Withholding tax is tax deducted at source from income earned by a taxpayer on a qualifying transactions, investment or income stream.
It is designed to capture tax and information on transactions to prevent tax evasion.
Relevant Tax laws
1) Companies Income Tax Act
2) Personal Income Tax Act
3) Tax regulations introduced from time to time by minister of finance:
(a). S.I. of 1997 – personal income tax [rates, etc. of tax deducted at source (withholding tax )regulations]
(b) S.I.10 of 1997 – companies income tax [rates, etc. of tax deducted at source (withholding tax) regulations]
(c) Personal income tax [rates, etc. of tax deducted at source (withholding tax amendment) regulations of 2000]
Divined ,rent or interest
Hire of equipment , motor vehicles ,plant & machinery
All commissions, consultancy, technical & management fees, legal fees, audit fees, listing fees and other professional fees.
Building ,construction or related activity
All types of contracts & agency arrangement ,other than sales in the ordinary course of business
Rates are reduced to 7.5% on dividend, rent, interest or royalty for entities operating in double taxation treaty countries.
Tax on dividend, rent, interest or royalty is final tax for non –resident companies.
Dividends distributed from petroleum profits are exempt from tax.
Tax Returns & Remittance
Tax Returns are filed monthly with evidence of remittance and a detailed schedule of taxable transactions.
Schedule should show the following details:
Name of supplier Address Nature of Invoice payment Amount Rate @ Y% Tax
Service Date Date
- 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.
- Following payment and filing of returns, the revenue processes credit notes for the suppliers on whose income tax was deducted.
- Credit notes can be used in applying for tax credit against current and future tax liabilities (i.e. where it is not final tax)
- Remittances are due to either federal or state tax authourities.
- Remittances due to federal inland revenue service (FIRS):
- Corporate entities,
- Non resident individuals,
- Members of the armed forces and police,
- Resident of Abuja,
- Foreign officers.
- Remittances due to state internal revenue services (SIRS):
- All other individuals / partnerships resident in the state.
Accounting for Tax
- Tax can either be due to the revenue (payables) or due from the revenue (receivables).
- The first step to complying filing of tax returns and remittances (for payables) is the recognition, for accounting purposes, of liability due to a supplier.
- Timing for tax filing begins at the point where the supplier’s invoice is recorded in the taxpayer’s books as payables or when it is paid, whichever comes first.
- Accounting treatment for WHT payables is as follows:
- Purchase of goods from supplier at 100(if transaction is taxable at, say, 5%)
Dr – Purchases 100
Cr – supplier 95
Cr – WHT payable 5
- Filing of returns and remittances of tax at end of month (whether invoice is settled or not)
Dr – WHT payable 5
Cr – Bank / Cash 5
Tax credits & Refunds
- Tax credits are granted as an offset against current or future income tax (including “minimum” or “dividend” tax)
- They represent a current asset in the taxpayer’s books.
- However a write-off tax receivables will not qualify as an allowable expenses for tax purposes.
- A cash refund of excess tax is possible in law if a taxpayer makes application to the revenue\.this will be followed by a tax audit to determine the extent of tax refund due to the taxpayer
- A refund is due within 90 days following a confirmation by the revenue.
- In practice, the mechanism for issuing refunds (at this current time )is yet to be put in place.
Offences & penalties
- Failure to deduct or remit tax within stipulated time is as follows:
- For corporate entities) penalty is 10% of tax not deducted or remitted plus interest at prevailing commercial rate.
- For individuals/ partnerships) penalty is higher of 5000 or 10% of tax not deducted or remitted plus interest at prevailing commercial rate.
- Companies are no by law forward inuilized tax credits (or receivables)to future periods.
- Time for filing withholding tax returns is now reduced from 30 days to21 days (for filing returns for corporate suppliers only)
- Penalty for failure to deduct or remit tax is now reduced from 200 % of amount not deducted / remitted to 10% (for filing of returns for corporate suppliers only).
Jacobs A. O. (B. Sc.)