WHT or Tax Withholding is an advance payment of Tax either to the Federal Inland Revenue Service or Internal Revenue Service of States of the Federation. This advance payment is meant to be deducted from the final tax payable by a Taxpayer. The legal basis for WHT is contained in the provisions of the Companies Income Tax Act 2004, Personal Income Tax Act, Petroleum Profit Tax Act and WHT Regulations.

An individual or company (Contractee) making payment on a qualifying transaction to a vendor (Contractor) is required, at the date when payment is made or credited, whichever first occurs, to make a deduction (Tax Withholding) at the appropriate rate on the invoice of the contractor. Where WHT is deducted at source, remittance must be made to the Federal Inland Revenue Service or Relevant State Internal Revenue Service within 21 and 30 days. The penalty for non-compliance is 10% per annum of the amount in default and interest at CBN lending rate, in addition to the un- deducted Tax Withholding.

WHT deducted from payments made to vendors that are limited liability companies are payable to the Federal Inland Revenue Service (FIRS), whilst WHT deductions made from payments to vendors that are individuals, partnerships and other non-incorporated bodies, are payable to the Internal Revenue Service (IRS) of the state where the individual, partnership, or non-incorporated body is resident.

The Withholding Tax Regulations provides that all types of Contracts and Agency arrangements, other than sales in the ordinary course of business are subject to WHT.

The rate of WHT on dividend, interest and royalty is reduced to 7.5% when paid to a corporate recipient resident in a treaty country. In the case of individuals, 7.5% is applied on dividend and 5% on royalty.

The misconception:

For so long, officials of the Federal Inland Revenue Service and the Internal Revenue Service of States tend to treat the WHT as a type of tax (maybe because it is called Withholding Tax) because they insist that any organisation that has made payment to a vendor without making a WHT deduction MUST pay the un-deducted WHT in addition to interest and penalty to the tax authorities.

Firstly, this is entirely a misconception on the part of these officials, and it amounts to collecting money twice as tax i.e. money is collected from the Organisation that failed to deduct WHT from a vendor and same money is collected from the vendor that is expected to have filed its tax returns with the tax authorities at the end of the year based on the invoice from which WHT was not deducted.

Secondly, where the WHT was not deducted from the vendor, the onus is on the Tax Authorities to provide evidence that such vendor did not file its tax returns and where this is confirmed, then the vendor should be made to pay the tax. Requesting the Contractee to pay WHT again amounts to collecting the money twice.

Flowing from all of the above, a company that did not deduct WHT from any of its vendors at worst only have the responsibility of providing the details of such vendors to the Tax Authorities so that they can be approached by the Tax Authorities to pay their taxes as against requesting the organisation that failed to deduct WHT to pay the un-deducted WHT, interest and penalty.

In conclusion, this is a wake-up call for the Tax Authorities to deploy technology in tracking the tax transactions of the taxpayers (their customers). If banks can successfully track the transactions of several millions of their customers without little or no error, the Tax Authorities should also be able to do so.

• Kayode Sunmola, Chartered Accountant and lawyer, wrote from Lagos.(This email address is being protected from spambots. You need JavaScript enabled to view it.)