On July 1st, 2024, the Nigerian Government, represented by the Finance Minister, Adebayo Olawale Edun, issued updated Withholding Tax Regulations. These new regulations establish a revised framework for compliance regarding the deduction and remittance of withholding taxes in Nigeria. This article offers an overview of the significant changes in the withholding tax regime, highlighting the implications for both residents and non-residents and outlining the expectations for taxpayers under the new rules.
1. WHAT IS WITHHOLDING TAX (WHT)
Withholding tax serves as a prepayment of income tax, which is deducted directly from certain transactions at the source. Typically, WHT can be credited against the final income tax owed, although there are exceptions where it is considered a final tax. The primary advantages of WHT include enhancing government cash flow by collecting taxes in advance, reducing tax evasion, and providing valuable data on taxpayer commercial activities. The Federal Inland Revenue Service (FIRS), under the authority of the Companies Income Tax Act (CITA), regulates withholding tax in Nigeria. The regulations introduced revised WHT rates for specific transactions.
2. KEY PROVISIONS OF THE REGULATIONS
a. Persons Covered by the Regulations
The new regulations specify that nearly all businesses, organizations, government ministries, departments, agencies, and their payment agents are obligated to deduct WHT on qualifying transactions.
b. Clarity on Timing of Deduction
The new regulations clarify that the obligation to deduct WHT shall arise at the earliest occurrence of:
1. When payment is made; or
2. The amount due is otherwise settled.
While the regulations did not provide further clarity on this, it is understood that any transaction aimed at settling a payment triggers the obligation to deduct WHT. For transactions between related parties, the regulations provide that the obligation shall arise at the time of payment or when liability is recognized, whichever is earlier.
c. Remittance of WHT
The new regulations, maintaining the previous position, state that remittance of the WHT deducted shall be paid to:
1. The Federal Inland Revenue Service not later than the 21st of the month following the month of payment.
2. The State Internal Revenue Service not later than the 10th of the month following the month of payment for Capital Gains Tax and PAYE, and not later than the 30th of the month following the month of payment with respect to any other deduction.
Submissions shall be accompanied by a statement containing detailed information about the person from whom the amount was deducted.
d. Double Payment of WHT for Entities with no Tax Identification Number (TIN)
If a supplier of goods or services involved in a transaction subject to WHT does not have a Tax Identification Number (TIN), the amount to be deducted at the source will be twice the rate specified in the Schedule to the Regulations.
e. WHT Deduction is not a Separate Tax or Extra Cost
The new regulations provide that deductions made from payments should not be construed as a separate tax or additional cost of the contract or transaction.
f. Deductions shall be receipted
The regulations stipulate that the customer must issue a receipt for the tax deducted to the vendor. The vendor can then present this receipt to the relevant tax authority as evidence of WHT deduction and receive credit, regardless of whether the customer has remitted the WHT.
g. Definition of Key Terms
The new regulations offer clarity by defining certain terms. Some of the key terms defined include:
i. “Across-the-counter transactions” is defined as “any transaction carried out between parties without an established contractual relationship or any prior formal contracting arrangement and in which payment is made in cash or on the spot via electronic means.”
ii. “Manufacturing” or “production” is defined as “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 overheads.”
iii. “Professional fees” is defined as “payments for services which are occupations in the tertiary sector of the economy requiring special training in the arts, technology, or sciences.”
iv. “Winning” is defined as “the net payout to a participant in a game of chance.”
3. EXEMPTIONS COVERED UNDER THE REGULATIONS
The new regulations introduced a range of exemptions designed to streamline tax processes and promote economic growth. These regulations provide specific exemptions from the obligations of WHT deductions, categorized into two main groups: individuals/corporations and transactions.
a. Exempted Persons
The regulations provide that the following people are exempted from WHT obligations:
i. Individuals
ii. Small Companies as defined under Section 105 of the Companies Income Tax Act (CITA), provided that the transaction amount for that calendar month is less than N2,000,000 and the supplier has a valid Tax Identification Number (TIN).
iii. Manufacturers and producers like farmers.
b. Exempted Transactions
The new regulations exempt the following transactions from deductions at source:
i. Compensating payments under Registered Securities Lending Transaction as provided by Section 81 (8) of the Companies Income Tax Act.
ii. Across-the-counter transactions as defined in the WHT Regulations.
iii. Interests and fees paid to a Nigerian bank by way of direct debit of the funds which are domiciled with the bank.
iv. Distribution or dividend payment to a Real Estate Investment Trust or Real Estate Investment Company;
v. Goods manufactured or materials produced by the person making the supply.
vi. Out-of-pocket expenses that are normally expected to be incurred directly by the supplier and are distinguishable from the contract fees.
vii. 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.
viii. Winnings from a game of chance or a reality show with contents designed exclusively to promote entrepreneurship, academics, technological, or scientific innovation.
ix. Any payment in respect of income or profit which is exempt from tax.
x. Insurance premiums.
This article should not be taken as legal or tax advice to readers. Taxpayers are encouraged to consult our taxation practice team for advice regarding the implications of the WHT Regulations 2024 for their business.
Contact Persons
Joshua Daranijo
Managing Partner
[email protected]
Izuchukwu Ibeanusi
Associate
[email protected]
