PECULIARITIES OF WITHOLDING TAX
- Taxpayer has no option as to whether to pay it or not as the person making the payment is statutorily required to deduct, and failure to deduct attracts sanction.
- It is an advance payment of income tax and can therefore be utilized as tax credit against income tax liability of the year to which the income relates.
- It represents the final tax in certain cases. For example, when the recipient of the income is a non-resident person and for certain incomes.
- Before now Withholding tax credit cannot be used to off-set tax liabilities of prior or future years except the years to which the income relate. One cannot use it to settle back year or future tax liabilities. However, the Companies Income Tax Amendment Act 2007 provides that unutilized withholding tax credit can be set off against future income and there is also provision for refund. No such provisions have been passed in respect of Personal Income Tax.
- Withholding Tax deductions from payments due to companies in column 1 of the appendix are payable to Federal Inland Revenue Service.
- Withholding Tax deductions from payments due to individuals in Column 2 of the appendix are payable to the State Internal Revenue Authority where recipient is resident.
- The Withholding Tax deduction in Column 2 are payable to the Federal Inland Revenue Service where the payments are due to residents of the FCT Abuja, members of the Nigerian Foreign Service and persons resident outside Nigeria, who derive income in Nigeria.
- Withholding Tax on dividend, interest, rent and royalties when suffered by non-residents represent final tax. Also, with effect from January 1996, Withholding tax on interest and dividend is final when suffered by Nigeria.
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.
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.
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.
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.
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).
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.