A Comprehensive Guide to Withholding Tax (WHT) in Nigeria

A Comprehensive Guide to Withholding Tax (WHT) in Nigeria

Withholding Tax (WHT) is a fundamental and proactive mechanism in the tax administration framework in Nigeria, designed to deduct income tax at the source of payment. Regulated primarily under the Federal Inland Revenue Service (FIRS) for corporate entities and State Boards for individuals, the system mandates that a person making a specified payment to another deduct tax at the prescribed rate and remit it directly to the relevant tax authority. The system encompasses a wide range of transactions that cover contracts for goods and services, consultancy, rent, dividends, interest, and royalties. By putting the burden of the initial collection on the payer, the Nigerian government ensures a consistent source of income, less tax evasion, and simplifies the tax process for the ultimate payer, who receives a credit for the tax already withheld. This guide presents an overview of the Nigerian WHT regime, such as its applicability, rates, compliance procedures, and the severe financial costs of non-compliance.

Recent Amendments

The Nigerian tax environment is fluid, and reforms are always underway under the Finance Act. While the underlying principles of WHT have not been modified, it is important that you remain aware of the developments each year through the Finance Acts. Recent focus areas have included:

1. Clarification on Digital Assets: The Finance Act 2023 introduced a 10% Capital Gains Tax on disposals of digital assets. Although this does not directly change WHT, it does signal that the digital economy is increasingly regulated, which could, in the future, impact WHT considerations for service providers in this area.
2. Enhancing the FIRS Powers: Ongoing reforms are making the FIRS enforcement and ability to gather data much stronger, and thus, compliance remains critical.
3. Clarification on Deductibility: The tax authorities are reiterating that where a WHT is not deducted, the underlying expense is disallowable in calculating Companies Income Tax, so that the taxpayer would be doubly liable, which greatly increases the taxpayer's tax liability.

Scope & Applicability

The obligation to deduct WHT is broad and applies to all "persons," including individuals, corporations, and government agencies. The key determinant is the nature of the transaction. Specified transactions include:

• Contracts for the Supply of Goods: All contract types for purchase of goods.
• Contracts for the Supply of Services or Skills: All contracts for services or skills, i.e. consultancy, professional fees (legal, audit, etc.), other technical services.
• Rent or Leasing: Monthly payment for use of property (land, buildings).
• Dividends: Payment of profit to shareholders.
• Interest: Payments of loans, deposits, and bonds.
• Royalties: Payment for use of intellectual property.
• Director's fees: Payments to directors for work.
• Commission: Payments made for agency work.

Compliance Process & Requirements

WHT compliance process is an elaborate routine, consisting of a monthly endeavor on the part of the paying party (the "withholding agent"):

• Registration: The firm must register with the FIRS or State Board of Internal Revenue (for an individual) and obtain a Tax Identification Number (TIN).
• Identification & Deduction: If the payer is making a payment against a particular transaction, the payer must:
• Identify the correct WHT rate.
• Calculate the WHT amount (e.g., on a N1,000,000 consultancy fee to a company, WHT due is N100,000).
• Deduct this amount from the payment to the beneficiary. The net amount (N900,000) is paid to the service provider.
• Remittance: The deducted WHT must be paid to the relevant tax authority (FIRS or State Board).
• Deadline: On or before the 21st day of the month following the month of deduction (FIRS). Most State Boards follow the same rule.
• Method: Payment is made electronically via the FIRS or State Board's online platform.
• Filing of Returns: Alongside the payment, the withholding agent must file a monthly WHT return.
• This return details all deductions made during the month, including the beneficiary's name, TIN, amount paid, and WHT deducted.
• The filing deadline is also the 21st of the following month.
• WHT Credit Note (Certificate) issue: After payment of the tax, the withholding agent is required to issue a proper WHT credit note to the beneficiary. The certificate is important as it serves to evidence payment of tax on their behalf, so they can claim it as a credit against their final income tax obligation or for a refund if paid in excess.

Deadlines & Timelines

• Monthly Remittance and Filing: The 21st of every month is the critical deadline for both paying the WHT deducted in the previous month and submitting the corresponding return.  
• Annual Returns: Companies must also include a summary of WHT transactions in their annual tax returns.

Technical/Reporting Format

Nigeria operates a digital tax administration system.  

• Platform: All remittances and filings are done through the FIRS TaxPro-Max platform for companies and federal obligations. State Boards have their own similar e-portals.  
• Format: The WHT return is filed electronically, and the system generates a unique receipt and credit note for each transaction.

Penalties for Non-Compliance

The penalties for failing to comply with WHT regulations are severe and financially damaging:

Details	Penalty
Failure to Deduct	If a payer fails to deduct WHT, the entire expense is disallowed for the purpose of calculating their company's Income Tax or Personal Income Tax. This may result in a significant rise in the payer's own tax obligation.
Late Remittance	Failure to remit the WHT retained by the 21st of the following month will automatically incur a 10% penalty on the principal tax amount, together with interest at the monetary policy target rate of the Central Bank of Nigeria (CBN)
Non-filing of Returns	You will be penalized on WHT returns as well for non-filing of the returns within the stipulated time.
Liability for Unremitted Tax	If you deduct WHT but fail to remit it, you may be personally liable for the full amount, plus penalty and interest.

Conclusion

In summary, Nigeria's Withholding Tax system requires strict adherence to a monthly remittance and filing deadline (the 21st) and issuing crucial credit notes to beneficiaries. The primary purpose of this regime is to secure government revenue and combat tax evasion, with severe penalties for non-compliance, including full expense disallowance, a 10% penalty on late remittance, and interest charges.

FAQs

1. Who is liable to deduct WHT (Withholding Tax) in Nigeria? 

All payers of transactions (individual or corporate) are liable for deducting the applicable WHT with respect to payments for: contracts, services, rent, dividends, and interest.  

2. What is the difference between WHT on companies and individuals?

The difference is mainly the collecting authority: FIRS for companies, State Boards for individuals.

3. How does the beneficiary claim credit for WHT deducted?

The beneficiary uses the official WHT Credit Note issued by the payer. This note is presented when filing their annual income tax return. The WHT credited is used to offset their total tax liability. If the credit exceeds their liability, they can apply for a refund.  

4. What happens if I don't get a WHT credit note from my client?

Without a WHT credit note, you cannot claim credit for the tax purportedly deducted. You should follow up with the client to obtain it. If they fail to provide it, you may need to pay the full tax on that income and pursue the client for the deducted amount.  

5. Is WHT a final tax?

For some transactions, like dividends and rent for individuals, WHT is often a final tax. For most other transactions, especially service fees and contracts, it is an advance payment of income tax, creditable against the beneficiary's final tax liability.