In June 2024, the Federal Government of Nigeria through the Minister of Finance and Coordinating Minister of the Economy, Adebayo Olawale Edun issued the Deduction of Tax at Source (Withholding) Regulations, 2024, effective from July 1, 2024.1 The purpose of the regulation is to provide clarity as to tax deduction rules, reduce withholding tax rates for low-margin businesses, promote ease of tax administration, and reflect global best practices. The Regulations supersede all other existing Regulations on Deduction at Source in Nigeria other than Pay As You Earn Tax.
WHAT IS WITHHOLDING TAX?
Withholding tax is the advance payment of income tax deducted at source.2 Upon deduction, the tax is remitted to the appropriate tax authority – Federal or State Board of Internal Revenue within the time stipulated under the Regulations. Withholding tax is designed to provide regular revenue flow of income to the Nigerian Government by bringing taxpayers such as consultants, contractors, suppliers, landlords & shareholders into the tax net and curbing tax evasion.
OVERVIEW OF THE DEDUCTION OF TAX AT SOURCE (WITHHOLDING) REGULATIONS 2024
The Regulations set out the rules for the deduction of tax from payments to taxable persons
under the Capital Gains Tax Act, the Companies Income Tax Act, the Petroleum Profits Tax Act, and the Personal Income Tax Act in respect of specified transactions. The regulation addresses some long-standing issues in the tax system such as the issue of excessive compliance burden on SMEs, strain on the working capital of low-margin businesses, ambiguities on compliance, eligible transactions, and remittance timing.
The key provisions of the deduction of tax at source (withholding) regulations are as follows:
Revised WHT rates
The new Regulations specify the eligible transactions and applicable rates at which deductions shall be made in the First Schedule of the Regulation.3 The rate reduction for some of the transactions was necessary due to low industry margins. Interestingly, the regulations also provide for reduced rates as specified in a Treaty between Nigeria and any other country for the avoidance of Double taxation to the extent that it has been ratified by the National Assembly.
The double withholding tax rate
The Regulations introduced the deduction of WHT at twice the rate applicable in the first schedule where the individual or company has no Tax Identification Number (TIN).4 Thus, in the event of supply of goods, rendering of service, or any eligible transaction involving passive income, the rate to be deducted at source would be double the rate specified in the Regulations where the Recipient has no Tax Identification Number.
Exemption of Small Companies from WHT
Small companies as defined by S.105 of the Companies Income Tax Act as well as a body unincorporated of equivalent attributes are now exempted from the WHT deduction obligation where the supplier has a valid Tax Identification Number and the value of the transaction is N2m or less during the relevant calendar month.5
Deduction is not to be treated as a separate tax
The Regulations clarify that the deduction made from payment should not be regarded as a separate tax or an additional cost of the transaction but treated as an advance or final tax of the supplier.6
Timing of WHT deduction at source
According to the Regulations, the obligation to deduct at source arises when (i) payment is made or (ii) the amount due is otherwise settled, whichever is earlier. With respect to related-party transactions, the obligation to deduct at source arises when (i) the time of payment or (ii) when the liability is recognized, whichever is earlier.7
Remittance of amount deducted at source
The timing for remittance of amounts withheld at source remains the same with extant laws and guidelines. In the case of payment to the Federal Inland Revenue Service, remittance should be done not later than the 21st day following the month of deduction of taxes payable to the Federal Inland Revenue Service whereas for payment to the State Internal Revenue Service, remittance should be done not later than the 30th day following the month of deduction for State Internal Revenue Service. Furthermore, payment to the State Internal Revenue Service with respect to Capital Gains Tax and Pay-As-You-Earn is due on the 10th day of the month following receipt of the gain/income.8
Filing of Returns to the Appropriate Tax Authority
The Regulations mandate that the person making the deduction is obligated to submit the return to the relevant tax authority with the evidence of remittance of the amount deducted as prescribed by the relevant tax authority from time to time.9
The return must contain the supplier's name and address, TIN/National Identification Number/Registered Company (RC) Number (or its equivalent), nature of the transaction, the gross amount paid/payable, tax deducted, and transaction month.
Introduction of tax deductions receipts and claim of WHT credit
Under the Regulations, a person who makes a deduction from any payment shall issue a receipt for the tax deducted showing the name, address, TIN, or National Identification Number (NIN)/RC number (if the person has no TIN) of the person from whom the deduction was made, nature of transaction, gross amount payable or settled, amount deducted and corresponding month.10 The receipt issued may be tendered to the relevant tax authority as evidence of the amount so deducted for purposes of claiming WHT credit.
