KEY HIGHLIGHTS FROM DEDUCTION OF TAX AT SOURCE (WITHHOLDING) REGULATIONS 2024

Recently, the Federal Ministry of Finance released a circular on a new regulation titled Deduction of Tax at Source (Withholding) Regulations 2024, effective from 1^st July 2024.

The Deduction of Tax at Source (Withholding) Regulations 2024, hereinafter referred to as “The Regulation” outlines tax deduction rules for specific transactions under the Capital Gains Tax Act, Companies Income Tax Act, Petroleum Profits Tax Act, and Personal Income Tax Act. The Regulation aims to simplify deductions, reduce complexities, and promote ease of tax compliance, reduce arbitrage, and adopt global best practices, replacing previous rules for deductions at source other than Pay-As-You-Earn (PAYE) tax. The Regulation supersedes any other regulations regarding withholding tax at source.

Outlined below are the key highlights in the Regulation:

Tax to be deducted at Source

The “First Schedule” of the Regulation outlines eligible transactions and applicable rates; and non-passive income transactions which will be twice the rate specified in the Schedule provided the recipient has no Tax Identification Number (TIN).

Persons required to make deductions at source.

These persons include a body corporate or unincorporate, other than an individual; a government; government ministry; department or agency; a statutory body; a public authority; any other institution, organisation, establishment or enterprise including those exempt from tax as well as a payment agent on behalf of any of the previously mentioned persons. A body corporate being a small company and unincorporated bodies are exempted if the supplier has a valid Tax Identification Number, and the transaction value is ?2,000,000.00 or less.

Deduction at source

This occurs when payment is made or settled, or when payment is due, or liability is recognized between related parties. The amount deducted on non-resident payments is the final tax, except for income liable to further tax due to taxable presence in Nigeria.

Remittance of amount deducted at source

The amount deducted at source must be remitted to the relevant tax authority within specified days of the payment date. Payments to the Federal Inland Revenue Service (FIRS), are to be submitted by the 21st day of the month following the payment date while payments to State Internal Revenue Services with respect to Capital Gains and PAYE, should be submitted by the 10th day of the month following the payment date. Other deductions should be submitted by the 30th day of the month following the payment date.

Deductions to be receipted

Deductions from payments must be issued upon remittance to the relevant authority, along with a statement containing the name and address of the person from whom the deduction was made, the Tax Identification Number (TIN), transaction type, gross amount payable or settled, deducted amount, and month. The receipt is to be submitted to the tax authority for tax credit claims. Unremitted deducted amounts are credited to the beneficiary, and unremitted amounts are treated as tax liability and recoverable with penalty and interest.

Offences

A person who fails to make a deduction at source or fails to pay to the tax authority on time is liable to penalties under the Federal Inland Revenue Service (Establishment) Act or Personal Income Tax Act. If the person fails to deduct at source and pays a portion, only an administrative penalty and one-time annual interest will be payable. If a person deducts an amount at source but fails to remit it to the tax authority, they will be required to pay the deducted amount along with an administrative penalty.

Exemptions

The Companies Income Tax Act provides exemptions for certain transactions, including compensating payments under Registered Securities Lending Transactions, distributions or dividend payments to Real Estate Investment Trusts or Companies, Across-the-counter transactions, interest and fees paid to Nigerian banks, goods manufactured or produced by the supplier, imported goods, income or profit payments, out-of-pocket expenses, insurance premiums, supply of Liquefied Petroleum Gas, commission retained by brokers, and winnings from games of chance or reality shows promoting entrepreneurship, academics, technological or scientific innovation.

The Deduction of Tax at Source (Withholding) Regulations 2024 has established a new system for ensuring compliance with the obligations related to withholding tax deduction and remittance in Nigeria. It is applicable to both residents and non-residents, and outlines taxpayer expectations.  The regulation has a significant impact on the Board, resulting in a withholding tax increase on Directors' fees - from 10% to 15% for resident Directors and to 20% for non-resident Directors."