What withholding tax means
Withholding tax is your customer paying part of your tax for you, out of your money.
When a company pays certain kinds of invoice, it deducts a percentage and remits it to the tax authority on the supplier's behalf. The supplier receives the balance and a credit note showing what was deducted.
The crucial point, and the one that causes the most anger among Nigerian freelancers, is that this is not a discount and not a fee. It is your own tax, paid early. The credit note is what you use to offset your eventual liability.
How it is used
It applies to a range of payments including professional and consultancy fees, contracts, rent, royalties, commissions and dividends, at rates that vary by payment type and by whether the recipient is an individual or a company.
In practice a supplier invoices gross, the client deducts the applicable percentage, pays the balance, and issues a withholding tax credit note. The supplier keeps that note and uses it against their own tax.
Key features
- Deducted at source by the payer, not paid separately by the recipient
- Remitted to the relevant tax authority by the payer
- Rates vary by payment type and by whether the recipient is a company or an individual
- Evidenced by a credit note, which the recipient uses to offset tax
- An advance payment of tax rather than an additional tax
How this works in Nigeria
Federal payments and company recipients generally involve the Federal Inland Revenue Service, while payments to individuals often involve the relevant state internal revenue service. Which authority receives it depends on the parties.
The recurring practical problem is credit notes. Clients deduct and never issue the note, which leaves the supplier out of pocket twice, once through the deduction and again when they cannot offset it. Ask for the credit note at the time of payment, not at the end of the year.
Withholding tax vs VAT
VAT is added to your invoice and collected from the customer. You charge it on top of your fee and remit it. It increases the amount the customer pays.
Withholding tax is deducted from your invoice. It reduces what lands in your account, and the deducted amount goes to the tax authority as an advance against your own liability.
So on a single invoice both can appear, with VAT added on top and withholding tax deducted from the fee element. Suppliers who do not understand this frequently believe they are being underpaid when the arithmetic is entirely correct.
Limits and risks
Withholding tax is not a final tax in most cases, so it does not end your obligation to file and account for tax. It is a payment on account.
Recovering the benefit also depends entirely on documentation. Without the credit note, the deduction is very difficult to claim, and that administrative failure is where most of the real loss happens for small suppliers.
Worth knowing
Chase the withholding tax credit note when the payment lands, not months later. Without it you cannot offset the deduction, and you have effectively paid the tax twice.