Penalties for non-compliance
The Regulations make it an offence for a person required to make a deduction at source to fail to do so or having deducted, fail to pay to the relevant tax authority by the due date. The person would be liable to a penalty as set out under Section 40 of the FIRS Establishment Act and Section 74 of the PITA.11
Furthermore, where a person required to deduct at source fails to do so, the person would be liable to an administrative penalty and a one-off annual interest on the amount not deducted. Whereas, if the person has deducted the amount at source but fails to remit to the relevant tax authority, the person would be liable to pay the amount so deducted in addition to an administrative penalty and annual interest on the amount.12
Exemptions
The Regulations exempt some specific transactions from WHT deduction. The transactions are as follows13:
- Compensating payments under a Registered Securities Lending Transaction in line with section 81(8) of the Companies Income Tax Act;
- Any distribution or dividend payment to a Real Estate Investment Trust or Real Estate Investment Company as provided under section 80(5) of the Companies Income Tax Act;
- Across-the-counter transactions as defined under regulation 8 of these Regulations;
- Interest and fees paid to a Nigerian bank by way of direct debit of the funds which are domiciled with the bank;
- Goods manufactured or materials produced by the person making the supply;
- Imported goods where the transaction does not create a taxable presence in Nigeria for the foreign supplier;
- Any payment in respect of income or profit which is exempt from tax;
- Out-of-pocket expense that is normally expected to be incurred directly by the supplier and is distinguishable from the contract fees;
- Insurance premium;
- Supply of Liquefied Petroleum Gas (LPG), Compressed Natural Gas (CNG), Premium Motor Spirits (PMS), Automotive Gas Oil (AGO), Pour Fuel Oil (LPFO), Dual Purpose Kerosene (DPK), and JET-A1;
- Commission retained by a broker from monies collected on behalf of the principal in line with the industry norm for such transactions;
- Winnings from a game of chance or a reality show with content designed exclusively to promote entrepreneurship, academics, and technological or scientific innovation.
Also, the Regulations clarify that exemption from the WHT deduction at the source should not be deemed as an express exemption from the relevant income tax, except as provided in the relevant enabling law.
CONCLUSION
The Deduction of Tax at Source (Withholding) Regulations, 2024, marks a significant shift in Nigeria's fiscal policy and tax administration, introducing a simplified and business-friendly withholding tax (WHT) regime. The regulations aim to reduce complexity, making it easier for businesses to understand and comply with WHT obligations.
Footnotes
1. Carolyn Wright, ‘Nigeria Issues Deduction of Tax at Source Withholding Regulations' https://taxnews.ey.com/news/2024-1347-nigeria-issues-deduction-of-tax-at-source-withholding-regulations-2024#:~:text=Nigeria%20issues%20deduction%20of%20tax%20at%20source%20(withholding)%20regulations%202024&text=Small%20companies%20are%20now%20exempt, N2m)%20in%20the%20relevant%20month. Accessed July 21, 2024
2. Bisi Adeyemi & Toluwalase Adeyemi, ‘Withholding Tax in Nigeria – A Method of Tax Collection' https://portal.dcsl.com.ng/data/resources/_1584437244_003SXO0549.pdf Accessed July 20, 2024
3. Regulation 1(a) of the Deduction of Tax at Source (Withholding) Regulations, 2024
4. Regulation 1(c) of the Deduction of Tax at Source (Withholding) Regulations, 2024
5. Regulation 2(2) of the Deduction of Tax at Source (Withholding) Regulations, 2024
6. Regulation 3 of the Deduction of Tax at Source (Withholding) Regulations, 2024
7. Regulation 4 of the Deduction of Tax at Source (Withholding) Regulations, 2024
8. Regulation 5(1) of the Deduction of Tax at Source (Withholding) Regulations, 2024
9. Regulation 5(2) of the Deduction of Tax at Source (Withholding) Regulations, 2024
10. Regulation 6(1) of the Deduction of Tax at Source (Withholding) Regulations, 2024
11. Regulation 7(1) of the Deduction of Tax at Source (Withholding) Regulations, 2024
12. Regulation 7(2) & (3) of the Deduction of Tax at Source (Withholding) Regulations, 2024
13. Regulation 8 of the Deduction of Tax at Source (Withholding) Regulations, 2024
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.