Breakdown of tax legislation in Nigeria

The importance of taxation in any economy cannot be overemphasised, and its effects remain significant. It helps greatly in the redistribution of income and gives the government funds that it can use to finance public services such as provision of adequate national security, public infrastructure, social security services, power, a network of roads and a host of other social amenities. The ability of the state to generate a substantial amount of revenue from taxes opens up opportunities for it to provide public services and improve the economy.

Corporate Income Tax 

The relevant legislative provisions governing the taxation of corporations in Nigeria state that corporate income tax (CIT) is payable on the profit of a company accruing in, derived from, brought into or received in Nigeria. Other than companies engaged in petroleum services operations, the applicable legislation governing the taxation of companies carrying out business in Nigeria is the CIT Act. The legislation has undergone several amendments to date, and with a business environment that is ever-changing and dynamic, more amendments are being proposed. Consequently, a company is chargeable to tax in its own name or in the name of a principal officer, attorney, factor, agent, receiver, liquidator or its representative(s) in Nigeria. Resident companies are liable to CIT on their worldwide income, while non-resident companies are subject to CIT on their Nigerian-sourced income.

The CIT rate is 30% and is assessed on a preceding year basis (i.e., tax is assessed on profits for the accounting year ending in the year preceding assessment). Investment income paid by a Nigerian resident to a non-resident is considered to be sourced in Nigeria and subject to withholding tax at source, which serves as the final tax. In respect to business profits, a non-resident firm that has a fixed base or a permanent establishment in Nigeria is taxable on profits attributable to that fixed base, and as such is required to register for CIT and file tax returns. Any withholding tax deducted at source from its Nigerian-sourced income is available as an offset against the CIT liability.

Small Businesses & Tax 

A Nigerian company is eligible to be taxed at a rate of 20% of its total assessable profits for the first five years of assessment if it is engaged in the following activities:

• Manufacturing or agricultural production;
• Mining of solid minerals; and/or
• Wholly export, and from which its trade and earning total gross sales (turnover) of less than N1m ($3160 at the time of printing) for the year.

The time limit may be extended by two years where the company can provide evidence of good records and management and has remained in the sectors already mentioned. This concessional rate of tax is not applicable to a firm that is formed to acquire the whole or part of a trade or business previously carried on by another company.

Pre-Operational Levy

Where an enterprise has not commenced business after at least six months since its incorporation date, it shall, for each year it obtains a tax clearance certificate (TCC), pay the following levies:

• N20,000 ($63.10) for the first year; and
• N25,000 ($78.90) for every subsequent year before a TCC is issued.

Minimum Tax Basis 

An enterprise may be charged a minimum tax if in any year of assessment the ascertainment of total assessable profits from all the revenue sources of a company results in any of the following consequences:

• A loss;
• No tax payable; and/or
• Tax payable which is less than the minimum tax.

Minimum Tax Rates

Where a company’s turnover is N500,000 ($1580) or less and the company has been in business for a minimum of four calendar years, the minimum tax to be levied and paid shall include the following:

• 0.5% of gross profit;
• 0.5% of net assets;
• 0.25% of paid-up capital; and
• 0.25% of turnover of the company to the tune of N500,000 ($1580).

Whichever is the highest and where the company’s turnover exceeds N500,000 ($1580), the minimum tax will still be calculated as stated above, plus 0.125% of turnover in excess of N500,000 ($1580).

Minimum Tax Exemptions 

The foregoing provisions on minimum tax are not applicable to:

• A company that is carrying on agricultural trade or business;
• A company with at least 25% imported equity; and
• Any company for the first four calendar years of its commencement of business.

Tertiary Education Tax 

The tertiary education tax, which is governed by the Tertiary Education Trust Fund (Establishment, etc.) Act 2011, imposes an education tax at a rate of 2% on the assessable profits of companies registered in Nigeria. The Federal Inland Revenue Service (FIRS) is charged with responsibility for the assessment and collection of tertiary education taxes from all companies. The assessment of a company for the purpose of the tertiary education tax is done at the same time as the company is being assessed for CIT or petroleum profits tax.

