Comprehensive Review: Deduction of Tax at Source (Withholding) Regulations 2024
The Federal Ministry of Finance, through the office of the Honourable Minister for Finance and Coordinating Minister for the Economy, recently issued new Withholding Tax (WHT) regulations titled the “Deduction at Source (Withholding) Regulations 2024” which brings new changes to the tax ecosystem in Nigeria, especially the deduction of tax at source.
The Regulations have an effective date of 1 July 2024. However, certain deductions related to transactions involving winnings from lotteries, gaming, reality shows, and similar activities are set to commence on 1 October 2024. Although signed by the Honourable Minister of Finance, thereby coming into operation in line with the provisions of the Interpretation Act, the Regulations have not yet been published in the official gazette.
The new Regulations supersede all previous regulations concerning deductions at source or Withholding Tax. The Regulations simplify areas of complexity that were not fully addressed by the former WHT regulations and the prescribed reduced deduction rates for industries with low margins. Also, the Regulations are designed to promote easier tax compliance and administration, reduce arbitrage between corporate and non-corporate business structures, address emerging issues, while also aligning with global best practices.
What to Know about Withholding Tax (WHT)
Withholding Tax (WHT) is a tax deducted at source from payments made to a taxable person for the supply of goods and services or any other eligible transaction involving both passive and non-passive income. It is not a separate form of tax but an advance payment of income tax.
WHT can be used as a tax credit to offset any subsequent income tax liability. However, in certain cases, the WHT deducted at source serves as the final tax in the hands of the recipients. WHT was designed to curb tax evasion by widening the tax net, which in the long run improves overall tax revenue generation.
Key Updates on the New Withholding Tax Regulations
Below are the notable changes brought by the “Deduction of Tax at Source (Withholding) Regulations 2024” to address the challenges faced by taxpayers and to promote tax compliance:
1. Tax to be deducted at source
- The new Regulations have expanded the list of eligible transactions liable to WHT, providing simplified and clear descriptions. There have also been reduced rates to address low-margin industries. Additionally, if a double tax treaty (DTT) duly ratified by the National Assembly exists between Nigeria and any other country, the reduced rates specified in the treaty will apply to eligible recipients who are residents of that treaty country.
- If recipients of payments for goods, services, or other eligible non-passive income transactions do not have a Tax Identification Number (TIN), the amount to be deducted at source shall be twice the specified rate. This is a drive to widen the tax net.
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2. Exemption of small businesses from Withholding Tax compliance.
The new Regulations exempt “small companies” (defined under the Companies Income Tax Act as having a gross turnover of N25 million or less) and unincorporated business entities with the same turnover threshold from the requirement to deduct tax at source from any transactions, provided the supplier is registered for tax (i.e. has a Valid TIN) and the transaction value is N2 million or less during the calendar month.
This exemption encourages small companies and unincorporated business entities to maximize their working capital without the burden of tax compliance. Remember, WHT deductions will not apply to transactions of small companies, since their profits are exempted from income tax.
3. Deduction at Source Obligations (i.e. When to deduct?)
- For transactions between independent parties, the obligation to deduct at source shall arise at the earliest of when payment is made or the amount due is otherwise settled (i.e. deduction is solely on a “cash basis”).
- For transactions between related parties, a deduction shall be made at the time of payment or when the liability is recognized, whichever is earlier.
- Also, deductions on any payment to a non-resident person shall be the final tax except such income is still subject to any other further tax by reason of a taxable presence in Nigeria.
4. Deduction to be Receipted
- The Regulations mandate that when an entity deducts tax from a supplier's invoice and remits it to the relevant tax authority, it must provide the supplier with a receipt for tax deducted at source.
- This receipt should include all relevant information about the supplier, such as their name, address, Tax Identification Number, National Identification Number (for individuals), or RC number (for companies), nature of the transactions, the gross amount payable or settled, the amount deducted, and the month of the transaction.
- The person from whom the deduction has been made (i.e. the beneficiary) may submit the receipt to the relevant tax authority as evidence of the amount deducted for the purpose of claiming tax credit irrespective of whether the amount has been remitted or not.
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5. Offences
- Where a person who is required to deduct at source fails to do so and has paid such portion representing the required deduction to the recipient, only an administrative penalty and one-off annual interest on the amount not deducted shall be due and payable (i.e. only penalty + Interest on the tax payable).
- Where a person has deducted an amount at source and failed to remit to the relevant tax authority, the amount so deducted in addition to an administrative penalty and annual interest shall be payable in line with applicable legislation (i.e. the principal amount + Penalty & interest).
6. Transactions Exempt from WHT deductions:
- Compensating payments under a Registered Securities Lending Transaction
- Any distribution or dividend payment to Real Estate Investment Trust or Real Estate Investment Company
- Across-the-counter- transactions: This refers to “any transaction carried out between parties without an established contractual relationship or any prior formal contracting arrangement and in which payment is made instantly in cash or on the spot via electronic means”. (i.e. transactions where there is no formal agreement or contract).
- Interest and fees paid to a Nigerian bank by way of direct debit of the funds domiciled with the bank
- Goods manufactured or materials produced by the person making the supply: This involves the assembling of a final product or the making of a part or component of a product utilizing raw materials or other inputs including labor and production overhead. This also includes the production of energy, including electricity, gas, and petroleum products.
- Imported goods where the non-resident suppliers do not have an Income tax presence in Nigeria
- Any payment in respect of income or profit which 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), Low 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 games of chance or reality shows with contents designed exclusively to promote entrepreneurship, academics, technological or scientific innovation.
7. Timeline for Remittance
- In case of payment to the Federal Inland Revenue Service (FIRS), not later than the 21st day of the month following the month of payment.
- In case of payment to the State Internal Revenue Service (SIRS), with respect to Capital Gains Tax and Pay-As-You-Earn, not later than the 10th day of the month following the month of payment, while with respect to any other deduction, not later than the 30th day of the month following the month of payment.
Conclusion
The new WHT Regulations aim to improve compliance and bring more taxpayers into the tax net. It also includes punitive measures to tackle deliberate tax evasion and curtail tax avoidance. Additionally, the regulations clarify the timing of deduction and definition of key terms, addressing previous ambiguities for taxpayers and tax authorities.
Written By;
Ajaba Okachi - Tax Consultant
Similoluwa Awodeyi - Tax Consultany
Victor Athe - Partner, Tax & Strategy Services