- Introduction
Withholding Tax (WHT) in Nigeria is an advance payment of income tax. The tax was first introduced into the Nigerian tax system in 1977 with the passage of Finance Act 1977. The tax was principally introduced to curb tax evasion, ensure prompt collection of taxes and expand the tax net in Nigeria.
Since the introduction of the tax, there have been several updates to the framework of the tax in Nigeria. These updates generally border around the expansion of the scope of the tax, amendments to the rates of the tax applicable on qualifying transactions as well as updates to the exemptions applicable to specific transactions.
WHT has helped the government collect revenue on a regular (monthly) pro-rata basis, rather than wait once every year to collect taxes from taxpayers.
Notwithstanding the above, this tax has not been without grey areas or areas of debate/concern between taxpayers and the tax authorities. These grey areas/issues amongst other reasons have prompted the Government through the Federal Ministry of Finance to publish a new WHT Regulation titled "Deduction of Tax at Source (Withholding) Regulations 2024" with a commencement date of 1 January, 2025. For the purpose of this article, we will refer to the above regulation as "The WHT Regulations 2024".
in this article, we will highlight some of the grey areas/issues in the prior WHT regime (See Section 2) and how the WHT Regulations 2024 have tried to bring clarity to these areas (See Section 3). We will also provide a summary of the applicable rates for some qualifying transactions in the prior WHT regime and the applicable rates per the WHT Regulations 2024 (See Section 4).
- Grey Areas/Issues with the prior WHT framework
- Low-margin companies in a state of perpetual WHT refund
Prior to the publication of the WHT Regulations 2024, the WHT rates in Nigeria range from 2.5% to 10%. Certain companies in Nigeria with low profit margins found themselves in a situation where WHT deductions made against their income, typically at 5% or higher, could not be fully absorbed against their income tax payable. This meant that such companies continued to have WHT credits which they may not be able to fully offset against their income taxes. Although these credits can be refunded as cash, the refund process is typically arduous and may take a long time to finalize.
- Sales in the Ordinary Course of Business
Prior to the publication of the WHT Regulations 2024, sales in the ordinary course of business of a vendor were exempted from WHT. However, the term "sales in the ordinary course of business" was a subject of debate amongst taxpayers and the tax authorities because the phrase was not defined anywhere in the tax laws or the tax regulations.
There have also been judicial rulings on the subject as seen in the case between TetraPak West Africa Limited vs The Federal Inland Revenue Service. In the above-stated case, the Tax Appeal Tribunal (TAT) ruled that "sales in the ordinary course of business" is a relative term which cannot be applied as a rule of thumb to all taxpayers without regard to their daily business activities. The TAT therefore highlighted certain conditions that can be leveraged in determining what constitutes a sale in the ordinary course of business of the vendor. Some of these conditions include determination of whether the transaction comprises the sale of part or the main object of the taxpayer's Memorandum and Articles of Association, the practice of the taxpayers business industry, etc.
Notwithstanding the above, the term "sales in the ordinary course of business" and its application thereof, remain unclear and subject to different interpretations by taxpayers and the tax authorities.
- Recovery of WHT Credit
Prior to the publication of the WHT Regulations 2024, taxpayers typically experience challenges when requesting WHT credit certificates for deductions that have been made against them but not remitted to the tax authorities by the payer. Typically, one of the requirements by the tax authorities for issuing a tax credit certificate is the provision of an evidence of remittance of the WHT to the tax authorities.
The above therefore creates an unfortunate scenario where taxpayers cannot get value for the deduction made against them because the paying party has not made the appropriate remittance to the tax authorities.
- Failure to deduct WHT
Prior to the publication of the WHT Regulations 2024, where a taxpayer fails to deduct WHT on the payment to its vendor on a qualifying transaction, and pays the gross invoice value to its vendor, such taxpayer will be liable to pay the amount not deducted, plus penalties and interest to the tax authorities. This raises an important concern; which is, since the tax in question belongs to the vendor not the payer, should the payer who is merely an agent of the government for collecting the tax be liable to the amount not deducted plus a penalty and interest? Also, given that the tax authority will have collected the tax on the transaction from the vendor in the form of a corporate or personal income tax, will the activity of charging the payer the principal liability not lead to double taxation on the same income?
- When to deduct WHT on qualifying transactions
Due to the wording of the extant laws on the deduction of WHT on qualifying transactions, there have been different interpretations on when to deduct WHT on qualifying transactions. The extant laws use the words "when payment is made or credited, whichever occurs first" in describing when WHT is due on a transaction with a vendor. Unfortunately, there is no definition of the word "credited" in the tax laws or the WHT regulations. Therefore, while some taxpayers take the view that WHT is due only when payment is made, others take the view that WHT is due when the expense is recognized. This has then created a scenario where different treatments are accorded to similar transactions by different taxpayers.