While the tertiary education tax does not include provisions for matters relating to the assessment and collection of the tax, the provisions of the CIT Act and Petroleum Profits Tax Act relating to the assessment and collection of CIT and petroleum profits tax, as the case may be, shall apply mutatis mutandis to that matter. The tertiary education tax is due and payable within 60 days after the FIRS has served the notice of assessment.

Offences & Penalties 

Failure to pay the tertiary education tax on the due date (i.e., within 60 days from the date of service of the notice of assessment for the company) attracts a 5% penalty of the tax unpaid. In addition to the penalty of 5%, the following fines shall be applied:

• For first-time offenders there may be a fine of N10,000 ($31.57) or imprisonment for a maximum term of three years; and
• For second or subsequent offenders there may be a fine of N20,000 ($63.14), imprisonment for a term of five years or both.

Where a company is found to have committed an offence under the Education Tax Act, every director, manager, secretary or other similar officers of the company shall be considered guilty of that offence and liable for punishment, unless he or she can prove that the act or omission constituting the offence took place without his or her knowledge, consent or connivance.

IT Development Levy 

The National IT Development Agency (NITDA) Act 2007 imposes a levy of 1% on the profits before tax for the companies and enterprises listed below and which have an annual turnover of N100m ($315,700) or more. The businesses included are as follows:

• GSM service providers and all telecommunications companies;
• Cyber companies and internet providers;
• Pension managers and pension-related companies;
• Banks and other financial institutions; and
• Insurance companies.

When paid by the companies the levy shall be considered tax deductible – that is the levy is an allowable deduction in computing companies’ profits for tax purposes. All monies accruing to the National IT Development Fund and accounts of the NITDA from the sources specified in the act shall be exempted from income tax, and all contributions to the fund and accounts of the agency shall also be considered tax deductible.

The NITDA Act 2007 also empowers the FIRS to assess and collect the IT development levy. The assessment of an enterprise for the purpose of the levy is conducted at the same time as the company is being assessed for CIT. The NITDA Levy is due and payable within 60 days after the FIRS has served notice of assessment to a company.

NITDA Offences & Penalties 

Failure to pay the NITDA levy on the due date may lead to a penalty. Where an offence under NITDA is committed by a corporate body, or another association of individuals, every chief executive officer of the corporate body or any officer acting in that capacity, or on his or her own behalf, and every other person purporting to act in that capacity is considered to have committed an offence, unless he or she can prove that the act and/or omission constituting the offence took place without his or her knowledge, consent or connivance.

Any corporate body or person who commits an offence under NITDA where no specific penalty is provided is liable on conviction to the following:

• For a first offence there is a fine of N200,000 ($631), imprisonment for a term of one year or both a fine and imprisonment; and
• For second and all subsequent offences there is a fine of N500,000 ($1580), imprisonment for a term of three years or both.

The institution of proceedings or imposition of a penalty does not discharge a company’s liability to pay the levy due to the FIRS.

Excess Dividend Tax 

A company may be required to pay dividends from profit on which tax is not payable in the following situations:

• It has no taxable profit;
• Its taxable profits are less than the dividend paid; and
• The company would be charged tax on the dividend declared or paid as if the dividend is the total taxable profits of the company for the relevant year of assessment.

Return Requirements 

A new company must file its returns within the first 18 months from the date of incorporation or six months after its first accounting period, whichever is earlier, within six months of the year-end of the company’s accounts. In practice, tax returns may be delayed until the first working day of the following calendar year for companies with a financial year-end date between January and June 30. This is intended to align corporate tax returns with the relevant fiscal year.

Failure to file tax returns may attract a penalty of N25,000 ($79) for the first month in which the failure occurs and N5000 ($15.8) for each subsequent month in which the failure continues. Upon conviction, the responsible officer of the company may be liable to a fine of N100,000 ($315.70), two years’ imprisonment or both.

