Nigerian Withholding Tax (WHT) Explained: Key Rules on Base Amount, Timing Rules, and Exemptions

 

If you’re a business owner or an accountant in Nigeria, understanding Withholding Tax (WHT) is crucial for staying compliant with tax regulations. One of the most common questions is: On what base amount should the WHT rate be applied? Equally important is: When should you deduct WHT? And last but not least: Are there exe
mpted transactions under the new WHT regulations?

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Let’s go right on to provide answers with practical examples to these germane questions.

On What Base Amount Should WHT Rate Be Applied?

You must deduct WHT from payments to suppliers, as mentioned in my earlier post—New Withholding Tax Regulations: Do All Businesses Need to Deduct? However, one of the most common questions about WHT is: On what base amount should the WHT rate be applied? This happens to be one of the questions often bedevilling young and inexperienced accountants and business owners in Nigeria.

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The straightforward answer to this question is: WHT should be applied only on the value of goods supplied or services rendered before VAT is added. In other words, VAT is excluded from the WHT calculation. This means you do not apply WHT to the total invoice amount—only to the base amount for goods or services.

This brings up another question: How do you determine the WHT Base Amount from an invoice or bill? What exactly constitutes the base amount for goods and services?

For goods; should it include handling charges, installation fees, delivery fees, trade discounts, or shipping fees? And for services; should it include the cost of materials purchased to perform the service, handling charges, delivery expenses, and other related costs?

The answer lies in what the Regulations say and what constitutes out-of-pocket expenses.

According to Regulation 10(i) of the Deduction of Tax at Source (Withholding) Regulations, 2024, the WHT base amount excludes out-of-pocket expenses. The regulation states:

"Out-of-pocket expenses are those that are normally expected to be incurred directly by the supplier and are distinguishable from contract fees."

In practical terms: For goods, the WHT base amount is the value of the goods alone, excluding trade discounts, handling charges, delivery charges, installation charges, and labour charges, as these are considered out-of-pocket expenses.

And for services, the WHT base amount is the professional or service fee alone, excluding the cost of materials purchased to perform the service and other related out-of-pocket expenses.

By applying these rules, you can correctly determine the WHT deduction for your supplier payments.

WHT Base Amount: Examples Make it Clearer

Let’s look at two examples to make this crystal clear.

Case Study 1: WHT on Goods Purchase

XYZ Enterprises Ltd purchases 100 office chairs from ABC Furniture Ltd. The invoice details are as follows:

• Cost of Chairs: ₦1,500,000
• Delivery Charges: ₦50,000
• Installation Fees: ₦30,000
• VAT (7.5% on ₦1,580,000): ₦118,500
• Total Invoice Amount: ₦1,698,500

The question is: Given the WHT rate of 2%, on what base amount should it be applied to get the WHT amount to deduct from payment to ABC Furniture Ltd?

 
As per WHT regulations, tax is deducted only on the cost of goods, excluding VAT and out-of-pocket expenses like delivery and installation.

• WHT Base Amount: ₦1,500,000 (Cost of Chairs)
• WHT Rate: 2% (assumed for goods)
• WHT Deduction: ₦1,500,000 × 5% = ₦75,000

Final Payment to Supplier:
Total Invoice Amount (₦1,698,500) – WHT (₦75,000) = ₦1,623,500

XYZ Enterprises Ltd should withhold ₦75,000 and remit it to the tax authority. WHT is not applied to delivery charges, installation fees, or VAT.

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Case Study 2: WHT on Services

DEF Ltd. hires a consulting firm, Smart Solutions, for tax advisory services. The invoice details are:

• Professional Fee: ₦800,000
• Cost of Tax Research Materials: ₦50,000
• Printing & Delivery of Reports: ₦20,000
• VAT (7.5% on ₦870,000): ₦65,250
• Total Invoice Amount: ₦935,250

For services, WHT is applied only to the professional fee, excluding the cost of materials, delivery charges, and VAT.