- WHT exemption for Small Companies
In Nigeria, the policy direction of the Government seeks to encourage small businesses to scale by relieving them of certain tax compliance obligations. Small businesses in this instance mean business that earn less than N25Million in a relevant year. Prior to the publication of the WHT Regulations 2024, small businesses were exempt from VAT compliance obligations. However, similar concessions did not extend to WHT. While this was not specifically a grey area, the introduction of an exemption of small companies from WHT compliance requirements will have given these companies room to focus on growing their businesses, thereby creating value for all the stakeholders of the business including the government, rather than collecting taxes (in the form of WHT) on behalf of the government.
- How the WHT Regulations 2024 has solved legacy WHT issues
- Reduced WHT Rates
The WHT Regulations 2024 have tried to solve the issue of perpetual WHT credit for low-margin companies by reducing the WHT rate applicable on certain qualifying transactions from 5% to 2%. This is especially for transactions conducted by low-margin companies. These transactions include co-location services, construction services etc. This reduced rate ensures that these companies have better/improved cash receipts and are able to optimize their tax assets like WHT credit notes.
- Certain exempt supplies
In a bid to end the debate on what constitutes "ordinary course of business", the WHT Regulations 2024 has now replaced the WHT exemption for "sales in the ordinary course of business" with a clear enumeration of supplies that will not attract WHT. These supplies include:
- Goods manufactured or materials produced by the person making the supply
- Supply of Liqueified Petroluem Gas (LPG), Compressed Natural Gas (CNG), Premium Motor Spirits (PMS), Automotive Gas Oil (AGO), Low Pour Furl Oil (LPFO), Dual Purpose Kerosene DPK) and Jet-A1
- WHT Receipts
The WHT Regulations 2024 have now resolved the protracted issue wherein vendors cannot get WHT credits because the beneficiary of the supply have made the WHT deduction but have not remitted said WHT to the tax authorities. The issue was resolved by requiring taxpayers who make a deduction from the payment to a vendor to issue a receipt to such vendor. This receipt shall serve as evidence that WHT has been deducted from the payment to the vendor. The vendor, therefore, can get their WHT credit upon presentation of the receipt to the tax authorities. This amendment ensures that the tax framework in Nigeria is fair to all parties.
- Penalty for non-deduction of WHT
In order to address the concern wherein taxpayers who make payments (inclusive of WHT) to their vendors are required to remit to the tax authority, the WHT liability plus an interest and penalty, the WHT regulations 2024 has now revised the penalty for failure to make a WHT deduction (where the WHT has been paid to the vendor) by stating that a payer who fails to deduct WHT on payment to a vendor shall be liable to only an administrative penalty. This ensures incidence of double tax on the same income is avoided and a taxpayer is not unduly punished for acting as a tax agent of the government.
- Clarification of timeline for obligation to deduct WHT
The WHT Regulations 2024 also clarified the timeline for deducting WHT on payment to suppliers. According to the regulation, the obligation to deduct WHT between unrelated parties shall arise at the earlier of when payment is made, or the amount due is otherwise settled. However, for related parties, WHT shall be due at the time of payment or when the liability is recognised. The above amendment now creates clarity to the lingering question – "when does one deduct WHT?". Also, the amendment ensures that taxpayers do not unnecessarily bear the WHT cost on transactions that have not been paid or settled. This is especially for transactions between unrelated parties.
- Outright Exemption of Small Companies from WHT Compliance
The WHT Regulations 2024 has now exempted small businesses from the requirement to deduct WHT at source from payments to vendors. This however applies where the vendor has a valid Tax Identification Number and the value of the transaction with the vendor is less than N2,000,000 in a relevant month.
- Comparison between the old and new rates for certain transactions
We have provided below, a comparison of the WHT rates per the old WHT framework and the WHT rates per the WHT Regulation 2024.
Transactions |
Corporate Recipient |
Non-Corporate Recipient |
||||||
Resident |
Non-Resident |
Resident |
Non-Resident |
|||||
Old |
New |
Old |
New |
Old |
New |
Old |
New |
|
Commission, consultancy, technical, management and professional (CTMP) fees |
10% |
5% |
10% |
10% |
5% |
5% |
5% |
10% |
Supply of goods or materials, except those supplies by the manufacturer |
5% |
2% |
5% |
N/A |
5% |
2% |
5% |
N/A |
Co-location and telecommunication tower services |
5% |
2% |
5% |
5% |
5% |
2% |
5% |
5% |
Supply or rendering of services other than those specifically listed in this schedule |
5% |
2% |
5% |
5% |
5% |
2% |
5% |
5% |
Construction of road, bridges, building and power plants |
2.5% |
2% |
2.5% |
5% |
5% |
2% |
5% |
5% |
Any other form of construction and related activities |
5% |
5% |
5% |
10% |
5% |
5% |
5% |
10% |
Brokerage fee |
10% |
5% |
10% |
10% |
5% |
5% |
5% |
10% |
Directors' fees |
N/A |
N/A |
N/A |
N/A |
10% |
15% |
10% |
20% |
Compensation for loss of employment |
N/A |
N/A |
N/A |
N/A |
10% |
10% |
10% |
10% |
The opinion expressed in this article is solely personal and does not represent the views of any organization or association to which the authors belong.