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INTRODUCTION
Withholding tax regulations play a crucial role in ensuring tax compliance and optimizing tax collection for governments. Recent amendments to these regulations have introduced substantial changes aimed at closing compliance gaps, minimizing revenue leakages, and promoting fair tax practices. These updates are designed to enhance the efficiency of tax administration while addressing the challenges faced by taxpayers and authorities alike. Taking a cue from the need to optimize tax collection in Nigeria, The Federal Ministry of Finance issued the Deduction of Tax at Source (Withholding) Regulations 2024 (hereafter referred to as “the Regulations”). The Regulations are designed to clarify the rules governing the deduction of tax from payments made to taxable persons under the provisions of the Companies Income Tax Act (CITA), Capital Gains Tax Act (CGTA), Personal Income Tax Act (PITA), and Petroleum Profits Tax Act (PPTA).1 The Regulation partially came into effect on the 1st of July 2024, however per government directive it has fully become an effective law as of 1st of January 2025.2
The primary objectives of these regulations include simplifying the withholding tax framework by consolidating rules across various tax acts, thereby reducing administrative burdens for businesses. They seek to address compliance challenges, particularly for small and medium-sized enterprises, by introducing exemptions for certain transactions and lowering withholding tax rates for industries with low margins. Additionally, the regulations seek to foster fair and equitable tax practices by providing clear definitions and outlining the responsibilities associated with withholding tax obligations.
NOTABLE CHANGES UNDER THE DEDUCTION OF TAX AT SOURCE (WITHHOLDING) REGULATIONS, 2024
- Revised Withholding Tax Rates: The new regulations have adjusted the withholding tax rates across various categories of income, including professional fees, dividends, royalties, and rent, albeit retaining certain withholding tax rates previously provided for. These revised rates are outlined below as they affect both corporate and non-corporate entities as well as resident and non-resident individuals.
• Dividends, Interest, Rent, and Royalties: The withholding tax rate remains at 10% for both resident and non-resident corporate entities. For royalty payments to individuals, the rate stays at 5%and this applies to residents and non-residents.
• Commission, Management, Technical, Consultancy, and Professional Fees: These now attract a uniform withholding tax rate of 5% withholding tax rate for resident corporate and non-corporate recipients and 10% for non-resident corporate and non-corporate recipients, which is considered the final tax.
• Contracts for Supply of Goods or Materials: A new rate of 2% applies to suppliers, excluding those who manufacture or produce the goods.
• Co-Location and Telecommunication Tower Services: Payments for co-location and telecommunication tower services now incur a 2% withholding tax for corporate and non-corporate residents, while a5% withholding tax applies to both corporate and non-corporate non-residents.
• Construction Contracts: For contracts involving roads, buildings, power plants, and bridges, the withholding tax rate is set at 2% for resident recipients and 5% for non-resident recipients. Other construction activities will incur a 5% withholding tax rate for residents and 10%for non-residents.
• Brokerage Fees: These fees will attract a 5% withholding tax rate for corporate and non-corporate resident recipients and 10% for non-resident either corporate or non-corporate recipients.
• Director’s Fees: This category sees a significant increase, with a new withholding tax rate of 15% for resident directors and 20% for non-resident directors, up from the previous rate of 10%. This change has raised concerns regarding the legality of differentiating between resident and non-resident directors.
• Non-Resident Entertainers and Sportspersons: Earnings from these individuals in Nigeria will be subject to a withholding tax rate of 15%.
• Winnings from Lottery, Gaming, and Reality Shows: These winnings will incur a withholding tax rate of 5% for resident recipients and 15% for non-residents. This particular change took effect on October 1, 2024.
• Payments for Other Services: Any payments not specifically listed in the regulations will attract a withholding tax rate of 2% for resident recipients and 5% for non-resident recipients.
• Compensation for Compensation for Loss of Employment: Such compensation is subject to capital gains tax at a rate of 10%, applicable to both resident and non-resident recipients.
- Specification of persons required to make deductions at source:
The Regulations outline the entities required to deduct tax at source, which include:
a. Corporate or unincorporated entities, excluding individuals.
b. Government ministries, departments, or agencies.
c. Statutory bodies.
d. Public authorities.
e. Any other institutions, organizations, establishments, or enterprises, including those exempts from tax; and
f. Payment agents acting on behalf of any of the aforementioned persons or entities.3
However, the Regulations however provided for certain exemptions to the deduction of tax from source. This exemption applies to a corporate body classified as a small company under Section 105 of the Companies Income Tax Act, or an unincorporated body with equivalent attributes, is exempt from the obligation to deduct tax at source from transactions, provided that:
(a) The supplier possesses a valid Tax Identification Number (TIN); and
(b) The value of the transaction does not exceed ₦2,000,000.00 within the relevant calendarmonth.4
- Remittance of Deduction from source
Under the Regulations the timelines for remitting withheld taxes are clearly defined:
a. Payments to the Federal Inland Revenue Service (FIRS): All withholding tax payments must be made by the 21st day of the month following the month in which the deduction was made.
b. Payments to State Internal Revenue Service (SIRS):
• For Capital Gains Tax (CGT) and Pay-As-You-Earn (PAYE) payments, these must be remitted by the 10th day of the month following the month of payment.
