Nigeria's New Withholding Tax Regulations Explained
In an exclusive interview with The Nation newspaper's Ibrahim Apekhade Yusuf, Victor Athe, partner at Stransact (Chartered Accountants), correspondent firm of RSM in Nigeria, shared insights on the federal government's latest withholding tax policy. He discussed the advantages and disadvantages of the new regime, providing a comprehensive overview of its implications for taxpayers and businesses.
Who is exempted from withholding tax?
The original idea behind the introduction of the WHT system in Nigeria, as early as 1977,was to widen the tax net by capturing details of entities that were then engaged in business transactions, without being formally registered for tax compliance. The implication of being unregistered for tax compliance purpose, is that these entities would continue to do business and earn income, but would never pay their fair share of income taxes to the government, whilst enjoying benefits from the resources contributed by the registered taxpayers.
However, with the Withholding Tax system in place, the invoices issued by an entity for goods or services sold would have to be subjected to tax deduction at a specified rate. A credit note is then issued in favour of the tax deduction suffered, such that the taxpayer can then apply the Withholding Tax credit note against the final income tax payable when filing its income tax returns for the relevant year. This is why Withholding Tax is referred to as an advance payment of income tax. It therefore follows that if an entity is not liable to pay income tax, perhaps due to some tax incentive that confers exemption on its income, its sales invoices should never be subject to Withholding Tax deductions. This is currently the case for Non-Resident Companies that have no income tax presence and are not rendering Technical, Management, Consultancy or Professional services to Nigerian customers, Small companies (i.e. those having gross turnover of N25 million or less), Companies that currently enjoy the Pioneer Status Incentive and other category of Nigerian companies that are outrightly exempted from income tax payment.
The Federal Ministry of Finance recently published the new “Deductions at Source (Withholding) Regulations 2024” which now replaces the previous Withholding Tax Regulations. The new Regulations now exempts small companies and unincorporated business entities (with the same turnover threshold as small companies) from the requirement to deduct tax at source provided the supplier is registered for tax and the transaction value is N2 million or less.
The debacle over the interpretation of the term “Sales in the ordinary Course of Business” has now also been effectively put to rest. The new Regulations now specifically exempts “Across -the-counter- transactions” (defined as transactions involving no established contractual relationship) from deductions at source.
Is withholding tax any different from VAT?
Withholding Tax is an advance income tax deduction. On the other hand, Value Added Tax is tax charged on the supply of goods and services. They are both governed by entirely different laws and regulations. Withholding Tax is principally governed by the Companies Income Tax Act (CITA), CITA Withholding Tax Regulations, Personal Income Tax Act (PITA) & PITA Withholding Tax Regulations, while VAT is governed by the VAT Act.
There are instances in which some entities like oil and gas companies, some Telcos (specifically MTN & Airtel) and Deposit Money Banks are statutorily required to withhold both Withholding Tax and VAT from invoices issued by suppliers before making net payments to them. In such situations, some suppliers would typically misunderstand and bemoan such multiple tax deductions. However, it should be noted that while the Withholding Tax deduction would eventually be credited against the final income tax payable by the supplier, the VAT charged on the supplier’s invoice would be remitted to a separate Federal Government VAT Account on behalf of the supplier.
Who really benefits from withholding taxes?
When an entity’s invoice suffers Withholding Tax deduction, credits would typically be issued to that entity which it would then apply against its eventual income tax payment when filing its Corporate Income Tax returns for the year. What this means, is that Withholding Tax, and should not constitute a different source of revenue for the government, knowing that it is merely part of an entity’s income tax that has been deducted in advance.
Withholding Tax deduction is typically applied directly on each of the supplier’s sales invoices, whilst the eventual income tax payable by the supplier is computed as 20-30% of its Taxable Profit for the year (i.e. Revenue less all expenses plus/minus all relevant tax adjustments, less capital allowances claimable). Now, where the total Withholding Tax deduction suffered on an entity’s sales invoices, all year round, is higher than its Income Tax payable for the year, it would give rise to an excess Withholding Tax credit situation. This would usually occur where the sales invoices are not properly structured to show the ‘profit component’ separate from the cost/reimbursement components, in which case, Withholding Tax would have to be applied on the entire invoice amount, rather than just the specific profit component. Since Withholding Tax is an advance payment of income tax, it should be applied on a base that constitutes the profit component of each of the sales invoices, and not the entire invoice amounts (which translate to the revenue reported for the year).
A lot of low-margin businesses are caught in this “Excess Withholding Tax Credits” web, which creates an unfavourable cash-flow situation for them. The plight of these businesses is further worsened by the consistently deteriorating value of the Naira, which means that the real value of the Withholding Tax credits when they are eventually utilised at a future date would even be further eroded. This constitutes a huge dis-benefit to these taxpayers.
In a case where an entity continues to have excess Withholding Tax credits, the whole essence of the Withholding Tax system would be defeated, since Withholding Tax is actually meant to be an advance payment of income tax rather than an excess payment above the income tax payable for the year. It is important to get professional help from well-experienced tax advisors, if this happens to be your peculiar situation at the moment.
