Inside Tax : Issue 33 - Unveiling The Issues In Withholding Tax (WHT) Administration (Cont'd)

As a follow on from our last week's edition of Inside Tax, other areas of concern with the operation and administration of WHT in Nigeria are:

Appropriate WHT rates to apply to transactions

Quite a number of corporate taxpayers are confused on the WHT rates to apply with respect to certain contract arrangements. A common example is transportation service versus "car hire". Hitherto, FIRS' default position was to regard such a transaction as a form of "hire" (which attracts 10% WHT) and seek to recover under deduction of WHT from the payer for such services who may have applied 5% on the premise that it is a contract for services. Another example is whether interior floral decoration is a contract for services, supply of flowers or provision of professional service.

Penalty for failure to deduct tax

Registered taxpayers, who in the first instance act as "collection agents", are often penalized for failure to deduct/remit WHT. The law requires taxpayers to pay the following where they fail to perform their duties as "collection agents" for government:

Amount not deducted Amount deducted but not remitted Shortfall in deduction (where the rates applied are established to be less than the appropriate rates largely due to the controversies in '1' and '2' above Penalty at 10% and interest at the prevailing commercial rate (21% is usually applied even though this is not consistent with the Central Bank of Nigeria's minimum rediscount rate) to apply on items 'a' to 'c' above. Section 82 of CITA provides that, "any person who being obliged to deduct any tax under section 78, 79, 80 or 81 of this Act fails to deduct or having deducted fails to pay to the Board within twenty-one days from the date the amount was deducted or the time the duty to deduct arose, shall be guilty of an offence and shall be liable to a penalty of 10 per cent per annum of the tax not withheld or not remitted as the case may be in addition to the amount of tax deducted plus interest at the prevailing commercial rate.

A review of these provisions would suggest that taxpayers should not be made to pay the taxes not withheld. Only a penalty of 10% on the amount not withheld should be payable by the taxpayer. Secondly, neither penalty nor interest should apply on any shortfall in amount deducted (the subject here is 'deduction' not wrong deduction). Thirdly, interest and penalty plus the amount deducted but not remitted shall apply in case of unremitted deductions.

This is only...