Industrial Training Fund 

The Industrial Training Fund (ITF) was established under the ITF Act in 1971 and further amended in 2011. The act was established in order to utilise contributions to the fund and, among other things, to provide, promote and encourage the acquisition of skills in various industrial sectors. It also provides a mandate to generate a pool of indigenous, trained manpower sufficient to meet the needs of the private and public sectors of the economy. The functions of the ITF include the following:

• Organising research and training as a form of support for the other activities of the fund;
• Building training facilities of its own;
• Identifying areas of natural need; and
• Encouraging greater involvement by employers in the organisation and development of training programmes and facilities, including the establishment of group training salaries and centres in certain areas of economic activity.

Employers’ Contribution

The ITF Act also stipulates that every employer with five or more employees, or with an annual turnover of at least N50m ($157,850), is obligated by Section 6 of the ITF (Amendment Act) 2011 to contribute 1% of their total annual payroll to the ITF as part of the employers’ contribution to the training of employees in Nigeria. The provisions of the act also require that every employer make the payment of 1% of the gross payroll to the fund no later than April 1 of the following year.

If an employer fails to make a payment to the fund, 5% of the amount unpaid shall be added for each month or part of a month after the date on which the payment was due. The private sector will do well to promote and institutionalise the objectives of the ITF as this will make Nigerian products and brands more competitive in regional and international markets.

Personal Income Tax 

The legal basis for this tax can be found in the provisions of the Personal Income Tax (PIT) Act 104 of 2011. Every taxpayer in Nigeria is liable to pay tax on the aggregate amount of his or her income, whether derived from within or outside Nigeria. The salaries, wages, fees, allowances, and other gains or benefits given or granted to an employee are chargeable to tax. Under the act, employers are deemed to be agents of the tax authority for the purposes of remitting taxes deducted from salaries due to employees.

However, the residency of a taxpayer determines the extent of a taxpayer’s liability in Nigeria. A person’s place of residence, for this purpose, is defined as a place available for his or her domestic use in Nigeria on a relevant day, excluding hotels and guesthouses. A person is deemed resident in Nigeria if he or she resides in Nigeria for 183 days in any 12-month period; however, expatriates holding residence permits are also liable to tax in Nigeria even if they reside in the country for less than 183 days in any 12-month period.

Once residence can be established, the tax authority of the state in which the taxpayer has his or her place of residence or principal place of business is the authority to which tax is owed. PIT is made up of direct assessment for self-employed persons and enterprises, and the pay-as-you-earn (PAYE) programme for salary earners.

PAYE 

PAYE is a method of collecting personal income tax from employees’ salaries and wages through deduction at source by an employer as provided by the relevant sections of the PIT Act (Section 81 of PIT Act Cap P8 LFN 2011). It is also referred to as employees’ tax, which is the tax required to be deducted by an employer from an employee’s remuneration paid or payable. The due date for remitting PAYE is the 10th day of every month following the month of deduction.

Section 81(2) of the PIT Act requires every employer to file a return with the relevant tax authority for all emoluments paid to its employees. Furthermore, the act requires that they must be filed no later than January 31 of every year with respect to all employees for the preceding year. Section 81(3) prescribes a penalty on conviction of N500,000 ($1580) in the case of a corporate entity and N50,000 ($158) in the case of an individual where Section 81(2) is breached.

PAYE does not differ from PIT in that the rates used for computation of tax due are the same. The current rates applicable to chargeable income are:

• 7% for the first N300,000 ($947);
• 11% for the next N300,000 ($947);
• 15% for the next N500,000 ($1580);
• 19% for the next N500,000 ($1580);
• 21% for the next N1.6m ($5050);
• 24% for income more than N3.2m ($10,100); and
• A minimum tax rate of 1% of gross income if the taxable income is below N300,000 ($947).

The PIT Act has defined gross emolument as the aggregate of wages, salaries, allowances ( including benefits-in-kind), gratuities, pension, superannuation and any other income derived solely by reason of employment (Section 33(2)). Employee incomes exempted from the tax include:

• Medical or dental expenses incurred by the employee;
• Retirement gratuities and compensation for loss of office;
• The cost of passage to or from Nigeria incurred by the employee;
• Interest on loans for developing an owner-occupied residential house; and
• Leave allowance, which is computed as 10% of the annual basic salary subject to a maximum level of N7500 ($23.70) per annum.

