Withholding Tax Regime Simplified: What Do I Need to Know?

Good morning, readers, and welcome to this week’s edition of Tax Education with the Tax Man Newsletter!

Our newsletter is basically providing you with valuable tax information and insights on contemporary issues in Nigerian taxation.

Today, we delve into the mechanism of income tax collection known as "Withholding Tax". We will explore this concept from a global perspective, covering the fundamentals, and conclude with key highlights of the Nigerian Withholding Tax Regulations 2024.

If you're hearing about withholding tax for the first time, unsure about its details, or already familiar with it, keep reading—there’s something valuable for you.

1. Introduction

Withholding tax is a mechanism used by the government to collect income taxes in advance at the source of income. It is an advance payment of income tax, which is deducted from payment made to a taxpayer by a payer known as the collection agent who remits the sum deducted to the relevant tax authority. Withholding tax remitted on behalf of a taxpayer is available for set-off against the ultimate income tax charged on the taxpayer by an assessment. The mechanism of WHT aligns with global best practices, where governments deduct tax at source to prevent tax avoidance and enforce compliance.

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2. Legal Framework of Withholding Tax

The formal adoption of WHT in Nigeria is backed by various tax laws and regulations, which provide a legal framework for its enforcement. Some of the key legislations that govern WHT include Companies Income Tax Act (CITA), Personal Income Tax Act (PITA), Petroleum Profits Tax Act (PPTA), Value Added Tax Act (VATA), Capital Gains Tax Act, Federal Inland Revenue Service (FIRS) Establishment Act and State Internal Revenue Service (SIRS) Laws. The regulations that govern WHT application in Nigeria include the Companies Income Tax (Rate, etc., of ?Tax Deducted at Source (Withholding Tax)) Regulations 1997 and the Personal Income Tax (Rate, etc., of Tax Deducted at Source (Withholding Tax)) Regulations 1997, and the Companies Income Tax (Rate, etc., of ?Tax Deducted at Source (Withholding Tax)) Amendment Regulations ?2016. Following the recent tax reforms in Nigeria to reflect current economic realities, and adopt international best practices, a new regulation - the Deduction of Tax at Source (Withholding) Regulations 2024 was approved by the Minister of Finance in July 2024. The commencement date of the Regulations was 30th September 2024, while implementation was on 1st January 2025, allowing for a minimum of 90 days notice required for tax changes in line with the 2017 National Tax Policy. Although the new Regulation revoked all existing regulations in respect of deductions at source or Withholding Tax it did not invalidate anything done under the revoked Regulations.

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3. Scope of Withholding

The scope of WHT in Nigeria has expanded over the years, to cover a broader range of income, business and financial transactions to boost revenue collection. WHT is deducted at source from certain payments, including salaries, dividends, interest, rents, contracts, and professional fees, before the recipient receives the income. In addition, WHT applies to payments made for commissions, management fees, and technical services rendered by businesses or individuals. Recent, it has been expanded to include winnings from lottery, gaming, and reality shows.

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4. Purpose of Withholding Tax

a. Ensure Early and Efficient Tax Collection

The mechanism of WHT ensures tax deductions at the point of income payment thereby providing governments with a steady flow of tax revenue throughout the year instead of waiting for annual tax returns. This does not only provide improved cash flow for governments, allowing for better planning and execution of public services but also ensures minimised opportunity for individuals and businesses to evade tax, enhancing the efficiency and reliability of tax administration.

b. Serves as an Advance Payment of Income Tax

WHT is not a separate type of tax but rather an advance payment towards a taxpayer’s final income tax liability. It ensures that at least a portion of tax liabilities is collected upfront, reducing the risk of non-payment. When filing the returns for a tax year, the amount deducted as WHT is to be credited against the total tax payable by the taxpayer thereby reducing their tax liability.? Where the total WHT deducted exceeds the final tax liability, taxpayers may be eligible for a tax credit or refund.

c. Prevent Tax Evasion and Improve Compliance

WHT helps to curb tax evasion by enforcing tax compliance at the point of payment. Since tax is deducted before funds reach the recipient, individuals and businesses cannot underreport their income to evade taxes. Knowing that tax is deducted in advance discourages taxpayers from avoiding their obligations. This mechanism ensures that governments collect a portion of taxes that might otherwise go unreported or unpaid.

d. Broadening the Tax Base

WHT plays a crucial role in expanding the tax net by capturing revenue from transactions that might otherwise go untaxed. This is particularly useful in economies where large portions of business activity occur outside formal tax structures. WHT ensures high-risk sectors such as professional services and contract-based businesses, which are more prone to tax evasion, contribute to tax revenue.

e. Enhancing Government Revenue Generation

WHT provides governments with a reliable and continuous revenue stream. Governments receive tax payments as transactions occur, rather than waiting for year-end declarations. This stable tax collection system allows governments to make informed budgetary and economic decisions. Since WHT is deducted and remitted by businesses and financial institutions, the administrative burden and cost on tax authorities is reduced.

