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.