All you need to know about Withholding tax in Nigeria as an SME.
As an SME, do you think the knowledge Withholding tax (WHT) and how it works in Nigeria is not worthy to be understood, or you belong to the school of thought that leaves everything you do to third parties without bothering on understanding the basics of what could affect your bottom line? Then this post will shock you!
I discovered from a lot of colleagues in the practice and from experience that a lot of SMEs suffer deductions of WHT from their invoices yet remit full tax liabilities at the due date for filing and payment of tax returns even after WHT deductions.
I also understand that a lot of SMEs are not aware and do not know the importance of the credit notes issued upon deductions of WHT on their invoices. Hence they tend to settle their full tax liabilities which is more or less like not maximizing their bottom lines at the end of the fiscal/ tax year in perspective.
Just in case you belong to any of the categories of tax payers I have mentioned above, then this post on Witholding tax in Nigeria, a guide for SMEs is just for you. This is to let you know all the ‘ I need to know information on WHT, regulations, deductions and other information that will help you understand the basics and also ensure your fiscal participation in not only making sure that you are fully compliant with respect to taxes but also understand how you can maximize your profits as a tax payer.
One of the real issues surrounding withholding tax application is the determination of ‘which’ applicable rates to ‘what’ transactions, failure of deduction and remittance of WHT payments, the importance of tax credit notes and any other recent amendment to the laws and regulations guiding Withholding tax in Nigeria.
As an SME, you need to understand the fiscal frontiers of the Nigerian economy, as it relates to the history of taxation and any other types of taxes in Nigeria. The Federal Government has shifted focus from oil revenue to tax as a means of income generation based on the dwindling economic fortunes of the country.
This aggressive tax drive will lead to the government intending to ascertain the completeness of transactions of all tax payers and are therefore looking for loopholes and ways to enforce more stringent penalties that will generate revenue for their expenditure. As an SME, understanding the basics of WHT will guide against you being used as a scapegoat for the government budgeted revenue for the years.
What is Withholding tax in Nigeria?
According to the Company Income Tax Act (CITA) Sections 60-63 and Personal Income Tax Act (PITA) Sections 69-72, Withholding tax in Nigeria is said to be the advance payment of income tax. It is the payment on account of the final income liability of the tax payer. This means that as a tax payer, you are actually paying in advance the tax you are meant to finally pay at the end of your financial year (FY).
It is important that you note that Withholding tax in Nigeria is not a separate type of tax on its own rather an advance payment of your income tax as a business owner. WHT is usually deducted at source when there is a payment to the tax payer whether he is an individual or a registered company.
Also, note that WHT deducted from payments due to a company are remitted to the Federal Inland Revenue Service while WHT deducted from Individuals are remitted to the relevant state tax authorities.
Let us use an easily understandable scenario as entrepreneurs. We will look at these scenarios in two case studies:
As the receiver of goods and services from a supplier. It is expected that an invoice will be issued as the legal evidence that a transaction has taken place. On this invoice, a lot of information will be stated in there like the type of transaction, the cost of each unit of goods or services as applicable and the total amount payable to the supplier.
For example a supplier invoiced you for N100,000 based on the supply of goods and services. What would be expected from you will be to first check the type of transaction, and ascertain whether the supplier is a company or an individual and then charge the applicable rate of WHT on it which is usually either 5 or 10% which is subsequently remitted to the tax authorities.
As an entrepreneur, the law therefore expects that you withhold tax from the payment that is due your supplier. The same also applies when you are the supplier/ or provider of the goods or service. It is expected that your client deducts from the total sum on your invoice.
Therefore, you should not be surprised when you issue an invoice of N100,000 and you N90,000 or N95,000 (depending on the applicable WHT rate) is credited into your account. An entrepreneur with a sound knowledge of withholding tax in Nigeria will quickly acknowledge that WHT has been deducted from his/ her payment.
After deduction and remittance of the WHT to the relevant tax authorities, a tax credit note is issued to the paying party for the benefit of the supplier. This credit note is therefore used by the supplier to claim tax credits when the time comes for the annual filing at the end of the FY.
If the tax payable by you as a supplier at the end of your FY is about N300,000 and you have aggregated a total sum of N70,000 as WHT deducted from all payments due to you during the year, what this means is that you would leverage the N70,000 (which you would have WHT credit notes as evidence of deductions) to reduce your total tax payment from N300,000 to N230,000. Therefore your net payment to the tax authorities (after showing them all WHT credit notes you have kept over the months) would be N230,000.
Unfortunately for a lot of entrepreneurs, they are not aware of this allowance by law to use the WHT credit notes as tax credits and yet still settle their full tax liabilities. Although the good side of this is that the law allows you to use your previous outstanding tax credit notes to settle subsequent tax liabilities. However this should not exceed a particular number of years, else the credit notes becomes null and void. We will get to the explanation in the next lines.
Prior to the amendment of CITA in 2007, there were no clear indications on the utilization of the Withholding tax in Nigeria’s credit notes. Taxpayers were not clear as to the fact whether credit notes that were not used in previous years can be used to offset future tax liabilities, however tax consultants advise their clients to use their credit notes and this was accepted by the revenue authorities.
