What is withholding tax?
Withholding tax (WHT) shifts tax collection to the payer. Instead of paying the full amount, the payer keeps back a percentage, remits it to the tax authority and gives the recipient a credit note or certificate.
Common types
- Employment income: PAYE or payroll withholding on salaries (see [payroll](/glossary/payroll)).
- Dividends, interest and royalties, including to non-residents.
- Contracts and services: in countries like Nigeria, Kenya and Ghana, businesses withhold tax on certain payments to suppliers and contractors.
- Rent and commissions.
How it works
- A supplier invoices $10,000 for consulting.
- The customer withholds tax at, say, 5% and pays $9,500.
- The customer remits $500 to the tax authority.
- The supplier receives a WHT credit note and uses the $500 against its own income tax.
Accounting entries
- Payer: debit expense $10,000; credit bank $9,500; credit WHT payable $500.
- Recipient: debit bank $9,500; debit WHT receivable (tax credit) $500; credit revenue $10,000.
Double tax treaties
Cross-border payments often face withholding tax. Double tax treaties can reduce the rate, provided the correct forms or residency certificates are supplied.
Tips
- Track WHT credit notes carefully, since unclaimed credits are lost money.
- Remit withheld tax on time to avoid penalties.