Frequently asked questions and answers on Withholding Tax
Question 1: What is Withholding Tax (WHT)?
Answer: Withholding Tax is basically an advance payment of income tax which may be used to offset or reduce tax liabilities. It is an advance payment [to be deducted by every taxpayer, who is an agent of WHT (see Question 10 below) at the point of settling suppliers’ bills] to be applied as tax credit to settle the income tax liability of the years of assessments to which the income that suffered the deduction relates (which is the income of the supplier of goods/ services, from which tax was deducted in advance). Withholding tax is not a tax but a prepaid tax.
Question 2: What is the due date for remitting WHT returns?
Answer: The due date for remitting WHT returns is 21st day of every month following the month in which the deductions were made.
Question 3: What is the rate of Withholding Tax for companies and individuals on transactions?
Answer: Rates of WHT for corporate and individuals on transactions are as follows: –
TRANSACTIONS COMPANIES INDIVIDUALS
Royalties 10 5
Contract of Supplies 5 5
Contract of Construction 2.5* 5
Dividend 10 10
Technical Service 10 5
Professional Service 10 5
Consultancy 10 5
Management Service 10 5
Commission 10 5
Rent 10 10
Interest 10 10
Hire, Charter, Lease 10 10
Directors fees 10 10
* Early 2015, the Minister for Finance (in exercise of the power conferred on her by the Companies’ Income Tax Act) had made amendments to the Companies Income Tax (rates etc., of tax deducted at source (withholding tax)) Regulations, 1997 (“the Regulations”).
The amendment substituted the old paragraph 1, of the Schedule to the Regulations with a new paragraph 1, which reduced the withholding tax rate on all aspects of building, construction and related activities (excluding survey, design and deliveries) to 2.5% from the former 5%.
The new paragraph 1 explicitly excluded “survey, design and deliveries” from the reduced rate which means that the hitherto 5% withholding tax rate is still applicable to such activities. Also, the reduction in rate was given effect under the Companies Income Tax (CIT) Act, implying that the reduction applies only to incorporated entities which alone are taxable under the CIT Act. Individuals or unincorporated entities are not included in this rate reduction.
Thirdly, the amendment was contemplated to cover only ‘Road Construction’ and not all aspects of construction.
Given the many controversies birthed by this amendment, the Federal Inland Revenue Service (FIRS) has made moves to seek the approval of the finance minister to revert to the previous rate of 5%.
Question 4: What is the content of remittance schedule of Withholding Tax Returns?
Name and address of the Agent/Depositor.
TIN of the Agent/Depositor.
The name and address of the Taxpayer/Beneficiary.
TIN of the Taxpayer/Beneficiary.
The nature of the transaction.
The gross value of the business on which WHT is being deducted.
The applicable rate of WHT.
The amount of WHT deducted.
The period covered.
Question 5: What is Withholding Tax Credit Note?
Answer: This is the document issued by the Tax Authority showing that a taxpayer has suffered tax deduction at source.
Question 6: What are the contents of Withholding Tax Credit Note?
Answer: Withholding tax credit note will generally include the following information.
Credit note number.
The name of the agent/taxpayer who deducted and remitted the Withholding Tax.
The name of beneficiary from whose income WHT was deducted.
The nature of transaction.
The date of the transaction.
The name of the bank through which remittance was effected.
The amount deducted.
The period covered.
Question 7: Can WHT Credit note be used to offset late returns penalty (LRP)?
Answer: No, WHT Credit Note cannot be used to offset LRP. Penalty is not Tax: WHT Credit Note can only be used to offset income tax due.
Question 8: Why does it take longer time to confirm WHT Credit Notes issued by the same FIRS?
Answer: Confirmation of WHT Credit Notes took longer time because of the manual process involved. Confirmation will now be done on-line with the FIRS web-portal.
Question 10: Who are the agents of WHT?
Answer: The agents of WHT are;
Corporate bodies (companies).
Individuals, firms and sole traders.
A statutory body, a public authority and other institutions or organizations.
Government Ministry, Department or Agency and Local Government.
Question 11: Is there any exemption from Withholding Tax?
Answer: Yes, there are certain transactions that are exempted from WHT, such as;
Direct purchase across the counter.
Direct purchase of raw materials from supplier as distinct from contract of supplies.
Sale in the ordinary course of business.
All imported goods.
Income exempted from income tax.
Claims in insurance business.
Interest on bonds.
Dividends redistributed by Holding Companies.
Question 12: What are the relevant documents required for filing WHT Returns?
Answer: Relevant documents for filing WHT includes**:
Evidence of payments to an authorized banks’ e-ticket.
Schedule of WHT deducted showing:
Name of supplier.
Nature of supply.
TIN of agent making remittance.
TIN of beneficiary (taxpayer).
**The FIRS is responsible for collection of WHT in respect of limited liability companies, individuals and unincorporated entities operating in the Federal Capital Territory (FCT) and non-resident individuals and companies, while the Tax Authority of the relevant State, where an individual or unincorporated entity (operating outside FCT) who suffers withholding tax is resident, is responsible for collection of WHT deducted from payments due to those individuals or unincorporated entities.
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