What is a Withholding Tax? A withholding tax is basically an advance and indirect source of taxation deducted at source from the invoices of the tax payer. It’s main purpose is to capture as much tax payers that may have evaded tax into the tax net. 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).
How Does it work? – 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
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.
Pls More on the WHT Note? Ok, 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
So what happens if my customer fails to remit my taxes on time? – Too bad, there is nothing much you can do except complain and then blacklist the customer. However, the tax authority upon noticing have penalties ranging from 200% per annum of tax not remitted for companies and N5,000 per annum for individuals. Meaning if your customer fails to remit N100k in withholding taxes already deducted from your invoice his penalty will be to pay N200k extra. This penalty also applies to anybody who even fails to deduct as well. Fortunately though, the tax authority can exercise leniency and grant the default some reprieve against the penalty.
As the Remitter , when Do I have to remit the taxes I deduct? – So, if you deduct taxes from your suppliers invoice you must file returns at the end of any given month. All you do, is draw up a schedule detailing the list of companies you deducted taxes from, their addresses, the value of the invoices, the tax deducted and the rate, Your name and address as the tax payer and the relevant tax authority . You then attach a cheque(s) for the total amount deducted for the month. You can pay directly to the bank. Banks these days have agent who collect these cheques on your behalf and promptly obtain receipt of payment on your behalf. After obtaining receipt of payments, you now take to the relevant tax authority attached to your schedule, so you can be handed the WHT credit notes on behalf of your clients. You should keep a file for all the WHT Credit note you receive on behalf of your clients for easy accessibility.
Does it mean all transactions involve WHT? – WHT is mainly for transaction involving contract of purchase. What this means is that WHT can only be deucted from your invoice if it involves supply of goods and services to a destination requested for by your client. WHT cannot be deducted in the ordinary course of your business, meaning if I you sell soaps and I come to your shop or market to buy the soap, I cannot deduct WHT from your receipt. However, If I ask you to supply to me then that becomes a contract and as such I am obliged to deduct WHT from you.
Pls what do you really mean by Relevant Tax Authority? – A relevant tax authority is either the State or the Federal Government. The State Government collected WHT from Individuals or Sole Traders under the Personal Income Tax Act. The Federal Inland Revenue collects tax on behalf of the Federal Government under the Company Income Tax Act
So What are the rates – The table below will help
Pls don’t forget to always consult a tax consultant for help with your taxes. This only serves as a guide.