Vi-M Professional Solutions

Category: Withholding Tax

  • New Withholding Tax Regulations in Nigeria – A Positive Step Forward

    New Withholding Tax Regulations in Nigeria – A Positive Step Forward

    The Federal Ministry of Finance, on 1 July 2024, issued a New ‘Deduction of Tax at Source (Withholding) Regulations 2024’, as part the country’s fiscal policy and tax reforms. These regulations, effective from 1 July 2024, replace previous enactments and practices on withholding tax, offering a streamlined and more efficient approach to withholding tax compliance in Nigeria.

    (Post update: Here is an easy snapshot of the Regulations: https://vi-m.com/wp-content/uploads/securepdfs/2024/07/NEW-WHT-RATES-IN-NIGERIA-1.pdf)
     
    Key Highlights of the New Regulations:


     1. Simplified Tax Deduction at Source

    The new regulations provide clear guidelines for deducting tax at source for various transactions under the Capital Gains Tax Act, Companies Income Tax Act, Petroleum Profits Tax Act, and the Personal Income Tax Act. This move aims to ensure transparency and consistency in tax administration.

    2. Exemption of Small Businesses

    Small companies and unincorporated businesses / business names making N25m or less in annual turnover (as defined under section 105 of the Companies Income Tax Act), are exempt from the requirement to deduct or remit WHT, provided the suppliers (from which the small businesses ought to withhold tax), have a valid TIN and the transaction value does not exceed N2m in a calendar month. This exemption reduces the compliance burden on small businesses, encouraging their growth and development.

    3. Reduced Rates and Specific Inclusions

    Businesses and individuals will benefit from reduced withholding tax rates, particularly in industries with low margins. For instance:

    • The supply of goods and services now enjoys simplified descriptions and reduced rates.
    • Co-location and telecommunication tower services attract lower rates to reflect industry realities.
    • Construction of roads, bridges, buildings, and power plants are now subject to reduced rates, recognizing the low margins in these sectors and supporting infrastructure development.
    • The inclusion of supply or rendering of services other than those specifically listed in the schedule addresses previously unregulated transactions, providing clarity and reducing ambiguity. This update ensures that all relevant transactions are covered under the withholding tax regulations, further simplifying compliance for businesses.

    4. Encouraging Formalization and Tax Compliance, with TIN

    To promote formalization and tax compliance, transactions involving recipients without a Tax Identification Number (TIN) will attract twice the standard withholding tax rate. This incentivizes all parties to obtain and use TINs, broadening the tax base and possibly improving revenue collection.

    5. Withholding Tax Receipts

    For the first time, the regulations mandate that persons making tax deductions issue receipts to the supplier for monies deducted from their pay, upon remittance of the tax to the relevant tax authority. This new practice will significantly enhance transparency and ease of doing business, allowing taxpayers to track and claim tax credits, using such receipts issued to them, whether or not their client has remitted the tax deducted from their pay. The receipt will include vital information such as the name and TIN of both the payer and the beneficiary, the nature of the transaction, the gross amount payable, and the amount deducted.

    6. Comprehensive Exemptions

    While exemptions from withholding tax are not new, the new regulations consolidate all existing exemptions from various laws into a single, comprehensive format. This clarity is crucial for businesses, ensuring they can easily understand and apply the exemptions. Notably, exemptions for transactions such as compensating payments under Registered Securities Lending Transactions, payments to Real Estate Investment Trusts, and certain payments to Nigerian banks, Across the counter transactions, Out of pocket expenses, Goods manufactured or material produced by the person making the supplies, payment in respect of income or profit which is exempt from tax, are now clearly listed. Some other exemptions include:

    • 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 brokers from monies collected on behalf of the principal.
    • Winnings from games of chance or reality shows promoting entrepreneurship, academics, and innovation.

    7. Persons Required to Deduct Tax

    The regulations specify that bodies corporate or unincorporate, government ministries, departments, agencies, statutory bodies, public authorities, and other institutions are required to deduct tax at source on eligible transactions. This comprehensive inclusion ensures that tax deductions are consistently applied across various sectors, enhancing overall tax compliance.

    8. Non-Resident Suppliers

    The new regulations also clarify the tax rates applicable to non-resident recipients of payments / suppliers, ensuring that withholding tax serves as the final tax for these entities unless the incomes are subject to further tax by reason of taxable presence in Nigeria. This inclusion simplifies compliance for international businesses operating in Nigeria, fostering a more attractive investment climate.

