The New Withholding Tax Regime (Deduction of Tax At Source Regulations 2024)

On July 1, 2024, the Ministry of Finance enacted the Deduction of Tax at Source (Withholding Tax) Regulations 2024 (the “Regulations”). The purpose of the Regulations is to improve the efficiency and friendliness of the Nigerian withholding tax system for businesses. This newsletter highlights the modifications and the advantages of the new Regulations for businesses. 

The Key Changes Under The Regulations Are.

1. Clear Unified Rules Guiding WHT Implementation. 
Businesses found it difficult to comprehend their withholding tax responsibilities prior to the Regulations’ release since the regulations governing WHT implementation in Nigeria were unclear and disjointed. WHT requirements are still found in several Acts, but the Regulations now offer precise and streamlined guidelines for putting them into practice. 

2. Clarification on Persons Required to Deduct at Source. 
The Regulations introduce a single, clear list of entities required to deduct WHT at specific rates on eligible transactions, explicitly excluding individuals. This list applies uniformly across all Income Tax Acts covered by the Regulations. They are body corporate or unincorporate, other than individuals, governments, and their Ministries, Departments and Agencies (MDAs), statutory bodies, public authorities, institutions, organizations, establishments and enterprises and payment agents on behalf of those listed above.

3. Exemption of Small and Medium Enterprises (SMEs) and Farmers from WHT Compliance

Small businesses and unincorporated bodies are exempt from the requirement to deduct WHT from transactions under Section 2(2) of the Regulations, provided that the supplier they are working with has a valid Tax Identification Number (TIN) and the transaction value during the relevant calendar month is not more than Two Million Naira.

4. Improved Utilization of Tax Credits

In the past, if the individual who withheld WHT from the payments (the “Tax Agent”) neglected to submit the tax to the appropriate authorities, the entities whose payments had been withheld (the “Tax Beneficiaries”) could not claim WHT tax credits from the Federal Inland Revenue Service (FIRS) against their eventual tax liabilities. Nevertheless, Tax Agents’ receipts for WHT tax credits are now acceptable for Tax Beneficiaries to claim under Section 6(3) of the Regulations, even if the agents haven’t sent in the sums that were withheld. These unremitted funds become the agents’ tax obligation and are refundable with any relevant fines and interest.

5. WHT to Function as an Advance Tax Payment and not an Additional Contract Cost

Although it is customary for contracting parties to increase the negotiated contract price to account for projected WHT deductions, the Regulations now expressly state that a WHT payment should not be treated as an additional cost of a contract or transaction and should not be included in the contract price as an additional cost in an effort to shift the burden of WHT payment to the other party to the contract (i.e., Gross Up provisions in contracts).

Conclusion
The recently enacted Deduction of Tax at Source (Withholding Tax) Regulations 2024 mark a noteworthy advancement for the tax authorities as they tackle persistent issues encountered by Nigerian firms. Even though there is still work to be done, especially regarding some of the ambiguities in the WHT regime, we anticipate that the implementation of these Regulations would promote a more business-friendly atmosphere, enabling companies to prosper in Nigeria.