On July 1, 2024, Nigeria’s Deduction of Tax at Source (Withholding) Regulations 2024 came into force. These regulations aim to enforce the collection of Withholding Tax (“WHT”) at the point of payment for various transactions..
The “point of payment” refers to the moment when the payment for goods or services is. This means that under the new regulation, WHT is taken out by the payer at the time the payment is made to the recipient (service provider), whether it is during the actual payment transaction or when the liability is recognized.
Here’s what you need to know about the new regulations.
How it Works:
- Deduction at Source: When a party makes a payment to a service provider/business, the party deducts the Withholding Tax from the total payment amount.
- Remittance: The party (payer) then remits the deducted tax to the relevant tax authority.
Eligible Transactions and Their Rates
The regulations specify the transactions subject to WHTand the applicable rates, which is detailed in the First Schedule of the regulations. Some key points to note on the eligible transactions include:
- Supply of Goods: WHT is deducted at source for supply of goods and at the rate specified in the schedule.
- Rendering of Services: Similar to the supply of goods, the tax rate is as specified for different forms of services.
- Non-Passive Income: If the business/service provider/vendor does not have a Tax Identification Number (TIN), the tax rate is doubled.
Reduced rates apply on eligible transactions if there is a treaty between Nigeria and another country to avoid double taxation. This ensures that foreign investors from treaty countries benefit from lower tax rates.
Who Deducts the Tax?
The responsibility to deduct WHT at source falls on various entities, including:
- Corporate Bodies: Both incorporated and unincorporated entities, except individuals.
- Government Entities: Ministries, departments, and agencies.
- Statutory Bodies and Public Authorities: Other institutions, organizations, establishments, or enterprises, even those exempt from tax.
- Payment Agents: Acting on behalf of the above entities.
It is however important to note that Small companies, as defined under section 105 of the Companies Income Tax Act, are exempt from this requirement if the supplier has a valid TIN and the transaction value is N2,000,000.00 or less in a calendar month.
Deduction Timing and Remittance
WHT must be deducted at the time of payment or when the amount due is settled, whichever is earlier. For transactions between related parties, the deduction occurs at point of payment or liability recognition, whichever comes first. For non-resident recipients, the deducted tax is the final tax unless further taxable presence is established in Nigeria.
WHT deductions must be remitted to the relevant tax authority:
- To the Federal Inland Revenue Service by the 21st of the following month.
- To a State Internal Revenue Service by the 10th or 30th of the following month, depending on the type of tax.
Withholding Tax (WHT) vs Value Added Tax (VAT)
Withholding tax (WHT) and Value Added Tax (VAT) serve different purposes and are applied differently:
- What are they: WHT is a tax on income, deducted at the source of payment and considered an advance payment of income tax. WHT are deducted at varying rates of 5-10% depending on the transaction.
VAT on the other hand is a consumption tax levied on goods and services at each production or distribution stage. VAT is a consumption tax also administered by the Federal Inland Revenue Service when goods are purchased and services rendered. VAT is deducted at a rate of 7.5% in Nigeria. - Who Bears the Cost: WHT is borne by the recipient of the payment (e.g., supplier or service provider), WhileVAT is ultimately borne by the final consumer of the goods or services.
- Purpose: WHT while facilitating revenue generation for the government, is intended to curb tax evasion by collecting tax in advance and ensuring that taxpayers are compliant to tax laws. VAT is purely designed to generate revenue for the government on the consumption of goods and services.
Penalties for Non-Compliance
Failure to comply with the new regulations attracts significant penalties. Not deducting or failing to remit deducted taxes by the due date results in penalties and interest, making compliance crucial for all liable entities.
Exemptions
Certain transactions are exempt from withholding tax deductions, including:
- Compensating payments under registered securities lending transactions.
- Dividend payments to Real Estate Investment Trusts.
- Specific across-the-counter transactions.
- Payments to Nigerian banks by direct debit of domiciled funds.
- Imported goods not creating a taxable presence in Nigeria.
- Out-of-pocket expenses, insurance premiums, and certain energy supplies.
The new regulations mark a significant shift in Nigeria’s tax landscape, aiming to enhance compliance and streamline tax collection. By clearly defining who must deduct taxes, when to do so, and the penalties for non-compliance, these regulations are set to improve the efficiency of tax administration and reduce tax evasion. Entities involved in eligible transactions must familiarize themselves with these rules to ensure adherence and avoid penalties.
Ready to simplify your tax compliance under the new Withholding Tax regulations? Partner with Startbutton today to streamline your transactions and ensure you stay compliant. Visit Startbutton or contact us at [email protected] to get started!
👋🏾Need help with staying compliant in African countries?
Startbutton helps businesses accept payment in African countries in a compliant and tax-efficient manner, without the need to register locally.
Send an email to [email protected] or visit www.startbutton.africa to get started.
