Introduction

Pursuant to the provisions of relevant tax laws[1], the Minister of Finance and Coordinating Minister of the Economy (the “Minister”) has issued new Deduction of Tax at Source (Withholding) Regulations 2024 (the “Regulations”) which took effect from 1 July 2024. The Regulations supersede all previous withholding tax (WHT) regulations and create a consolidated WHT regime for Capital Gains Tax (CGT), Companies Income Tax (CIT), Petroleum Profits Tax (PPT) and Personal Income Tax (PIT). This article provides an overview of the key provisions of the Regulations.

Key Provisions of the Regulations

1. Conditional Exemption of Small Companies and Unincorporated Entities from Making Deductions at Source

Small companies[2] and unincorporated entities of equivalent attributes are exempted from deducting tax at source provided that the supplier has a valid Tax Identification Number (TIN) and the value of the transaction is NGN2,000,000 (Two Million Naira) or less within the relevant calendar month.[3]

Previously, small companies were obligated to deduct tax at source notwithstanding the value of the transaction. This conditional exemption aims to reduce the compliance burden on small companies and similar unincorporated entities.

2. Timeframe for Deductions at Source

The Regulations provide that the obligation to deduct tax at source shall arise when payment is made or when the amount due is otherwise settled. However, where the transaction is between related parties, the deduction is required to be made at the time of payment or when the liability is recognised, whichever is earlier.[4]

The amount deducted on any 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.

3. Timeframe for Remittance of Deducted Tax to Relevant Tax Authorities

The timeframes for remittance of tax deducted at source remains the same, [i.e. 21^st of the following month for payments to the Federal Inland Revenue Service (FIRS) and 30^th of the following month for payments to the relevant State Internal Revenue Service (SIRS)], while remittance to the SIRS for CGT and Pay-As-You-Earn (PAYE) is required to be made not later than the 10^th day of the month following the payment.[5]

4. Improved Tax Credit Regime

A person who deducts tax at source is required to issue a receipt to the person from whom the deduction was made upon remittance of the deducted tax to the relevant tax authority. This receipt allows the person from whom the deduction was made to claim a tax credit for the amount deducted.

The Regulations also provide respite for taxpayers who suffer deductions that have not been remitted to the tax authority. Where the tax has been deducted but not remitted, the person from whom the deduction was made will still be entitled to tax credit from the relevant tax authority, while the person who deducted the tax at source will be liable to pay the unremitted tax with penalty and interest.[6]

5. New WHT Rates

The Regulations prescribe different WHT rates for companies and individuals on the one hand, and residents and non-residents on the other hand.

• For resident corporate and non-corporate recipients, commission, consultancy, technical, management, and professional fees are now liable to a reduced WHT rate of 5%.[7] The Regulations also impose a fixed rate of 10% on these fees for non-resident corporate and non-corporate recipients.
• Similarly, the WHT rate on the supply of goods or materials, other than by the manufacturer or producer, has been reduced from 5% to 2%.
• Brokerage fees are subject to 5% WHT for residents and 10% for non-residents. WHT on resident directors’ fees has been increased from 10% to 15%, while non-resident directors’ fees are now subject to 20% WHT. On the other hand, WHT on royalties for resident and non-resident individuals has been reduced to 5% from the 10% prescribed by the CITA and PITA.
• Construction of bridges, roads, buildings, and power plants now attracts a reduced WHT rate of 2% for residents. Non-residents are also now subject to WHT for such construction activities at the rate of 5%. Other forms of construction activities are subject to 5% WHT for residents and 10% for non-residents. However, construction activities will typically require incorporation of a Nigerian subsidiary which would generally be liable to pay all applicable taxes. The circumstances under which a non-resident company will be subject to WHT for construction activities are therefore unclear.
• In addition, the Regulations now introduce a 10% WHT on compensation for loss of employment for both resident and non-resident individuals. Finally, non-resident entertainers and sports persons are now subject to 15% WHT on fees earned in Nigeria.

6. Gaming Sector

Another key provision of the Regulations is the imposition of WHT on winnings from lotteries, gaming, and reality shows, except where such events exclusively promote entrepreneurship, academics, technological, or scientific innovation. The applicable WHT rate is 5% for resident individuals and 15% for non-resident individuals.

This provision will become effective from 1 October 2024. Lottery and betting companies, as well as organizers of reality shows, will be required from 1 October 2024 to deduct and remit WHT before disbursing winnings to participants.

