Lagos Internal Revenue Service Tax collection in Lagos, Taxes in Lagos, Lagos State Government, Personal Income Tax in Lagos, High Net Worth Tax in Lagos, Hotel Occuoancy in Lagos

PECULIARITIES OF WITHOLDING TAX

WITHHOLDING TAX: STATUTORY DUTIES AND RIGHT OF THE TAX PAYER

Nature Of Witholding Tax

Withholding Tax is the deduction of the tax at source from payment made to a taxable person or company in respect of income derivable from services or investments. It is not another form of tax but simply an advance payment of the tax, as the tax deducted at source can be off-set against any subsequent tax liability that may be due in respect of such income. In certain cases, the withholding tax deducted at source is the final tax e.g. Interest and dividend. The enabling Acts never used the phrase ‘Withholding Tax’ but overtime this phrase has crept into our tax language and has held fast till date. The relevant sections of Personal Income Tax Act and Companies Income Tax Act only refer to tax on identified items and not withholding tax.

Enabling Laws

The authority of the deduction of Withholding Tax at source is contained in Sections 69, 70, 72 and 73 of the Personal Income Tax Act in respect of individuals and Sections 78, 79, 80 and 81 of CITA Cap. C21 LFN 2004 in respect of Companies. The Tax provisions referred to above deal with deductions from rent, interest, royalties, dividends, directors’ fees (PITA only) and other payments. It is under these Sections that the application of the general provisions contained in Section 73 PITA and Section 81 CITA widens the scope of Withholding Tax deductions to including building contracts, contract of supplies, consultancy and professional service, which are not specifically mentioned in the Tax Acts.

Tax Remittances and Tax Authorities

Taxes are to be withheld from payments due to corporate bodies and individuals at the rates listed in the appendix and remitted to the relevant authorities on the earlier of 30 days from the date the amount was deducted and the time the duty to deduct arose. The time within which taxes withheld are to be remitted has been reduced from 30 to 21 days for Companies as par the Companies Income Tax Amendments Act 2007. Remittance date in respect of individuals has not been adjusted. Failure to deduct or having deducted, failure to remit to the relevant authority, withholding tax deducted at source from payment due to corporate bodies is an offence punishable on conviction with a fine of 10% of the tax not withheld or not remitted in addition to payment of the tax itself plus interest at the prevailing commercial rate. Similarly, failure to deduct or having deducted, failure to remit to the revenue service withholding tax withheld from payments due to individuals is an offence punishable on conviction with a fine of ₦5,000 in addition to the tax deductible or deducted but not plus interest at the prevailing commercial rate.

Operation Of The Witholding Tax System

When any of the payments listed in the appendix is being made by a payer who is an agent of the relevant tax authority for collection and remittance of Withholding Tax at the appropriate rate, the tax must be correctly deducted from payment and the net paid to the creditor. Except for dividends which can be paid by corporate bodies, the payer has been defined as a company (incorporated or unincorporated). Government Ministries and Departments, Parastatals, Statutory bodies, Institutions and other established organization approved for the operation of Pay As You Earn system, notwithstanding that the payer is in itself not liable to pay tax. For example, an embassy which in itself not liable to pay tax has an obligation to withholding tax when it makes a payment in respect of any of the items listed. The total amount withheld monthly is to be remitted to the relevant authority.

Currency Deduction

The currency in which tax is to be deducted and paid over to the relevant tax authorities is the currency of transaction. Where the transaction is in foreign currency, tax is to be withheld in the foreign currency and paid to the relevant tax authority.

Payment Schedule

Each withholding Tax being paid to the Revenue must be accompanied with a payment schedule, which is a list of those who suffered the deductions that make up the amount been remitted. The payment schedule must contain the following particulars.

  • Name of Taxpayers who suffered the deductions
  • Their addresses
  • The nature of their activities/services and period covered
  • The total amount of tax withheld
  • The balance paid to the taxpayer
  • The tax contract for which returns were being made
  • The date of payment
  • Witholding Tax Credit Notes/Certificate Of Payment

    When payment is made in respect of Withholding Tax deducted at source, the Federal Inland Revenue Service will issue credit Notes in favor of the taxpayer whose names are contained in the Withholding Tax Schedule. Lagos State Internal Revenue Service issues Certificate of Payment. The Certificate of Payments are to be forwarded by the collection agent to the taxpayers who suffered the deductions to enable them claim tax credit against their tax liabilities for the relevant assessment year(s).

  • It is important to emphasis that the presentation of a letter from the collection agent showing that a taxpayer has suffered deduction is not enough for the LIRS to grant Withholding Tax Credit.
  • Similarly, Government Treasury receipts issued by other government departments showing that they have deducted tax from a taxpayer are not enough to grant tax credit.
  • Official Receipt/Payment

    An official receipt is issued in favor of the tax agents when payments are made to the tax office in respect of Withholding Taxes they deducted at source. This receipt is only documentary evidence that the tax agent would have the pending issuance of certificate of payment, which would be issued in favor of individual tax payers listed on the remittance schedule.

    Set-Offs and Refunds

    The recipient of a payment that has suffered tax by deduction at source is entitled to demand from the payer evidence that the payer has not only deducted the tax but has also accounted for the tax to the relevant authority; otherwise, he is unlikely to be given credit for the tax already paid against his total liability for a given year of assessment. In completing his annual tax return, the recipient is obliged to disclose his income and claim the off-set. The claim for offset must be accompanied with relevant certificate of payments. Failure to declare a source of income, even though the income may be exempt from tax, may be tantamount to tax avoidance, which is from all sources and claim all the tax reliefs that are due on him. Even where an income is tax exempt, he is obliged to disclose. Utilized Withholding Tax credit could be used to offset corporate tax liabilities accruing prior to or subsequent to the year to which the credit relates. In addition, a new sub-section 7 has been added to the Companies Income Tax Act through the 2007 Amendments Act which allows Corporate taxpayers to obtain a direct refund of any excess tax paid has been inserted. No such amendment has been made to personal income tax, the import of which is that the right of off-set for individual tax payers will continue to be restricted to the year in which the withholding tax relates.

    Conclusion: The Distinctions between Witholding Tax and Value Added Tax

    The distinction between deduction of Withholding Tax and VAT is very important. Incidentally, the rate for Withholding Tax deduction on some income and VAT on some items are same. Withholding Tax is paid to the relevant authority depending on whether the taxpayer is a corporate body or an individual. The VAT on the other hand, can only be paid to the Federal Inland Revenue Service under the Nigerian Tax Laws. VAT is a form of indirect tax while withholding tax is a direct tax. Withholding tax is deducted from income while VAT is on goods and service. The individual who suffered withholding tax has the right to set it off against future income, VAT cannot be so off-set.