted from paying withholding taxes. For instance,
if your business deals with creams and customers come to your shop
to buy, you are not expected to pay a WHT to such customers.

How Does Withholding Tax Work?

As said earlier, WHT ensures that eligible taxpayers pay their
taxes as due. When an individual or organization supplies products
to another company or individual, the supplier company will issue
an invoice to show the bill for the product. WHT demands that the
purchaser deducts a certain percentage (tax) from the amount on the
invoice. The deducted amount is then remitted to the tax
authority.

For example, if a company supplied goods worth ₦200,000 to
another company and the applicable tax rate is 10%, the purchaser
will only pay ₦180,000 to the supplier and remit the remaining
20,000 (10%) to the FIRS.

It doesn’t end there. The purchaser also should present the
evidence of remittance to the supplier. The supplier can then keep
this tax credit, so he can use it when needed at the end of the
financial year.

What is a Withholding Tax Note (WHT Note)?

A withholding tax note is a credit note issued by a relevant tax
authority to beneficiaries upon payment of a withholding tax. This
serves as evidence of remittance for the payer. Note that this task
is made on your behalf by another company. You then have to go back
to the company or individual that pays for you, so you collect your
WHT Note. Without this note, you have no evidence to claim the
payment of tax to the government.

Information on a WHT Note

• Credit Number
• Tax payer’s name (the company that deducts the tax)
• Beneficiary’s name (the company whose invoice is deducted)
• Date of transaction
• Nature of transaction

How to Use a WHT Note to Reduce Income Taxes

Withholding tax is beneficial to both sides – the taxpayer and
the collecting authority. While it ensures that more taxes are
remitted to the tax authorities, it benefits individuals or
companies as it ensures that they pay taxes on every transaction
and not once at the end of a financial year – when it might seem a
huge amount to remit.

For example, if your payable tax is ₦300,000, and you have paid
₦200,000 as withholding tax, then you are left to make a payment of
₦100,000 at the end of the financial year. As such, it is essential
to keep your WHT Note.

What If a Purchaser Company Fails to Pay on Time?

If, after a withholding tax has been deducted on an invoice and
the involved company or individual does not remit it, you must go
to the relevant authority to file a complaint. Upon knowing this,
the collecting authority will penalize the company or individual
who has failed to remit your withholding tax. The penalty for a
company that fails to remit a deducted tax is 200% of the deducted
amount.

For example, if your tax payable is ₦200,000, and your customer
or client fails to remit it after it has been deducted on your
invoice, the client will be penalized by paying ₦400,000 extra,
making the total amount to be paid to the tax authority ₦600,000.
This penalty is also for companies and individuals that fail to
deduct the tax. But in most cases, the tax authority is usually
soft in enforcing the penalty and instead gives the defaulting
company or firm the grace to pay the expected amount that it has
failed to pay.

When Should a Withholding Tax Be Paid?

A remitting company is required to pay the deducted withholding
tax within one month. To make this easy, it is wise to keep a
proper record of the company that you are paying on its behalf, the
amount deducted, the type of transaction, and other necessary
information.

You can schedule when to pay into the account of the relevant
tax collecting authority. Thankfully, banks have made it easier
today to pay as they come to your company so you can pay to them,
and they will make the payment on your behalf and bring back the
teller for you. You again have to take the receipt to the authority
in charge of the tax, where they will offer you WHT notes on behalf
of your customer. You must, however, keep these notes safe, so you
can present them to your customers when they come for their WHT
notes.

Conclusion

Taxation is one essential area to which every business must pay
attention. Withholding taxation as a type of tax in Nigeria is
another technique adopted to ensure that companies and individuals
pay tax as appropriate. This article has provided you with an
overview of withholding tax in Nigeria.