In Nigeria, withholding tax (WHT) serves as an advance payment on income tax, designed to ensure a steady stream of tax revenue and minimize tax evasion. This article provides a detailed breakdown of how WHT works in Nigeria.
Withholding Tax Explained
Withholding tax is a type of tax deducted at the source of specific payments. When you make payments for goods or services to a resident company or individual, a portion of that payment might need to be withheld as tax. This withheld amount is then remitted to the Federal Inland Revenue Service (FIRS) on behalf of the recipient.
Types of Withholding Tax in Nigeria
1. Rent: Landlords receive rent with a portion withheld by the tenant as WHT.
2. Dividends: Companies deduct WHT from dividends paid to shareholders, usually at a 10% rate.
3. Interest: WHT applies to interest earned on loans, deposits, and other financial transactions.
4. Royalties: Non-residents receiving royalties in Nigeria are subject to WHT.
5. Management and Consultancy Fees: Similar to royalties, WHT is imposed on such fees paid to non-residents.
Benefits of Withholding Tax
– Curbs Tax Evasion: Collecting tax at the source ensures a baseline level of tax collection, even if the recipient fails to file their income tax returns.
– Boosts Government Revenue: WHT provides a consistent flow of tax income for the government.
– Simplifies Tax Administration: WHT reduces the burden on individual taxpayers by collecting a portion of their tax liability upfront.
WHT Rates and Deadlines
The rate of WHT depends on the type of payment:
– 5%: Applicable to individuals providing professional or consultancy services.
– 10%: The standard rate for most payments subject to WHT, including rent, royalties, and directors’ fees.
It’s crucial to remember that the deadline for filing WHT returns and remitting the withheld tax is typically the 21st day of the month following the month the payment was made. Delays can result in penalties.
Note: Per the recent developments in tax regulations as at 04/07/2024, changes have been made to certain rates.
Consequences of Not Paying WHT
– Penalties and Interest: The payer becomes liable for the unpaid tax, along with penalties and interest charges.
– Double Taxation for Payee: The payee might lose the ability to claim credit for the withheld amount, leading to paying tax on the same income twice.
– Financial Penalties: The defaulter faces a 10% penalty on the unremitted amount.
Who Should Pay Withholding Tax in Nigeria?
Anyone responsible for deducting tax from income payments (the payer) is expected to remit those withheld taxes to the FIRS. The FIRS administers and collects withholding taxes on behalf of the Nigerian government.
Exemptions from Withholding Tax
Withholding tax is not a separate tax but a pre-payment system for existing taxes. Transactions where taxes have already been paid are generally exempt from WHT.
Per the recent developments in tax regulations as at 04/07/2024, Small Businesses and Unincorporated entities (with annual turnover of less than 25 million naira) are exempt from deducting WHT on transactions, according to certain provisions.
Withholding Tax and Foreign Transactions in Nigeria
Navigating Nigerian taxation can be daunting, especially with foreign transactions. WHT adds complexity, raising questions about its applicability and implications for non-resident companies, treaty agreements, and specific income types.
Non-Resident Companies: are generally exempt from WHT authority due to:
– Limited Regulatory Control: FIRS lacks the practical means to monitor WHT deductions by companies outside Nigeria.
– Double Taxation Agreements: Certain treaties between Nigeria and other countries (e.g., UK, Canada, France) aim to avoid double taxation, applying a reduced WHT rate, typically 7.5%.
Permanent Establishments: Non-resident companies with a “fixed base” (e.g., office, factory) or large-scale projects in Nigeria might be deemed to have a PE, subjecting them to Nigerian tax regulations and WHT obligations.
Exceptions to the WHT Rule
– Free Trade Zones/EPZ: Companies in FTZs or EPZs are generally exempt from most Nigerian taxes, including WHT.
– Specific Income Types: Certain incomes, like insurance premiums and telephone bills, are inherently exempt from WHT.
Tax Compliance
Filing WHT returns is a legal obligation for anyone responsible for deducting and remitting taxes. The deadline for submission is the 21st of every month following the deduction. Failure to file or remit WHT on time results in hefty penalties: N25,000 for the first month and N5,000 for each subsequent month. To avoid penalties and ensure smooth compliance, contact tax professionals on the subject matter.
For professional advice on Accountancy, Transfer Pricing, Tax, Assurance, Outsourcing, online accounting support, Company Registration, and CAC matters, please contact Inner Konsult Ltd at www.innerkonsult.com at Lagos, Ogun state Nigeria offices, or www.sunmoladavid.com. You can also reach us via WhatsApp at +2348038460036.
