Executive Summary
The Federal Inland Revenue Service (FIRS) has reiterated the obligation of companies to deduct and remit Withholding Tax (WHT) on interest paid or credited on short-term securities, in line with the provisions of Sections 78(1) and 81(1) of the Companies Income Tax Act (CITA), Cap C21, LFN 2004 (as amended).
This Tax Alert highlights the statutory requirements, compliance obligations, and potential implications for non-compliance.
Legal References and Background
Section 78(1) of CITA provides that: “Where a Nigerian company is making payment to another company or to any person in respect of interest, royalty, rent, dividend or any other payment as may be prescribed, such company shall, at the date when the amount is paid or credited, whichever first occurs, deduct therefrom tax at the prescribed rate and remit same to the Service within 21 days thereafter.”
In addition, Section 81(1) of CITA mandates that: “Every company required under this Act to deduct tax from any payment shall, within 21 days after the deduction, remit the amount so deducted to the Service and render a return of all deductions made in the preceding month.”
These provisions impose a clear obligation on companies to deduct and remit withholding tax on interest payments, including those arising from short-term financial instruments such as treasury bills, commercial papers, bankers’ acceptances, and other money market securities.
Key Compliance Requirements
1. Deduction of Withholding Tax:
- Companies must deduct WHT at the point of payment or credit, whichever occurs first.
- The applicable rate is 10% for domestic transactions or 7.5% where a Double Tax Agreement (DTA) applies.
2. Remittance and Returns:
- Remit the tax deducted to the Federal Inland Revenue Service (FIRS) within 21 days of the deduction.
- File a corresponding return detailing the beneficiaries and the amounts deducted.
3. Scope of Application:
- Applies to interest on short-term securities and similar instruments issued by companies, financial institutions, or government agencies.
Consequences of Non-Compliance
Failure to deduct or remit withholding tax as required under Sections 78(1) and 81(1) attracts the following:
- Penalty:10% of the amount not deducted or remitted.
- Interest: At the prevailing Central Bank of Nigeria (CBN) rate.
- Tax Disallowance: The related interest expense may be disallowed as a deductible expense in computing company income tax.
Our View
Given the increased scrutiny by the FIRS on financial transactions and investment income, companies should review all interest-bearing transactions particularly those related to short-term securities and intercompany loans to ensure full compliance.
It is advisable to implement internal controls that:
- Automatically trigger WHT deductions upon payment or credit of interest.
- Track remittance deadlines to avoid penalties; and
- Maintain comprehensive documentation of all deductions and filings.
Action Points for Companies
- Review all current and historical short-term investment arrangements.
- Ensure withholding tax deductions are made at the correct rate and remitted promptly.
- Keep proper records of WHT remittances and returns for audit purposes.
- Engage your tax advisors for a compliance health check where necessary.
Conclusion
Compliance with Sections 78(1) and 81(1) of CITA ensures that companies remain in good standing with the tax authorities while avoiding unnecessary penalties and disallowances. Organizations are encouraged to strengthen their internal compliance systems to align with these statutory provisions.
