June 6, 2018
Utilization of withholding tax (WHT) credit against income tax liability has always been the practice in Nigeria and this may be due to the fact that the enabling tax legislation are supposedly clear on the method of utilizing WHT credits. However, given the pressure to increase tax revenue in Nigeria, a new dynamic was introduced with respect to the manner in which WHT credits should be used to offset income tax liability. This article focuses on the legislative requirement for the utilization of WHT credits versus the directive by the Federal Inland Revenue Service (FIRS).
WHT deduction is a popular concept in both developing and developed countries. It was introduced in the United States of America as far back as World War II and in the United Kingdom in the early 1940s for salaried employees. The policy underpinning WHT, apart from facilitating tax collection on a “as you go” basis, helps in widening the tax net to capture transactions that would have otherwise escaped tax, especially in the informal sector.
Nigerian tax legislation provides for the WHT system to function as an advance payment of income tax. There are essentially pari materia provisions in the Personal Income Tax Act (PITA, sections 69-75), Companies Income Tax Act (CITA, sections 78-84), Petroleum Profits Tax Act (PPTA, sections 56 & 54); and the Federal Inland Revenue Service (Establishment) Act 2007 (FIRSEA, section 40), together with the WHT Regulations that provide the legal basis for the operation of the WHT system.
For instance, Section 81(5) of the CITA states that “income tax recovered under the provisions of this section by deduction from payment made to a company shall be set off for the purpose of collection against tax charged on such company by an assessment.”
Section 81(7) then states that “any excess payment arising from compliance with Sections 60, 61, 62 and 63 of this Act over the assessment under Section 25 of this Act shall be refunded by the Service within ninety days of the assessment if duly filed with the option to set off against future taxes.” It is important to note that reference to Sections 60, 61, 62 and 63 under Section 81(7) stated above, is a reference to Sections 78, 79, 80 and 81 of the CITA.