Exemption of small businesses, manufacturers… highlights of gazetted withholding tax regulations

The federal government has officially published gazetted withholding tax regulations.

Taiwo Oyedele, chairman of the presidential committee on fiscal policy and tax reforms, posted on X on Wednesday.

Withholding tax (WHT) is an advance payment of income tax on specified transactions.

WHT is collected on dividends, rent, consulting, and brokerage fees, amongst others.

Where the company or person providing the technical services is an enterprise, the withholding tax would go to the state, but if it is a company, the WHT goes to the federal government.

According to Oyedele, the regulations grant rates reduction and full exemption from withholding tax to small businesses with annual turnover not exceeding N25 million.

He added that the commencement date of the new regulations is September 30, while implementation begins on January 1, 2025, to allow for a minimum of 90 days’ notice required for tax changes in line with the 2017 National Tax Policy. 

“However, there is a provision permitting the FIRS, with the approval of the Finance Minister, to issue guidelines for the implementation of the Regulations and where appropriate, permit early application of the Regulations from 1st July, 2024,” he said. 

“The essence of this provision is to enable persons who wish to adopt the Regulations early to do so given that it is generally providing reliefs to businesses rather than imposing a burden.”

TheCable takes a closer look at the gazetted withholding tax regulations.

The following are what you should know;

DEDUCTION OF TAX AT SOURCE

According to the document, the objectives of the regulations are to 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, the Petroleum Profits Tax Act, and the Personal Income Tax Act in relation to specified transactions.

The regulations also aim to remove complexities in the deduction of tax at source; reduce the rates of deduction for sectors with low margins; provide exemptions for small businesses and manufacturers; and promote the ease of tax compliance and administration.

Others are to curb tax evasion, reduce arbitrage between corporate and non-corporate business structures, and adopt global best practices in the deduction of tax at source.

PERSONS REQUIRED TO DEDUCT AT SOURCE

The regulations said the following persons are required to deduct tax at source on eligible transactions — a body corporate or unincorporated, other than an individual; a government ministry, department or agency; a statutory body; a public authority; any other institution, organisation, establishment or enterprise including those exempt from tax; and a payment agent representing any of the aforementioned.

“Notwithstanding the provisions of this regulation, a body corporate, being a small company as defined under section 105 of the Companies Income Tax Act and a body unincorporate of equivalent attributes are exempt from the requirement to deduct tax at source from any transaction, provided that the — (a) supplier has a valid Tax Identification Number (TIN); and (b) value of the transaction is N2,000,000.00 or less during the relevant calendar month,” the document showed.

REMITTANCE OF AMOUNT DEDUCTED AT SOURCE

On the amount deducted at source, the federal government said remittance should be made to the relevant tax authority.

“In the case of payment to the Federal Inland Revenue Service (FIRS), not later than the 21st day of the month following the month of payment; and in the case of payment to a State Internal Revenue Service,” the document added.

“With respect to Capital Gains Tax and Pay-As-You-Earn, not later than the 10th day of the month following the payment, and with respect to any other deduction, not later than the 30th day of the month following the month of payment.

“Where an amount is deducted at source, the person making the deduction shall submit a return to the relevant tax authority with the evidence of remittance of the amount deducted, in the format prescribed in the second schedule to these regulations or as may be prescribed by the relevant tax authority from time to time.

“The return shall be accompanied with a statement in the format prescribed in the Second Schedule to these Regulations and containing the following information in respect of the person from whom the amount was deducted, that is, the — name and address; TIN, national identification number (NIN), RC number or its equivalent; nature of transaction in respect of which the payment was made; gross amount paid or payable; amount of tax deducted; and calendar month to which the payment relates.”

TRANSACTIONS EXEMPTED FROM DEDUCTION

The following transactions are exempt from deduction at source — compensating payments under a registered securities lending transaction in line with section 81(8) of the Companies Income Tax Act; 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.

“Across-the-counter transactions as defined under these Regulations; interest and fees paid to a Nigerian bank by way of direct debit of the funds which are domiciled with the bank; goods manufactured or materials produced by the person making the supply; imported goods where the transaction does not create a taxable presence in Nigeria for the foreign supplier; and any payment in respect of income or profit which is exempt from tax,” the document reads.

Others are telephone charges, internet data and airline tickets; out-of-pocket expense that is normally expected to be incurred directly by the supplier and is distinguishable from the contract fees; insurance premium; 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.

In addition, commission retained by a broker from money collected on behalf of the principal in line with the industry norm for such transactions is exempted.

The regulations also exclude winnings from a game of chance or a reality show with content designed exclusively to promote entrepreneurship, academics, and technological or scientific innovation.