I would take on withholding tax this Morning. Withholding tax has been one of the headaches of most business merchants In Nigeria, it's very complex, and it's a grey area of the law. but I would simplify this aspect of law for business owners

To put this in context, What is withholding tax exactly? Withholding tax is a mechanism introduced by the government to ensure that people who are supposed to pay taxes do not evade paying the taxes. it is a tool that would help the government identify persons who are supposed to pay taxes. Withholding taxes are imposed and regulated by The Companies Income Tax Regulations of 1997 (WHT Regulations).

This law provides that transactions and contracts are generally subject to WHT taxes with a particular exemption; which we will come to later.

Who is supposed to pay withholding taxes in a given transaction?
By operation of the regulations, The paying customer, in transactions that are subject to withholding taxes, is the person who pays withholding taxes on such transactions to the government. the rate oF WHT can range from 2.5% to 10% of the contract sum.

Let me give you an example, lets assume a company produces copper wire, by operation of the WHT Regulations, whoever buys copper wire from the company is supposed to pay a withholding tax to the FIRS in the name of the supplying company. This would help FIRS to know that the copper wire company is supposed to pay taxes to the Government. S81 of the Capital Income Tax Act provides that The Withholding tax is to be refunded back to the company within 90 days when the company pays its normal income Tax.

Now, what are the exemptions, I.e When will a transaction not be subjected to withholding tax? the WHT regulation provided that all types of contracts and agency arrangements are subject to withholding taxes EXCEPT sales in the ordinary course of business

This is where the problem usually comes forth. The question is this, what transactions. are "Sales in the ordinary course of business" and as such would not be subject to WHT taxes? FIRS in enforcing the law practically made all contractual transactions subject to WHT and would most times not refund companies. The FIRS believes that as long as you write a formal contract, you are subject to WHT. However, this is wrong.

The Tax appeal Tribunal has laid down some tests that must be passed before the FIRS or any relevant tax agency can subject your transactions to withholding tax. the court said 4 things must be considered,

1.) Whether the transaction is related to the type of business stated in the Memorandum and Article of association of the company. (Memorandum and Article of association is a fancy word for the official business plan and rules of the company that is recognized by law) if the transaction is related to the business contained in the official business plan, most likely your transaction would not be subject to WHT.

A simple tax planning strategy that you can do is to expand the aim of your business i.e expand your official business plan to contain likely contracts that the company would enter into, you will forward this to the Corporate Affairs Commission. who will register it on your behalf. or you can draft your contracts in such a way that it would reflect the official business of the company.


2.) The type of industry a business operates in. another factor that would be considered is the type of industry that a company operates in. for example, Oil and gas companies, Maritime and shipping companies may likely have withholding taxes imposed on their contracts as the buying parties are usually international partners,(there are ways by which it can be structured) but however an importer of household items by nature of his business should not be subject to withholding taxes.

3.) The Antecedent of the Taxpayer. If the Taxpayer is the type who evades taxes, Withholding taxes may be likely imposed on most of the taxpayer's transactions however if the taxpayer is someone who doesn't default on paying his taxes, then WHT taxes shouldn't apply, Because remember the purpose of the law is to ensure that people don't evade paying the necessary taxes.

4.) The frequency of the Transaction. if the transaction is a type that the company routinely engages in, it something they do almost every time, such a transaction should not be subject to WHT. however, if the transaction is a "once in a while" transaction, depending on the type of industry, WHT may be imposed however remember the industry matters.

So as a lawyer one of the things I can help your business with is to give "a legally backed and research-filled opinion", as to whether your transaction should be subject to withholding taxes. I could also help plan and restructure your business in a tax-efficient manner.

next, we would talk about Refunding process of WHT

Hello, I'm a lawyer with expertise in tax matters, we would discuss tax matters on this thread, resolution of tax controversy, and all that.

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