Payments exempt from Nigerian withholding tax
Which supplier payments a Nigerian business does not deduct withholding tax from, according to the NRS, and how to avoid over-deducting by mistake.
By Achekam · · 5 min read · For Running a business businesses in Nigeria
Most guidance on Nigerian withholding tax is about remembering to deduct it. The opposite mistake gets less attention: deducting it from payments that are exempt. A supplier who sells you their own manufactured goods, or an insurer collecting a premium, will not thank you for short-paying them, and the tax you withheld and remitted in error then has to be untangled.
This article sets out the transactions the NRS lists as exempt from deduction at source, explains the distinction that trips businesses up most often, and suggests a short test to run before every supplier payment run.
Who has to deduct in the first place
The NRS says bodies corporate or unincorporate other than individuals, government ministries, departments and agencies, statutory bodies, public authorities and other institutions, even tax-exempt ones, and their payment agents, must deduct tax at source on eligible transactions.
So the duty sits with almost every business that is not an individual. The word that matters is "eligible". Some transactions are outside the scheme altogether, and deducting from them is as wrong as failing to deduct from the rest.
The NRS list of exempt transactions
The NRS lists transactions exempt from deduction at source. Among them:
- goods manufactured or materials produced by the supplier;
- insurance premiums;
- distinguishable out-of-pocket expenses;
- interest and fees paid to a Nigerian bank by direct debit;
- supplies of petroleum products such as PMS, AGO, LPG and CNG.
The list on the NRS page is longer than this. Read the full version on the NRS's withholding tax page, which also explains who must deduct and how, before you mark any supplier as exempt.
Out-of-pocket expenses must be distinguishable
"Distinguishable" is doing real work in that item. When a consultant bills a fee plus travel costs they paid on your behalf, the reimbursed costs can be outside the deduction only if they are shown separately and can be told apart from the fee. A single all-in figure gives you nothing to separate. Ask suppliers who recharge costs to list them as separate lines with receipts.
Bank charges by direct debit
Interest and fees your Nigerian bank takes from your account by direct debit are on the list. Do not create a withholding entry for them when you record the bank charges from your statement.
Maker or trader: the distinction that matters most
The first item on the list, goods made or materials produced by the supplier, is where most confusion lives. It covers the supplier's own products. It does not automatically cover goods a supplier bought from someone else and resold.
The Lagos Internal Revenue Service's withholding tax rate table shows the other side of that line. It sets 2% on the supply of goods or materials other than by the manufacturer or producer, when paid to resident corporate or non-corporate suppliers, and marks the rate as not applicable to non-resident suppliers. The LIRS document is undated and states no legal basis, so treat the rate as correct at the time of writing and check it with your adviser.
In practice:
| Supplier | What they sell you | Deduct? |
|---|---|---|
| A factory | Goods it manufactured | No, on the NRS list |
| A distributor | The same goods, bought from the factory | The LIRS table sets 2% for supplies other than by the maker |
| A farm | Produce it grew | Possibly not, as material the supplier produced; confirm |
| A wholesaler | Produce bought from many farms | Check: it is not the producer |
When a supplier tells you they are the manufacturer, ask for something that shows it, and keep it on file.
When you deduct by mistake
Over-deducting creates work on both sides. Your supplier is short-paid, and the tax you remitted is in the wrong place.
The NRS's refund guidelines list, among the cases in which a taxpayer is eligible for a refund, withholding tax remitted at rates higher than the statutory rates. A deduction on an exempt payment is a close cousin of that problem. Ask your adviser how the correction and any refund should be handled, and settle the shortfall with the supplier rather than leaving it on their account.
In your own books, Achekam lets a business post manual journals. An unbalanced journal, or one dated in a closed month, is refused, and a posted journal is corrected only by a reversal. So a wrongly recorded deduction is not edited away; it is reversed and replaced, leaving both entries visible for anyone who checks later.
Keeping the exemption visible
Achekam keeps one supplier list with duplicate checks by name or VAT number, and quotations, orders and bills pick their supplier from it. Supplier bills are recorded line by line with VAT. A bill without a purchase order waits for approval before it posts, and a bill can be paid in full or in parts from a chosen bank account.
Use that structure to make the exemption obvious to whoever pays. Record the exempt item on its own bill line, with a description that says why: "own manufactured goods", "insurance premium", "out-of-pocket travel, receipts attached". Whoever approves the bill sees the reason, and whoever pays it knows not to deduct.
A quick test before each payment run
- Is the payer a body that must deduct? For most businesses, yes.
- Is the item on the NRS list, such as own-manufactured goods, an insurance premium or a bank charge by direct debit?
- For goods, is the supplier the maker or producer, with evidence on file?
- For recharged costs, are they shown separately with receipts?
- Is the reason written on the bill line?
- If any answer is unclear, deduct only after checking with your adviser.
The 2% rate on goods bought from traders is explained in the 2% withholding on goods for Nigerian manufacturers, and the general rules on deducting and remitting are in withholding tax on supplier payments. Run the test once on last month's payments; it is the fastest way to find any habit that needs fixing.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
