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Executive summary

Nigerian Minister of Finance and Coordinating Minister of Economy, Olawale Edun, signed into law the deduction of tax at source (withholding) regulations 2024 (the Regulations), with a commencement date of 1 July 2024, in June 2024.

The Regulations intend to complement the statutory provisions and replace all prior rules for deductions at source other than Pay-As-You-Earn Taxes. The Regulations sets out the rules for deduction of tax from payments to taxable persons under the Capital Gains Tax Act (CGTA), Companies Income Tax Act (CITA), Petroleum Profits Tax Act (PPTA), and Personal Income Tax Act (PITA) in respect of specified transactions.

In addition, the regulations seek to simplify the administration of WHT, reduce the rates of deduction for industries with low margins, promote ease of tax compliance, reduce the disparity between corporate and noncorporate structures and address emerging issues and adopt global best practices.

This Tax Alert summarizes the key changes introduced by the Regulations and the impact of those changes.

Detailed discussion

Revised WHT rates

The new Regulations reduce rates for certain transactions as shown below. The rate reduction for some of the transactions was necessary due to low industry margins. In addition, the revised WHT rates partly addressed the ambiguities and subjectivity that have been experienced over the years on WHT rates applicable to various transactions.

*It appears that income from cross-border services other than technical, professional, management and consultancy services stipulated by the SEP order will be liable to WHT based on this simplified description. Accordingly, we expect further clarity to be provided by the relevant tax authority in this regard.

Duplicate withholding tax rate

The Regulations have introduced a duplicate WHT rate to be applied on eligible taxable transactions (such as supply of goods and services), where the vendor has no Tax Identification Number (TIN). This implies that companies or individuals not registered for taxes in Nigeria (including nonresidents) shall be liable to have WHT withheld on their transaction fees at rates twice the applicable WHT rates provided in the first schedule of the Regulations.

Small companies' exemption from WHT compliance obligations

Small companies (i.e., companies that earns gross turnover of N25m or less per annum) are now exempted from the WHT deduction obligation where the following conditions are met:

1. The supplier has a valid TIN.
2. The value of the transaction is N2m or less during the relevant calendar month.

Although, the exemption is intended to reduce the burden of WHT compliance for small companies, they are still obligated to monitor transactions with their suppliers to ensure the exemption conditions are met. Where the exemption conditions are not met, small companies are required to comply with the WHT deduction obligation.

Treatment of WHT deducted for reporting purpose

The Regulations clarify that WHT is not a separate tax and should also not be an extra cost to the person making the deduction. As such, WHT should be a deduction from the transaction cost, because it will be treated as an advance payment of income tax or final tax of the supplier.

Furthermore, this clarification in the Regulations can also be aligned with the provision of Section 27(1) of the CITA, which provides that tax borne by a company on behalf of another person shall be an unallowable expense. Therefore, businesses should take note of the implications of engaging in business contracts with fees stated as "net of withholding tax," as this could shift the tax burden to the recipient of the goods or services, which is not in line with the provisions of the tax laws.

Also, when calculating the WHT due on the transaction, the tax authority may include the WHT borne by the recipient as part of the total contract amount and subject same to WHT.

Timing of WHT deduction at source

The Regulations have differentiated the timing of the WHT deduction obligation on transactions with third-party suppliers and related-party suppliers. According to the Regulations, the obligation to deduct WHT arises as outlined below.

1. Third-party transactions — the earlier of when (i) payment is made or (ii) the amount due is otherwise settled. This implies that the WHT deduction is now applicable only when the transaction fee is being paid/settled and not when the expense is accrued/recognized, as previously provided.

   By implication, WHT due on applicable transactions accrued/recognized prior to 1 July 2024 should still be treated in line with the previous WHT Regulations (i.e., WHT should be remitted earlier of accrual or payment).

2. Related-party transactions — the earlier of (i) the time of payment or(ii) when the liability is recognized. The timing of the WHT deduction for intercompany taxable transactions is still in line with the extant law — i.e., the earlier of payment or accrual/recognition.

Remittance of WHT deducted at source

The timing for remittance of amounts withheld at source, according to the Regulations, is still in line with extant laws and guidelines (i.e., the 21st day following the month of deduction of taxes payable to the Federal Inland Revenue Service and 30th day following the month of deduction for State Internal Revenue Service ), while payment to the State Internal Revenue Service with respect to Capital Gains Tax and Pay-As-You-Earn is due on the 10th day of the month following receipt of the gain/income.

Also, the Regulations specify that the person making the deduction is obligated to submit the return with the filing template provided on the second schedule of the Regulations, including evidence of remittance of the amount deducted as prescribed by the relevant tax authority.

