President Bola Tinubu has continued to leave no one in doubt that his government is determined to overhaul our tax system to deliver the best possible outcomes for businesses and also enhance Nigeria’s revenue generation architecture. This is why, upon assumption of office, one of the first major things President Tinubu did was to set up a Presidential Committee on Fiscal Policy and Tax Reforms headed by Taiwo Oyedele.
Eleven months later, this committee has made some far-reaching recommendations including reforms in the withholding tax system in Nigeria. Earlier this month, the federal government approved a new regulation known as the “Deduction at Source (Withholding) Regulations 2024”, which exempted small businesses, manufacturers and farmers in Nigeria from paying withholding tax.
What is withholding tax?
In a layman’s understanding, withholding tax (WHT) is an advance payment of income tax, which is deductible at source on payments made for certain transactions. It is usually counted as a credit against income tax. In other words, WHT is like an upfront payment of income tax of a business and its personnel, deducted when payments are made to the business for goods supplied or services rendered, which is remitted monthly to FIRS by the deducting entity to allow the government to have a steady flow of income tax revenue and also reduce the burden of the payer having to pay a bulk sum at once as annually income tax filings.
How Withholding Tax Works
In describing how the WHT regime works, it is necessary to list some of those transactions that qualify to pay WHT before now. They include:
1. Rents on all properties
2. Dividends (income from shares)
3. Interest earned in Nigeria (income from investments of any kind except financial institutions)
4. Commission, consultancy, technical and management fee
5. Constructions (all types of construction contracts)
6. Contracts and agency arrangements (this covers all forms of supplies, deliverables etc)
7. Directors fee (for company Board members or Directors)
8. Royalty
To explain how the withholding tax system works, let us use a practical example: There are two companies, Company A and Company B. Company B gets a contract from Company A to supply building materials for ₦ 1 million. On completion of the transaction, Company A will withhold ₦50,000, which is 5% of the contract sum and remit that to the FIRS as withholding tax. In other words, Company B will only be paid ₦950,000. At the end of Company B’s financial year, when they are paying their taxes, the ₦50,000 remitted as WHT on their behalf by Company A will be deducted from the total income taxes they have to pay for the year.
If over the financial year, they engaged in many supplies in which withholding taxes were deducted and eventually the amounts deducted exceeded their supposed annual income tax liability, they will get a refund from the government or the excess amount will become a tax credit for the next financial year. However, for the FIRS/SIRS to count the WHT that was deducted from Company B’s income as part of its income tax already paid, Company A that did the deduction at source (i.e. before paying Company B N950,000) MUST have remitted the N50,000 to FIRS or the relevant SIRS and issued Company B with a tax credit note.
What were the problems with the former WHT system?
Before the new regulation by the Ministry of Finance came into effect on July 1, 2024, there were a lot of inefficiencies and confusion that characterised the withholding tax system in Nigeria, some of which constituted an unnecessary burden to the cash flow of many businesses.
First, the WHT rate for suppliers was high (5% of the amount of goods supplied), and the taxpayers complained that this rate eat into their margins. Also, sometimes, the deductions were not even remitted by the agent that did the deductions to the tax authority, which means FIRS for instance won’t count the deductions as income tax credits for the supplier. This leaves the supplier having to pay for his full income tax (more like double taxation).
Also, there were confusions on what type of transactions were exempt from withholding tax. According to the previous WHT regulations, contracts for the outright sale and procurement of goods and services in the ordinary course of business. This particular provision is vague leading to many suppliers like manufacturers, small businesses and even farmers being subject to 5% WHT. Equally, the
Some of the new reforms introduced
The new withholding regulations by the Tinubu administration have now clearly defined the transactions that are exempt from withholding tax deductions and also reduced the rates for some eligible transactions.
1. Manufacturers, Farmers and small businesses are now exempt from withholding tax deductions. According to the regulations, manufacturers and farmers are no longer required to pay withholding tax when they supply their products. Also, small businesses are also exempt from WHT provided that their annual turnover is less than N25 million.
2. WHT for the sale of goods by Nigerian businesses who are not manufacturers or farmers is now 2% instead of 5%.
3. Businesses in the energy sector are now exempt from withholding tax where such businesses supply electricity, gas and petroleum products. This means electricity distribution companies, petrol marketers and gas suppliers (LPG and CNG).
4. The new regulation also provides that the customer (and not the tax authority) should issue WHT receipts and credit of withholding tax deducted to the vendor. The vendor can then present this receipt to the relevant tax authority as evidence of withholding tax deducted and will get value regardless of whether the WHT was remitted to the tax authority by the customer or not.
The biggest takeaway from the withholding reforms initiated by the Tinubu administration is that they promote competitiveness, equity, and ease of compliance. By simplifying the WHT system, it prevents tax avoidance and detects tax evasion to close the tax gap, and consequently increase government revenue while at the same time reducing the burden on so many businesses. The biggest beneficiaries, of course, are the manufacturers, farmers and other small businesses who are now freed from this WHT encumbrance. It leaves more money on their balance sheet.
For example, the reforms in the withholding tax regime frees a lot of money for businesses previously impacted by loopholes in the administration of withholding tax where it is difficult for businesses to get tax refunds when WHT deductions exceed their actual tax liabilities for the year. Previously, a lot of businesses had their money tied up because what was being deducted from them was far more than the taxes they needed to pay. These new regulations have put paid to this headache.
President Tinubu is one president who has shown unmistakable determination to overhaul the tax system in Nigeria. The withholding tax reforms recommended by the Taiwo Oyedele committee and approved by the President are just the beginning of a massive restructuring in the tax administration in Nigeria. By the time other recommendations of the committee are codified and relevant legislations amended including a comprehensive Finance Bill, a strong fiscal foundation would have been laid for sustainable economic growth.