Withholding tax in Nigeria refers to the deduction of tax at source from payments (income) due to a benefiting party, by the paying party for onward remittance to the relevant tax authority of the benefiting party. Withholding tax is not another type of tax, but a mode of tax payment. It is an advance payment of a taxable entity’s normal income tax, since it is available for set-off against the ultimately assessed tax.

The two income tax statutes in Nigeria, viz: the Personal Income Tax Act (PITA) 1993 and the Companies Income Tax Act (CITA) 1993 both provide for the deduction of tax at source by a paying party. Sections 60, 61 and 62 of CITA specifically provide for the deduction of tax from interest, rent and dividend respectively, due to companies. Similarly, sections 68, 69, 70, and 71 of PITA provide for the deduction of tax at source from rent, interest, dividend and directors fees respectively, due to individuals and non-corporate.

A relevant tax authority or the minister in charge of government revenue is further empowered by Section 62 of CITA and Section 72 of PITA to direct that tax be deducted at source from the payments due to taxable persons or companies. Such directives are usually by way of publication in official government gazettes, stating the nature of payments from which to withhold tax and the rate of withholding tax to be applied on such payments. Two federal government gazettes have since been published in 1994, each in line with the provisions of Section 62 of CITA and 72 of PITA.

The withholding tax system is aimed at achieving a number of objectives both for government and the tax payer. The chief objective however, is to reduce the incidence of tax evasion by companies and individuals, thereby increasing the revenue earning potentials of government from income tax. Withholding tax apart from ensuring that tax evasion is minimized also guarantees the all-year round flow of revenue to government instead of waiting for the financial or fiscal year-end when tax assessments and collection are carried out. Similarly, the effect of large tax payment on the cash flow of businesses is also reduced by the installment payment of tax via the withholding tax system.

The sections of CITA and PITA that provide for the deduction of withholding tax peg the rate for deducting tax on interest, rent, dividend and directors fees at 10% each. Federal government gazettes on withholding tax however contain a more comprehensive list of taxable payments and the applicable rates as follows:




Rate for

Rate for Non-


Type of Payment








Dividend, Interest, Rent








All aspects of building,




construction and related








All types of contract and agency




arrangement other than outright sale




and purchase of goods and property in




the ordinary course of business




Consultancy and Professional Services




Management Services








Technical Services




Directors' Fees




Section 64 of CITA provides that “any person who being obliged to deduct any tax under section 60, 61, 62 or 63 of this Act fails to deduct or having deducted fails to pay to the board within twenty-one days from the date the amount was deducted or the time the duty to deduct arose, shall be guilty of an offence and shall be liable to a penalty of 10 per cent per annum of the tax not withheld or not remitted as the case may be in addition to the amount of tax deducted plus interest at the prevailing commercial rate.”

Section 73 of PITA makes a similar provision to the one quoted above, except that it allows up to 30 days from the date of deduction or the day the duty to deduct arose before remittance.

CITA and PITA require every organization that withholds tax to account for the tax so deducted with a schedule detailing the following information:

i. The name of the tax payer.
ii. The nature of transaction from which payment is due
iii. The total amount due to the tax payer.
iv. The rate of withholding tax applied
v. The amount of tax withheld and the period to which the remittance relates

With the above details, the relevant tax authority is expected to prepare and deliver withholding tax credit advices to each and every beneficiary contained in the schedule. FIRS have recently designed an amended schedule to be used in remitting withholding tax taken from companies. The amendments are in line with FIRS objective of automating the withholding tax credit claim system.

Section 64B of CITA directs that tax withheld shall be remitted to the tax authority in the currency in which the deduction was made. This means that transactions made in foreign currency are to suffer withholding tax in the same currency and that the tax so withheld is to be remitted in the same currency. In like manner penalty for default would also be calculated in the same currency.

Withholding tax as explained earlier is not another type of tax but an advance payment of income tax and for which the tax payer is expected to be given credit and which credit is available for set-off from the ultimate tax assessment. This is however only possible when the party making the payment actually remits the tax collected with a schedule containing information about the tax payers from whom the deductions were made, in line with laid down guidelines. This is expected to be the source of information for the relevant tax authority to award tax credit. The non-adherence to this practice by organisations is the major reason why many taxpayers are unable to obtain credit notes for withholding tax taken from their payments.

A tax payer from whom tax has been withheld is expected to obtain withholding tax credit notes from the relevant tax authority via the paying organisation. All credit notes obtained are forwarded to the tax authority, which in turn records the credit against the tax payer’s account. Assessed tax and related charges are usually entered as debits in the taxpayer’s tax account, while he is expected to pay only the difference between his assessed tax and withholding tax credit.

Note however that for a withholding tax credit note to be valid for set-off against the tax assessed in a year, the withholding tax must be in respect of the same year as the year of assessment and that the tax authority must be satisfied that the income from which the tax was withheld forms part of the income being assessed to tax. A situation where a person or company’s entire tax assessment in a year is off-set by withholding tax credit notes would usually be viewed with suspicion by the tax authority which may sometimes have to carry out a more detailed verification of the claims, by way of a full-blown tax audit/investigation exercise on the taxpayer.

