Withholding Tax in Nigeria 2024 – Rates and Obligations

Withholding Tax in Nigeria 2024 – Rates and Obligations

Witholding Tax in Nigerian

When someone makes a payment to another person or business, they are required to subtract a certain percentage of that payment and send it directly to the tax authorities on behalf of the recipient. This percentage of payment is known as Withholding Tax (WTH). In this article, we will explore the concept of withholding tax in Nigeria, its underlying objectives, the types of services it encompasses, and the current withholding tax rates set by the FIRS (Federal Inland Revenue Service), as well as potential avenues for individuals to qualify for exemptions from this taxation framework.

Witholding Tax in Nigeria

What is withholding tax?

Withholding tax refers to a tax mechanism where the payer, usually an employer or a financial institution, must deduct a certain percentage or amount from a payment made to a payee, such as an employee or a contractor.

This system helps ensure that taxes are paid correctly and on time. It also makes the process more convenient by shifting the responsibility of tax remittance to the payer. Withholding tax is an important part of how taxes are collected in many countries and helps keep the system fair and transparent for everyone involved.

Purpose of withholding tax in Nigeria?

The purpose of withholding tax is to ensure the timely collection of taxes and promote tax compliance. By shifting the responsibility of tax deduction and remittance to the payer, governments can streamline the tax collection process and reduce the risk of tax evasion.

Types of Withholding Tax in Nigeria

Withholding tax is commonly applied to various types of income, such as salaries, wages, dividends, interest, and royalties. Let’s dive deeper into the type of services subject to withholding tax in Nigeria.

1. Withholding tax on Dividend & Interest

Regarding dividends, withholding tax is deducted at the source by the company distributing the dividends. For individuals, the current withholding tax rate for dividends in Nigeria is 10%, while for corporate entities, it is 10%.

Similarly, withholding tax is also levied on interest payments. When an individual or a company receives interest income, the payer is responsible for deducting withholding tax from the interest payment. Nigeria’s current withholding tax rate for interest is 10% for individuals and corporate entities.

2. Withholding tax on Rents

This tax is deducted from the rent paid by tenants to landlords. For individuals, the current withholding tax rate for rent is 10%. Individuals and companies involved in rental transactions must understand their obligations regarding withholding tax on rent payments.

3. Withholding tax on Directors’ fees

Companies should accurately calculate and deduct the appropriate withholding tax amount from director fees and ensure timely remittance to the tax authorities to avoid penalties or legal issues. The current withholding tax rate is 5% for individuals serving as directors. For companies, the rate is 10%.

4. Withholding tax on Royalties

When a person or a company pays royalties to another party for the use of intellectual property, such as patents, copyrights, or trademarks, they must deduct withholding tax from the royalty payment and remit it to the relevant tax authority. For resident individuals, the current withholding tax rate for royalties is 5%. For companies, the rate is 10%.

5. Withholding tax on Commissions

When a person or entity receives commissions for services rendered, the payer must deduct withholding tax from the commission payment and remit it to the relevant tax authority. For individuals, the current withholding tax rate for commissions is 5%, while for corporate entities, it is 10%.

6. Withholding tax on Consultancy, professional, and management fees

When a company or individual pays these services to a consultant, professional, or service provider, they must deduct withholding tax from the payment and remit it to the relevant tax authority. Nigeria’s withholding tax rate for consultancy, professional, and management fees is 5% for individuals. For corporate entities, the withholding tax rate is 10%.

7. Withholding tax on Technical service fees

When a company or individual makes payments for technical services rendered by another company or individual, they must deduct withholding tax from the payment and remit it to the relevant tax authority. The withholding tax rate for technical service fees in Nigeria is 10% for companies and 5% for individuals.

8. Withholding tax on the Construction of roads, bridges, buildings, and plants

When a company or individual engages in construction activities and makes payments to contractors, they must deduct withholding tax from the payment and remit it to the relevant tax authority.

For individuals, the current withholding tax rate for construction services is 5%, while for corporate entities, it is 2.5%. The rate of other construction contracts is 5% for both individuals and companies.

9. Withholding tax on Contracts and agency arrangements

When payments are made to contractors or agents for their services, the payer must deduct withholding tax from the payment and remit it to the relevant tax authority. The current withholding tax rate for individuals is 5%, while for corporate entities, it is 5%.

Withholding Tax Rates in Nigeria

Withholding tax (WHT) is applied to certain types of transactions, as listed below. The WHT rates are the same for resident and non-resident companies and individuals.