In addition, the sixth schedule of the PIT ( Amendment) Act 2011 lists a number of contributions as tax exempt, and these include the following:

• National Housing Fund contributions;
• National Health Insurance Scheme contributions;
• Life assurance premium;
• National Pension Scheme; and
• Gratuities.

Section 36(6) of the PIT Act also empowers the government to assess the income tax of a taxpayer under a presumptive tax regime based on an order published in the national gazette for that purpose. This suggests a continuation of the best judgment assessment regime where a taxpayer makes it practically impossible for the revenue service to do a proper ascertainment of income and assess tax accordingly. Section 52 prescribes a penalty of N50,000 ($158) for individuals and N500,000 ($1580) for corporate entities where the taxable person fails or refuses to keep books of account which in the opinion of the relevant tax authority are required for the purpose of tax assessment.

Itinerant Worker 

The definition of an itinerant worker has been expanded to include even high-earning persons, so long as they work in more than one state in Nigeria for more than 20 days in three months of an assessment year. The cap on earnings, which had been N600 ($1.89), with respect to an itinerant worker has been removed.

Therefore, it appears that any person who works in more than one tax jurisdiction within an assessment year can be liable for tax in more than one state, if it can be ascertained that he or she worked in the state for more than 20 days in no less than three months of the year. This provision is further buttressed by the amendment to the definition of principal place of residence.

Tax Clearance 

The new PIT Act states that ministries, departments and agencies of the government and banks that require presentation of a TCC for certain transactions are now expected to send such to the issuing authority for verification. Apart from the list of transactions in the Principal Act (Section 85, Subsection 4), new transactions that will require such verification are as follows:

• Change of ownership for motor vehicles by the vendor;
• Application for a plot of land; and
• Any other transaction as may be determined from time to time.

The penalty for transacting the listed businesses without presentation and verification of a TCC is a fine of N5m ($15,800), a term of imprisonment of three years, or both. Penalty for TCC offences related to falsification, impersonation, etc., is now N50,000 ($158) plus twice the tax payable, whereas previously it was N500 ($1.58).

Penalties For Failure To Deduct 

The legal amendments to the section on failure to deduct brings to an end the controversy as to the power of a tax authority to impose interest and penalties for non-deductions or remittance of withholding tax. The benchmarking of interest on tax underpayment against the Central Bank of Nigeria’s monetary policy rate is welcome, as tax authorities can no longer use arbitrary commercial interest rates, which are usually excessive.

Penalties for non-deduction or non-remittance of withholding tax are no longer dependent upon conviction, and interest on underpayment is now charged at the Central Bank of Nigeria’s monetary policy rates rather than prevailing commercial rates. Tax underpayment by government departments and ministries can now be recovered at source via allocations through the office of the Accountant General of the Federation. Interest on underpayment is to be computed on annual basis.

Sections 87 and 88 of States Board of Internal Revenue opens up a means for the appointment of competent and seasoned professionals at State Boards of Internal Revenue. The new criteria, as per the amendment, are as stipulated below:

• Chairman and directors of a State Board of Internal Revenue can be appointed from outside the civil service, but they must be professionally qualified and experienced in taxation;
• Three other board members are also to be appointed on their personal merit to represent each of the state’s three senatorial districts; and
• State Boards of Internal Revenue are now to be funded by 5% of their total revenue collection.

Power To Distrain 

In the new Section 104 of the Principle Act, which replaces the previous Section 104, the following provisions are made:

• It is mandatory for tax authorities to apply under oath to a High Court judge sitting in chambers for the issuance of a warrant to distrain defaulting taxpayers of their properties;
• A tax authority is empowered to keep the goods confiscated for 14 days, after which if the tax owed and the charges incidental to the distress are not paid, the goods may be sold; and
• A court order from a competent jurisdiction is required before immoveable properties can be disposed of by a tax authority, and this includes the authority to enter and search a taxpayer’s premises under Section 53.