Unutilized withholding tax credits are however available for transfer to subsequent tax years. This means that withholding tax credits notes received after the tax year to which they relate are not useless, as the taxpayer can apply to the tax authority to transfer his unutilized tax credit balance in one year to offset or reduce the debit balance in another year.

The 2007 amendments to CITA (Section 63 (7)) have even further empowered FIRS to refund proven excess withholding tax to any taxpayer within 90 days of filing a claim. Note however, that before payment of any such claims FIRS would have to satisfy itself that the taxpayer does not owe any other tax.

Section 62 (3) of CITA accords dividend received, and from which withholding tax has been deducted the status of a franked-investment income. This means that the withholding tax on such dividend shall be the final tax on the income and that the net-dividend received shall not be regarded as a taxable income in the hand of the recipient. Conversely, any credit notes obtained for withholding tax suffered on dividend would not be available for set-off against a company’s tax liability.

However, where dividend received by a company is further re-distributed, the redistributing company is still required to withhold tax from such redistribution but is allowed to set-off the withholding tax suffered on the initial dividend from the tax withheld on the second distribution.

There is usually an apparent confusion as to the responsibility of a paying organization to deduct withholding tax from an entity whose incomes are exempted from tax. This confusion should really not exist as Section 19 of CITA, which deals with profits exempted from tax, clearly states in paragraph (n) that “nothing in this section shall be construed to exempt from deduction at source, the tax which a company making payments is to deduct under section 60, 61 and 62 of this Act, such that the provisions of sections 60, 61 and 70 of this Act shall apply to a dividend, interest, rent or royalty which is a part of the profits or income referred to in subsections (1) (a) to (f) and (h) to (l) of this section.” In plainlanguage, the paragraph is saying that income tax exemption does not necessarily extend to withholding tax exemption.

The above clause is rational considering the fact that the exemption from tax of the profits of certain organizations as contained in Section 23 limits the exemption to the incomes of the organization that have direct bearing on its object clause. Therefore, when a religious organization, for example, extends its income sources to non-religious activities such incomes become taxable to the extent of their profit tendency.

Therefore, except for specific provisions in Section 19 (1) (g), (nA), (o - s) no ordinarily taxable payments shall be exempted from withholding tax. The specific exemptions provided for include:

  1. Dividend of a Small Company involved in manufacturing during its first five years of operation


  1. Dividend received from investments in wholly export-oriented businesses
  1. Interest on the deposit account of a foreign non-resident company, provided that the deposit is in foreign currencies and brought into Nigeria through government approved channels


In view of the above, it is usually recommended that a company demands for a copy of certificate of withholding tax exemption (in line with Section 19 (2) of CITA) before it succumbs to a plea not to withhold tax from payments due to a supplier.

Non-resident companies are companies that are not registered in Nigeria and with no place of business in Nigeria. This means that such companies cannot be held accountable by Nigerian tax authorities for the deduction and remittance of withholding tax due from payments made to Nigerian companies.

To ensure that payments received from non-resident companies are also brought under the withholding tax net, FIRS requires that Nigerian organizations account on their own for withholding tax ordinarily due on payments received by them from non-resident companies. This is in line with the powers conferred on the relevant tax authority by section 38 of CITA and section 49 of PITA to appoint one person or company as agent of another towards the recovery of a tax. Therefore, an organization is expected to determine the withholding tax due on a taxable payment received from a non-resident company and remit same to the relevant tax authority on behalf of the non-resident company.

The FIRS has in the last two years embarked on the restructuring of the tax collection and accounting system and this reform process has extended to withholding tax payment and accounting. The reforms include the development of a Taxpayer Identification Number (TIN) system, which ascribes a unique number to each and every company registered in Nigeria. The number is now to be quoted on all correspondence with FIRS and on the withholding tax schedule. In fact it is currently impossible for a company to remit withholding tax to FIRS without quoting the TIN of all its suppliers in the withholding tax schedule.

The ultimate goal of FIRS is to ensure that withholding tax credit system becomes automated; such that the withholding tax deducted from a taxpayer can be credited to his tax account as soon as the payment is made to the bank. It is hoped that this system will become operational very soon and that it will put in the past those days when taxpayers wait endlessly for the delivery of their withholding tax credit notes from FIRS.

To make the system work for both the taxpayer and the organization withholding the tax, it is advised that companies indicate their TIN in addition to their RC (Company Registration) number on their invoices and headed papers, so as to ease the process of rendering withholding tax returns to FIRS and ensuring that the taxpayer gets credit for tax withheld from his incomes.



It is an unarguable fact that the withholding tax system if properly managed would go a long way towards improving the efficiency and transparency of the Nigerian tax system.

Companies and individuals would maximize their withholding tax credit utilization for the settlement of their income tax liabilities. Similarly, a paying organization that is strict in keeping with its withholding tax agency obligations could actually be enhancing its cash flow position as it is able to reduce to the barest minimum its exposure to additional tax liability arising from non-compliance.