UNDERSTANDING THE WIDTH OF WITHHOLDING TAX
The need for government to equitably increase the amount it collects as tax, increase efficiency in tax collection vis-à-vis preventing tax payers from evading the payment of taxes through various smart tax avoidance or tax evasion schemes has led to the introduction of withholding tax in many countries including Nigeria. Although withholding tax isn’t a new concept to the Nigerian Tax system, it administration is surrounded by some misconceptions due to the low level of tax education.
Withholding Tax (WHT) is an advance payment of the ultimate income tax liability of the taxpayer or company. As against the unpopular misconception, Withholding Tax (WHT) is not a distinct tax type and therefore has no legislation of its own. It is only a mechanism for the collection of other taxes. Consequently, its application is provided for in the enabling law of other tax types i.e. Section 81 of Company Income Tax Act, Section 54 of Petroleum Profit Tax Act, Section 73 of Personal Income Tax Act and Section 13 of Value Added Tax (VAT) Act.
WHT is not directly collected by the FIRS/ SIRS rather certain Person are liable to deduct WHT on behalf of the relevant tax authority then include company (corporate or non-corporate), government Ministries and Department, Parastatals, statutory bodies, institutions and other established organization approved for the operations of Pay As you Earn System (PAYE).
A taxpayer from whom tax has been withheld is expected to gain withholding tax credit notes from the relevant tax authority via the deducting organization. The withholding tax credit note is in turn used by taxpayer to set off tax assessed within that year or if unutilized within that year can be applied based on the taxpayer request to transfer the credit balance in that year to offset or reduce debit balance of another year.
In cases where there is an excess charge of WHT on a taxpayer, the 2007 amendments to CITA (Section 63 (7)) have even further empowered FIRS to refund proven excess withholding tax to any taxpayer within 90 days of filing a claim.
Incomes subjected to WHT include
Rents: This includes rental income on both real and personal property. As a general rule, income on a property (rent, hire or lease payments or rights (royalties) situated in Nigeria is liable to tax in Nigeria, the place of payment notwithstanding. Where a person rents or hires property/services from another, WHT at the rate of 10 per cent will apply.
Interest: This is income from investments of every kind. WHT is applicable to income from government securities and income from bonds or Treasury bills. Interest on loans paid by a Nigerian company is often not subject to WHT.
Dividends: Refer to income from shares. The income is subject to tax whether it is received by a Nigeria company or a non-resident company. The tax imposed is regarded as final tax, but corporate bodies are allowed to recoup WHT deduction where the dividend is to be redistributed as Franked Investment Income (FII). The Petroleum Profit Tax Act (PPTA) however exempts dividends payable by oil producing companies on petroleum operations from WHT imposition.
Royalty: Refers to unearned income which accrues to the owner from past endeavours. Permission must be obtained before it can be used. It is payment of any kind as a consideration for the use of or the right to use any patent, trade mark or right.
Consultancy/professional/management/technical Services-These are specialised services rendered by persons with the required knowledge and skills. The mere fact that services are provided by a company which has consultancy as part of its name does not by itself render such service as consultancy. The real content of the services being provided must be examined and if it amounts to a consultancy service, then the appropriate rate would apply; the same treatment applies to professional/management services. For instance, if an engineering company is carrying out a construction activity, the proper classification for the services would be ‘‘construction’’ as opposed to professional/technical services; similarly, the use of industrial machinery/equipment to provide a service does not render it to be ‘technical’’ because the industry position requires that only arrangements that involve a transfer of technology should be classified as technical
In the administration of tax, it is a common phenomenon to have some people or class of persons exempted from paying a particular tax. In the case of withholding tax, Companies operating within the Free Trade Zones, Export Processing Zones are exempted from the administration of WTH. Also WHT exemptions are enjoyed on Insurance premium, Turnover/income from dealership or distributive trade and telephone bills.
While collecting WTH on behalf of the relevant tax authorities, there are certain important regulations
Returns for corporate suppliers should be filed within 21 days from end of month of transactions.
Returns for non–corporate suppliers should be filed within 30 days from end of month of transaction.
In practice, tax returns are filed in the same month they occur.
Tax deducted should be remitted to the revenue in exchange for a receipt of payment.
Tax is payable in the currency of the qualifying transaction.
Vis a Vis the regulations listed above, the administration of withholding tax in Nigeria is guided by Offences and penalties. Some of the offences include
Failure to withhold tax or
Failure to remit or late remittance of the tax withheld
Non remittance of the tax withheld within the time limit stipulated by the Revenue.
The Penalties for the offence state are
For companies: A fine of 200 per cent of the tax not withheld or withheld but not remitted, plus interest at the prevailing commercial rate.
For Individuals & other organizations: A fine of the higher of N5,000 or 10 per cent of the amount of tax due, plus the amount of tax deductible, or withheld but not remitted, plus interest at the prevailing commercial rate.
Simultaneously penalty for default would also be calculated in the same currency.
In conclusion, despite the number of changes Nigeria has made to its tax system in the past, there is still a very long way to go and the current situation of things is a no-no. Taxes should be collected effectively and fairly, both in equitable and monetary terms, for our benefit, so as to ensure our desired growth and development. However, to ensure the effective administration of tax, knowledge is key. Understanding The Width of Withholding Tax is just a little drop, watch out for more to come.
This article was written by Aduloju Oluwatofunmi Isaac, A 400 level law student and avid member of The Tax Club,University of Lagos.