The filing schedule must contain the supplier's name and address, TIN/Registered Company (RC) Number (or its equivalent), nature of transaction, gross amount paid/payable, tax deducted and transaction month. It should be noted that the national identification number (individual) or RC number (corporate) is now acceptable if a TIN is not available.

Introduction of tax deductions receipts and claim of WHT credit

Based on the Regulations, a person who makes a deduction shall issue a receipt for the tax deducted showing the supplier's name, address, TIN or National Identification Number (NIN)/RC number (if the person has no TIN), nature of transaction, gross amount payable or settled, amount deducted and corresponding month.

The receipt issued (template provided on the third schedule of the Regulations) may be used by the person from whom WHT is deducted as evidence of the amount deducted for purposes of claiming WHT credit upon submission to the tax authority.

Furthermore, where a receipt is issued to a beneficiary for an unremitted WHT deducted, the tax authority shall credit the amount to the beneficiary and treat the amount as a liability of the person who made the deduction with applicable penalty and interest.

Although this is a welcome development, the Regulations do not appear to consider circumstances in which deduction receipts are manually submitted and the process for uploading these receipts to the tax filing portal, considering that tax returns are now submitted electronically. Given that taxpayers have had to navigate complex processes over the years in the recognition, uploading and utilization of credit notes, which may also occur in this instance, relevant tax authorities will likely need to implement procedures to make this process more user friendly.

Penalties for noncompliance

The Regulations introduced the following penalties for noncompliance with the WHT deduction obligation:

1. An administrative penalty and one-off annual interest shall apply if a person fails to deduct WHT on any taxable transaction but remitted the full contract amount to the supplier.
2. An administrative penalty and annual interest (in line with the applicable legislation), plus the amount unpaid, shall apply if a person has deducted the applicable WHT but fails to remit to the relevant tax authority.

Further, the Regulations specify provisions of the extant laws — Section 40 of the FIRS establishment Act and Section 74 of the PITA — as applicable penalty for noncompliance.

Note that this could contradict the actual penalty applicable where a taxpayer fails to deduct taxes from the transaction amount. This is because the extant laws provide that the taxpayer shall be liable to pay the amount of tax deductible/not deducted in addition to the applicable interest and a 10% penalty on the amount of tax due. However, section 7(1) of the Regulations states that only an administrative penalty and a one-off annual interest payment shall be applicable.

Further clarity from the relevant tax authorities on this apparent inconsistency would be welcome.

Exemptions

The Regulations outline 12 types of transaction exempted from WHT deduction that significantly aligns with existing laws and regulations, including:

1. Good manufactured or materials produced by the person making the supply
2. Imported goods where the transaction does not create a taxable presence in Nigeria for the foreign supplier
3. Across-the-counter transactions (i.e., a non-contractual arrangement paid instantly in cash or on the spot via electronic means)
4. Supply of Liquified Petroleum Gas, Compressed Natural Gas, Petroleum Motor Spirits, Automotive Gas Oil, Low Pour Fuel Oil, Dual Purpose Kerosene and Jet-A1
5. Winnings from a games of chance or reality shows with contents designed exclusively to promote entrepreneurship, academics, technological or scientific innovation

It should be noted that the specific exemption on goods manufactured, or materials produced by the person making the supply is expected to address the ambiguity around what qualifies as sale of supply in the ordinary course of business.

Also, the Regulations clarify that exemption from the WHT deduction at the source should not be deemed as an express exemption from the relevant income tax, except as provided in the relevant enabling law.

Due date for CGT deducted on compensation for loss of office

The CGTA did not provide a payment due date on CGT deducted from compensation for loss of office. However, various State Internal Revenue Service-issued publications address when the CGT is to be paid.

Accordingly, the Regulations have now specified the due date to remit the CGT deducted by an employer from compensation paid to an employee for loss of office. The due date specified in the Regulations is the 10th day following the month of payment.

Next steps

Following the changes to the WHT deduction obligation, which takes effect from 1 July 2024, taxpayers should endeavor to swiftly seek solutions to address the significant changes efficiently. Potential actions include:

• Change the WHT rate on the accounting software and/or WHT computation schedule.
• Ensure all vendors have TINs or the system is configured in such a way that the rate applicable Is doubled where TIN is not provided.
• Implement procedures for issuance of WHT deduction receipts to suppliers after filing WHT returns.
• Separate WHT deduction and payment procedures for third-party and related-party transactions.
• Monitor the non-exempt transactions by small companies.
• Treat WHT due on applicable transactions accrued/recognized prior to 1 July 2024 in line with the previous WHT Regulations.
• Ensure WHT deducted is remitted as and when due.

Taxpayers should keep abreast of the changes introduced by the Regulations and ensure compliance as the sanctions provided in the Regulations and/or other extant tax laws shall apply for failure to comply.