• WHT Base Amount: ₦800,000 (Professional Fee)
• WHT Rate: 10% (assumed for services)
• WHT Deduction: ₦800,000 × 10% = ₦80,000

Final Payment to Supplier:
Total Invoice Amount (₦935,250) – WHT (₦80,000) = ₦855,250

Take note: WHT is deducted only from the service fee and not from materials, delivery costs, or VAT. The tax authority receives ₦80,000, while the supplier receives ₦855,250.

 

These scenarios illustrate how to correctly determine the WHT base amount and ensure compliance with tax regulations.

When should you deduct WHT?

Timing is everything when it comes to WHT deductions. Under the new regulations, you must deduct WHT at the earlier of two events:

1. When payment is made: If you’re paying a supplier upfront, you must deduct WHT at the time of payment.

2. When the liability is recognized: If the amount due is recorded as a payable (even if payment is delayed), WHT should be deducted at that point.

For transactions between related parties, the rules are slightly stricter. WHT must be deducted either when payment is made or when the liability is recognized—whichever happens first.

For practical example on when to deduct WHT, let’s revisit XYZ Enterprises Ltd and ABC Furniture Ltd. to understand the timing of WHT deductions.

o   Invoice Date: October 1, 2024

o   Payment Date: October 15, 2024

In this case, XYZ Enterprises Ltd must deduct WHT on October 15, 2024, when the payment is made. However, if XYZ Enterprises Limited records the liability in its books on October 10, 2024, WHT must be deducted on that date, even if the payment is made later. That’s, at the point of posting the transactions into the ledger, WHT must be recognised or posted accordingly.

Are there exempted transactions under the new WHT regulations?

When it comes to Withholding Tax (WHT), not all transactions are created equal. While many payments to suppliers and contractors require you to deduct WHT, there are several exceptions to the rule. These exemptions are designed to simplify the tax process, reduce the burden on certain industries, and encourage specific types of economic activities. If you’re a business owner in Nigeria, it’s crucial to understand which transactions are exempt from WHT deductions to avoid overpaying or underpaying taxes.

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So, the next time you’re reviewing a payment or invoice, take a moment to check if it falls under one of these exemptions below:

1. Payments for Goods Manufactured or Materials Produced by the Supplier

If you’re purchasing goods or materials that are manufactured or produced by the supplier, you don’t need to deduct WHT. This exemption is particularly beneficial for manufacturers and producers, as it reduces the administrative burden of tax compliance.

2. Imported Goods (If the Foreign Supplier Doesn’t Have a Taxable Presence in Nigeria)

When you import goods into Nigeria, you might wonder whether WHT applies. The good news is that if the foreign supplier doesn’t have a taxable presence in Nigeria, the transaction is exempt from WHT. This means that if the supplier isn’t registered or operating in Nigeria, you don’t need to deduct WHT from the payment. However, if the foreign supplier has a taxable presence in Nigeria (e.g., a branch or office), WHT may still apply. This exemption helps facilitate international trade while ensuring that foreign businesses without a Nigerian presence aren’t unfairly taxed.

3. Insurance Premiums

Insurance is a critical part of risk management for businesses, and the good news is that insurance premiums are exempt from WHT. Whether you’re paying for property insurance, liability insurance, or any other type of coverage, you don’t need to deduct WHT from these payments.

4. Bank Interest and Fees Paid via Direct Debit

If you’re paying interest or fees to a Nigerian bank through a direct debit arrangement, these payments are exempt from WHT. This exemption applies to transactions where the funds are domiciled with the bank, making it easier for businesses to manage their banking relationships without worrying about WHT deductions. It also encourages the use of formal banking channels, which is a key part of Nigeria’s financial inclusion strategy.

5. Telecommunication Services (e.g., Internet, Phone Bills)

In today’s digital age, telecommunication services are essential for businesses to operate efficiently. Fortunately, payments for telecommunication services, such as internet data and phone bills, are exempt from WHT. This means you don’t need to deduct WHT when paying your monthly internet or phone bills.

