What is Withholding Tax (WHT)?

The Withholding Tax (WHT) system was introduced into the Nigerian financial system in 1977, and is regulated by various tax acts and regulations. It was introduced to generate revenue for the government and curb tax evasion. Withholding Tax is also used to receive taxes on non-residents. 

It is charged on dividends, interests, rents, directors fees, hire on equipment, commissions, royalties, technical and service fees, management fees, contracts other than sales in the ordinary course of business (PWC as of 9th February 2024).

Challenges of the WHT System in Nigeria

The administration of the Withholding Tax System has faced numerous obstacles since its inception. Several of these challenges encompass:

Payment Processes

Withholding tax laws expect that deduction and remittance laws lie with the customer. Customers have to pay the tax after payment for goods and services which could be quite confusing for the seller and the customer, as well as create a cash strain for entrepreneurs.

Different withholding tax rates

The tax rates are different depending on the type of transaction that is being collected. The range of withholding taxes in Nigeria is between 2.5% and 10%. For example, rental rates are 10% WHT while rates on contract agreements are 5%. The rates need to be harmonized and streamlined as there should be a clear agreement between contracts for rents and rental agreements.

Rigorous refund process

Taxpayers are expected to request for a refund if the amount of WHT withdrawn is higher than their income liability tax. This process is rigorous and largely impossible in practice as many taxpayers are subjected to rigorous audit processes.

The issue of multiple taxation

Withholding tax being treated as a separate tax from other taxes, has posed an issue of multiple taxations and increased the cost of doing businesses.

Overview of Policy 

The Chairman of the Presidential Committee on Tax Reforms, Mr. Taiwo Oyedele,  announced the Deduction of Tax at Source (Withholding Tax) Regulation 2024 on July 2, 2024. This announcement was in accordance with the Capital Gains Tax Act, the Companies Income Tax (CIT) Act, the Petroleum Profits Tax (PPT) Act, and the Personal Income Tax (PIT) Act. 

The Withholding Tax (WHT) Act entails prepayment of income tax and advance payment of income be deducted at a rate between 5 and 10 percent, depending on the transaction carried out. These deductions are targeted at offsetting or reducing tax liabilities. The WHT stands out as it supersedes every other deduction at source except the Pay as you Earn (PAYE), as confirmed by the Minister of Finance. The execution and implementation of the WHT will ride on the backs of some selected entities, including government ministries, departments and agencies, and public authorities, among others, with the exception of individuals. 

The Withholding Tax Regulation requires that deduction happens immediately after the amount due is settled and  payment is made. While remittances to the state internal revenue service be made latest on the 10th day of the following month; it also requires that in the case of remitting to the Federal Inland Revenue Service (FIRS), payment should not exceed the 21st day of the month following the month of payment.

It requires remittances to be done alongside evidence of the amounts deducted and other documents that must contain the nature of the transaction to which the payment was made, the gross amount paid or payable, the amount of tax deducted, and the calendar month to which the payment relates. In addition, it requires the information of the persons whom the amount was deducted, which must include name and address, tax identification number, national identification number, and RC number or its equivalent.

The Withholding Tax Regulation made exemptions for some categories of transactions, including any distribution or dividend payment to a Real Estate Investment Trust or  Real Estate Investment Company, compensating payments under a registered securities lending transaction, interest and fees paid to a Nigerian bank by way of direct debit of the funds that are domiciled with the bank, across-the-counter transactions, goods manufactured or materials produced by the person making the supply, and imported goods with no taxable presence in Nigeria. It also exempted any payment in respect of income or profit, which is exempt from tax, insurance premium, and supply of Liquefied Petroleum Gas (LPG), Compressed Natural Gas (CNG), Premium Motor Spirit (PMS), Automotive Gas Oil (AGO), Low Pour Fuel Oil (LPFO), Dual Purpose Kerosene (DPK), as well as  JET-A1.

What does this mean?

The implementation of the Withholding Tax policy comes with the following implications 

• The number of eligible transactions subject to tax deduction at source will increase.

• SMEs and other firms with an annual turnover of less than NGN 25 million will be exempted from deduction on any transactions provided the supplier has a valid tax identification number (TIN) and the total transaction amount is NGN 2,000,000 or less in a year.

• The deduction is not a separate tax or  extra cost and should not reflect on the contract pricing.

• A reduced rate for eligible persons who are resident in a treaty country.

• Increased tax amount for persons supplying goods or services without tax identification numbers (TINs).

Conclusion

The implementation of this regulation will be a significant stride towards resolving the issue of multiple taxation and achieving tax simplification and harmonization. Although this policy is commendable, it would be beneficial if tax administration becomes uniformly efficient across all jurisdictions.