Legal & Tax Alert – Companies’ and Personal Withholding Tax Regime
Withholding Tax (“WHT”) is an advance tax payment which is deducted and withheld from any income or disbursement due to a taxable person or to a taxable corporation, for onward remittance to the relevant tax or government collecting authority, against a final income tax liability.
This advance tax payment can be set-off against the final tax obligation(s) of the taxable person or corporation subject to such taxable person applying for and obtaining the Withholding Tax Credit Notes in respect of each advance tax withheld and remitted to the tax authorities.
Tax payers do not have any discretion as to whether to withhold and remit this advance tax in the light of the mandatory statutory obligation on the person making the payment to withhold and remit this advance tax. Failure to deduct or to withhold, and remit this advance tax to the relevant tax authority attracts punitive fines and penalties some of which are enumerated in this tax alert.
Section 78 of the Companies’ Income Tax Act (as amended) (“CITA”) requires that where a company makes a payment to another company or to an individual, either as interest (with inter-bank deposits and royalty excluded), rent, dividend, etc, such a company shall at the time of making such payment deduct an advance tax of ten per cent (10%) of the gross amount that is paid, and remit such deducted and withheld tax to the Federal Inland Revenue Service (“FIRS”) forthwith.
Non-Resident Companies & WHT
Any tax withheld from the income due to a non-resident company or individual is deemed to be a final tax on such non-resident’s income earned from its Nigeria sources provided that the non-resident company does not have a fixed base or permanent establishment for doing business in Nigeria. See Section 78 (4) CITA.
Franked Investment Income. Section 80(3) CITA
Dividend income received after the deduction of the advance withheld tax of ten per cent (10%) of such dividend income is regarded as Franked Investment Income to the company receiving such dividend, and such dividend would not be charged to any further Nigerian tax with regard to the income of the recipient company.
Where however such franked investment income is re-distributed and tax is required to be accounted for on the gross amount of the dividend so earned, such company will be entitled to set-off the tax already withheld on the dividend income in order for double taxation not to accrue on the franked investment income.
Currency for Remitting WHT
All taxes that are withheld are required to be remitted in the currency of the transaction to the relevant tax authority not later than 21 days for corporations, and 30 days for individuals, from the date that the withheld amount was deducted or ought to have been withheld and remitted. See Sections 82 & 84 of CITA.
Unutilised Withholding Tax Credit Notes
The Companies’ Income Tax Amendment Act, 2007 now allows all unutilised withholding tax credits to be set-off against the future tax obligations of the beneficiary of such withheld taxed income. There is however no similar provision with respect to any unutilised WHT credit notes for individuals under the Personal Income Tax regime.
Penalties for Failure to Deduct WHT
Any person obligated to deduct, withhold and remit immediately this advance tax, in the currency of the transaction from which the deduction was effected, but who fails to do so, or having withheld or deducted this advance tax fails to pay it over to the Federal Inland Revenue Service within twenty-one (21) days from the date the obligation to withhold or deduct the advance tax arose, shall be guilty of an offence and liable on conviction to (a) pay in addition to the tax not withheld or where withheld, is not remitted; (b) a penalty of one hundred per cent (100%) per annum on the advance tax withheld or not withheld, or where withheld the advance tax is not remitted; in addition to (c) interest at the prevailing commercial bank lending rates on the advance tax and the penalty for not remitting the advance withheld tax.
PERSONAL INCOME AND WITHHOLDING TAX PROVISIONS
Sections 69-75 of the Personal Income Tax (Amendment) Act (“PITA”) mandatorily requires that where any rent, interest or royalty, dividend or directors fees is paid by a corporation to an individual, or where such income is paid by an individual to another individual, the payer of such income must deduct, withhold and remit forthwith, or otherwise within thirty (30) days of the deduction whether the deduction is made or not, ten per cent (10%) of the gross amount paid as an advance or withheld tax to the tax authority of the State where the recipient of the income resides.
Where the income paid is with regard to interest or royalty income, the rate of the advance tax to be withheld and remi