Read Also: What Businesses/Suppliers Need to Know About Withholding Tax in Nigeria

6. Winnings from Entrepreneurial or Academic Reality Shows

Reality shows that promote entrepreneurship, academics, technological innovation, or scientific advancement are becoming increasingly popular in Nigeria. If you or your business receives winnings from such shows, you’ll be glad to know that these winnings are exempt from WHT. This exemption encourages participation in programs that drive innovation and skill development, contributing to Nigeria’s economic growth.

7. Broker Commissions

Brokers play a vital role in facilitating transactions across various industries, from real estate to financial markets. Under the new WHT regulations, **commissions retained by brokers** from money collected on behalf of their principals are exempt from WHT. This exemption applies as long as the commission is in line with industry norms. By exempting broker commissions, the government aims to support the brokerage industry and ensure that brokers can operate without unnecessary tax complications.

8. Registered Securities Lending Transactions

Securities lending is a common practice in the financial sector, where securities are temporarily transferred from one party to another. Payments made under Registered Securities Lending Transactions are exempt from WHT. This exemption helps maintain liquidity in the financial markets and supports the smooth functioning of securities lending activities.

9. Dividend Payments to Real Estate Investment Trusts (REITs)

Real Estate Investment Trusts (REITs) are a popular investment vehicle for those looking to invest in real estate without directly owning property. Under the new regulations, dividend payments to REITs are exempt from WHT. This exemption encourages investment in the real estate sector and supports the growth of REITs in Nigeria.

10. Any Income or Profit That Is Exempt from Tax Under Nigerian Law

If a payment relates to income or profit that is already exempt from tax under Nigerian law, it is also exempt from WHT. This ensures that businesses and individuals don’t face double taxation on income that is already tax-free. For example, certain agricultural income or income from export activities may be exempt from tax, and consequently, WHT deductions don’t apply.

11. Petroleum Products Such as PMS, AGO, and LPG

The energy sector is a cornerstone of Nigeria’s economy, and the government has provided specific exemptions for certain petroleum products. Payments for Premium Motor Spirits (PMS), Automotive Gas Oil (AGO), Liquefied Petroleum Gas (LPG), and other related products are exempt from WHT. This exemption helps stabilize the energy market and ensures that businesses and consumers can access these essential products without additional tax costs.

Final Thoughts: Summary and Conclusion

The three key areas—WHT Base Amount, When to Deduct WHT, and Exempted Transactions—are critical for ensuring compliance and avoiding penalties. Let’s recap the key takeaways:

1. WHT Base Amount: 

   - WHT is applied only on the value of goods or services before VAT is added. 

   - Out-of-pocket expenses, such as delivery charges, installation fees, and material costs, are excluded from the WHT base amount. 

   - For goods, the base amount is the cost of the goods alone. For services, it’s the professional or service fee, excluding related expenses. 

2. When to Deduct WHT: 

   - WHT must be deducted at the earlier of two events: when payment is made or when the liability is recognized. 

   - For related-party transactions, WHT must be deducted at the time of payment or liability recognition, whichever comes first. 

3. Exempted Transactions: 

   - Certain transactions, such as payments for manufactured goods, imported goods (without a taxable presence), insurance premiums, telecommunication services, and broker commissions, are exempt from WHT. 

   - Understanding these exemptions can save your business from unnecessary tax deductions and streamline your financial processes. 

Understanding Withholding Tax (WHT) in Nigeria is not just about compliance—it’s about empowering your business to operate efficiently and avoid unnecessary costs. By mastering the rules around WHT base amounts, timing of deductions, and exempted transactions, you can ensure that your business remains compliant while focusing on growth and profitability. 

So, the next time you receive an invoice or prepare to make a payment, take a moment to apply these rules. It’s a small step that can save you from big headaches down the line.

Kindly let me know your thoughts on this in the comment section below. Thank you.