Introduction
The Deduction of Tax at Source (Withholding Regulations) 2024 (‘the Regulations') provides rules for deduction of tax at source from payment to taxable persons under Capital Gains Tax Act (CGTA), Companies Income Tax Act (CITA), Petroleum Profits Tax Act (PPTA) and Personal Income Tax Act (PITA) in respect of certain transactions.1 In other words, the Withholding tax regime seeks to collect from source, the taxes that are payable under these tax laws only on certain specific transactions. It would be expected that income from other transactions not subject to this method of collection will be declared and taxes deducted at the time of annual filing.
The transaction for which tax is to be deducted at source are listed in the first schedule to the Regulations, together with the applicable rates, as follows: dividend interest, royalty, rent, hire, lease, commission, consultancy, technical, management and professional fees, supply of goods or material other than by the manufacturer or producer, co-location and telecommunication tower services, supply or rendering of services other than those specifically listed in the Schedule, construction of road, bridges and power plants, any other form of construction related activities, brokerage fee, directors' fees, compensation for loss of employment, income of entertainers and sports persons who are not resident in Nigeria (in respect of amounts earned in Nigeria) and winnings from lottery, gaming, reality shows, etc. Under Regulation 10 however, some aspects of these transactions are exempted from deduction of tax at source.
It is apt to note that any exemption from deduction of tax at source is not an exemption from payment of the tax, except the enabling law provides so. The Regulations took effect from 1st January, 2025.2
Guiding Rules
The following rules are to guide deduction at source:
1. Persons entitled to deduct at source:3
- a corporate or unincorporated entity other than an individual. Where the corporate body is a small company with a gross turnover of N25,000,000.00 or less4 or, if unincorporated has similar features, it would not have the obligation to deduct at source before payment, if the supplier has a valid TIN and the value of the transaction is N2,000,000.00 or less in the relevant calendar month.
- a government ministry, department or agency
- a statutory body
- a public authority
- any other institution, organization, establishment or enterprise, including those exempt from tax, and
- a payment agent representing any of the above-listed persons
The Regulations5 upheld the penalty clause stipulated in the Federal Inland Revenue Service (Establishment) Act and Personal Income Tax Act (PITA) which states that failure to deduct shall, upon conviction, render the person who failed to deduct liable to pay the tax that was not deducted plus a penalty of 10% of the tax withheld and interest at the prevailing Central Bank of Nigeria minimum re-discount rate and imprisonment of not more than three years.6 However, it subsequently provided that where a person fails to deduct but paid the portion that was meant to be deducted to the tax payer, only an administrative penalty shall be due and payable. There is thus a conflict in these the two provisions and by the rules of interpretation of statute, it is the provision contained in the Act that would be upheld.
2. Time of deduction
Generally, deduction is to be done either when the payment is made or when the amount that is due is settled, whichever is earlier. However, in the case of related parties, it is to be done at the time of the payment or when the liability is recognised, whichever is earlier.
3. Remittance of the amount deducted
If it is in respect of taxes which ought to be collected by the Federal Inland Revenue Service, the amount deducted shall be remitted not later that the 21st day of the month preceding the month of payment.
If on the other hand, it is in respect of taxes to be collected by the State Inland Revenue Service, where it it is in respect of Capital Gains Tax or Pay As You Earn, it shall be remitted not later than the 10th day of the month preceding the month of payment; and with respect to other deductions, not later that the 30th day of the preceding month.
Failure to remit within the stipulated period after deducting attracts a penalty of 10% of the tax withheld and interest at the prevailing Central Bank of Nigeria minimum re-discount rate and imprisonment of not more than three years upon conviction plus an administrative penalty. It is apt to note that under the respective laws that created the offence, that is CITA and PITA, it is upon failure to remit after 30 days that the offence would be said to have been committed.7 For compliance purposes however, it is better for businesses to stay compliant with the Regulations and remit within 21 days.
4. Filing of returns
Following remittance, returns ought to be filed to the taxing authority. The returns is to be filed with evidence of remittance in the format prescribed in Schedule 2 of the Regulation and it contains the following information of the person from whom the tax was deducted - name and address, Tax Identification Number, National Identification number (for an individual) or RC Number, nature of the transaction, gross amount paid or payable, amount of tax deducted, and calendar month to which the payment relates.
5. Issuance of a receipt
Upon remittance, the person deducting is to issue a receipt to the taxable person together with a statement in the format prescribed in Schedule 3 of the Regulation or as prescribed by the taxing authority from time to time and which basically contains the same information as the the one for the returns.
Other points for consideration
- Where there is a double taxation treaty between Nigeria and any other country and same has been been ratified by the National Assembly, and the treaty or protocol prescribes reduced withholding tax rates, such rates shall be applied to payments being made to residents in that treaty country.
- The tax to be deducted shall not be treated as a separate tax or an additional cost of the contract/transaction neither shall it be included in the contract price.
- The tax deducted is an advance tax. In other words, the tax payer can apply same as a tax credit, to reduce future tax liabilities as assessed. In certain cases, e.g in respect of non-residents without a taxable presence in Nigeria, it is a final tax.
- Where the tax payer does not have a tax identification number and the payment being made to such person is in respect supplies of goods and services or transactions involving non-passive income (for example, employment income, business income, professional services income, etc), the tax to be deducted would be at twice the normal rate prescribed in the regulations.
Conclusion
Businesses are encouraged to comply with the provisions of the Regulation so as not to be exposed to avoidable liabilities arising from non-compliance.
It is however important to note that certain provisions of the Regulations make variations to the provisions on the enabling Acts and this questions the validity of the Regulations in respect of those specific provisions. In addition, the CGTA does not authorise the Minister to make regulations for deduction at source in relation to capital gains and as such the validity of doing so is questionable. Where these issues are brought before a competent judicial authority, it could invalidate the Regulations to the extent of their inconsistency with the respective Acts of the National Assembly.
Footnotes
1. Regulation 1(a) and 2 of the Deduction of Tax at Source (Withholding Regulations) 2024
2. Supra at Regulation 11(1)
3. Supra at Regulation 12 (1)
4. Section 105, Companies Income Tax Act, Cap C18 Laws of the Federation of Nigeria, 2004
5. Supra at Regulation 9(1)
6. Section 40, Federal Inland Revenue Service (Establishment) Act, 2007 (as amended) and section 74 Personal Income Tax Act, Cap P8, LFN 2004 (as amended)
7. ibid
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