In Nigeria, withholding tax (WHT) acts as an advance payment on income tax. It’s a system designed to ensure a steady stream of tax revenue and reduce tax evasion. Here’s a breakdown of how WHT works in Nigeria:
What is Withholding Tax?
WHT is essentially a type of tax deducted at the source of certain payments. When you make payments for goods or services to a resident company or individual, you might be required to withhold a portion of that payment 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
- Rent: Landlords receive rent with a portion withheld as withholding tax by the tenant.
- Dividends: Companies deduct withholding tax from dividends paid to shareholders, typically at a 10% rate.
- Interest: Withholding tax applies to interest earned on loans, deposits, and other financial transactions.
- Royalties: Non-residents receiving royalties in Nigeria are subject to withholding tax.
- Management and Consultancy Fees: Similar to royalties, withholding tax is imposed on such fees paid to non-residents.
Benefits of Withholding Tax
- Curbs Tax Evasion: By collecting tax at the source, the government ensures a baseline level of tax collection, even if the recipient fails to file their income tax returns.
- Boosts Government Revenue: Withholding tax 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 you need to deduct 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 the deadline for filing WHT returns and remitting the withheld tax. This is typically the 21st day of the month following the month the payment was made. Delays can result in penalties.
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 (payer) is expected to remit those withheld taxes to the Federal Inland Revenue Service (FIRS).
The Federal Inland Revenue Service (FIRS) is responsible for administering and collecting 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 withholding tax.
Withholding Tax and Foreign Transactions in Nigeria
Navigating the complexities of Nigerian taxation can be daunting, especially when foreign transactions come into play. Withholding Tax (WHT) adds another layer to the equation, raising questions about its applicability and implications for non-resident companies, treaty agreements, and specific income types. Let’s untangle this intricate web and gain clarity on WHT’s impact on foreign transactions in Nigeria.
For non-resident companies, the landscape differs from domestic businesses. They are generally exempted from the authority to deduct WHT, primarily due to factors like:
Limited Regulatory Control: FIRS lacks the practical means to monitor and verify WHT deductions performed by companies outside of Nigeria’s boundaries. Inspecting their accounting books becomes an infeasible task.
Double Taxation Agreements: Certain treaties exist between Nigeria and other countries (around eight currently) that aim to avoid double taxation. For transactions covered by these agreements, a reduced WHT rate applies, typically 7.5% of the standard rate (e.g., 7.5% instead of 10%). Countries like the UK, Northern Ireland, Canada, France, Belgium, Netherlands, Pakistan, and Romania fall under this category.
Permanent Establishments
However, the exemption for non-resident companies doesn’t grant them the complete freedom to act as they wishe. The concept of “Permanent Establishment (PE)” comes into play, essentially blurring the line between foreign and domestic entities. A PE is established when a non-resident company exhibits certain characteristics within Nigeria, like:
- Possessing a “fixed base” like a factory, office, or branch.
- Utilizing a dependent agent with contractual authority within Nigeria.
- Engaging in large-scale projects like turnkey constructions.
- Operating through affiliated entities in a non-arm’s length manner.
If any of these conditions apply, the non-resident company is deemed to have a PE in Nigeria, effectively placing it within the reach of Nigerian tax regulations. As a result, its income becomes taxable in Nigeria and its PE acquires WHT obligations just like any domestic business.
Exceptions to the WHT Rule
Free Trade Zones/EPZ: A Tax Haven
Companies operating within designated Free Trade Zones (FTZs) or Export Processing Zones (EPZs) enjoy a different scenario. Their status as entities functioning outside the Nigerian Customs Territory grants them exemption from most Nigerian taxes, including WHT. Even their transactions with suppliers outside the FTZ/EPZ are considered outside the domestic tax realm.
Beyond non-resident status and specific zones, certain income types are inherently exempt from WHT. These include:
Insurance Premiums: Premiums received by insurers and stockbrokers fall outside the WHT net, although commissions earned by insurance brokers are subject to the tax.
Dealership/Distributive Trade Turnover: Income earned by distributors and dealers from their trading activities is generally categorized as ordinary business transactions and, therefore, exempt from WHT. However, commissions paid to them by the companies they represent remain subject to the tax.
Telephone Bills: Unlike many other services, telephone bills are explicitly excluded from the WHT ambit.
Understanding the intricate interplay between WHT and foreign transactions in Nigeria is crucial for both foreign companies operating within the country and domestic entities engaging in international business. This knowledge empowers effective compliance, avoids potential penalties, and fosters smoother financial operations.
Automating your Tax Compliance
Filing WHT returns is a legal obligation for anyone responsible for deducting and remitting the tax. The deadline for submission is the 21st of every month following the month the deduction occurred. Failure to file or remit WHT on time comes with hefty penalties: N25,000 for the first month and N5,000 for each subsequent month.
To avoid these penalties and ensure smooth compliance, use AutoComply to automate your tax filings and notify you before taxes are due. Our user-friendly dashboard simplifies the process of filing WHT returns, saving time and ensuring accuracy.
