1. Introduction
Withholding tax has its origins in the early 20th century, primarily as a measure to
ensure tax compliance and improve the efficiency of tax collection. The concept was
first prominently implemented in the United States during World War II but was
only introduced into Nigeria’s tax regime in 1977 to serve as an advance payment of
income tax on specified transactions and not as a form of separate tax. The primary
goal of the Withholding Tax (WHT) system was to broaden a country’s tax base by
capturing information on businesses that might not be formally registered for tax
compliance.
2. Meaning of Withholding Tax
Also known as retention tax, WHT reflects an arrangement where customers
withhold a portion of the fee due on services rendered to them by vendors, and the
same will be remitted by them to the government. In this way, WHT acts as an
advance towards the taxpayer’s final income tax obligation, thus reducing the
taxpayer’s tax liability. The purpose of WHT is to provide a steady revenue stream
for the government and to reduce tax evasion.
As the WHT regime expanded from taxes on payment to contractors, dividends, and
royalties, to cover transactions such as sales by small and medium-scale enterprises
(SMEs), contracts, and agency arrangements, it led to various complications and
ambiguities. This placed a significant compliance burden on businesses, particularly
SMEs, affecting their working capital and introducing uncertainties about compliance
requirements, eligible transactions, applicable rates, and remittance timing.
In the exercise of its regulatory power and to curb the aforementioned burdens, the
Federal Ministry of Finance issued the Deduction at Source (Withholding)
Regulations 2024 for general transactions such as construction, telecommunication
services, management services, etc. with their commencement date on 1 st July 2024,
while for special transactions such as gaming-related services, reality shows and
other similar events, the regulation will take effect on 1 st October 2024 subject to
changes from a gazetted version. The regulation has also introduced salient
changes which are set to redefine how withholding taxes are taxed and deducted in
Nigeria. The administration of WHT in Nigeria is vested in the Federal Inland
Revenue Service and State Internal Revenue Services.
3. Relevant Changes Introduced by the “Deduction of Tax at Source
(Withholding) Regulations 2024”
3.1 Applicability and Eligibility:
– The new Regulations now applies to all WHT payments that were formerly
made by companies, banks, and financial institutions making certain types of
payments, such as dividends, interest, royalties, technical service fees, etc.,
and whose taxes were independently regulated and required to be paid under
the Companies Income Tax Act (CITA), Capital Gains Tax Act (CGTA),
Petroleum Tax Profits Tax Act (PPTA), and Personal Income Tax Act (PITA).
– The Regulations have introduced a clear list of entities required to deduct
WHT on transactions:
i. body corporate or unincorporated, other than individuals;
ii. governments, and their Ministries, Departments, and Agencies (MDAs);
iii. statutory bodies;
iv. public authorities;
v. institutions, organizations, establishments, and enterprises; and
vi. payment agents on behalf of those listed above.
3.2 Time frame for deduction of tax
For payment of taxes to the Federal Inland Revenue Service, it is to be
deducted not later than the 21 st of the month of the next month in which it is
paid.
Where it is to be paid to the State Inland Revenue Service, it should be paid
not later than the 10 th of the month following the month of payment,
And as regards other deductions, not later than the 30 th of the month of the
next month of payment.
3.3 Exemption of Small Companies and Unincorporated Bodies:
The Regulations exempt small companies and unincorporated bodies from
the requirements to deduct WHT from any transaction where the value of the
transaction is not above Two Million Naira and the supplier has a valid Tax
Identification Number (TIN)
3.4 Issuance of Receipts:
The Regulations provide that the customer (i.e. payer of the fee) should issue
a receipt of WHT tax deducted to the vendor (i.e. provider of the service).
The receipt should include the name, address, and any Tax Identification
Number of the person from whom the deduction was made, or where the
beneficiary has no Tax Identification Number, a National Identification Number
in the case of an individual, or the RC number in the case of a Company.
3.5 Tax Credit
Where a person has made a deduction, he/she may submit the receipt to the
relevant tax authority as evidence of the amount deducted to claim tax credit
for the amount deducted.
Also, where a person has issued a receipt for taxes that are yet to be remitted
to the relevant authority, the beneficiary is to be credited by the relevant tax
authority.
This means that the taxpayers can obtain credit as soon as the Receipts are
issued to them regardless of whether the taxes were remitted by the
customer.
3.6 Exempted Goods/Services:
The Regulations also introduced transactions/goods/services that are WHT-exempt
(among others):
i. Goods manufactured or materials produced by the person making the
supply. The Regulations define manufacturing/production to mean
assembling of a final product or component of a product utilizing raw
materials or other inputs including labor and production overheads which
include energy production, including electricity, gas, and petroleum
products.
ii. Across-the-counter transactions, i.e. transactions carried out between
parties without established or prior contractual relationship and in which
payment is made on the spot.
iii. Interest and fees are paid to a Nigerian bank by way of direct debits to
accounts in the bank.
iv. Out-of-pocket expenses are normally expected to be incurred by the
supplier distinguishable from contract fees.
v. Insurance premium.
vi. 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.
vii. Commission retained by the broker from monies collected on behalf of the
principal in line with the industry norm.
viii. Winnings from a game of chance or a reality show with content designed
to promote entrepreneurship, academics, technological or scientific
innovation.
3.7 Penalties:
Customers who did not deduct WHT but paid their vendors in full will be
subject to an administrative penalty to be determined by the relevant tax
authorities.
Also, WHT will apply at twice the designated rate on income earned by
vendors that do not provide a Taxpayers Identification Number (TIN).
4. Conclusion
The new Deduction of Tax at Source (Withholding Tax) Regulations 2024 represents
a noteworthy step forward for the tax authorities to address long-standing challenges
faced by small and medium enterprises in Nigeria. The Regulations provide for the
rules that apply to the deduction of taxes from payments of taxable individuals and
companies under the PPTA, CGTA, CITA, and PITA as amended in relation to the
transactions specified under applicable laws and the Regulations. The Regulations
are designed to facilitate and simplify the processes for companies in using the
deduction of WHT to offset tax obligations.