In Nigeria, as with several other tax jurisdictions, income tax is payable by every taxable person on income derived from employment, business, investments and other income generating activities. The income generated is expected to be declared to the respective tax authority on a periodic basis for tax purposes, depending on whether the income is taxable on an actual year basis or preceding year basis. The tax payable on the income of a taxpayer is usually determined at the end of the respective reporting period and paid by the taxpayer.
In some instances, the tax payable on certain forms of income is paid in the course of a tax year, prior to the end of the reporting period. The tax is usually deducted by the party (Payer) making the payment and remitted to the coffers of the respective tax authority on behalf of the taxpayer. This system of tax payment is known as Withholding Tax (WHT) and is governed by the WHT Regulations, pursuant to the Personal Income Tax Act as Amended (PITAM) and the Companies Income Tax Act (CITA). Based on the WHT Regulations, transacting parties are required to deduct tax at certain rates, ranging from 5% to 10% from payments made in relation to various business transactions. WHT should also be deducted from payments for rent, interest and dividend. The tax deducted under the WHT system is an advance payment of income tax, which will form a tax credit to offset the tax payable by a taxpayer when income tax returns are filed.
Sadly, it has become increasingly challenging for taxpayers, especially individuals and non-corporate entities to utilize the tax credits. The challenges include the non-remittance of WHT deducted by clients or customers, inability to obtain WHT credit notes on time, inability to claim tax credits, refusal by tax authorities to grant tax credits due to difference in the year of assessment and the year stated on the credit notes, etc. The present WHT administration system in many states in Nigeria is rather underwhelming and appears punitive rather than just a mechanism for advance collection of taxes.
This article focuses on these challenges as it relates to individuals and non-corporate entities and measures that can be adopted by the State Revenue Authorities ("SRA") to resolve these challenges.
WHT Administration for Individuals/Non- Corporate Entities in Nigeria
WHT administration for individual and non-corporate taxpayers fall under the purview of the SRA of the place of residence of the taxpayer/ the Beneficiary (except in cases where a bank is the Payer). Based on the provisions of the PITAM, the Payer is expected to immediately pay over the tax deducted from the amount due to the Beneficiary to the relevant tax authority. As further stated in the WHT Regulations, the Payer is also expected to issue a receipt for the tax so deducted showing details (in relation to date, amount, purpose of payment, period related etc.) of the deduction to the Beneficiary. This receipt is to be submitted to the relevant tax authority to enable the Beneficiary make claims in the form of tax credits for the tax so deducted.
In practice, the Beneficiary is only able to claim and enjoy the tax credit upon submission of the WHT remittance receipt (referred to as bulk receipt) to the respective tax authority and collection of WHT credit notes for same. This process is usually tedious and lengthy due to bureaucracy within the System.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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