In all, the new PIT Act 2011 as amended is aimed at lowering the income liability as envisioned in the national tax policy. This might be in preparation for higher rates via indirect taxes. Companies and employers will need to review their current payroll structures in order to ensure optimum compliance with the new amendments. The importance of this cannot be over-emphasised, especially with the now stringent penalties for contraventions.

VAT 

Value-added tax (VAT) is an indirect tax placed on the domestic consumption of goods and services, except for those that are zero-rated (not liable to tax), such as food and essential drugs, or goods or services generally exempted by law. It is a consumption tax that is levied on a product or services whenever value is added at each stage in the chain of production and at the final sale.

VAT was introduced into the Nigerian system in 1993 by the federal government through Decree 102 of 1993, while invoicing for tax purposes did not commence until January 1994. This resulted in the abolition of the Sales Tax Decree No. 7 of 1986. The rationale behind replacing the sales tax with VAT was informed by a number of factors, which include the fact that the sales tax was targeted at mostly locally manufactured goods, as well as the fact that the sales tax was very narrow in nature.

Goods & Services Liable To VAT 

In Nigeria VAT is regulated by the VAT Act 1993, as well as the VAT Amendment Act 2007, which provides that VAT shall be chargeable and payable on all goods and services except those listed in the first schedule to the act, which include the following:

• All medical and pharmaceuticals products;
• Basic food items;
• Baby products;
• Educational materials, books, etc.;
• Fertiliser, agricultural and veterinary medicine, agricultural machinery, including associated transportation equipment;
• All exports (products), excluding non-oil exports, which enjoy zero-rated status;
• Plant and machinery equipment for use in gas utilisation and downstream operations in the petroleum industry;
• Plants and machinery equipment imported for use by companies in an export processing zone or free trade zone, provided that 100% of the production of such companies is for export, otherwise tax shall accrue proportionately on the company’s profits;
• Commercial vehicles and associated spare parts;
• Non-oil exports;
• Goods purchased by diplomats; and
• Goods purchased for use in humanitarian donor-funded projects.

Definitions 

Humanitarian donor-funded projects include projects undertaken by non-governmental organisations, religious and social clubs, or societies recognised by law as participating in activities that are not for profit and are in the public interest. A “VAT able” person is one who trades in goods and services that are subject to VAT. Every VAT able person is obligated to register for VAT payment. Professionals such as lawyers, architects, accountants, engineers, etc., who provide professional services to their clients are also required to register for VAT. There is, therefore, no threshold for registration.

The VAT Act provides that VAT shall be charged at a rate of 5%. The body responsible for administering VAT is the FIRS. Under the VAT Act, every person conducting business in Nigeria is obligated to register with the FIRS for VAT within six months of commencement of business.

VAT consists of two types of tax: output VAT, which is any VAT collected on behalf of the government, and input VAT, which is any VAT paid to other persons. Where the output VAT in a particular month is more than the input VAT in the same month, the difference is required to be remitted to the government on a monthly basis by the taxable person. Where the reverse is the case, the taxpayer is entitled to a refund of the excess VAT paid. Although in practice, the taxpayer is much more likely to receive a tax credit for excess VAT from the government than to remit the difference.

In sharing the revenue derived from VAT between the three tiers of government, the federal government, through its Revenue Mobilisation Allocation and Fiscal Commission, has applied the following sharing formula:

• 15% for the federal government;
• 50% for state governments and the Federal Capital Territory Abuja; and
• 35% for local governments.

VAT Penalties 

There are various offences and penalties prescribed for non-compliance with the provisions of the VAT Act. For instance, a person who has provided false documents will be liable on conviction to a fine twice the amount under-declared. For tax evasion, a person will be liable to a fine of N30,000 ($94.71) or two times the amount of tax being evaded (whichever is greater), or a term of imprisonment of three years. A person who fails to make an attribution shall be liable to a fine of N5000 ($15.79). Failure to issue a tax invoice will attract a penalty of 50% of the goods or services for which the invoice was not issued.