    9. Interpretations of Terms

    The interpretations section of the regulations provides clarity on various terms and provisions, ensuring that taxpayers and administrators have a common understanding. This clarity reduces the risk of disputes and enhances the smooth implementation of the regulations.

    10. Timely Remittance and Accountability

    The regulations mandate timely remittance of deducted taxes to the relevant authorities, with clear deadlines:

    • Federal Inland Revenue Service: by the 21st day of the following month.
    • State Internal Revenue Services: various deadlines depending on the type of tax.

    11. Simplified Procedures and Compliance

    New templates for remittance and returns have been introduced. Detailed receipts will be issued for tax deductions, enhancing transparency and enabling taxpayers to claim tax credits efficiently.

    12. Offences and Penalties

    The regulations outline specific offences and associated penalties to enforce compliance.  Noteworthy is the new provision that states that taxpayers who pay suppliers (rather than deduct), the WHT portion of the payment (possibly for supplier self-remittance), will be liable to only an administrative penalty and a once-off annual interest on the amount not deducted. 

    13. Positive Impact on Business Environment

    The new withholding tax regulations are expected to:

    • Simplify Compliance: Clear guidelines and reduced rates help businesses understand their tax obligations and comply more easily.
    • Promote Transparency: Detailed documentation and timely remittance enhance accountability and trust in the tax system.
    • Support Economic Growth: Incentives for compliance and exemptions for certain transactions stimulate business activities and investments.

    Conclusion
     
    The Deduction of Tax at Source (Withholding) Regulations 2024 marks a significant improvement in Nigeria’s tax administration. By simplifying procedures, reducing rates, and promoting compliance, these regulations are poised to create a more efficient and business-friendly environment.
     
    For more information, queries or professional assistance, please contact Vi-M Professional Solutions via email on clients@vi-m.com.

  • FIRS Issues Public Notice on New Tax Treaty WHT Rates

    FIRS Issues Public Notice on New Tax Treaty WHT Rates

    In a recent Public Notice (view here), the Federal Inland Revenue Service (FIRS), announced, that the Honourable Minister of Finance, Budget, and National Planning, has approved the discontinuation of the unilateral application of the uniform Withholding Tax (WHT) rate of 7.5% on dividends, interest and royalties paid by residents of Nigeria and beneficially owned by residents of its treaty partners under the Double Tax Agreements (DTAs) between Nigeria and other countries. 

    With effect from 1 July 2022, the rates specified in the Nigerian tax laws will now apply, except where the rate per tax law exceeds the maximum rate specified in the applicable tax treaty, in which case, the maximum rate specified in the tax treaty will apply. 

    This unilateral application of reduced WHT rate of 7.5% on these payments to residents of Nigeria’s Treaty partner countries, has been in application in Nigeria since 1999, sequel to the policy statement of the then military government, as contained in the Budget Statement of 1999.  

    According to the FIRS, this policy statement of the 1999 government on unilateral reduction of WHT rate to 7.5% wasnot effected/ promulgated into any tax law. Also, Protocols were not executed between Nigeria and the treaty partners to effect any reduction in the WHT rates specified in the relevant DTAs. Only some DTAs that were drawn up after 1999 reflected this reduction in WHT rate.

    On this backdrop, the new WHT rates that will apply, according to the FIRS’ Public Notice, effective 1 July 2022 on dividends, interest and royalties paid by residents of Nigeria and beneficially owned by residents of tax treaty partners(in line with the maximum rates agreed in the respective Tax Treaties, or specified in the tax laws as the case may be) are: 

    S/N Treaty Partner Dividend – For company with voting powers of 10% and aboveDividend –All others Interest Royalties– Payment to Companies Royalties –Payment to Individuals
    1Italy10% 10% 10% 10% 5%
    2United Kingdom10%10%10%10%5%
    3Belgium10%10%10%10%5%
    4Pakistan10%10%10%10%5%
    5Czech Republic10%10%10%10%5%
    6Slovak Republic10%10%10%10%5%
    7France10%10%10%10%5%
    8Netherlands10%10%10%10%5%
    9Romania10%10%10%10%5%
    10Canada10%10%10%10%5%
    11South Africa7.5%10%7.5%7.5%5%
    12China7.5%7.5%7.5%7.5%5%
    13Philippines10%10%10%10%5%
    14Singapore7.5%7.5%7.5%7.5%5%
    15Sweden7.5%10%7.5%7.5%5%
    16Spain7.5%10%7.5%7.5%5%