Based on hindsight, what’s the projected revenue the country stands to get from the receipt of withholding taxes?
Improved compliance with Withholding Tax should actually bring about an increase in the number of taxpayers in the tax net. While increased Withholding Tax payment should not actually translate into increased revenue for the government, it can potentially improve collection of major taxes like income tax- corporate, personal and VAT.
Part of the amendments introduced by the New Withholding Regulations is that where a non-registered entity issues a sales invoice, the Withholding Tax rate to be applied should be double the rate ordinarily applicable. This would potentially drive a lot of businesses currently operating outside the tax net to get registered quickly for tax compliance purposes, since they would not want to suffer the attendant cash-flow implications.
The new Regulations now also requires that where an entity makes tax deductions from the invoice of a supplier and remits to the relevant tax authority, it should issue the supplier a receipt containing all relevant information of the supplier (name, address, Tax Identification Number, National Identification Number in the case of an individual or RC number in the case of a company, nature of transactions, gross amount payable, amount deducted and month of the transaction). The supplier can use this receipt to claim the income tax credit from its relevant tax authority (whether the entity that made the tax deduction has remitted the amount deducted, or not). The relevant tax authority will impose applicable penalty and interest charges where the tax amounts deducted are not remitted timely.
Would this not add to multiple taxation, which has rendered almost most businesses prostate?
The New Withholding Regulations have directly listed a number of laudable exemptions from deductions at source, which include: Interest and fees paid to a Nigerian bank by way of direct debit of the funds domiciled with the bank, Supply of goods/materials by the manufacturer, Imported goods by non-resident supplier without Income tax presence in Nigeria, Insurance Premium, Payment relating to income/profit that is tax-exempt, Reimbursable expenses, 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, etc.
The direct exemption of these transactions from deductions at source would further strengthen the cash-flows of the affected businesses (that are mostly characterised by low-margins). However, this should not be misinterpreted as exemption from income tax obligations. The reduction of the withholding rates for other low-margin businesses like retail and construction are also commendable.
Furthermore, the new Regulations also specifically states that the reduced Withholding Tax rates, as contained in a Double Tax Treaty between Nigerian and any other country, shall apply to an eligible recipient to the extent that such reduced rates are contained in the relevant Treaty or Protocol duly ratified by the National Assembly. This means the reduced Withholding Tax rates would now be automatically enjoyed by eligible non-residents without them having to write formally to the Federal Inland Revenue Service as previously required.
Under the new regime of withholding taxes, what’s the possibility of compliance given the penchant by unscrupulous businessmen to cut corners and commit tax avoidance?
The new Withholding Regulations contain some punitive provisions that aim to directly tackle non-compliance. For instance, The Regulations provide that where an entity that is not registered for tax issues an invoice for supply of goods or services, the rate of deduction that should be applied should be twice the normal applicable rate.
The new Regulations also require that an entity that makes tax deductions should issue a receipt to the supplier. The supplier would then be able to claim the tax credit from the relevant tax authority (whether the entity that made the deduction has remitted, or not). In this instance, the Tax Authority would be required to hold accountable the entity that has deducted and failed to remit the deductions. The tax authority will also impose additional penalty and interest charges.
The new Regulations further state where an entity fails to make deductions at source from a supplier’s invoice, the entity shall only be liable to payment of just an administrative penalty and one-off annual interest charge (not including the Principal Withholding Tax amount not deducted). This is understandable, since it is expected that the supplier from whom tax deductions were not made, would eventually declare its entire income and file its income tax returns for the relevant year. Therefore, seeking to collect the principal Withholding amount from the entity that failed to deduct at source, would only be tantamount to double taxation. However, where an entity has made the Withholding Tax deduction, and failed to remit, the new regulations require payment of the principal amount deducted, in addition to the administrative penalty and interest charges.
The Regulations also specifically states that Withholding Tax deductions should not constitute a separate tax or an extra cost. What this means is that, where an entity has paid the full invoice amount to a supplier without deducting Withholding Tax, and then decides to bear the Withholding Tax burden from its own cash-flows, that extra Withholding Tax payment paid, will not be admissible as valid business expenses for income tax purposes. The less onerous approach for an affected taxpayer in this situation would be to either “seek to make the omitted Withholding Tax deductions from future payments to the supplier” or “just make provisions for payment of penalty and interest resulting from the non-deduction.”
Can digital products fall under withholding taxes too?
The application of Withholding Tax deductions on digital supplies will depend on the nature of the transaction (whether B2B or B2C). Typically, Business-to-customer (B2C) type of digital supplies would usually not require detailed contracting between both parties before they are made, while most Business-to-Business (B2B) type digital supplies would require detailed contracting that would be tailored to the specific needs of the service recipient.
Following the definition of “Across-the-counter transactions” in the new Withholding Regulations, it then means that B2C-type digital supplies would enjoy exemption from Withholding Tax deductions while B2B supplies involving contracts between both parties will be subject to Withholding Tax deductions. Where the B2B supplies are from a non-resident entity, the Withholding Tax deducted shall be the final tax, except where the non-resident is involved in other transactions that trigger income tax presence in Nigeria.