A person who resists an authorised tax officer is liable to a fine of N10,000 ($31.6), a six-month term of imprisonment or both. If a tax invoice is issued by an unauthorised person, this act carries a fine of N10,000 ($31.6) or a six-month term of imprisonment. Failure to register for VAT attracts a fine of N5000 ($15.79), and if after a month registration is still not completed, the business premises shall be liable to being sealed up.

Failure to collect tax by a taxable person carries a fine equivalent to 150% of the uncollected tax, plus a 5% interest surcharge above the Central Bank of Nigeria’s rediscount rate. A person who fails to keep proper records and accounts is liable to a penalty of N2000 ($6.31) for every month in which the failure continues.

Popularity Of VAT 

Since its introduction, VAT has contributed tremendously to government revenue. Today, VAT is used as an important instrument for fiscal and economic policies in over 50 countries of the world. The countries that operate VAT systems in Europe include Austria, Belgium, Denmark, Germany, Finland, France, Greece, Ireland, Italy, Luxembourg, Norway, Portugal, Spain, Sweden and the UK. Hungary, Poland and the Czech Republic are among the emerging East European free-market economies that are also considering the introduction of VAT.

In the region of Central and South America VAT is used in Argentina, Bolivia, Brazil, Colombia, Costa Rica, Ecuador, Guatemala, Mexico, Honduras, Peru, Uruguay, the Dominican Republic and Haiti. In Asia countries that operate the VAT system include China, India, Indonesia, South Korea, Taiwan, Pakistan, Philippines, Japan and Thailand.

In the Middle East, Israel and Turkey use the VAT system. In sub-Saharan Africa, Nigeria is joined by Benin, Botswana, Burkina Faso, Guinea-Bissau, Kenya, Lesotho, Madagascar, Mali, Mauritania, Morocco, Niger, Senegal, South Africa, Swaziland and Togo in operating a VAT system as part of their overall taxation framework.

It was the impressive performance of VAT in virtually all these countries where it has been introduced and put into practice that influenced the decision to introduce VAT in Nigeria. This is as a result of the fact that VAT is a consumption tax that is relatively easy to administer and pretty difficult to evade, hence the wide embrace by many countries throughout the world.

The revenue derived from VAT is a significant source of revenue for the Nigerian government. For example, the actual VAT revenue for 1994 was N8.18bn ($25.8m), which was 36.5% higher than the projected N6bn ($18.9m) for the year. Similarly, actual VAT revenue for 1995 was N21bn ($66.3m) compared with the projected N12bn ($37.9m). Considering the total federal revenue collected in 1994 and 1995, VAT accounted for about 4.06% and 5.93% of tax revenue, respectively. In 2008 as much as N404.5bn ($1.28bn) was collected via VAT, which amounted to 5.1% of total revenue.

VAT & Economic Growth 

The addition of value to the economy through new economic activities sustains economic development; however, VAT is one of the main means of providing capital to the government via taxation revenues to finance necessary developmental projects. In Nigeria it has improved the social and macroeconomic indicators of the economy for the past 23 years.

VAT has also helped in accelerating economic growth by mobilising privately held resources, which automatically boost public revenues, enhancing consumption patterns and generating savings. All these methods help a great deal in sustaining the economic development of the country.

When compared with other taxes, such as petroleum profits tax, CIT, PIT, capital gains tax, etc., that have long been in existence, one can argue that VAT has also contributed greatly to the country’s economic development. When referring to VAT as a major tool for sustainable economic development in Nigeria, one cannot but point out that revenue generated by VAT has been utilised by the government for various infrastructural developments, including railway and road construction, educational advancement and so on. Apart from generating revenue for the government, it has also played a role in employment creation, which has benefitted a number of people. That VAT has helped in taxing the untaxed sector of the economy is another point worthy of mention. It is a tax that one must pay at one time or another regardless of whether the person is an individual, corporation, employee, employer or self-employed, and this is a significant reform in Nigeria’s tax system.

