Withholding Tax Simplified
Withholding tax (WHT) is an advance payment of income tax which may be used to offset or reduce income tax liability or claimed as a refund. It is an advance payment to be applied as tax credit to settle the income tax liability of a taxpayer for the relevant year of assessment. This means that withholding tax is not a tax itself but an advance payment used to offset future tax liabilities.
How does WHT work?
There are two companies, Company A and Company B. Company B gets a contract from Company A to supply building materials for ₦10million. On completion of the transaction, Company A will withhold ₦500,000 (5% of contract sum) and remit that to the relevant tax authority as WHT. Company B will only be paid ₦9,500,000. At the end of Company B’s financial year, when they are paying their taxes, the ₦500,000 remitted as WHT on their behalf will be deducted from the total income taxes they have to pay.
Requirements for Filing Withholding Tax
To file withholding tax, you need the following documents:
- Evidence of payment to an authorized bank (this is called an e-ticket).
- Schedule of WHT deducted showing the following:
- Agent Name
- Agent TIN
- Agent address
- Period covered
- Beneficiary’s TIN
- Beneficiary’s Name
- Beneficiary’s Address
- Invoice No.
- Contract date
- Contract Description
- Contract Amount
- Contract type
- WHT rate
- WHT Amount
- Period covered
Follow the link in the description to download a copy of the WHT schedule from our website
Due Date for Remitting WHT Returns in Nigeria
The due date for remitting WHT to FIRS in Nigeria is the 21st day of the month following the month in which the deductions were made. While the due date for remitting WHT deducted from individuals and non-limited liability companies to relevant State Internal Revenue Service (SIRS) is 30 days after the duty to deduct arose.
Penalty for Failure to Deduct or Remit WHT
Failure to remit WHT due to the FIRS will attract a penalty of 10% per annum and interest at Central Bank of Nigeria rediscount rate. Furthermore, failure to remit WHT to the SIRS will attract a fine of either ₦5000 or 10% of tax due, whichever is higher, in addition to the principal tax due and interest at the bank lending rate.
Qualifying Transactions for Withholding Tax
Withholding tax is deducted at source only on qualifying transactions. It may also represent the final tax liability on certain franked investment incomes.
What are franked investment incomes?
Franked investment incomes are incomes on which tax has already been paid (usually deducted at source) and are thus exempted from additional tax by the investor. Dividend and Income on unit trust are common examples of franked investment incomes.
Let’s say a company makes a profit at the end of their fiscal year, the company pays a Companies Income Tax on that profit and then a percentage of the profit after tax is then paid to its shareholders as dividend. This dividend is no longer taxed because the tax was already deducted previously or at source.
The following are qualifying transactions on which WHT are deducted using appropriate rates for individual and corporate beneficiary:
|Qualifying Transactions||Individual Beneficiary (%)||Corporate Beneficiary (%)|
|Commission, Consultancy, Technical and Management Fee||5||10|
|Contracts and Agency Arrangements||5||5|
This includes rental income on both real and personal property. As a rule, income on a property (rent, hire, lease payments or rights-royalties) situated in Nigeria is liable to tax in Nigeria – the place of payment notwithstanding.
Dividend refers 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 final tax.
This is income from investments of every kind. This income, like interest received by a Nigerian company, with exception of financial institutions, is liable to WHT. Interest payable to a non-resident investor is also liable to WHT at the appropriate rate and funds the final tax.
These are specialized services rendered by persons with the required knowledge and skills, like Management consulting.
This refers to all types of construction contracts, including road construction, laying of pipelines, maintenance activities and service charges.
This is an annual amount due to Directors, usually payable quarterly, for services rendered to an organisation as a Board member.
Contracts and Agency Arrangements
Contract and agency arrangements cover all forms of supplies, deliverables, or the likes. However, note that it does not extend to contract for the outright sale and procurement of goods and services in the ordinary course of business.