CITA was therefore amended to provide explanations that WHT can be forwarded indefinitely and utilized against future tax liabilities.
In practice though, the practicability of using the credit to offset tax assessments has been debatable since the FIRS has denied a lot of companies the opportunity to use their credit notes of previous years to offset tax liabilities.
What are the information on a WHT credit note:
- The credit note number
- The name of the tax payer (the purchaser of your goods/ services who deducted and remitted the tax on your behalf
- The tax payer Tax Identification Number (TIN)
- The name of the recipient of the WHT credit note
- The nature of the transaction
- How do I remit the deducted WHT
- Now that you have deducted the WHT from the invoice(s) presented to you. The law requires that you prepare a schedule indicating all the suppliers’ names, the date transaction took place, their company addresses, the value of goods/ services provided, the WHT deducted and rate of deduction, the tax identification number. You will also have to include your name and address as the tax payer.
- You can then proceed to a bank for payment into the government coffers. Before now, the Interswitch pay direct platform was used for all remittances due to the government, but as it is now the Remitta platform is used to remit all WHT due to the FIRS.
As an SME, all you do is take your schedule to the Public Sector division of any bank near you and remit your taxes. The bank in turn makes payment on your behalf, stamps your documents and presents a receipt of payment to you.
Please note that this receipt is not the WHT credit note. It is the only evidence stating that you have remitted your taxes, and you will be expected to take the receipts and your schedule to your relevant tax authority office and present for the issuance of WHT credit notes.
Well, due to bureaucracy and I don’t know what, it takes forever for the tax authorities to print out your WHT credit notes, so I would advise you give it a month or two before approaching the tax office for collection of your credit notes.
What is the implication of my refusal to deduct and remit Withholding tax in Nigeria
There is always a penalty for late remittance of WHT not to talk of non-deduction and non-remittance.
While Section 82 of CITA states that for companies, there is a penalty of 10% on non deduction within 21 days from the date of deduction of the WHT tax or the time there arose the duty to deduct. Apart from the 10% penalty that will be slammed on the defaulter, there is also an interest associated with the non-remitted amount at the prevailing rate for that year.
However for non-remittance of WHT for any reason, even after deduction, the penalty on conviction is a 200% fine of the principal tax due in addition to interest at the prevailing commercial interest rate.
Section 74 of Personal income Tax Act allows individuals up to 30 days for remittance of WHT deducted to the relevant state board of internal revenue.
Failure to remit WHT by individuals will amount to a penalty of a fine of N5,000 or 10% of the tax due, whichever is higher in addition to the principally WHT due plus interest at the bank’s prevailing interest rate.
This penalty is not applicable to only you but also any tax payer whose responsibility to deduct and remit falls on but fails to do so. Therefore it is important that you take note of deductions and ‘remittance’ of WHT.
Withholding tax rates in Nigeria
|Types of WHT||Companies||Individual|
|Divident, Interest, rent||10%||10%|
|Hire of equipment, motor vehicles, plants, and machinery||10%||10%|
|Commission, consultancy, technical and management fees, legal fees, audit fees, and other professional fees||10%||5%|
|All types of contracts and agency arrangements, other than sales in the ordinary course of business||5%||5%|
Do I have to deduct WHT from all my transactions?
Please note that WHT is only deducted on the supply of goods and services to a particular location. WHT is not deducted from Over the counter (OTC) transactions, that is, transactions that involve just the exchange of money over the counter. Take for instance; if you sell food and I come to your shop to buy foodstuffs, then it is a transaction in the ordinary course of business.
However if I enter into a ‘contract’ with you to supply me ‘food stuffs’ then the obligation to deduct WHT arises, and I would be gratified to deduct WHT from you.
Not all companies are subject to WHT deductions:
There are certain taxable payments that are exempt from deductions of WHT. These provisions was made in Section 21 of the CITA, and these are:
- Dividend of a small company involved in manufacturing during the first five years of operations
- Dividend received from investment in wholly- oriented businesses
- Interest from deposit of a foreign non-resident company, provided the deposit is in foreign currencies and brought into Nigeria through the government approved channels.
- To have a more profitable business, I would encourage that you seek more knowledge of withholding tax in Nigeria. Always try to make sure that during contract negotiations and documents presentation, the tax deductions are well spelt out as this is where a lot of SMEs make mistakes. I will also advise that you request for all evidences of WHT remittances that is due to your business. The tax credit is of course beneficial with respect to enabling you claim tax credit or refund when your time for filing of annual tax returns is due.
- Remember that evidence of WHT deductions would be requested by the tax authorities and presenting the credit helps reduce the final tax burden on your business. I will also implore all contract employers too to endeavour to collect WHT credit due to their suppliers from the FIRS. This will help in the provision of a mutually beneficial relationship and also increase the efficiency of cash flow for entrepreneurs and support a tax compliance and efficient system.
Now that you have the basics of withholding tax in Nigeria. Do you have any comments for us? Please drop in the comment section below.