Withholding Tax Regime Simplified: What Do I Need to Know? 2

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 continue with the mechanism of income tax collection known as “withholding tax”. We will explore case studies revolving around the Nigerian Withholding Tax Regulations 2024.

If you are just hearing about withholding tax for the first time, or you are not too sure about it, or you are knowledgeable about it, just read on; there’s a takeaway for you.

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Case Study A:

SMART Limited, a Nigerian construction company, carried out the following transactions during the month of February 2025:

a) SMART Limited awarded a contract for advisory and professional services to a foreign consultancy firm, Global Consult, on 10th January 2025. Global Consult is an American company not registered in Nigeria. The contract sum for the service is ?150 million. On 10th February 2025, SMART Limited paid the full contract sum to Global Consult.

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b) A sister company, STAR Ltd, provided technical services to SMART Limited, amounting to ?70 million, on 18th February 2025. This transaction was recognized in the books of SMART Limited with an understanding to pay at the end of the year.

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Let us analyse Case Study A with respect to Withholding Tax in Nigeria:

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a. SMART Limited is required to deduct WHT (10% of ?150M = ?15M) at the source from Global Consult on February 10th, 2025, and remit it to the Federal Inland Revenue Service (FIRS) on or before March 21st, 2025. This would become the final tax on Global Consult in Nigeria, except where it earns income and is liable to further tax due to a taxable presence in Nigeria.

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b. SMART Limited should also deduct WHT from STAR Limited (5% of ?70M = ?3.5M) on February 18th when the transaction was recognized in the books and remit it to FIRS on or before March 21st, 2025.

c. SMART Limited, upon remittance of the tax deducted to the FIRS, should issue a receipt and a statement to Global Consult and STAR Limited, from whom tax was deducted. The statement should include the following information, or as may be prescribed by the relevant tax authority:

i. Name and address of the beneficiary;

ii. TIN of the beneficiary;

iii. If the beneficiary has no TIN, the National Identification Number (NIN) for individuals, or the RC Number in the case of a company, or its equivalent;

iv. Nature of the transaction in respect of which the payment was made;

v. Gross amount paid, payable, or settled in the currency of the transaction;

vi. Amount of tax deducted; and

vii. Calendar month to which the payment relates.

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Key Note

a)???? 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 recognized.

b)??? WHT deducted at the source must be remitted to the relevant tax authority not later than the 21st day of the month following the month of payment.

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Case Study B:

ABC is a small Nigerian company that manufactures plastic: Below are transactions made with its suppliers during the month of February 2025:

a)???? XYZ Ltd, a registered company with a valid Tax Identification Number, supplied materials worth ?1,950,000 under a contract of supply on 10the Feb. 2025

b)??? EKY & Bros an unincorporated entity without a valid Tax Identification number supplied goods worth ?1,900,000 on 18th Feb. 2025 on contract.

c)???? Climax Consult, a Nigerian company with valid Tax Identification number provided professional service. A professional fees of ?4,500,000 was paid on 20th Feb. 2025

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Let us analyse Case Study B with respect to Withholding Tax in Nigeria:

a. ABC Limited is not required to deduct tax on the supply from XYZ Limited since the transaction meets the condition for exemption — a valid TIN and a transaction value of (?1,950,000) less than ?2,000,000 .

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b. ABC Limited should deduct 2% of ?1,900,000 from EKY Limited and remit it to the Federal Inland Revenue Service (2% x ?1,900,000 = ?38,000). This is because EKY Limited does not have a valid TIN.

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c. ABC Ltd is required to deduct tax (?4,500,000 x 5% = ?225,000) on the supply of services from Clamax Consult since the transaction is above ?2,000,000 which is a condition for exemption.

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Key Note

i. Small companies and small unincorporated entities are exempt from deducting tax at the source from any transaction, provided that the following conditions are met:

(a) the supplier has a valid Taxpayer Identification Number (TIN); and

(b) the value of the transaction is ?2,000,000.00 or less during the relevant calendar month.

Where the conditions listed above are not met, a small company or unincorporated entity has the obligation to deduct tax on all eligible transactions.

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ii. The rate of WHT for Commission, consultancy, technical, management, and professional fees has changed to 5% for Nigerian companies and individuals and 10% for non-residents except for Non-Residents in countries with Avoidance of Double Taxation Agreements, which have a reduced rate of 7.5%. Prior to the Withholding Tax Regulation 2024, the rate was 10% for both resident and non-resident companies and individuals.

iii. The rate of WHT for the supply of goods or materials (other than by the manufacturer or producer) is 2% for Nigerian companies and individuals only. Prior to the Withholding Tax Regulation 2024, the rate was 5%.

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Refer to the gazetted copy of the Withholding Tax Regulations 2024 and the Federal Inland Revenue Service Information Circular for more information on WHT applications. You can download this from my post on LinkedIn.

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As you read this, keep in mind that paying your fair share of taxes is not only a legal responsibility but a civic duty, as taxes are the essential lifeblood that sustains governments around the world.

Let me know your thoughts about the mechanism of WHT.

Stay connected with Angela C. Nnamani as we discuss tax-related and other issues. Feel free to share and repost this article.