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Unveiling The Challenges In Withholding Tax (WHT) Administration In Nigeria

17 March 2014   (0 Comments)
Posted by: Author: Deloitte
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Author: Deloitte

WHT operates as an advance payment of income tax. Thus, where no taxable income is earned, WHT would not crystallise. This principle was introduced into the Nigerian tax system more than 50 years ago. From only applying to dividend, it has been extended to cover other investment incomes (i.e. interest and rent/royalties), services (i.e. consultancy, technical, management) and all contract arrangements via series of legislative amendments to the then principal legislation on companies income tax, petroleum profit tax and personal income tax. WHT rate has also progressed from 2.5% in 1985 to the present maximum rate of 10%.

It is noteworthy that provisions relating to operation of WHT are covered under the collection enforcement and recovery sections of the relevant statutes. The basic rule of WHT is that duty to deduct at applicable rate arises whenever payment is made or credited, whichever first occurs, by the payer in favour of the beneficiary. After deduction, the payer is required to remit the amount deducted to the relevant tax authority (RTA) within thirty (30) days following the date of the transaction. The amount remitted is available to the beneficiary as a credit which can be set-off against its eventual tax liability for the relevant accounting period or year of assessment.

The RTA to which remittance is made by the payer is determined by reference to the legal status of the beneficiary. Thus, where the beneficiary is a company, the RTA is Federal Inland Revenue Services (FIRS) and the relevant State Board of Internal Revenue Services (SIRS), where the beneficiary is individual, enterprise or partnership.

Today, the laws giving effect to WHT are: Personal Income Tax Act, Companies Income Tax Act and Petroleum Profits Tax Act. FIRS has issued separate information circulars at various times to clarify the operation, administration and provisions on WHT as stipulated in these legislation. However, the point needs to be emphasised that WHT is not a separate type of tax like capital gains tax or value added tax. Where a taxpayer is not liable to income tax under any of the conditions stipulated in the aforementioned tax legislation, WHT would not be applicable.

In spite of the duration of introduction of WHT in the Nigerian tax system, there are still many issues with regard to its operation and administration which require clarity. As far as some taxpayers are concerned, absence of a single rate applicable to all transactions and beneficiaries has made the WHT process very confusing.

We will examine the following extant areas of concern with the operation and administration of WHT in Nigeria:

Bureaucratic process of claiming tax credit: currently, a taxpayer that has suffered source deduction of WHT needs to obtain a WHT credit certificate from the tax authorities through its customer that deducted the tax from its income. The taxpayer then forwards the WHT credit certificate to tax authorities for confirmation before the credit can be applied to offset the taxpayer's eventual income tax liability. In reality a lot of taxpayers sit on huge amounts of WHT receivable accounts for which they are unable to obtain tax credits because they could not get the credit notes from their customers. After carrying such assets for a while, statutory auditors carry out impairment testing on such receivable accounts and often recommend that the assets be impaired. As this is a tax cost, such impairment will not be allowed as tax-deductible by the tax man. This leaves the taxpayer in double jeopardy – inability to enjoy a tax credit and inability to get tax deduction for taxes withheld at source when these are impaired. 

The taxpayer then files his tax returns and has to settle his tax liability in cash – an avoidable impact on cash flow.

With the advent of technology and development of FIRS web portal and similar portals by other tax authorities, it should be relatively easy to automate the process of granting credit to taxpayers' the moment remittance of WHT is made, indicating the taxpayer's identification number of the beneficiary of such payment. 

Applicability of WHT on all  contractual and agency arrangements other than sales in the "ordinary course of business": irrespective of guidelines and explanatory notes published by the revenue authorities to enable taxpayers understand what is meant by "ordinary course of business", this concept still remains a grey area, and has caused so much confusion for taxpayers.

FIRS in its information circular (2006/02), for instance, explained that "sale in the ordinary course of business" includes the supply of raw materials to a manufacturer; delivery of normal products to distributors and dealers by manufacturers; direct sales of goods to third parties and independent business transactions between an agent and a third party.

For instance, in a scenario where a car manufacturing company sells cars to its distributors and dealers, there is no obligation to withhold tax as such transactions would be deemed to have occurred in the ordinary course of business. However, in the case where a textile distributor buys textiles from several textile producers and supplies on demand to several retailers, the question then arises if there is an obligation to withhold tax by retailers.

Due to this uncertainty, some taxpayers refrain to deduct WHT from payments to suppliers since, in their view, the supplies are deemed to be in the ordinary course of business. In the event of tax audit, the Revenue authorities most times hold differing views and would often impose WHT with interest and penalty on these transactions.

We will examine the other seeming areas of concern in WHT operation and administration in our next edition of Inside Tax Article.

This article first appeared on


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