f. Supports double taxation agreements (DTAs) and Cross-Border Transactions

This provides a mechanism for reducing the potential for tax duplication between two countries. DTAs are designed to avoid the situation where a taxpayer is subject to tax on the same income in both the source country (where the income originates) and the residence country (where the taxpayer is domiciled). WHT helps in this process by allowing the source country to withhold tax at a reduced rate, as specified in the DTA, on income such as dividends, interest, or royalties paid to non-residents. The residence country then typically provides a tax credit or exemption for the WHT already paid, ensuring that the income is not taxed twice. WHT framework promotes cross-border investment and economic activity by eliminating the double taxation barrier and encouraging international trade and investment.

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5. Challenges in WHT Administration in Nigeria Before 2024

Despite the benefits provided by WHT administration, the WHT system before 2024 faced several challenges, including:

a. Complexity in WHT Administration:

The old Withholding Tax (WHT) Regulations exempted sales in the ordinary course of business" from WHT which created ambiguity and inconsistencies in tax compliance. The exemption was broad and not well-defined, leading to different interpretations of what qualified as "ordinary course of business." These often resulted in disputes between taxpayers and tax authorities over whether certain transactions should be subject to WHT or not. Other complex issues include when to deduct WHT, what transactions were to be exempt from WHT, and high WHT rates for certain transactions giving rise to excess WHT Credit and refund. These complexities created loophole for some individuals and businesses to avoid withholding tax on transactions that were actually taxable, leading to a loss in revenue for the government.

b. Slow Refund Process:

Individuals and businesses are entitled to refund or credit where the WHT payments made to the tax authority exceed their actual tax liability. However, the refund process was often cumbersome and slow, leading to frustration among taxpayers. There were frequent delays in processing claims, sometimes taking several months or even years. This delay in receiving refunds not only affected businesses’ cash flow but also discouraged proper compliance, as many taxpayers faced financial strain while waiting for refunds. Additionally, the lengthy refund process created an administrative burden for both tax authorities and taxpayers, leading to inefficiencies in the tax system.

c. Multiple Taxation Risks:

Complex and overlapping tax system, with multiple tax jurisdictions across federal, and state, ?levels, often leads to multiple taxation risks for domestic businesses. A typical example is the Federal and State tax authorities imposing similar taxes, such as VAT and Sales tax, without clear coordination. This can result in companies being liable for the same taxes in various regions. Additionally, frequent changes in tax policies, inconsistent enforcement, and a lack of proper communication between tax authorities exacerbate the confusion, leading to the risk of companies unknowingly paying duplicate taxes.

d. Double Taxation Risks:

Non-resident companies are often subject to WHT on their income derived from Nigerian sources, and when these companies operate in countries with similar tax regimes, they may face the same tax liabilities in both jurisdictions. The absence of proper credits or exemptions for taxes paid in Nigeria can give rise to a non-resident company being taxed twice on the same income. This increases the financial burden and complicates tax compliance for non-resident businesses operating in Nigeria.

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?6. Objective of the New Nigerian Withholding Tax Regime

The new Withholding Tax (WHT) Regulation is introduced to establish clear and comprehensive guidelines for the deduction of tax at source across various sectors, under the provisions of the Capital Gains Tax Act, Companies Income Tax Act, Petroleum Profits Tax Act, and the Personal Income Tax Act, specifically for specified transactions. The regulations aim to simplify the process of tax deductions, eliminating complexities that have previously hindered effective implementation, reducing the rates of deductions for sectors with low-profit margins, and ensuring a more equitable tax burden. Small businesses and manufacturers are provided with exemptions to encourage growth and ease their compliance. The regulations also focus on promoting the ease of tax administration and compliance, making it simpler for businesses and individuals to meet their tax obligations. By addressing issues of tax evasion, the new framework intends to improve revenue collection and deter illicit practices. It also aims to reduce the gap in tax treatment between corporate and non-corporate business entities, preventing any arbitrage. Furthermore, the regulations are designed to align Nigeria's tax deduction practices with global best practices, foster a fairer and more transparent tax environment, strengthen the tax system, enhance compliance, and support the country’s broader economic goals.

