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 withholding tax
The payer of withholding tax in respect of any of the activities covered under the withholding tax regime 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.
Who is taxable
All Persons, Companies etc. who’s Incomes are liable to income tax, are subject to Withholding Tax.
However, exempt entities like 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.
Withholding Tax Implication On Foreign Transactions
Non Resident Companies/Enterprises
The Revenue practice is that non-resident companies are not empowered to deduct anytype 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 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 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 (8) countries and these countries are granted a reduced rate of WHT deduction, usually at 75% of the generally applicable WHT rate. 7.5%. These countries include UK, Northern Ireland, Canada, France, Belgium, the Netherlands, Pakistan, and Romania.
Permanent Establishment (PE) Principle Exists Under Nigeria 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 permanent establishment
• 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 in connection with the activities listed above.
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 withholding tax
Sections of CITA and PITA that provides for the deduction of withholding tax at the applicable rates below.
Types of payment Applicable rates
Companies Individual
Dividends, Interest, Rent 10%, 10%
Directors Fees10%, 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 on 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 withholding tax 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 percent 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% 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.
Mr. Obaro is a tax and financial analysist based in Abuja
