WITHHOLDING TAX RATES IN NIGERIA: ALL YOU NEED TO KNOW

A withholding tax is a system of taxation. it’s more advanced than the Value Added Tax(VAT) system but it is not separate from it as most people erroneously think. It’s an easier way for the government to get more people to pay their tax. Government loses money using other tax systems because people will have to pay their taxes after they have spent part of their income but with Withholding Tax, people will have to pay the government first before spending their income. This system prevents tax evasion and facilitate faster payments of taxes. { Withholding Tax Rates In Nigeria }

WHAT IS WITHHOLDING TAX (WHT)

Withholding tax (WHT) is the tax required by the Law to be withheld by a party from each payment made to another contracting party from the income or services it rendered. When this tax is withheld, it is required to be remitted periodically to the Government Inland Revenue Service who then issue a Withholding Tax Credit Note for the benefit of the party whose income was withheld. Withholding tax can be said to be an advance payment of income tax. In Nigeria, Withholding tax rates in Nigeria had been introduced by the Federal Government to increase it revenue, increase the efficiency of tax collection in the country as well as prevent tax evasion.

Tax Rate

How does Withholding Tax work?

Withholding Taxes are paid by the employer instead of the employee. So the tax is deducted directly from the employee’s salary before it gets into his hands. Once the tax is deducted from the employee’s salary, the employer will have to remit it to relevant tax agencies for the government. The employee is expected to obtain a Withholding Tax Credit Note from the employer as a confirmation that the money deducted from his salary by the employer has been remitted to the government. This withholding tax credit note can also be used by the employee reduce income tax payable at the end of each business year.

The above is just an employer/employee case scenario. Withholding tax covers far more than that. It covers many business transactions that involve contracts. When a company supplies goods or services to another company, an invoice will be issued as a confirmation of payment to the supplier. The company issuing the invoice (the company making payment for the goods/services) will have to pay the Withholding Tax to the government by deducting it from the money to be paid to the supplier. I’ll give an example to illustrate this. Company A supplies company B with raw materials worth N1 million. Company B using the current Withholding Tax rate in Nigeria of 10% (an assumption) will have to deduct a total of N100,000 and pay N900,000 to Company A instead of the N1 million. Company B will then remit the deduction to the government. Company A will then have to go back to company B to collect the Withholding Tax Credit Note as proof that Company B has truly remitted the money to the government. The Withholding Tax Credit Note is very important to company A as it can be used to reduce its total tax at the end of the year – more on how that can be done later in this post.

WITHHOLDING TAX RATES IN NIGERIA

The Withholding Tax Rates in Nigeria { WHT } varies among individuals and companies / corporate bodies. These also vary amongst either the individuals or companies involved. In most cases, however, the Withholding Tax rates for individuals is anything from 5 percent to 10 percent while for companies, it is between 2.5 percent to 10 percent.

WITHHOLDING TAX COLLECTING AGENTS IN NIGERIA

Withholding tax is been collected by all organisations or bodies making payments to
suppliers of goods and services by making deductions on Withholding Tax and then remitting it to the Tax Authority as payments are being made.

DUE DATE FOR FILING WITHHOLDING TAX RETURNS

For filing of WHT, it can be done either on or before the 21st day of the month following the month in which the deductions were made.

DOCUMENTS NEEDED FOR FILING WITHHOLDING TAX RETURNS IN NIGERIA

2 relevant documents are needed for filing a WHT, These includes

• an evidence of payment such as bank teller, e-ticket from a Federal Inland Revenue Service (FIRS) designated revenue collecting bank
• and a schedule of WHT deducted indicating the Name of Supplier or vendor, the Taxpayer Identification Number (TIN) of the supplier or vendor whose tax was withheld and the related amount.

What is a Withholding Tax Credit Note?

The Withholding Tax Credit Note is like your invoice – it’s a proof of payment. If you supplied goods to a company and the Withholding Tax is deducted from your balance, there’s no way you’ll know if the money has been truly remitted to the government except by going back and demanding for the receipt – the Withholding Tax Credit Note. Once you’re able to get the Withholding Tax Credit Note, then you can use it at the end of the year to reduce your total payable tax to the government but without it, you’ll have to pay more money to the government.

Why You Should Always Collect Your Withholding Tax Credit Note

First off, without collecting the withholding tax credit note from your customers there’s no way you’ll know if the customer has truly remitted the money to the government. Sure, you can trust your customers but not everyone can be trusted, so ensure the government gets your tax by going back and obtaining your Withholding Tax Credit Note.

Another important reason you should always go back to your customers for your Withholding Tax Credit Note is that it can help reduce the amount of money you pay to the government as tax. I’ll illustrate this with an example. If at the end of the year, you are supposed to pay N200,000 as a tax to the government but from all the Withholding Tax Credit Notes you’ve collected, the average amounts to N50,000, you’ll have to pay N150,000 as a tax instead of N200,000. The more Withholding Tax Credit Note you collect per business year the less you’ll have to pay as a tax to the government.

What Should I Do After Obtaining My Withholding Tax Credit Note?

After obtaining your withholding Tax Credit Note, the best thing to do is to keep it as safe as you can. You can then take this to the tax office. When you get there 1 of three things will happen.

1. Your tax liability is N1m and you have a Withholding Tax Credit Note of N250,000
   In this scenario, you’ll have to pay N750,000 instead of the N1 million as a tax to the government. However, you must be able to provide all your withholding tax credit note totaling to N250,000.
2. Your tax liability is N400,000 and you have a Withholding Tax Credit Note of N600,000
   In this scenario where your withholding tax is more than your tax liability, you’ll not pay the tax collector any money. The tax collector will need to pay you the amount owed you but the FIRS does not operate that way, it won’t pay you the excess in cash, rather it will carry it to the next year and use it to reduce your tax liability.
3. You do not have any tax liability
   You won’t have to pay any more if your withholding credit note matches your tax liability. For example, your withholding tax credit note is N1 million and your tax liability is N1 million, in this case, you will not pay any tax to the government.
   
   Seeing the above it is important that you always go back to your customers for your Withholding Tax Credit Note –  else you are liable to pay more to the government.
   

What If My Customer Fails To Remit My Tax?

Sadly there’s nothing you can do about this. Although the tax authorities have a penalty for this,  there’s no way you won’t pay more in tax to the government if your customers deferred.

As An Employer/Purchaser When Do I Remit Deducted Taxes?

After making deductions from your customer’s invoice, you’ll have to remit this to the government in order to get a withholding tax credit note which your customers will definitely come back and demand from you. To obtain the withholding tax credit note, you’ll have to file returns at the end of any given month from which the deductions were made. All you have to do is, draw up a schedule giving various details of the companies you deduct the taxes from, like their addresses, the value of the invoices, the tax deducted and the rate, and as the taxpayer, you’ll have to state your name and address. Go with this to the necessary tax agency or even to the bank with the necessary amount. After making payments ensure you obtain a receipt for each of the companies on your list from the tax collector or bank, you’ll need that to collect your customers withholding tax credit note.

How do I Get The Withholding Tax Credit Note For My Customers?

After obtaining the receipt of payment for each of your customers, visit the necessary tax authorities in your schedule to be given the withholding tax credit note.

We hope this article has been most helpful? We’ll like to hear your thoughts about this through the comment section and if you have any question feel free to ask and we’ll be glad to help.

That’s it from NaijaQuest on ” All You Need To Know about Withholding Tax Rates in Nigeria “, as usual, we would like to know your thoughts and suggestions through the comment box and remember like us on facebook @ facebook.com/9jaquest or follow us on twitter @ twitter.com/NaijaQuest. Thanks

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