What is withholding tax?
Withholding tax is a tax mechanism where the payer is required to deduct a certain percentage of the payment made to a payee and remit it to the relevant tax authority on behalf of the payee.
It is a tax deducted from the income source and paid directly to the government. In Nigeria, the withholding tax is one of the most important taxes businesses and individuals have to deal with.
Types of Withholding Tax in Nigeria
- Withholding tax on rent: This tax is deducted from the rent paid by tenants to landlords.
- Withholding tax on dividends: This tax is deducted from dividends paid to shareholders. The tax rate is usually 10% of the total dividends paid.
- Withholding tax on interest: This tax is imposed on interest paid on loans, deposits, and other financial transactions.
- Withholding tax on royalty: This is a tax imposed on royalties paid to non-residents.
- Withholding tax on management and consultancy fees: This is a tax imposed on management and consultancy fees paid to non-residents.
Why do people pay withholding tax?
- Withholding tax is paid to collect taxes from the source of income.
- It ensures that the government receives the taxes due to it, even before the taxpayer receives the income.
- It ensures that taxpayers do not evade their tax obligations, as it makes it difficult for them to do so.
Consequences of not paying withholding tax
- The payer can be held liable for the tax due, penalties, and interest.
- The payee may be unable to claim the tax credit for the amount withheld. This can result in double taxation for the payee, as they may end up paying tax on the same income twice.
- The defaulter will be required to pay 10% of the amount not remitted to the government.
Who should pay withholding tax in Nigeria?
Anyone who deducts tax from income is expected to remit these taxes to the FIRS. Withholding tax is deducted from the income of payees and in turn, paid directly to the FIRS.
Who regulates the withholding tax system?
The withholding tax system in Nigeria is regulated by the Federal Inland Revenue Service (FIRS). They are responsible for administering and collecting taxes on behalf of the government.
Are there items exempted from withholding tax in Nigeria?
Withholding tax is not another type of tax but an advanced system of paying tax that is already levied. It is not deducted from transactions that you’ve already paid taxes on.
Bottom Line
Withholding tax is an important tax system in Nigeria, as it helps to ensure that taxpayers do not evade their tax obligations. It is also a means of collecting taxes and is aimed at ensuring that the government receives the taxes due to it. Don’t be a tax evader. Ensure that you pay your taxes at the right time.
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