Many businesses in Nigeria today have failed because their administrators neglected their managerial obligations–perhaps out of ignorance.
Since you will not want your business to fall into such a deadly pit, it is essential to ensure you block certain holes that might make you pay more charges than necessary. One of the holes where many businesses in Nigeria pay more than necessary is the area of withholding tax.
This article was written to provide you with everything you need to know about withholding tax in Nigeria. Withholding tax is also called retention tax
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:
- Construction activities
- Consultancy services
- Professional services
- Management services
- Technical services, etc.
- 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.
- Rents: these are incomes generated from personal physical properties. When a person hires out his properties, the income generated is liable to withholding tax.
- 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.
- 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.
- 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
|Type of Payment||WHT Rate for Companies||WHT Rate for individuals|
|Dividends, Interests, Rents||10%||10%|
|Commissions, Consultation, Technical, Service Fees||10%||5%|
|Construction or Building Contracts||5%||5%|
|Contracts other than outright sales and purchase of goods in the ordinary course of business||5%||5%|
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.
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.