7. Transactions Exempted from Deduction at Source

The following transactions are exempted from WHT under the Regulations[8]:

• Any payment in respect of income or profit which is exempt from tax;
• Goods manufactured or materials produced by the person making the supply: This exempts producers and manufacturers from deductions at tax;
• Compensating payments under Registered Securities Lending Transactions in line with Section 81(8) CITA;
• Any distribution or dividend payment to a Real Estate Investment Trust or Real Estate Investment Company as provided under Section 80(5) of the CITA;
• Across-the-counter transactions meaning informal contractual agreements where payment is made in cash or instantly on the spot;
• Interests and fees paid to a Nigerian Bank by way of direct debit of the funds domiciled with the Bank;
• Out of pocket expenses directly incurred by supplier which is separate from contract fees;
• Winnings from game of chance or reality show whose contents promote entrepreneurship, academic, technological, or scientific innovation;
• Insurance premium;
• Imported goods where the transaction does not create a taxable presence for the foreign supplier;
• Broker commissions charged in accordance with industry norms; and
• Supply of Liquified Petroleum Gas (LPG), Compressed Natural Gas (CNG), Premium Motor Spirit (PMS), Automotive Gas Oil (AGO), Low Pour Fuel Oil (LPFO), Dual Purpose Kerosene (DPK), and JET-AI.

8. Reduced WHT Rates for Businesses with low Margins

The Regulations provide for reduced WHT rates for industries with low margins. For example, the supply of goods or materials, co-location and telecommunications tower services, and construction services now attract a 2% WHT for resident individuals and companies, and 5% for non-residents.

9. Improved Measures to Ensure Tax Compliance

The Regulations provide that transactions involving recipients without a Tax Identification Number (TIN) will be subject to twice the rate specified in the Schedule to the Regulations. The Regulations seek to expand the tax net to increase government revenue by encouraging taxable persons to register with the FIRS.[9]

10. Implications of the Regulations on Non-resident companies and individuals

Previously, there was no distinction between the WHT rates for resident and non-resident taxpayers. The Regulations however prescribe higher WHT rates for non-resident companies and individuals for various transactions.

In addition, the Regulations, as noted above, provide that the amount to be deducted at source from active business income arising from the supply of goods or any other eligible transaction shall be twice the prescribed amount where the recipient has no TIN. This means that non-resident companies that do not have TIN would face higher WHT rates. To avoid this consequence, non-resident companies earning active business income from Nigeria would need to register with the FIRS and obtain a TIN.

11. Offences

The Regulations provide for penalties for failure to deduct or remit the tax deducted by the due date. The penalties include payment of the tax withheld, a 10% penalty per annum, and interest at the prevailing Central Bank of Nigeria minimum rediscount rate. However, if a person fails to deduct WHT but pays the full amount to the recipient, only an administrative penalty and one-off annual interest will apply.[10]

The Regulations do not prescribe the rate of administrative penalty, and this could create uncertainty for taxpayers. In addition, penalties and interest for non-compliance with the obligations to withhold and remit tax are sufficiently provided for under the relevant tax laws.[11]

Under the FIRS Act, PIT Act and CIT Act, failure to withhold tax or remit withheld tax attract the same penalties and the provisions of the Regulations which seek to create different penalty regimes for failure to withhold and failure to remit are inconsistent with the relevant provisions of the FIRS Act, PIT Act and CIT Act.

Conclusion

The Regulations contain important provisions that are aimed at reducing the WHT compliance burden on small companies and manufacturers, increasing tax revenue through improved compliance measures, and assisting businesses in low margin industries to maintain better cashflow. The express exemption of exempt income from WHT and the simplification of the process of utilizing WHT credits are also welcome developments. However, the effective date of the Regulations coincides with the release date, and this may pose significant challenges for immediate implementation by the relevant entities obligated to deduct tax at source.

Furthermore, as stated above, we note that the Regulations amend the WHT rates such as applicable WHT rates for resident directors’ fees and royalties for resident and non-resident individuals. The enabling tax laws only provide for the Minister to make regulations concerning the administration of deductions of tax at source but does not expressly provide that the Minister can amend the WHT rates which are prescribed by statute. The variation of the WHT rates, for instance, for directors’ fees and royalties which are prescribed by the PIT Act and the CIT Act appear to amend the laws and may be subject of legal challenge for being beyond the scope of the Minister’s powers.

[1] Section 81(9) of the Companies Income Tax Act, Section 56 of the Petroleum Profits Tax Act, and section 73(6) of the Personal Income Tax Act.

[2] Small companies, as defined under the CITA are companies with a gross turnover of ₦25,000,000 or less.

[3] Regulation 2.2 of the Regulations

[4] Regulation 4 of the Regulations.

[5] Regulation 5 of the Regulations.

[6] Regulation 6 of the Regulations.

[7] The rate was previously 10%.

[8] Regulation 8 of the Regulations.

[9] Regulation 1(c) of the Regulations.

[10] Regulation 7 of the Regulations.

[11] Section 40 FIRS Act, Section 74 PITA and Section 82 CITA