Automation of the withholding tax system – Will migration be seamless?

Federal Inland Revenue Service (FIRS) in its bid to extend the Integrated Tax Administration System (ITAS) initiative to all of its processes, recently indicated its intention to fully automate the withholding tax (WHT) system in Nigeria.

Pursuant to this initiative, FIRS has started inviting taxpayers for reconciliation of unutilized WHT credits. The essence of this exercise is to update all taxpayers’ unused/outstanding WHT credit notes into FIRS’ system for effective takeoff of the automated tax credit system. This is a welcome development in the tax administration system in Nigeria, as the objective is to simplify the tax compliance process and cut out inherent inefficiencies.

It is instructive to note that WHT is not a separate type of tax but an advance payment of income tax. It is simply, payment on account of the ultimate income tax to be paid. The legal basis for WHT is contained in the provisions of the Companies Income Tax Act, Personal Income Tax Act, Petroleum Profit Tax Act and the Regulations made thereunder.

An entity making payment on qualifying transactions withholds the tax, at the applicable rates. Deductions from qualifying payments made to limited liability companies are payable to FIRS. For qualifying payments to individuals, partnerships and other non-corporate bodies, the relevant tax authority is the Board of Internal Revenue of the state (including Federal Capital Territory) where the individual, partnership or body is resident.

The WHT mechanism has contributed in various ways in strengthening Nigeria’s tax system. It ensures that income tax payable is collected ahead of the due date of filing tax returns. The tax revenue could be used to carry out government operations and programs before the actual due date for payment of income tax. In essence, it improves the cash flow of government. It has assisted tax administrators to gather information on economic activities of other agents that were, hitherto, outside the tax net.

The system has also assisted in capturing the activities of offshore companies that carry out business activities in Nigeria. It increases compliance, decreases tax evasion and invariably reduces the collection cost.

However, there are inherent difficulties in obtaining WHT credit, which makes it appear unfavorable to taxpayers. Until recently, FIRS used to issue the credit notes to the entity that had withheld and remitted the tax (payer). The payer will then distribute the credit notes to the taxpayers that suffered the source deductions (beneficiaries). The Revenue only grants credit when the beneficiaries present the credit notes. The process is rather cumbersome, involves much paper work and valuable time in pursuit of the credit. In a number of cases, some of the credits are lost due to such bureaucratic constraints.

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