Introduction

Income tax[1] is an annual tax levied by the state or federal governments on the income and profits of taxable individuals and companies respectively. In a bid to reduce income tax evasion and to provide government with year-round cash flow, there exists an advance form of income tax, which is deducted at source from the income derived from specified transactions. This advance form of tax is known as Withholding Tax (WHT). Because WHT is an advance form of income tax and not an independent type of tax in itself, persons that have suffered WHT can apply it as tax credit to settle their eventual income tax liability.

For example, Company XYZ’s CIT for 2018 financial year is N1,000,000, and the company has WHT credit notes worth N500,000, the Company would reduce it’s CIT tax liability by its WHT credit notes of N500,000 and pay N500,000 to FIRS as CIT for 2018.

Essentially, WHT is an advance payment of income tax, however, in some instances, it is a final tax payable on an income. For example, WHT deducted from royalties, interest and dividends payable to individuals, both resident and non-resident are final income taxes.

Key facts of Withholding Tax

• WHT is applicable on several specified transactions including, but not limited to the following:   dividends, interest, directors’ fees, consultancy services and management fees.
• Transactions that are ordinarily not liable to tax in Nigeria are also not liable to WHT; thus, contracts and supplies of goods and services performed entirely outside Nigeria by non-resident taxpayers will not be liable to WHT.
• WHT is applicable to transactions carried out by both individuals and companies. Although the WHT rate may defer for transaction types as illustrated in the table below.
• WHT deducted from individuals, sole proprietors or partnerships are payable to the state government in which such entity resides. WHT deducted from companies or incorporated bodies are payable to Federal Inland Revenue Service (FIRS).
• The period for filing WHT is 21 days after the duty to deduct from payments to companies or individuals.
• The penalty for failure to deduct or remit tax is 10% of the amount not deducted/remitted and interest at the prevailing Central Bank of Nigeria re-discount rate and imprisonment for period of not more than three (3) years.
• Companies are required to submit, in electronic form, a schedule of all their suppliers for the month showing the tax identification number (TIN), address of the suppliers, the nature of the transaction, WHT deducted, and invoice number.

The table below shows the WHT rate applicable to the specified transaction types;

Personal Income Tax (PIT) and Companies Income Tax (CIT)