Withholding tax is an advance payment of tax, deductible at the point of payment or when credit is affected, whichever comes before the other for the activities or services affected.
It should not be believed that withholding tax is an additional cost of the contract, but an advancement of tax. In other words, it is a prepaid tax.
It is one of the types of taxes in Nigeria that is reclaimable, after assessment, from future tax liability.
Withholding tax is suffered at the source and the liability is spread over a series of activities.
So, if you want to understand taxation in Nigeria, you’ll have to understand what withholding tax is, the payment of withholding tax, accounting, penalties, etc.
You may even be wondering, which forms of businesses pay the withholding tax? See this video for more.
Payment of Withholding Tax in Nigeria
Any corporate or incorporated body (including individual’s) who is a recipient of the payment of the credit for the stipulated activities/services is liable to suffer withholding tax.
However, amount deducted is to be regarded as payment on account only, but foreign investors are not affected by this rule, as their withholding tax remains a final tax.
It should be noted that with effect from Jan 1, 1996, withholding tax on dividend, and interest earned from shareholding in Nigeria for any investment is to be a final tax in the hands of recipients.
Also check what education tax is all about in this detailed post. Learn more about Board of Trustee, disbursement and uses of the education tax fund.
Deduction of Withholding Tax
Any corporate or incorporated body, a government ministry, department or agency, local government, statutory body, public authority, any other institutional organization, establishment and enterprises which operates a PAYE and make payment of the specified activities or service are statutory under obligation to deduct.
The specified amount is deducted from the gross and the net paid to the contractor in case of contract activities.
However, the contractor will claim back the tax deducted when he makes the full tax returns of all the incomes at the year and assessment raised.
Remittance of Withholding Tax
Deductions from corporate bodies, residents of the Federal Capital Territory Abuja, Foreign Affairs, Military or Police officers or a non-resident individual shall be remitted to the Federal Inland Revenue Service.
However, deductions from other categories of individuals other than those specified above are to be remitted to the State Internal Service in which the individual is resident.
The time limit for remittances of withholding tax deductions is 30 days to the designated banks in case of the tax payable to the Federal Inland Revenue Service, or where however, the tax payable to States Internal Revenue Service.
A receipt shall be issued to the person who suffered the deduction to cover the amount deducted.
Any agent of deductions or withholding tax shall submit a schedule reflecting details of deductions to the relevant tax authority.
On receipt of the evidence of payment of withholding tax form, the designated banks, the FIRS shall issue withholding tax credits notes in respect of each of the beneficiaries reflecting in the list of the withholding tax schedule sent to the office.
This system is to facilitate the claim of credit for the tax suffered by the beneficiary in the relevant tax authority (FIRS offices).
Also check: The taxation of special companies in Nigeria
Accounting For Withholding Tax
In accounting for Withholding Tax in Nigeria, the payer shall provide relevant information to the tax authority regarding;
- Amount of payment (Gross)
- Amount of deduction
- Amount of remittance
- Location/address of property (in case or rent)
- Names and address of the recipient
- Period covered by the payment
- Accounting period of the company from which dividends are paid (in case of individuals)
- Nature of activities or services
The information above shall accompany the remittance, in addition to a statement of declaration of truth.
Time For Deduction and Remittance
It is stated in the Act that withholding tax should be deducted from the source at the point of payment or when the payment is being accrued.
The time limit for the remittance to the State Board of Internal Revenue should be within 30 days of the deduction or within 30 days the duty to deduct arises, which ever is earlier.
Penalty for Failure to Deduct Withholding Tax In Nigeria
Under the personal income tax decree of 1993, the failure to deduct or after deducting, or failing to remit the amount deducted within the stability time limit, will result in the imposition of penalty at N5,000 or 10% of the amount, either not deducted or remitted, whichever is higher.