Withholding Tax In Nigeria: Rates And Its Application

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Switzerland is holding a referendum on the imposition of a 4% tax on video streaming service providers.
Switzerland is holding a referendum on the imposition of a 4% tax on video streaming service providers.

The Federal Inland Revenue Service (information circular No. 2006/02) states that Withholding Tax is an advance payment of income tax; in principle, however, Withholding tax (WHT) is a payment on account of the ultimate income tax liability of the taxpayer or company.

For emphasis, WHT is not a type of tax on its own and neither does it confer any exemption on the filing of annual tax returns by the company which had suffered WHT deductions. The tax is usually deducted at the source when payment is to be made to the beneficiary.

The main objective of the WHT regime is to capture more taxpayers into the tax net by ensuring that taxpayers who had hitherto evaded taxes would be made to pay the same. The overriding objective of the regime is to ensure full disclosure, transparency, predictability, and fairness.

The administration of WHT in Nigeria is vested in the Federal Inland Revenue Service and State Internal Revenue Services.

Finance Act 2019 And Finance Act 2020 Provisions On Applicability Of Withholding Tax In Nigeria

Section 13 of CITA has been amended by the 2019 Finance Act by the insertion of a new paragraph ‘e’ which means that if the trade or business comprises the furnishing of technical, management, consultancy or professional services outside of Nigeria to a person resident in Nigeria to the extent that the company has Significant Economic Presence (SEP) in Nigeria.

It is worthy to mention here that Section 6 of PITA is amended in the Finance Act 2020 by inserting a new Section “6A” to replicate the withholding tax provision in CITA of Finance Act 2019 which states that “Notwithstanding the provisions of section 6 of this Act, where an individual, executor, or trustee outside Nigeria carries on a trade or business that comprises the furnishing of technical, management, consultancy or professional services to a person resident in Nigeria, the gains or profits of the trade or business shall be deemed to be derived from and taxable in Nigeria to the extent that the individual, executor or trustee has a significant economic presence in Nigeria, provided that the withholding tax applicable to income pursuant to this Act shall be the final tax on the income of a non-resident recipient who does not otherwise fall within the scope of section 6 of this Act”.  

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Withholding Tax In Nigeria: Rates And Its Application - Brand Spur

As the case may be, the Act states that the Minister (which is the Minister of Finance) may by Order, determine what constitutes SEP of a non-resident individual, executor or trustee.

 Withholding Tax Rates In Nigeria

The applicable rates and provision of WHT in Nigeria covers transactions of resident companies or individuals and non- resident companies or non – resident individuals.

Tax deductable Companies (%) Individuals (%)
Dividends, Interest and Rents 10 10
Directors fees N/A 10
Hire of equipment 10 10
Royalties 10 5
Commission, Consultancy, Technical and Service fees 10 5
Management fees 10 5
Construction (Roads, Buildings and Bridges) 2.5 5
Contracts other than sales in the ordinary course of Business 5 5

Withholding tax is always deducted at source. Note that dividend received after deduction of WHT is regarded as Franked Investment Income and is not liable to further income tax.

Double Taxation Agreement (DTA) On WHT

Nigeria has double taxation treaty agreements on withholding tax with a few countries with the under listed applicable rates:

Countries Dividend (%) Interest (%) Royalties (%) Management/Technical fees (%)
Belgium 7.5 7.5 7.5 10
Canada 7.5 7.5 7.5 10
China 7.5 7.5 7.5 10
Czech Republic 7.5 7.5 7.5 10
France 7.5 7.5 7.5 10
Netherlands 7.5 7.5 7.5 10
Pakistan 7.5 7.5 7.5 10
Philippines 7.5 7.5 7.5 10
Romania 7.5 7.5 7.5 10
Slovakia 7.5 7.5 7.5 10
South Africa 7.5 7.5 7.5 10
Spain 7.5 7.5 7.5 10
United Kingdom 7.5 7.5 7.5 10

 

In conclusion, returns for WHT are filed 21 days after the duty to deduct must have arisen from companies. However, failure to deduct or remit WHT attracts 10% of the amount not deducted or remitted.

Filing is to be done electronically by companies or individuals by attaching a schedule of all their suppliers for the month with their tax identification numbers (TIN), address of the suppliers, the nature of the transaction, WHT deducted and invoice number.

We advise members to constantly update their knowledge with the relevant tax laws and to always look forward to circulars from the Federal Inland Revenue Service in order to avoid penalties and sanctions.