On the 1st of July 2024, the Federal Government of Nigeria approved the Deduction of Tax at Source (Withholding) Regulations 2024, (the “Regulation”). The Regulation which revises all prior rules in respect of deductions at source or withholding tax, aims to simplify the current WHT regime and increase fiscal revenue by ensuring taxes are collected efficiently in Nigeria and ultimately reducing tax fraud.

WHT serves as an advance payment of income tax and is deducted at the source from various types of payments such as contracts, dividends, interest, royalties, supplies and services. For example, if XYZ Ltd invoiced a client for N10,000,000, the Client might be required to withhold a certain percentage in order to remit the same directly to the relevant tax authority on XYZ Ltd’s behalf. XYZ Ltd would then report the balance as income tax on its tax return.

It is important to note that the Regulation addresses the issue surrounding taxable persons, eligible transactions, applicable rates and timing of the obligation for remittance. In this newsletter, we provide an explanation on the provisions of the Regulation and how businesses may be impacted.

Below are the key changes businesses should be aware of:

Taxes to be deducted at source

(i) The Regulation specifies the eligible transactions and applicable rates for corporate resident and non-resident recipients as well as for non-corporate resident and non-resident recipients;

(ii) New income categories have been created under eligible transactions, namely winnings from lottery, gaming, reality TV shows, and brokerage fees.¹  A 15% WHT rate is now applicable on amounts earned in Nigeria to transactions with entertainers and sportspersons;

(iii) For construction contracts (roads, bridges, buildings and power plants) and contracts of supplies or services, there is a reduction in WHT rate from 2.5% to 2% for companies and 5% to 2% for individuals. However, WHT rates relating to construction contracts (any other form of construction and related activities) by non-resident persons and directors' fees have increased from 5% to 10% and 10% to 20% respectively. In the case of constructions outside of roads, bridges, buildings and power plants, carried out by non-residents, the 10% WHT is considered final, requiring no additional assessment to personal or corporate income tax.

(iv) Co-location and telecommunication tower services are now liable to a 2% WHT deduction from 5%.

(v) The Regulation also creates a unified WHT regime for Capital Gains Tax (“CGT”), with compensation for loss of employment for individuals; for Personal Income Tax, with the rate for directors’ fees; for Companies' Income Tax, and petroleum profits tax.

(vi) The Regulation specifies that when a recipient does not have a tax identification number, the amount to be withheld at source for any qualified transaction involving non-passive income, such as the supply of products or provision of services, shall be twice the rate specified.

Exempted transactions

The following transactions are exempted under the new Regulation:

(i) Winnings from a game of chance or a reality show with contents designed to promote entrepreneurship (such as Lion’s Den, Shark Tank), academics (such as Who Wants to Be a Millionaire, Countdown, The Chase), technological (such the Gadget show, Robot Wars) or scientific innovation; for instance, games of chance such as roulette and blackjack are exempted from WHT deductions;

(ii) Across-the-counter transactions, such as transactions carried out between parties without established or prior contractual relationship and in which payment is made on the spot;

(iii) Interest and fees paid to a Nigerian bank by way of direct debit of the funds which are domiciled with the bank;

(iv) Payment in respect of income or profit which is exempt from tax;

(v) Supply of Liquefied Petroleum Gas, Compressed Natural Gas (CNG), Premium Motor Spirits (PMS), Automotive Gas Oil (AGO), Low Pour Fuel Oil (LPFO), Dual Purpose Kerosene (DPK) and JET-A1;

(vi) Commission retained by broker from monies collected on behalf of principal in line with the industry norm;

(vii) Goods manufactured or materials produced by the person making the supply;

(viii) Insurance premiums;

(ix) Imported goods where the transaction does not create a taxable presence in Nigeria for the foreign supplier;

In short, if the taxpayer is a small business owner, farmer, or manufacturer, the Regulation means they are exempted from WHT. Notably, the exemption list above now addresses transactions such as item (ii) and (viii) that have caused uncertainty in the past.

Persons required to make tax deductions at source

The Regulation lists out the persons required to make WHT deductions and specifies that small businesses as defined under Companies Income Tax Act² , are exempted from the requirement to deduct tax at source, provided that the supplier has a valid Tax Identification Number and the value of the transaction is N2,000,000 or less during the relevant calendar month. Essentially, the Regulation makes the tax registration of small businesses a condition precedent for their exclusion from the applicability of WHT to such businesses.

