The operation of WHT is not peculiar to Nigeria. It is a concept that has been adopted by many countries but subsequently scrapped by most countries. It has been used as a tax mechanism in the United States and United Kingdom as far back as the Second World War but only introduced into Nigeria’s tax regime in 1977. In Nigeria, it is regulated by various income tax Acts and the WHT Regulations.
WHT was introduced in the Nigerian tax system to minimise the incidence of tax evasion, by ensuring that more persons are brought into the tax net through disclosure from the larger taxpayers to whom they supply goods or services. In this regard, it serves as a veritable means of gathering information of commercial activities carried out by both resident and non-resident taxpayers for statistical purposes and for formulating tax policy. It is also an efficient way of collecting tax on non-residents who may not have a strong nexus in Nigeria especially on investment income such as dividend, royalty and interest.
Generally, WHT is an advance payment of income tax, deductible at source on qualifying transactions. It may also represent the final tax liability on certain passive income. Since WHT is seemed as an advance payment of income tax, it can be utilities as a credit against the beneficiary’s income tax liability for the relevant years.
Withholding tax rates are usually 10% or 5% depending on the type of transaction and collecting authority for the tax (which can be a Federal Inland Revenue or the State Inland Revenue). Examples of transactions with 10% rates include Dividend/interest, Rent , charter, Hire,lease. Transactions with 5% rate include contracts and agency arrangements, excluding sales in ordinary course of business. 
Understanding how WHT works.
When a company or individual supplies goods or services to another company an invoice will usually be issued as evidence of a transaction. If for example the amount payable by the purchaser is N1million at the relevant tax rate is 10% then upon payment the purchaser will deduct N100,000 from the invoice of the supplier and then remit 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 tax credit not to reduce any income tax payable at the end of his year of assessment.
The question that naturally arises tax payers is  How do I Use a WHT Note to reduce by income taxes? WHT is an advance payment of your income tax, therefore if at the end of a financial year your tax payable is N500,000 and an aggregate of all your WHT credit note is N200,000, the net tax you will pay to the government will be N300,000. That is why it is important to keep your WHT Note.
furthermore,the WHT credit note is a document issued by a relevant tax authority to a beneficiary as evidence that withholding tax was deducted from its business. It is usually issued to the company that deducted the WHT from your invoice as such you must endeavour to always go back and request for it. This is because without it you will not be able to claim back the money that has been deducted from your invoice.

A WHT Credit note will include the following
1. Credit Number
2. The name of the tax payer (purchaser of your services or goods) who deducted the tax and remitted on your behalf
3. The name of the beneficiary whose invoice was deducted (which is you I suppose)
4. The Date of the transaction including the nature of the transaction
Offences and penalties for Failure to Remit WHT
Section 82 of the CIT Act (as Amended) provides that failure to withhold tax from qualifying transactions or Remit the WHT deductible within 21 days attracts “a penalty of 10 per cent per annum of the tax not withheld or not remitted, as the case may be.
Furthermore, section 40 of the FIRS (Establishment) Act provides that the failure to deduct tax or remit taxes withheld attracts upon conviction, a penalty of 10% of the amount in default, plus interest at the CBN minimum re-discount    rate( now replaced by the monetary policy rate), in addition to the amount not withheld or not remitted.
The applicable penalty based on the personal income Tax Act is 5,000 naira or 10% of the amount of tax due, whichever is higher, in addition to the amount of tax deductible or deducted plus interest at the prevailing commercial rate.
The Legal Basis and Key provisions of WHT
WHT is Governed by the following legislations/ regulations.
▶Personal income Tax (PIT) Act, Cap. P8, LFN 2004 (as amended by the PIT (Amendment) Act, 2011)
▶Companies Income Tax (CIT) Act, Cap. C 21 , LFN 2004 ( as amended by the CIT (Amendment)Act, 2007)
▶Petrolum Profits Tax Act, Cap P13, LFN 2004.
▶WHT Regulations issued pursuant to the PIT Act and The CIT Act.
It is vital to note that-
▶WHT deducted on dividend, interests, rent and royalties due to a non- resident recipient is the final tax payable on such income.
▶WHT should be deducted and remitted in the currency of the transaction.
▶The entity Making the payment is statutorily required to remit the WHT deducted within 21 days after the payment is made or credited , whichever occurs first.
▶The FIRS administers the tax for corporate entities and state Boards of Internal Revenue(SBIRs) administer it for individuals and unincorporated entities.
▶WHT dude on transactions with limited liability companies should be remitted to the FIRS while WHT due on transactions with individuals should be remitted to the SBIR in the state of residence of the vendor.
Practical Issues  and current WHT issues.
1. Ambiguity in the definition  of “ordinary course of business- The schedule of the WHT regulations provides that “all types of contracts and agency arrangements, other than sales in the ordinary course of business are liable to WHT.  Thus, the WHT regulations  do not define the phrase ” ordinary course of business”. The meaning of the phrase has, therefore been a subject of debate.
In the US case of Kelvin C. Haney and Marilyn Sue Melhorn .V. Angela R. Copeland (case no 02-30516), ordinary course of business was defined as any matter which transpires as a matter  of normal and incidental daily customs and practices in business.
Based on the FIRS Circular No. 2006/02, the following transactions are carried out in the ordinary course of business.
▶where there is a dual relationship between parties in a business transaction (i.e where  manufacturer sources raw Materials for production directly from a supplier.
▶Where a manufacturer delivers its normal products to its distributors and dealers for sale.
2 Deductibility of WHT by non- resident Entities-
Based on the tax laws, NRCs are required to withhold tax from payments to Nigerian individuals/companies. However, in practice  this is not done based on the circular issued by the FIRS.
3 WHT Refund- Theoretically where the WHT deducted from a company in a tax year is higher than its income tax liability for the tax year, the FIRS  is expected to refund the excess tax if the taxpayer applies for a tax refund. The refund is expected yo be paid after a proper audit has been conducted.
However, in practice, companies are usually left with no option but to carry forward the tax credit for offset against the income tax liability arising in subsequent tax years, due to the bureaucratic bottlenecks currently associated with the tax refund pocess.
The audit exercises convicted in connection with refund applications are usually overly aggressive and are conducted with a mindset of establishing tax liabilities that are significant enough to offset the refund.
Does WHT apply on payments to organizations whose income is exempted from  CIT which includes
1 Income derived by ecclesiastical, charitable,  or educated institutions (excluding profits derived from a trade or business).
2 Income derived by a company enjoying pioneer status from its pioneer production
3 Income derived by statutory or registered friendly societies etc( excluding profits derived from a trade or business) 
4 Income derived by companies in the free trade zone from the approved activities in the zone.
5 Income derived by companies from bonds and interest on bonds.
WTH should not apply to the above incomes, since they are exempted from CIT

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