With the recent global economic recession and diminished oil prices, the government is facing the need to continuously raise revenue from taxes without further stunting economic growth. With this in mind, it is worthy of note that taxes levied on personal income and company income tend to reduce economic growth. Hence, in 2016 the Nigerian government decided to focus more on deriving revenue from VAT, which is a consumption tax. The advantage of this is that a person will not be taxed based on his or her interest, dividends and capital gains. It, therefore, relieves the tax burden for low savers or low-income earners.

What Is Withholding Tax 

Withholding tax is basically an advance and indirect source of taxation deducted at source from the invoices of the taxpayer. The main purpose of withholding tax is to capture as many taxpayers that may have evaded tax, into the tax net. Withholding tax rates usually range between 5% and 10%, depending on the type of transaction and the collecting authority for the tax, which can be either the FIRS or the State Inland Revenue Service.

Withholding tax is also called retention tax and is a government requirement for the purchaser of an item that creates income to withhold or deduct tax from a payment, and pay that tax to the government. In most jurisdictions, withholding tax applies to employment income. Many jurisdictions also require withholding tax on payments of interest or dividends. In most jurisdictions, there are additional withholding obligations if the recipient of income is resident in a different jurisdiction, and in those circumstances withholding tax sometimes applies to royalties, rent or even the sale of real estate. Governments may also use withholding tax as a means of combating tax evasion, and sometimes impose additional withholding tax requirements if the recipient has been delinquent in filing tax returns or in industries where tax evasion is perceived to be common.

Who Is Taxable 

All persons, companies, etc., whose income is liable to income tax are subject to withholding tax. However, exempt entities include educational institutions, government ministries, parastatals and other agencies of government, as they tend to be agents for the collection of withholding tax. These bodies are required to deduct withholding tax on any payment made to a taxable body and remit the same to the relevant tax authority. The payer of withholding tax for any activity that comes under this tax requirement shall include companies (corporate or non-corporate), government ministries and departments, parastatals, statutory bodies, any related institutions and other organisations that are approved for the operations of the new PAYE programme.

How It Works

When a company or individual supplies goods or services to another company, an invoice will usually be issued as evidence of the transaction. If, for example, the amount payable by the purchaser is N1m ($3160) and the relevant tax rate is 10%, then upon payment the purchaser will deduct N100,000 ($315.7) from the invoice of the supplier and then remit the sum to the relevant tax authority. The purchaser is also obligated to obtain evidence of remittance in the form of a withholding tax credit note on behalf of the supplier. The supplier can now use the withholding tax credit note to reduce any income tax payable at the end of the year of assessment.

Typically, the withholding tax is treated as a payment on account of the recipient’s final tax liability. It may be refunded if it is determined when a tax return is filed that the recipient’s tax liability to the government which received the withholding tax is less than the tax withheld, or additional tax may be due if it is determined that the recipient’s tax liability is more than the withholding tax.

In some cases, the withholding tax is treated as discharging the recipient’s tax liability and no tax return or additional tax is required. The amount of withholding tax on income payments, other than employment income, is usually a fixed percentage. In the case of employment income, the amount of withholding tax is often based on the employee’s estimated final tax liability, determined either by the employee or by the government. Some governments have written laws which require taxes to be paid before the money can be spent for any other purpose. This ensures that the taxes will be paid first, and will be paid on time as the government needs the funding to meet its obligations.

Typically, it is required that withholding be done by the employer, taking the tax payment funds out of the employee or contractor’s salary or wages. The withheld taxes are then paid by the employer to the relevant government body that requires payment, and applied to the account of the employee, if applicable. In some cases, the employee may also be required by the government to file a tax return based on a self-assessment of one’s tax and self-reporting withheld tax payments. Some systems require that income taxes be withheld from certain payments other than wages made to domestic persons.

