Introduction
On the 1 st of July 2024, the Federal Government of Nigeria, under the hand of the Finance Minister, Hon. Olawale A. Edun, announced the promulgation and immediate implementation of the Deduction of Tax at Source (Withholding) Regulations 2024 (the "Regulations"). The Regulations marks the beginning of a simplified and business-friendly withholding tax (WHT) regime, signifying a substantial shift in Nigeria's fiscal policy and tax administration. The Regulations outlines the procedures for deducting taxes at source from payments to taxable individuals and companies under the amended Companies Income Tax Act, the Personal Income Tax Act ("PITA"), Capital Gains Tax Act and the Petroleum Profits Tax Act. Notably, the Regulations, which took effect on 1st July 2024, supersedes all other existing Regulations on Deduction at Source or WHT.1
Overview of Withholding Tax
WHT is a method for collecting income tax at the time of payment for specific transactions. It serves as an advance payment that can usually be offset against income tax liabilities, although there are situations where WHT is considered as a final or definitive tax. The implementation of WHT provides several benefits. It allows the government to effectively manage its cash flow by proactively collecting tax revenue on a transaction-specific basis, reducing reliance on annual tax filings. Additionally, WHT helps in reducing tax evasion and collecting valuable data related to the commercial activities of taxpayers, thereby contributing to a better understanding of the economy
Overview of Withholding Tax Before now, existing Withholding Tax Regulations have given rise to numerous concerns about the timing of Withholding Tax deductions, exemptions for specific transaction types, excessively high tax rates for certain transactions, and other administrative challenges. Hence, the Regulations was promulgated to address these issues through the implementation of substantial amendments. These key innovative provisions are highlighted below:
a) Clarity on WHT regime on supply of goods:
Section 1(a) of the Regulations 2024 imposes WHT on transactions specified in the First Schedule of the Regulations, at the rates specified in the Schedule. Unlike the previous WHT Regulations that exempted WHT on 'sales in the ordinary course of business' which created a lot of confusion as to what qualifies as 'sales in the ordinary course of business', the Regulations clearly outline that Nigerian businesses are required to apply a 2% WHT on the sale of goods2 , except in cases where the goods are directly manufactured or provided by the manufacturer or producer. Additionally, over-the-counter sales3 and other specific transactions listed under the Exemptions in Section 8 of the Regulations are also excluded from the application of the WHT.
b) Withholding Tax on Transactions without Tax Identification Number:
When vendors fail to furnish their Taxpayer's Identification Number (TIN), any trading income they earn will be subject to a WHT at a rate that is double the specified standard rate.4
c) Clarity on who has the Obligation to deduct WHT:
The Regulations eliminates the requirement of businesses that operate the Pay-As-You-Earn (PAYE) scheme to be eligible to deduct WHT. This means that almost all businesses, including those exempt from tax, government ministries, departments, agencies, and their payment agents are now required to deduct withholding tax on eligible transactions. However, there are some exemptions.5
The following are exempt from withholding tax deduction obligations:
- Individuals.
- Small Companies or Unincorporated entities whose gross
turnover is less than N25,000,000 provided that:
- The supplier has a valid TIN and
- The value of the transaction is N2,000,000 or less.6 In essence, small companies are not required to deduct withholding tax if the transaction value is less than NGN2,000,000 and the vendor has a valid TIN. This provision aims to provide clarity on who is required to deduct WHT and under what circumstances.
In essence, small companies are not required to deduct withholding tax if the transaction value is less than NGN2,000,000 and the vendor has a valid TIN. This provision aims to provide clarity on who is required to deduct WHT and under what circumstances.
d) Clarity on Time of Deduction of WHT:
The Regulations have provided clarity on the appropriate time that the obligation to deduct WHT arises. It provides that for transactions between unrelated parties, withholding tax (WHT) should be deducted at the earlier of the following events:
" when payment is made; or
" when the amount due is otherwise settled.7
For transactions involving related parties, WHT applies at the time of payment or when the liability is recognized. However, we note that the provision of the existing tax laws8 which state that WHT for passive income streams such as dividends, interest, royalty, and rent become due at the earlier of when the payment is "made or credited" remains in force and overrides the provisions of the Regulations.
e) When to remit Withholding Tax:
The timelines for payment or remittance of withholding tax remain consistent with the previous withholding tax regulations. Hence, payments to the Federal Inland Revenue Service (FIRS) remain due by the 21st of the following month,9 while payments to the relevant State Internal Revenue Services (SIRS) are due by the 30th of the following month. Additionally, the Regulations specify that Capital Gains Tax (CGT) deducted on payments to individuals should be remitted to the relevant State's Internal Revenue Service (IRS) by the 10th of the following month thus, aligning with the timeline for income tax payments made through the Pay-As-You-Earn (PAYE) Scheme.
f) The Deducted Amount at Source is Not a Separate Tax:
The Regulations have clarified that WHT deductions should not be considered as an additional tax or an extra cost for the contract or transaction but as an advance payment of income tax.10 Hence, WHT payment should not be factored into the contract price. The purpose of this clarification is to prevent the shifting of the tax burden on transactions subject to WHT, which ordinarily lies on the vendor/recipient of an income, to the recipient of the service/transaction, whose only obligation is to deduct the WHT and remit to the relevant tax authority.
g) WHT Receipts and Credits Now Issued by Customer:
The Regulations stipulate that the customer, rather than the tax authority, is responsible for issuing a receipt of tax deducted to the vendor.11 This receipt must encompass specific details of the recipient or supplier, comprising their name, address, Tax Identification Number (TIN) and/or NIN or RC Number, nature of the transaction, gross amount, the amount deducted, and payment month.12 Upon presentation of this receipt, the tax authority will extend credit to the supplier/recipient, irrespective of whether the entity making the deduction has remitted the withheld tax to the tax authority. The vendor can furnish this receipt to the relevant tax authority as proof of WHT deducted and obtain credit, regardless of whether the WHT was remitted by the customer. In scenarios where customers issue receipts for deducted but unremitted WHT, they will be liable for the WHT as part of their tax obligation, along with interest and penalties under the law.
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Footnotes
1. Regulation 10 of the Deduction of Tax at Source (withholding) Regulations, 2024
2. First Schedule, Deduction at Source (Withholding) Regulation, 2024.
3. Regulation 8 (1)(C) (ibid).
4. Regulation 1(C)(ibid).
5. Paragraph 2(1), Deduction at Source (Withholding) Regulation, 2024
6. Paragraph 2(2) (ibid)
7. Paragraph 4(2) (ibid)
8. See Sections 69, 70, 71, and 72 of the Personal Income Tax Act, 2004 (as amended), and Sections 78, 79 and 80 of the Companies Income Tax Act, 2004 (as amended).
9. Regulation 5(1), Deduction at Source (Withholding) Regulation, 2024
10. Regulation 3 (ibid).
11. Regulation 6(1), Deduction at Source (Withholding) Regulation, 2024
12. Ibid.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.