• For all other deductions, payments are due by the 30th day of the month following the month of payment.5
Additionally, individuals or entities making these deductions are required to submit returns to the appropriate tax authority using a specified template outlined in the second schedule of the regulations. Upon making a payment, they must issue receipts and provide a statement that includes information as stipulated in Regulation 6. The format for these receipts is detailed in the third schedule of the regulations.
- Timing of deduction of Withholding Tax
The Regulations provide clear rules on when withholding tax must be deducted:
• General Transactions: Tax must be deducted when a qualifying transaction is settled, whether by payment or any other form of settlement.
• Transactions Between Related Parties: The obligation to deduct withholding tax arises at the earlier of these two events:
A. When payment is made.
B. When the liability is recorded or recognized.
• Non-Residents: For non-resident individuals, the withholding tax deducted is treated as their final tax on the transaction. However, if the individual has a taxable presence in Nigeria, they may be subject to additional taxation. These rules are designed to simplify tax administration by clearly defining when withholding tax applies, ensuring timely compliance, and reducing confusion or disputes over tax deductions and remittances.6
- Withholding Tax is not an Extra Tax
The regulations clarified in detail that the deduction of withholding tax should not be considered as a form of additional tax or additional cost, meant to beaded to the contract or transaction. Instead, deduction of the withholding tax should be treated as an advance payment or, in some cases, the final tax liability of the supplier.
This clarification aims to resolve situations where suppliers quote contract prices or agreement terms excluding withholding tax, effectively shifting the burden of paying withholding tax to the customers/recipients of payment from contracts or agreements. By clarifying this, the regulations ensure that withholding tax is properly accounted for and paid to the relevant tax authority by the supplier without unfairly increasing costs for customers/recipients.
- Deduction at source to be receipted
Basically, the Regulations provide that any individual or entity that deducts tax from a payment is required to issue a tax receipt to the supplier or recipient for the withheld amount upon remitting the tax to the relevant tax authority. This receipt must include essential details such as the recipient's name, address, Tax Identification Number (TIN), nature of the transaction, gross amount, the amount deducted, and the month of payment. Importantly, the receipt serves as evidence for the supplier or recipient to claim withholding tax credits from the tax authority. This process is designed to facilitate easier access to and utilization of withholding tax credits for taxpayers. Notably, credit will be granted regardless of whether the person who made the deduction has actually remitted the withheld amount to the tax authority. In cases where the tax has not been remitted, that amount will be considered a liability of the individual or entity that made the deduction, and it will be recoverable by the tax authority along with any applicable penalties and interest. This provision aims to enhance compliance and ensure that taxpayers can effectively manage their withholding tax obligations.7
TRANSACTIONS EXEMPTED FROM DEDUCTING WITHHOLDING TAX AT SOURCE
The regulations outline specific instances where payments are exempt from withholding tax deductions, including:
1. Compensating payments in accordance with Section 81(8) of the Companies Income Tax Act.
2. Any distribution or dividend payment to a Real Estate Investment Trust or Real Estate Investment Company as provided undersection 80(5) of the Companies Income Tax Act.
3. Across-the-Counter Transactions: As defined under these Regulations 8
4. Interest and fees paid to a Nigerian bank by way of direct debit of the funds which are domiciled with the bank.
5. Goods manufactured, or materials produced by the person making the supply.
6. Imported goods where the transaction does not create a taxable presence in Nigeria for the foreign supplier.
7. Any payment in respect of income or profit which is exempt from tax.
8. Telephone charges, internet data and airline tickets.
9. Out-of-pocket expense that is normally expected to be incurred directly by the supplier and is distinguishable from the contract fees.
10. Insurance premium.
11. 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.
12. Commission retained by a broker from money collected on behalf of the principal in line with the industry norm for such transactions; and
13. Winnings from a game of chance or a reality show with contents designed exclusively to promote entrepreneurship, academics, technological or scientific innovation.9
It is important to point out that an exemption from withholding tax deduction at the source does not equate to a complete exemption from income tax unless explicitly provided under the enabling law. Thus, while withholding tax may not apply to certain transactions, applicable taxes must still be assessed and paid as required.