Types of paymentCommission, consultancy, technical, and service feesWHT for individuals (%)
Dividends, interest, and rents1010
Directors feesN/A10
Hire of equipment1010
Royalties105
Commission, consultancy, technical, service fees105
Management fees105
Construction (roads, buildings, and bridges)2.55
Contracts other than sales in the ordinary course of business55
Withholding Tax Rates in Nigeria

Consequences of withholding violation

Failure to pay withholding tax in Nigeria can have serious consequences for both the payer and the payee. Firstly, the payer, responsible for deducting and remitting the tax, can be held legally liable for the tax amount due, along with penalties and interest. If the withholding tax is not paid, the payer may face legal actions, such as fines or prosecution, and may be required to settle the outstanding tax liability.

On the other hand, if the withholding tax is properly paid and remitted, the payee may claim the tax credit for the amount that should have been withheld. As a result, the payee may experience double taxation, meaning they could pay tax on the same income twice—once when they receive the income and again when they file their tax returns.

In addition to the legal and financial consequences, the defaulter of withholding tax in Nigeria may also be subject to a penalty. According to Nigerian tax laws, a penalty of 10% of the amount not remitted to the government can be imposed on the defaulter. This penalty prevents non-compliance and ensures taxpayers promptly fulfil their obligations.

Exemptions from withholding tax in Nigeria

There are ways to avoid paying withholding tax in Nigeria legally, and they include:

  • Invest in tax-free investment vehicles such as mutual funds or exchange-traded funds (ETFs): These investment vehicles are structured to allow investors to earn income without incurring withholding tax.
  • Hold your investments in a tax-sheltered account: Tax-sheltered accounts are special accounts designed to provide tax advantages to investors. By holding investments within such accounts, individuals can defer or reduce the withholding tax they must pay.
  • Claim a credit for taxes paid to another country on your Nigerian tax return: If you have paid taxes on certain types of income in another country, you may be eligible to offset your Nigerian withholding tax liability by claiming a credit for those taxes.

Difference between VAT and WHT?

Value Added Tax (VAT) is a tax imposed on the value added to goods and services at each stage of their production and distribution while withholding tax is a tax deducted or withheld from an employee’s income by the employer.

Tax is deducted from an employee’s salary by the employer. WITHHOLDING
What it is Tax on goods and services at each stage of production and distribution. Tax deducted from an employee’s salary by the employer.
When it is applied Applied when goods or services are bought or sold. Applied when the employee receives their salary.
Collection process Collected by businesses and passed on to the government. Deducted by the employer from the employee’s salary and remitted to the government.
Purpose Generates revenue for the government. Ensures timely payment of taxes by employees and simplifies the collection process.
Who pays the tax Ultimately paid by the final consumer who buys the goods or services. Paid by the employee from their salary.
Withholding tax in Nigeria

The bottom line

By familiarizing yourself with withholding tax, its purpose, rates, and applicable transactions, you can navigate the Nigerian tax landscape more effectively. Whether you are an employee, a business owner, or a tax professional, staying informed about withholding tax empowers you to fulfil your tax obligations and contribute to the nation’s development. 

FAQs

What is Withholding Tax (WHT)?

Withholding tax (WHT) is a type of tax that is deducted from payments made to individuals or businesses by another party. The party that deducts the tax is known as the withholding agent. The withholding agent is then responsible for remitting the tax to the tax authorities.

What are the rates of WHT in Nigeria?

The rates of WHT in Nigeria vary depending on the type of payment. For example, the rate of WHT on interest payments is 10%, while the rate of WHT on dividend payments is 5%. The full list of WHT rates can be found on the website of the Federal Inland Revenue Service (FIRS).

Who is liable to pay WHT in Nigeria?

The liability to pay WHT depends on the specific circumstances of the payment. In general, the withholding agent is liable to pay WHT. However, there are some cases where the payee may also be liable to pay WHT.

What are the penalties for non-compliance with WHT in Nigeria?

The penalties for non-compliance with WHT in Nigeria can be severe. The withholding agent may be liable to pay a fine of up to 20% of the amount of tax that should have been withheld. The payee may also be liable to pay a fine of up to 10% of the amount of tax that should have been withheld.

How can I stay compliant with WHT in Nigeria?

There are a few things that you can do to stay compliant with WHT in Nigeria. First, you should familiarize yourself with the WHT rates and the rules that apply to your business. Second, you should ensure that you have a system in place to withhold the correct amount of tax from payments. Third, you should remit the withheld tax to the tax authorities on a timely basis.

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