Understanding The Key Changes Of “Deduction Of Tax at Source (withholding) Regulations, 2024”

Recall that in the second half of the previous year, July 2024, the new tax regime on withholding tax was approved and published in the Official Gazette in October 2024, with a six-month window period before becoming effective on January 1, 2025.

The revised regulations now set to be fully enforced, formally christened the “Deduction of Tax at Source (Withholding) Regulations, 2024,” pursuant to section 14 being the citation section of the regulation, aims to modernize Nigeria’s tax system, streamline compliance, and address longstanding inefficiencies.

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The regulation signed into law by the Minister of Finance and Coordinating Minister of the Economy, Wale Edun,  in exercise of the powers conferred on him by section 81(9) of the Companies Income Tax Act, Cap C21, LFN, 2004, section 56 of the Petroleum Profits Tax Act, Cap P13, LFN, 2004, section 73(6) of the Personal Income Tax Act, Cap. P8, Laws of the Federation of Nigeria, 2004, and of all other powers enabling him in that behalf, clothed , Wale Edun, Minister of Finance and Coordinating Minister of the Economy to make the Regulations;  Deduction of Tax at Source (Withholding) Regulations, 2024.

The reforms are expected to alleviate the financial and administrative burdens on businesses, particularly Small and Medium Enterprises (SMEs), farmers, manufacturers and producers among others.

Challenges of the previous withholding tax regime

The Chairman of the Presidential Committee on Fiscal Policy and Tax Reforms, Oyedele Taiwo Oyedele, in the course of speaking to newsmen on the withholding tax reform signed into law 1st of July, 2024 noted that the previous withholding tax regime “had evolved into a complicated system over time, creating numerous challenges for businesses”. These challenges according to him includes:

1. Ambiguities regarding persons required to comply, eligible transactions, applicable rates, and timing of the obligation for remittance, among others.
2. Treatment of the deduction as a separate tax, thereby adding to the list of multiple taxes and cost of doing business.
3. Challenges regarding obtaining refunds for excess withholding tax.
4. Lack of exemption threshold making the cost of compliance by taxpayers and cost of enforcement by the tax authority uneconomical.
5. Some emerging and contemporary issues are not properly addressed.
6. The overall structure of the withholding tax regime promoted tax inequity.

Key modifications and Overall Objectives of Withholding Regulations, 2024,”

As Modification of Part I of the First Schedule to the Principal, the objectives of these Regulations are to —

1. set out the rules for the deduction of tax at source from payments to taxable persons under the Capital Gains Tax Act, the Companies Income Tax Act, Petroleum Profits Tax Act, and the Personal Income Tax Act in relation to specified transactions ;
2. remove complexities in the deduction of tax at source ;
3. reduce the rates of deduction for sectors with low margins ;
4. provide exemptions for small businesses and manufacturers;
5. promote the ease of tax compliance and administration;
6. curb tax evasion ;
7. reduce arbitrage between corporate and non-corporate business structures;
8. adopt global best practices in the deduction of tax at source.

Key advantages for SMEs, Manufacturers, Producers and Farmers under the Withholding Regulations, 2024

Announcing the commencement of the Withholding Tax reforms on New Year’s Day, Taiwo Oyedele, Chairman of the Presidential Committee on Fiscal Policy and Tax Reforms, outlined several key features and advantages of the updated regime especially for SMEs to include:

Exemption of SMEs from withholding tax compliance

SMEs are now exempt from withholding tax compliance. This change is expected to ease administrative and financial challenges for these businesses, fostering growth and innovation in the sector. Businesses with low profit margins will benefit from reduced withholding tax rates, which will enhance their cash flow and reduce operational costs.

Exemption of manufacturers and producers, particularly farmers

Manufacturers and producers, particularly farmers, are now exempt from withholding tax. This move is designed to strengthen critical sectors, ensuring their sustainability and growth. The new withholding tax provisions are intended to curb tax evasion, minimize avoidance opportunities, and promote transparency in tax remittances.

Other transactions exempt from deduction at source

By the provisions of section 10. of the Deduction of Tax at Source (Withholding) Regulations, 2024 particularly in Section 10 subsection (1) ,the following transactions are exempt from deduction at source

1. compensating payments under a Registered Securities Lending Transaction in line with section 81(8) of the Companies Income Tax Act ;
2. any distribution or dividend payment to a Real Estate Investment Trust or Real Estate Investment Company as provided under section 80(5) of the Companies Income Tax Act ;
3. across-the-counter transactions as defined under these Regulations ;
4. interest and fees paid to a Nigerian bank by way of direct debit of the funds which are domiciled with the bank ;
5. goods manufactured or materials produced by the person making the supply ;
6. imported goods where the transaction does not create a taxable presence in Nigeria for the foreign supplier ;
7. any payment in respect of income or profit which is exempt from tax ;
8. telephone charges, internet data and airline tickets ;
9. out-of-pocket expense that is normally expected to be incurred directly by the supplier and is distinguishable from the contract fees
10. .insurance premium ;
11. supply of Liquefied Petroleum Gas (LPG), Compressed Natural Gas (CNG), Premium Motor Spirits (PMS), Automotive Gas Oil (AGO), Low Pour Fuel Oil (LPFO), Dual Purpose Kerosene (DPK), and JET-A1 ;
12. commission retained by a broker from money collected on behalf of the principal in line with the industry norm for such transactions ;
13. winnings from a game of chace or a reality show with contents designed exclusively to promote entrepreneurship, academics, technological or scientific innovation.

Key Features of the Withholding Regulations, 2024

streamlining the process of obtaining credit for taxes deducted at source

Apart from the exempting SMEs, manufacturers, producers and farmers, one of the major key feature of the new tax regime is that, the reforms now being implemented will streamline the process of obtaining credit for taxes deducted at source, making it easier for businesses to leverage such deductions.

Conclusion

By and large, the updated the Withholding Regulations, 2024 reflect emerging economic issues and align with international standards, ensuring Nigeria’s tax system remains contemporary and globally competitive and by providing clear guidelines on the timing of deductions and definitions of key terms, the new policy has eliminated ambiguities that previously made compliance difficult.

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