    * The phrase, “Beneficially owned” means that the beneficial owner of the income must be a resident of the other treaty country/ partner, even if the income was not paid directly to the person. An agent, nominee, conduit company or a person acting as a fiduciary or administrator who is the direct recipient of the payment but not the beneficial owner is not entitled to the reduced treaty WHT rate or rate cap. For example, where a dividend is paid by a Nigerian company directly to a resident of Nigeria’s treaty partner but for the benefit of a resident of Nigeria or another country, the treaty rate on dividend will not be applicable. On the other hand, the treaty rate will be applicable if the dividend is paid to a resident of another country but for the benefit of a resident of the treaty country. 

    To claim tax treaty benefits, including the reduced WHT rate, the FIRS requires that taxpayers / agents of WHT comply with the contents of this Public Notice and the contents of FIRS’ updated Circular on the ‘Claim of Tax Treaties Benefits and Commonwealth Tax Relief in Nigeria’, published on 11th May 2022 (view here).

    According to the referenced Circular, there are several conditions that must be fulfilled before a taxpayer can claim tax treaty benefits or benefits under the ‘Commonwealth Income Tax Relief’. 

    One thing to note is that for any non-resident beneficial owner of dividend, interest, and royalty income to enjoy any reduced WHT rate in Nigeria contained in the DTA between Nigeria and the applicable treaty partner country, a pre-approval /ruling from the FIRS is also required.  After receiving this approval or ruling from the FIRS, the taxpayer should submit a copy of the approval or ruling to the WHT collecting agent who is making the payment to the non-resident (e.g., Government ministries, departments, agencies and parastatals, companies, statutory bodies, institutions, and other withholding tax (WHT) collecting agents of FIRS etc.), to reflect the rate in the WHT deduction. 

    To prevent or mitigate the financial impact of this new pronouncement on beneficial owners of these incomes in the respective treaty countries, it is possible, that Trade Associations or Chambers of Commerce of those adversely affected treaty partners (or the treaty partner countries themselves), can quickly push or pressure for negotiations to be activated between Nigeria and their countries to effect or execute a reduction in the maximum WHT rates specified in their various DTAs.

    It is also recommended that all affected taxpayers should read and familiarize themselves with the elaborate explanations provided by the FIRS on Nigeria’s Tax Treaties, Commonwealth Tax Relief and claim of tax reliefs under both Arrangements, in its updated Circular on ‘Claim of Tax Treaties Benefits and Commonwealth Tax Relief in Nigeria’ issued on 11 May 2022.

    For more enquiries on this subject, please send an email to clients@vi-m.com.

  • FIRS To Carry Out Nationwide VAT and WHT Compliance Monitoring Exercise

    FIRS To Carry Out Nationwide VAT and WHT Compliance Monitoring Exercise

    In its Public Notice of 1 June 2022 (view here), the Federal Inland Revenue Service (FIRS), has announced that it would be embarking on a nationwide Value Added Tax (VAT) and Withholding Tax (WHT) compliance monitoring exercise with effect from 1 July 2022.

    To this end, the FIRS’ teams of officers will be visiting selected taxpayers or taxable persons (including companies, NGOs, or MDAs) to review their VAT and WHT records. This exercise will cover 2016 to 2020 accounting years (including any earlier years for which the records of any of such taxpayers have not been tax-audited). A letter of notification (including the documents required for the exercise) will be sent to all taxpayers or tax agents who have been selected for the VAT and WHT compliance monitoring exercise.  

    From the FIRS’ Notice, although no direct statement was made to this effect, it can be inferred that taxpayers who have undergone tax audits covering the years mentioned, may not be subjected to the VAT and WHT monitoring exercise. 

    In the light of the proposed exercise, the FIRS has also extended invitation to all taxable persons and tax agents who have collected VAT or deducted WHT over time (or before now) but have not remitted them, to do so within 2 weeks from the date of Publication of the Notice.

    We advise affected taxpayers to conduct a pre-check or pre-audit exercise in-house to enable them plan /mitigate any exposures that may arise from the FIRS’ compliance monitoring exercise.

    For more enquiries, please send an email to clients@vi-m.com.