Nigeria’s Withholding Tax Reforms: Key Changes and Implications

INTRODUCTION

Nigeria has overhauled its nearly half-century-old regime on the administration of withholding tax (WHT) with the signing of the Deduction of Tax at Source (Withholding) Regulations 2024 by the Minister of Finance.

The new regulations, effective from 1 July 2024, are part of the reforms being proposed by the Presidential Fiscal Policy and Tax Reforms Committee, headed by Taiwo Oyedele. The new regulations supersede all previous WHT regulations, particularly the Companies Income Tax (Rate, etc., of Tax Deducted at Source (Withholding Tax)) Regulations, 1997 and the Personal Income Tax (Rate, etc., of Tax Deducted at Source (Withholding Tax)) Regulations, 1997.

HIGHLIGHTS OF THE CHANGES

Some key changes are highlighted below:

1. Decrease in WHT Rates

Professional, Management, Technical, and Consultancy Services

• The rate of WHT has been reduced from 10% to 5% for payments to a Nigerian company for professional, management, technical, and consultancy services. The WHT for these payments to a non-resident company remains at 10%, and as before, no further tax is payable in Nigeria by the non-resident.

Any other Service and Supply of Goods or Materials

• The rate of WHT has been reduced from 5% to 2% for payments to a Nigerian resident for any service (other than professional, management, technical, and consultancy services) and the supply of goods or materials. This excludes “over-the-counter supplies” of goods or materials (i.e., transactions without a pre-existing contractual relationship or any prior formal agreement, where payment is made immediately in cash or via electronic means on the spot).

Construction Payments to Residents

• The rate of WHT has been reduced from 2.5% to 2% in respect of payment to a Nigerian resident for the construction of roads, bridges, buildings and power plants.

Co-Location And Telecommunication Tower Services

• The rate of WHT has been reduced from 5% to 2% for payments to a Nigerian resident for co-location and telecommunication tower services. The WHT for these payments to a non-resident company remains at 5%.

2. New/ Increased WHT Rates

Non-Resident Entertainers and Sportspersons

• A 15% WHT is now to be deducted from the earnings of non-resident “entertainers and sportspersons”, and this is the final tax payable in Nigeria.

Winnings from Lotteries, Gaming, Reality Shows, and Similar Activities

• Starting 1 October 2024, winnings from lotteries, gaming, reality shows, and similar activities will attract WHT of 5% for a resident and 15% for a non-resident. No further tax is payable in Nigeria by the non-resident.

Construction Payments to Non-Residents

• WHT on payment to a non-resident for the construction of roads, bridges, buildings and power plants has been increased from 2.5% to 5%.

Directors’ Fees

• The WHT on payment of directors’ fees has been increased from 10% to 15% for residents and to 20% for non-residents. As before, no further tax is payable in Nigeria by a non-resident director.

3. Administration

Exemption for Small Businesses with Turnover of 25 Million Naira or Less

• Companies and unincorporated bodies with a turnover of 25 million Naira or less are exempt from deducting WHT on transactions up to 2 million Naira if the supplier has a Tax Identification Number.

Double WHT Rate for Unregistered Recipients of Non-Passive Income

• The recipient of any non-passive income liable to WHT will suffer twice the WHT rate where the recipient is not registered with the FIRS for tax purposes.

Extension of WHT Liability to Payment Agents

• The liability to deduct and remit WHT now extends to payment agents who make payments liable to WHT.

Timing of WHT Deduction

• The obligation to deduct and remit WHT now arises on the earlier of payment or settlement, rather than payment or accrual under the old regime. For connected parties, however, it remains the earlier of payment or accrual.

Requirement to Issue Receipts for Withholding Tax Deductions and Tax Credit Entitlement

• A person who deducts withholding tax is required to issue a receipt for the tax so deducted. The receipt entitles the recipient to claim a tax credit for the amount deducted, regardless of whether the WHT has been remitted to the relevant tax authority.

4. Exemptions

WHT is not to be deducted in respect of payment for the following:

• goods manufactured or materials produced by the person making the supply;

• winnings from a game of chance or a reality show with content designed “exclusively to promote entrepreneurship, academics, technological or scientific innovation”.

• insurance premiums;

• interest and fees paid to a Nigerian bank through direct debit of funds domiciled at the bank; and

• supply of liquefied petroleum gas, compressed natural gas, premium motor spirits, automotive gas oil, low-pour fuel oil, dual-purpose kerosene, and JET-A1.

COMMENTS

Taxpayers should have been given advance notice of the new regulations in order to assess their impact and ensure a seamless transition.
For instance, businesses with existing contracts that do not account for/anticipate changes in the WHT regime would need time to obtain expert guidance on the impact of the new regulations, especially with respect to the following questions:

• what are the legal, tax and financial implications of such contracts?

• will the contracts need revisions to accommodate the new withholding tax regulations? and

• will the parties need to renegotiate terms to address the impact of the new regulations?

The new regulations could lead to disputes between contracting parties, particularly if one party is disproportionately affected.
Despite these challenges, the new regulations are expected to create a fairer tax environment and ease the burden on businesses during this challenging economic period. Accordingly, the Federal Government and the Presidential Fiscal Policy and Tax Reforms Committee deserve commendations.