Deduction: not a separate tax or an extra cost

The Regulation reiterates an important principle of WHT, which is that a payment deduction will be considered an advance or final tax of the supplier depending on the circumstances, and not as a separate tax or an additional cost of the contract or transaction.

Deduction at source

(i) The obligation to deduct at source arises when payment is made or the amount due is settled;

(ii) Between related parties, deduction is made at the time of payment or when the liability is recognised;

(iii) The amount deducted on any payment to a non-resident person shall be the final tax except where the income is liable to further tax by reason of taxable presence in Nigeria.

Other than related party transactions, the obligation to deduct WHT arises only when payment is made, or the transaction is otherwise settled.

Timelines of remittance of amount deducted at source

The deadlines for remittance have not changed. Accordingly, the Regulation states that payment shall be made to the Federal Inland Revenue Service (“FIRS”) no later than the 21st day of the month following the month of payment; with respect to CGT and Pay-As-You-Earn (“PAYE”), payments to the State Internal Revenue Service (“SIRS”) should be made no later than the 10th day of the month; any other deduction, no later than the 30th day of the month following the month of payment.

It is worth noting that where an amount is deducted at source, the person making the deduction shall submit a return with the evidence of remittance of the amount deducted to the tax authority. The responsibility is on the person making the deduction to have a receipt of deduction and to make the same available to the person on whose behalf the deduction was made.

Deduction to be receipted

This is meant to simplify the process of obtaining and utilizing WHT credit. Based on the Regulation, the tax authorities will no longer insist on the remittance of WHT deductions before issuing credit notes as confirmation that deduction has been made. Receipts issued by the deducting party to the beneficiary will be considered sufficient for the issuance of WHT credit notes. The amount unremitted will be treated as the tax liability of the person who made the deduction

Offences

The Regulation distinguishes between ‘’failing to deduct and remit’’ and ‘’deducting but failing to remit’’, each carrying its own penalty. The responsibility lies on the persons in charge of making deductions at source. Businesses must be aware of their responsibilities under this new tax regime, in order to avoid the risk of penalty. The Regulation makes it an offence where:

(i) A person responsible for making deductions at source or who has deducted but fails to pay the relevant tax authority before the deadline commits an offence and shall, upon conviction, be liable to pay the tax withheld or not remitted in addition to a penalty of 10 percent of the tax withheld or not remitted per annum, interest at the prevailing Central Bank of Nigeria minimum rediscount rate and, imprisonment for period of not more than three years as set out in section 40 FIRS or section 74 of the Personal Income Tax Amendment (“PITA”). In this case, the guilty party would be the person who withheld tax on behalf of the counterparty but failed to remit or has the responsibility to deduct but failed to do so;

(ii) A person required to deduct at source but has failed to do so and pays a 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. For example, in the event where the taxpayer pays the client the entirety of the fee agreed but fails to deduct WHT at source;

(iii) Where a person has deducted the amount at source and failed to remit such amount, the amount so deducted in addition to an administrative penalty and annual interest shall be payable. For instance, in the circumstance where a client provides an invoice for services provided to XYZ Ltd and XYZ Ltd withholds tax at the point of payment but fails to remit the amount withheld to the relevant tax authority, then XYZ Ltd would be found liable to the penalty prescribed by the law;

Conclusion

In conclusion, it is important that taxpayers begin to familiarize themselves with the provision of this Regulation in order to avoid unnecessary penalties. By exempting small businesses and certain key sectors, reducing rates for low-margin businesses, and streamlining compliance and refund processes, these changes have been established to alleviate financial burdens, stem leakage and stimulate economic growth in the country.

Finally, by its provision, the Regulation ought to come into force on the 1st of July 2024, even though it is yet to be published in the Federal Republic of Nigeria’s official gazette. The effective date of the Regulation appears to be inconsistent with the provision of the National Tax Policy which recommends a 90-day implementation timeline for tax laws. It remains to be seen whether implementation will commence immediately.

Please note that this newsletter does not constitute legal advice. Kindly contact the authors of this article if you have any questions or require any legal advice regarding changes that may affect your business in light of the revised WHT Regulation.

Click here to download Deduction of Tax at Source Regulations 2024 

1. Note the exemptions below.
2. Small businesses, particularly those earning N25,000,000 or less annually.