Withholding Tax (WHT) is an advanced payment on income tax deducted directly from source by a service provider. The taxpayer could be a company or an individual and the rate of WHT ranges from 2.5% to 10%, depending on the nature of the transaction.
WHT is not a separate tax but serves as a credit against the tax liability of the taxpayer. For example, companies are required to pay Companies Income Tax (CIT) at the end of their accounting year and after their audited accounts have been filed. At the point of the assessment of their CIT liabilities, the WHT deducted from their invoices to service providers during the year would be deducted from the CIT payable for that financial year.
WHT and Non-Resident Companies
Non-resident companies are companies not incorporated in Nigeria. Under the Companies Income Tax Act (CITA), non-resident companies which have a “fixed base” in Nigeria are liable to pay CIT on profit generated in Nigeria and therefore subject to WHT.
A fixed base implies some degree of permanence and will include facilities (such as a factory, office, branch, mine, oil or gas well); activities (such as building, construction, assembly or installation) and provision of services in connection with the activities stated above. Non-resident companies which operate in Nigeria through a dependent agent authorized to conclude contracts or deliver goods on its behalf, execute a turnkey project in Nigeria, or carry out business operation between itself and its Nigeria affiliate which does not appear to be at arms-length, would also be subject to WHT.
However, the new Finance Act (2020) expands the scope of non-resident companies to include digital entities (i.e. e-commerce businesses, online payment platforms, cloud storage platforms, etc) and companies which provide technical, management, consultancy, or professional services to persons resident in Nigeria provided that such companies have “significant economic presence” in Nigeria.
What is Significant Economic Presence?
The Finance Act (2020) requires the Minister of Finance to issue an order to determine what will constitute “significant economic presence” of a non-resident company. The Minister is yet to issue that order and therefore, the application of this provision of the Finance Act (2020) is not yet in effect.
WHT and Fee Payments to Non-Resident Companies
In practice, before the Finance Act(2020), where a Nigerian entity intends to obtain foreign exchange from the official market for the purpose of fulfilling its financial obligations to a non-resident company, the Nigerian company is required by the Central Bank of Nigeria to show evidence of deduction of WHT for the service rendered, whether or not such foreign entity had a “fixed base” in Nigeria. This highlights the need for the Central Bank of Nigeria and Federal Inland Revenue Service to ensure that tax processes are streamlined for uniformity in tax administration.
The extent to which non-resident companies would be subject to WHT will be determined by the criteria described by the Minister of Finance on what constitutes a significant economic presence in Nigeria. When this occurs, non-resident companies not already subject to WHT may become so considering the government’s drive to expand the nation’s tax net and increase its tax income.