If you owed tax last year or received a large refund you may want to adjust your tax withholding. Owing tax at the end of the year could result in penalties being assessed. On the other end, if you had a large refund you lost out on having the money in your pocket throughout the year. Changing jobs, getting married or divorced, buying a home or having children can all result in changes in your tax calculations.
WITHHOLDING TAX RATES IN NIGERIA.
Except for interest, rent, dividends and directors fees, most withholding tax rates on payments on earned income are accessed at the rate of 10% for corporate bodies and 5% for individuals. The actual rates for most items are shown in the table below:-
Type of Payment Companies Individuals
Dividends 10 10
Management fees 10 5
Bond interest, royalties 10 5
Interest 10 10
Rent 10 10
Royalties 10 5
Consultancy and technical service fees 10 10
Commission 10 5
Construction contracts 5 5
Income from all aspects of building and other civil
Works construction 5 5
Income from contracts other than outright sale and
Purchase of goods and property in the ordinary
course of business 5 5
Directors’ fees 10 10
Taxed Nigerian dividend subsequently redistributed
by a company Nil Nil
In Nigeria, Non resident recipients of income in the form of interest, dividends and royalties, upon deduction of withholding tax, are not liable to further tax payments, under Nigerian law, provided that for the tax year, they remain non-resident. Also in Nigeria, where there is an agency arrangement, it is only the rewarding commission of the Agent that is subject to payment of withholding tax
PENALTIES FOR LATE OR NON-REMITTANCE OF WITHHOLDING TAX.
All withholding tax liabilities are required to be collected and paid over to the tax authorities within 30 days of their becoming due for payment. Where there is a failure to remit this Tax for whatever reason, the penalty on conviction is a 200% fine of the tax due in addition to commercial rates of interest until the entire amount accessed as withholding tax is fully paid.
ADVANTAGES OF WITHHOLDING TAX.
The Federal Board of Inland Revenue in its Book, “General Tax Guide For Tax Administrators & Practitioners” enumerated the following advantages which we now summarise for your convenience: –
I This Tax helps to broaden the tax net by bringing otherwise unknown tax payers or tax evaders into the tax net.
II This Tax prevents tax evasion(s) which are usually disguised in obscure transactions.
III This Tax makes tax payment less cumbersome for the tax payer who may not have the culture of filing tax returns and making tax payments.
IV This Tax guarantees regular flow of revenue to the government.
V This Tax is a form of voluntary compliance with tax Laws.
DISADVANTAGES WITH WITHHOLDING TAX ADMINISTRATION.
A. The tax guide does not state any disadvantage. From experience however, the Practical Problems with this tax is the fact that principals in a contract sometimes deduct this tax from the entire contract sum instead of withholding only the required percentage of the income accruing to the contracted party.
B. Also, deductions made are not remitted to the Inland Revenue Service. This unfortunately deprives the contracted party the advantage of claiming tax credits. As the contracted party is usually in a much weaker position, it finds it difficulty to insist on its rights.
C. There are also complaints of delays in obtaining the Tax Credit Note from the Inland Revenue Services.
To have a more profitable business, it is recommended that you increase your knowledge in this area, ensure that in pre-contract negotiations and documentation, the payment of this Tax is resolved and that the correct rate is deducted as withholding tax. You should request very nicely for evidence of the payment of this Tax so that you can benefit from the tax credits accruing when your final tax is computed.