PENALTIES FOR NON-COMPLIANCE WITH THE DEDUCTION OF TAX AT SOURCE (WITHHOLDING) REGULATIONS, 2024
Based on the provisions of the Regulations, failure to comply with the obligations to deduct or remit withholding tax carries significant consequences provided for in the Regulations:
1. Failure to Deduct or Remit Tax: If a person required to deduct withholding tax fails to do so, or if they deduct but fail to remit the tax to the relevant tax authority on time, they will be subject to penalties under Section 40 of the FIRS Establishment Act or Section74 of PITA.10 Where no deduction is made, but the full amount is paid to the recipient, the payer will only be liable for an administrative penalty and a one-time annual interest on the amount that should have been deducted.11
2. If an amount is deducted but not remitted, the payer will be required to pay the deducted amount, along with an administrative penalty and annual interest, as specified under the applicable tax laws.12
IMPACT OF THE DEDUCTION OF TAX AT SOURCE (WITHHOLDING) REGULATIONS, 2024 ON BUSINESSES: WHAT TO EXPECT IN 2025 AND BEYOND
The new Regulations has both its advantages and disadvantages when it comes to the impact it would have on the carrying out of business. The notable advantageous impacts are discussed below:
a. Reducing Compliance Costs
One of the primary advantages of the new withholding tax regulations is the exemption from withholding tax obligations for small businesses, as defined under the Companies Income Tax Act. Specifically, small businesses with a turnover of Twenty-Five million Naira (N25,000,000) or less per annum are exempt from withholding tax deductions, provided they possess a valid Tax Identification Number, and that the transaction value does not exceed Two million Naira (N2,000,000) in any givenmonth13. This exemption allows small businesses to allocate resources more effectively, as they no longer need to navigate the complexities and administrative burdens associated with withholding tax deductions. By streamlining this process, small businesses can focus their efforts on growth and operational efficiency rather than compliance with intricate tax regulations.
b. Encouraging Formalization
The new regulations also incentivize small businesses to formalize their operations by requiring a TIN for exemptions. This requirement serves as a catalyst for small businesses to engage with tax authorities, thereby fostering a culture of compliance and transparency. By formalizing their operations, these businesses can access various benefits, including eligibility for government contracts, access to financing options, and improved credibility with suppliers and customers. The push towards formalization is not only beneficial for individual businesses but also contributes to the broader goal of increasing the tax base in Nigeria, ultimately leading to enhanced fiscal revenue.
IMPACT OF THE DEDUCTION OF TAX AT SOURCE (WITHHOLDING) REGULATIONS, 2024 ON CONTRACTS AND AGREEMENT: WHAT TO EXPECT IN 2025 AND BEYOND
The Regulation significantly impacts transactions in several keyways:
- It is pertinent and important for contracts and agreements to now incorporate specific provisions detailing the withholding tax responsibilities of the parties involved. This addition is essential to prevent disputes and ensure compliance with the new regulations.
- Businesses will need to consider withholding tax obligations when determining the pricing of goods and services. This adjustment is crucial for maintaining profit margins, as companies may need to account for the tax impact in their pricing strategies.
- Parties entering into agreements must exercise greater diligence in verifying each other's tax compliance status. This heightened scrutiny is necessary to avoid joint liability for any unpaid taxes, ensuring that all parties are aware of their obligations under the new regulations.
- Cross-border deals may become more intricate due to varying withholding tax rates and potential treaty benefits. Businesses engaging in international transactions will need to carefully assess these factors to ensure compliance and optimize their tax positions.
- Long-term contracts established under previous regulations may require renegotiation to align with the new withholding tax requirements. This process will help ensure that all parties are on the same page regarding their tax obligations moving forward.
CONCLUSION
The Deduction of Tax at Source (Withholding) Regulations, 2024, represents a transformative step toward refining Nigeria's tax administration framework. By introducing streamlined processes, clarifying responsibilities, and addressing longstanding compliance challenges, these regulations aim to balance the needs of businesses with the government's revenue collection goals.
For businesses, the key takeaway lies in the proactive adjustments required to navigate the new tax landscape. Whether it’s revisiting contract terms, incorporating withholding tax into pricing strategies, or ensuring timely remittance and compliance, these changes demand heightened diligence and accountability. Small businesses, in particular, stand to benefit from targeted exemptions that reduce administrative burdens while encouraging formalization.
However, the regulations also bring their complexities, especially for cross-border transactions and sectors with narrow profit margins. Businesses must prioritize understanding these new rules and, where necessary, seek expert guidance to align with compliance requirements without compromising operational efficiency.
Ultimately, while the new regulations impose additional obligations, they offer an opportunity for businesses to strengthen their financial governance and contribute to a more robust, transparent, and equitable tax system in Nigeria. By adapting to these changes, stakeholders can mitigate risks and leverage the benefits of a more structured withholding tax regime.
CITATIONS
1) https://assets.kpmg.com/content/dam/kpmg/ng/pdf/2024/07/The%20Federal%20Ministry%20of%20Finance%20(FMoF).pdf accessed 14th January 2025
2) https://research.hktdc.com/en/article/MTc1OTQzMDI3OQaccessed 14th January 2025
3) Section 4 (1) of the Deduction of Tax at Source (Withholding)Regulations, 2024.
4) Section 4 (2) of the Deduction of Tax at Source (Withholding)Regulations, 2024.
5) Section 7 (1) of the Deduction of Tax at Source (Withholding)Regulations, 2024.
6) https://assets.kpmg.com/content/dam/kpmg/ng/pdf/2024/07/The%20Federal%20Ministry%20of%20Finance%20(FMoF).pdfaccessed 14th January 2025.
7) Section 8 Ibid
8) means 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
9) Section 10 Ibid
10) Section 9 (1) Ibid
11) Ibid page 5
12) Ibid page 5
13) Section 4 (2)(a)(b) of the Deduction of Tax at Source (Withholding)Regulations, 2024
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