The Deduction of Tax at Source Withholding Tax (WHT) Regulations 2024 released on July 1, 2024, by the office of the Honourable Minister of Finance and Coordinating Minister of the Economy, has now been gazetted on October 2, 2024.
The regulations have an effective date of 1 January 2025 and supersede all previous regulations concerning deductions at source or Withholding Tax. It also simplified areas of complexity in the old regulations as well as the issue of reduced rates for industries with low margins have now been adequately addressed by the new regulations.
Also, the regulations are designed to promote easier tax compliance and administration, reduce arbitrage between corporate and non-corporate business structures, and 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:
Tax to be deducted at source
- 'The new Regulations' has 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.
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.
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.
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.
Offences
The regulations also specify the penalties for those who either fail to withhold tax at source (WHT) or, after withholding, fail to remit the deducted amount to the appropriate tax authority. The penalties include:
- Failure to deduct the required amount attracts an administrative penalty.
- Failure to remit the amount already deducted attracts an administrative penalty, and annual interest.
Transactions Exempt from WHT deductions:
The following transactions are exempt from withholding tax deductions as stipulated by the regulations.
- 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
- Telephone charges, internet data and airline tickets.
- 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.
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.
Legal Implications of the Gazetted Regulations
The earlier version of the WHT regulations that was initially published stated 1 July 2024 as its commencement date. A lot of taxpayers had since commenced implementation of the regulations. However, the recently gazetted version states that implementation of the regulations shall be effective from 1 January 2025. It also stated in the new Regulations that the relevant tax authority shall, with the permission of the Minister, issue guidelines for the effective implementation of the Regulations.
The Federal Inland Revenue Service (FIRS) subsequently issued a public notice stating that the new regulations shall take effect from 1 January 2025, while the Companies Income Tax (Rates, etc of Taxes Deducted at Source (Withholding Tax) Regulations (old CIT WHT Regime) shall continue up until 31 December 2024. However, it is important to note that this FIRS notice only affects corporate taxpayers. All other unincorporated business entities, whose taxes are administered by their respective State Revenue Authorities, are not affected by this FIRS notice.
Nonetheless, corporate taxpayers who began complying with the new regulations from July may be concerned about whether their actions were lawful or whether they have inadvertently breached the regulations.
Did Taxpayers Breach the Law by Complying Early?
No, taxpayers who began complying with the new regulations from July were acting within the confines of the law, based on the information available at the time. While the gazetted version has now shifted the official start date to January 2025, any deductions made before it was published in the official gazette are not considered unlawful.
We understand that tax compliance can be complex, especially with shifting regulatory landscapes, but rest assured that your early compliance efforts were entirely legitimate. For more detailed information on why early compliance with ungazetted regulations does not constitute a breach of law, we encourage you to read our in-depth article on this topic: The Legal Propriety of Ungazetted Acts or Regulations in Nigeria.
Next Steps for Taxpayers
Now that the gazetted version is officially in place and the FIRS has clarified the start date for corporate taxpayers, we advise all taxpayers to discontinue the use of the new regulations and revert to the previous withholding tax regulations until 1st January 2025. This delay provides additional time to adjust and prepare for the new WHT regulations without fear of legal consequences.
Written By:
Ajaba Okachi - Tax Consultant
Similoluwa Awodeyi - Tax Consultant
Victor Athe - Partner, Tax & Strategy Services