Withholding Tax Credit Note 

The withholding tax credit note is a document issued by the relevant tax authority to a beneficiary as evidence that the withholding tax was deducted from its business. It is usually issued to the company that deducted the tax from the invoice, and as such a taxpayer must endeavour to always go back and request it. This is because without it the taxpayer will not be able to claim back the money that has been deducted from the invoice.

A withholding tax credit note will include the following information:

• Credit number;
• Name of the taxpayer (purchaser of your services or goods) who deducted the tax and remitted it on your behalf;
• Name of the beneficiary whose invoice was deducted; and
• Date and nature of the transaction.

Advantages Of A Credit Note 

A withholding tax credit note can also be used to reduce income taxes. Withholding tax is an advance payment of income tax; therefore, if at the end of a financial year the tax payable is N500,000 ($1580) and an aggregate of all withholding tax credit notes is N200,000 ($631), the net tax you will pay to the government will be N300,000 ($947). Thus it is important to keep withholding tax credit notes.

Procedures vary for obtaining a reduced withholding tax under income tax treaties, and the process to recover excess amounts withheld vary by jurisdiction. In some cases, recovery is made by filing a tax return for the year in which the income was received. Time limits for recovery also vary greatly. Taxes withheld may be eligible for a foreign tax credit in the payee’s home country.

Failure To Remit 

In some cases, a customer may fail to remit taxes on time. In this instance, there is nothing much to do except file a complaint and then blacklist the customer. However, the tax authority upon noticing a failure to remit has penalties of 200% per annum of tax not remitted for companies and N5000 ($15.79) per annum for individuals. This means that if a customer fails to remit N100,000 ($316) in withholding tax already deducted from an invoice, his or her penalty will be to pay N200,000 ($631) extra. This penalty also applies to anybody who fails to deduct as well.

Fortunately, though, the tax authority can exercise leniency and grant the defaulter some reprieve against the penalty. Penalties for delay or failure to remit withholding tax to the authorities can also be severe. The sums withheld by a business are regarded as a debt to the tax authority so that upon bankruptcy of a business, the tax authority stands as an unsecured creditor. However, the tax authority will sometimes have legislative priority over other creditors.

Remitting Taxes Deducted 

If taxes have been deducted from a supplier’s invoice, one must file returns at the end of any given month. The first step is to draw up a schedule detailing the list of companies that taxes were deducted from, as well as their addresses, the value of the invoices, the taxes deducted, the rates, and the name and address of the taxpayer and relevant tax authority. After drawing up this schedule, a cheque must be attached for the total amount deducted for the month, which can be paid directly to the bank.

Currently, banks have agents who collect these cheques on the payer’s behalf and can promptly produce a receipt of payment on the payer’s behalf. After obtaining a receipt of payment, the taxpayer may proceed to the relevant tax authority with the attached schedule to be handed with the withholding tax credit notes on behalf of their clients. A file should be kept for all withholding tax credit notes received on behalf of clients for easy accessibility. Most withholding tax systems require withheld taxes to be remitted to tax authorities within specified time limits, which may vary with the withheld amount. Remittance by electronic funds transfer may also be required or preferred.

Withholding Transactions

Withholding tax is mainly for transactions involving contracts of purchase. What this means is that withholding tax can only be deducted from an invoice if it involves supply of goods and services to a destination requested for by a client. Withholding tax cannot be deducted in the ordinary course of business, meaning if a vendor sells soaps and a client comes to the shop to buy soap, the vendor cannot deduct withholding tax from the receipt. However, if the client asks the vendor to supply them, then this entails a contract and as such the vendor is obliged to deduct withholding tax.

Nearly all systems imposing withholding tax requirements also require reporting of amounts withheld in a specified manner. Copies of such reporting are usually required to be provided to both the person on whom the tax is imposed and to the levying government. Reporting is generally required annually for amounts withheld with respect to wages. Reporting requirements for other payments vary, with some jurisdictions requiring annual reporting and others requiring reporting within a specified period after the withholding occurs. A relevant tax authority is either the State Inland Revenue Service or the FIRS. The state government collects withholding tax from individuals or sole traders under the PIT Act, while the FIRS collects all taxes due under the CIT Act.