How Nigeria can improve witholding Tax Administration.

What is Withholding Tax?

Withholding tax is not a separate type of tax rather it is an advance payment of income tax available as a set-off against company income tax that would be later assessed on the taxpayer.

How it works

When the income subject to withholding tax is paid or credited, whichever first occurs, the payer of the income is required by law to deduct the withholding tax at the appropriate rate and remit the tax directly to the relevant tax authority within twenty-one days following date of deduction of Tax from income; whereas the net amount of the income is paid or credited to the payee herein referred as the taxpayer.

This balance on the taxpayers account will remain as credit until it is utilized as a deduction to income tax; the treatment of WHT reporting is similar to that of a bank statement. The WHT flowing into the taxpayers tax account called K-Card is recognized as a credit to the beneficiary, waiting to be utilized in settling his tax liability at the time he files his tax returns. To promote transparency the taxpayer should be alerted by the tax authority of any credit on his tax account electronically through SMS alert and or email.

Withholding Tax best practice – The way forward

Consequently when the taxpayer files his tax returns, the difference arising after deducting his tax credit should also be communicated to him electronically in real time. The tax authourity should resist the urge not to tax ambush the taxpayer but allow for openness in the tax paying process.

Similarly, where after deducting the WHT credit on the assessed tax and the taxpayer still has a credit on his K-Card, the credit outstanding should be refunded to the taxpayer to his mail box or credited back to his bank account. This act will encourage the taxpayer to pay his tax voluntarily and provide incentive for mandatory compliance.

Treatment of Net Witholding Tax

Net WHT after deductions is treated either as carry forward to subsequent tax years or a refund. In practice though, the issue of refund is cumbersome partly due to the slow and tedious process of refund on the one hand and administrative inefficiency on the other hand. With appropriate technology in place this bottlenecks can easily be unbundled and tax administration will become efficient and trustworthy.

A Tax Collection Tool to curb Tax Evasion

Over the years Withholding tax system has been used to track down taxpayers such as landlords, shareholders, consultants, contractors, suppliers, etc and their incomes which may otherwise not be reported by them is brought into the tax net on a first line charge. It is therefore also a collection machinery to curb tax evasion. Data generated by these transaction activities provides enormous opportunity to curb tax evasion and bring in taxpayers to the tax net thereby increasing Tax Revenue yield. The information thrown up by withholding tax data mining provides a huge lead to forensic tax accountants to capture otherwise lost or hidden taxpayers and initiate forensic tax investigation on some notable tax activities of the beneficiary. This single tool can generate many other Tax leads that are capable of providing additional Tax revenue to the Tax Authorities in their various tax jurisdictions.

Note

Withholding tax is backed up by:

• Individual: Sections 69-73 of PITA Cap P8 LFN 2004 (as amended)
• Companies: Section 78-80 of CITA Cap C21LFN 2004 (as amended)
• Petroleum Companies: Section 54 & 56 PPTA Cap P13 LFN 2004