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7. Highlights of the New Nigerian Withholding Tax Regulation 2024

a.???? Clarification of Treatment of WHT as an Advance Tax, not a Separate Tax

The Regulation clearly specified that WHT deducted is an advance or final tax of a supplier. It should not be regarded as a separate tax or an additional cost of the contract or transaction. WHT should also not be included in the contract price.

b.???? Clarification on Applicable Transactions and Reduced WHT Rates

There is a clear provision on specific transactions that are deductible of WHT including? Commission, consultancy, technical, management, and professional fees, directors fees, supply of goods and services including those not specifically listed, and winnings from lottery, gaming, reality shows. The applicable transactions and rates are harmonized to reflect industry margin and simplify description. Find below are the applicable transactions and rates for the new regime. Reduced rates provided under a Treaty between Nigeria and any other country for the avoidance of Double Taxation or protocol duly ratified by the National Assembly shall apply to an eligible recipient who is resident in a treaty country:

c.???? Clarification on Time of WHT Deduction and Remittance

The duty to deduct WHT arises at the time of payment or settlement of liability, however for related parties, WHT should arise at the earlier of time of payment or when the liability is recognised. WHT Deduction from payment to a non-resident person shall be the final tax except where the income is liable to further tax by reason of a taxable presence in Nigeria. Remittance of WHT deducted at source shall be remitted to the Federal Inland Revenue Service, not later than the 21st day of the month following the month of payment while remittance to a State Internal Revenue Service is 30th day of the month following the month of payment except for Capital Gains Tax and Pay-As-You-Earn, which shall be remitted not later than the 10th day of the month following the payment. A template for the monthly WHT schedule and receipt for tax deducted at source are provided in the Second and Third Schedules respectively, of the Regulation.

d.???? Anti-Avoidance Provision and other Punitive Measures to foster Voluntary Compliance

?A collection agent (person who makes the deduction of WHT/ person who has the obligation to deduct WHT) supplying goods or services or any eligible transaction involving non-passive income is to deduct an amount equal to twice the rate specified in the Schedule to the Regulation, where the recipient has no Tax Identification Number. This is to ensure that all vendors register with the relevant tax authority and obtain a unique TIN. Also, failure to deduct WHT or failure to remit the deducted tax will lead to recovery of the tax deducted with a penalty and an annual interest. However, where the collection agent fails to deduct WHT and instead makes payment in full to a vendor, an administrative penalty and one-off annual interest will apply on the amount not deducted. This will ensure voluntary compliance of collection agent to WHT.

e.???? WHT Credit to be granted upon presentation of Tax Receipt

Collection agents are to issue a tax receipt to the supplier for the amount withheld upon remittance of the tax to the relevant tax authority and a statement in the format prescribed in the Third Schedule to the Regulations or as may be prescribed by the relevant tax authority from time to time, containing information including the name, address, Tax Identification Number (TIN) of the supplier, nature of transaction, gross amount, amount deducted and month of payment. The supplier will be granted credit by the tax authority upon presentation of the tax receipt, whether the collection agent has remitted the withholding tax (WHT) deducted or not. However, the amount unremitted by the collection agents shall be treated as a tax liability on his account and shall be recoverable with applicable penalty and interest. This will promote the ease of beneficiaries obtaining and utilizing WHT credits while promoting voluntary compliance of collection agents.

f.????? Clarification of Collection Agents for WHT

The regulation specified that, other than individuals, persons required to deduct tax at source on eligible transactions include companies, unincorporated entities, government Ministry, departments, or agencies; statutory body, public authority, any other institution, organisation, establishments, or enterprise, including those exempt from tax, and a payment agent representing any collection agent.

g.???? Exemption of Small Businesses

Small companies (companies with turnover of less than N25 million in a relevant year) and unincorporated entities of equivalent attributes are exempt from deducting tax at source from any transaction, provided that the supplier has a valid Tax Identification Number (TIN) ; and the? value of the transaction is N2,000,000.00 or less during the relevant calendar month.

h.???? Clarification on Transactions Exempted from WHT

The Regulation provides transactions that are exempt from WHT, however, it clarifies that an exemption from WHT in the regulation shall not be taken to be an exemption from the relevant income tax except if it is specifically provided in the enabling law. Below is a list of transactions that are exempt from WHT in line with the Regulation:

?i. Compensating payments under a Registered Securities Lending.

?ii. Transaction in line with the Regulations made by the Minister of Finance on the advice of the Board.

?iii. Transaction Distribution or dividend payment to a Real Estate Investment.

iv. Trust or Real Estate Investment Company.

v. Across-the-counter transactions: any transaction carried out between parties without an established contractual relationship or any prior formal contracting arrangement and in which payment is made instantly in cash or on the spot via electronic means.?

?vi. Interest and fees paid to a Nigerian bank by way of direct debit of the funds which are domiciled with the bank.

vii. Goods manufactured or materials produced by the person making the supply.

viii. Imported goods where the transaction does not create a taxable presence in Nigeria for the foreign supplier.

ix. Payment in respect of income or profit which is exempt from tax.

x. Telephone charges, internet data, and airline tickets.

xi. Out-of-pocket expense that is normally expected to be incurred directly by the supplier and is distinguishable from the contract fees.

xii. Insurance premium.

xiii. 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.

xiv. Commission retained by a broker from money collected on behalf of the principal in line with the industry norm for such transactions.

xv. Winnings from a game of chance or a reality show with contents designed exclusively to promote entrepreneurship, academics, or technological or scientific innovation.