Withholding Tax (WHT) is an advance payment of income tax that is deductible at source on specific transactions. In simple terms, where Party A and B enter a transaction for which payment is to be received and income tax is payable, Party B is required under the law to deduct a percentage before payment to Party A for remittance to the tax authority as an advance payment of income tax for Party A. Amounts withheld can be applied as tax credit during tax return filings to reduce the overall income tax liability of Party A.
The concept of WHT was introduced into Nigeria's tax system in 1977 to curb tax evasion, reduce tax leakages and to gain insights on the commercial activities of resident and non-resident businesses. Prior to now, the WHT regime presented challenges for businesses due to ambiguities in applicable provisions of law, burdensome compliance requirements, irregularity of the WHT credit system and inconsistent practices by tax authorities. Recognizing this, the Ministry of Finance recently issued the Deduction of Tax at Source (Withholding Tax) Regulations 2024 (the "Regulations"), effective 1st of July 2024. These regulations aim to streamline the withholding tax process in Nigeria, making it more business-friendly and efficient.
In this newsletter, we highlight the key changes and the benefits of the new Regulations for businesses.
1. What is Withholding Tax?
WHT is not another form of tax, rather it is an advance payment of income tax deducted at various rates, now ranging from 2% to 20% depending on the transaction. WHT cannot be used to offset any other type of tax liability, except income tax liabilities. Also, WHT is first used in the year of assessment to which an income relates before it can be used to settle future tax liabilities.
2. What are the Transactions Subject to WHT and Applicable Rates?
The transactions subject to WHT and the applicable rates are as follows:
| Corporate Recipients | Non-Corporate Recipients | |||
|---|---|---|---|---|
| Transactions | Resident | Non-resident | Resident | Non-resident |
| Dividend, Interest | 10% | 10% | 10% | 10% |
| Royalty | 10% | 10% | 5% | 5% |
| Rent, Hire or Lease | 10% | 10% | 10% | 10% |
| Commission, consultancy, technical, management, and professional fees | 5% | 10% | 5% | 10% |
| Supply of goods or materials other than by the manufacturer or producer | 2% | N/A | 2% | N/A |
| Co-location and telecommunication tower services | 2% | 5% | 2% | 5% |
| Supply or rendering of services other than those specifically listed in the Schedule | 2% | 5% | 2% | 5% |
| Construction of road, bridges, building and power plants | 2% | 5% | 2% | 5% |
| Any other form of construction and related activities | 5% | 10% | 5% | 10% |
| Brokerage fee | 5% | 10% | 5% | 10% |
| Directors' fee | N/A | N/A | 15% | 20% |
| Compensation for loss of employment | N/A | N/A | 10% | 10% |
| Entertainers and sport persons | N/A | 15% | N/A | 15% |
| Winnings from lottery, gaming, reality shows, etc. | N/A | N/A | 5% | 15% |
3. What is the Scope of Application of the Regulations?
The new Regulations will apply to all WHT payments made under the following laws:
- Capital Gains Tax Act (CGTA)
- Companies Income Tax Act (CITA)
- Petroleum Tax Profits Tax Act
- Personal Income Tax Act (PITA)
4. What are the Transactions exempted from WHT?
A few transactions exempted from WHT are: distributions or dividend payments to a real estate investment trust or real estate investment company; across-the-counter transactions; interest and fees payable to a Nigerian bank through direct debit of funds domiciled with the bank; goods/materials manufactured or produced by a supplier; imported goods from a foreign supplier with no taxable presence in Nigeria; winnings from a game of chance or reality show exclusively promoting entrepreneurship, academic, technological or scientific innovation, etc.
5. What are the Key Changes and Benefits for Businesses under the Regulations?
a. Clear Unified Rules Guiding WHT Implementation
Prior to the issuance of the Regulations, businesses struggled to understand their withholding tax obligations as the rules guiding the implementation of WHT in Nigeria were ambiguous and fragmented. Although WHT provisions are still contained in various Acts, the Regulations now provide clear and simplified rules for its implementation.
b. Clarification on Persons Required to Deduct at Source
The Regulations introduce a single, clear list of entities required to deduct WHT at specific rates on eligible transactions, explicitly excluding individuals. This list applies uniformly across all Income Tax Acts covered by the Regulations. They are:
- body corporate or unincorporate, other than individuals
- governments, and their Ministries, Departments and Agencies (MDAs)
- statutory bodies
- public authorities
- institutions, organizations, establishments and enterprises
- payment agents on behalf of those listed above.
c. Exemption of Small and Medium Enterprises (SMEs) and Farmers from WHT Compliance
Section 2(2) of the Regulations exempts small companies and unincorporated bodies from the requirements to deduct WHT from any transaction, provided however that the value of the transaction during the relevant calendar month, is not above Two Million Naira and the supplier they are dealing with has a valid Tax Identification Number (TIN).
d. Improved Utilization of Tax Credits
Previously, entities from whose payments WHT had been deducted ("Tax Beneficiaries") could not claim WHT tax credits from the Federal Inland Revenue Service (FIRS) against their eventual tax liabilities if the person who deducted WHT from the payments (the "Tax Agent") failed to remit the tax to the authorities. However, Section 6(3) of the Regulations now permit Tax Beneficiaries to claim WHT tax credits through receipts issued by Tax Agents, regardless of whether the agents have remitted the deducted amounts. These unremitted amounts become the tax liability of the agents and are recoverable with applicable penalties and interest.
e. WHT to Function as an Advance Tax Payment and not an Additional Contract Cost
While it is common practice for contracting parties to adjust negotiated contract price upwards to account for anticipated WHT deductions, in a bid to shift the burden of WHT payment to the other party to the contract (i.e. Gross Up provisions in contracts), the Regulations now expressly state that a WHT payment should not be treated as an additional cost of a contract or transaction and therefore should not be included in the contract price as an additional cost.
Conclusion
The Withholding Tax regime has been the most complex aspect of tax compliance in Nigeria. The new Deduction of Tax at Source (Withholding Tax) Regulations 2024, represent a significant step forward for the tax authorities to address long-standing challenges faced by businesses in Nigeria. While more work remains to be done, particularly with respect to some ambiguities still within the WHT regime, we expect that the implementation of these Regulations will foster a more business-friendly environment, allowing businesses to thrive in Nigeria.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
