The Federal Government, on 2 October, 2024 published in its gazette, the Deduction of Tax at Source (Withholding) Regulations 2024 (the Regulations) which was earlier introduced by the Federal Ministry of Finance on 1 July 2024. The Regulations set out the rules for the deduction of taxes at source from payments to taxable persons under the Capital Gains Tax (CGT) Acts, Companies Income Tax (CIT) Act, Petroleum Profits Tax (PPT) Act and Personal Income Tax (PIT) Act in respect of specified transactions. The commencement date of the Regulations is 30 September 2024 while the implementation date is 1 January 2025.

Following the powers conferred on it by the Regulations, the Federal Inland Revenue Service (FIRS) issued a public notice on 3 October 2024, with respect to the commencement and implementation of the Regulations. Specifically, the FIRS stated in its public notice that the Regulations will take effect from 1 January 2025. The FIRS further stated that the Companies Income Tax (Rates etc., of Tax Deducted at Source (Withholding Tax)) Regulations, 1997 remains in force up until 31 December 2024.

Read our previous publication on this subject here.

Key Highlights of the Gazette

1. Exemption for Small Businesses on WHT Deductions
   Small businesses are now exempt from the obligation to deduct WHT on transactions with other small businesses. This exemption alleviates the administrative burden of complying with WHT regulations, making it easier for small businesses to operate efficiently.
2. Issuance of Tax Receipts for Credit Utilization
   The new regulations mandate the issuance of tax receipts to taxpayers, simplifying the process of utilizing tax credits. This ensures transparency and helps businesses track their tax deductions and compliance more efficiently.
3. Measures to Encourage Compliance and Curb Evasion
   Several measures were introduced to encourage compliance and curb tax evasion. By providing clearer guidelines and reducing ambiguities, the regulations aim to improve the accuracy of tax reporting and collection.
4. Clarity on Applicable Transactions and Reduced WHT Rates for Service Contracts
   The regulations clearly define the types of transactions subject to WHT, including those eligible for reduced rates. This ensures that businesses are aware of their obligations and can apply the correct WHT rates on their transactions.
5. Guidance on Timing of Deduction and Remittance
   Businesses are now provided with clearer instructions on when to deduct and remit WHT to the relevant tax authorities. This reduces confusion and helps companies stay compliant with WHT obligations.
6. Exemption of Certain Transactions
   Certain transactions, such as telephone charges, internet data, and airline tickets, are now exempt from WHT deductions. This provides relief for service providers and their clients, simplifying the WHT process for these commonly used services.
7. Definition of Key Terms
   The regulations provide clear definitions of key terms related to WHT, reducing ambiguities and improving compliance for taxpayers.

Key Changes in the WHT Regulations

1. Modification of Sanction for Non-Deduction of WHT
   If a taxpayer fails to deduct WHT and has already paid the full amount to the recipient, they will now face only an administrative penalty. While the regulations mention this penalty, they do not define the exact nature of the administrative penalty. This lack of clarity leaves room for interpretation, requiring further guidance from the authorities.
2. Transactions Exempted from WHT
   Telephone charges, internet data, and airline tickets are now exempt from WHT deductions. This change eliminates the need for WHT deductions on these services, reducing the administrative complexity for service providers and users. Additionally, the nature of these transactions makes it impractical to deduct WHT, so this change aligns with real-world business practices.
3. Revocation of Existing Regulations
   The new regulations revoke all previous WHT regulations, but any actions taken under the previous regulations remain valid. This ensures a smooth transition to the new rules without retroactive disruptions.
4. Implementation Timeline
   The regulations officially take effect on 30 September 2024, with enforcement beginning on 1 January 2025. This three-month transition period allows businesses and stakeholders to adjust their systems and processes to comply with the new rules. However, if state tax authorities adopt an earlier commencement date of 1 July 2024, companies could face challenges adapting their accounting software to accommodate varying commencement dates across different jurisdictions.

Implications for Businesses

1. Relief for Small Businesses
   The exemption from WHT deductions for small businesses offers a significant advantage by reducing their tax compliance burden. This change is expected to create a more conducive environment for entrepreneurship, which is essential for driving economic growth.
2. Simplification of Compliance
   Exempting certain services like telephone charges, internet data, and airline tickets from WHT deductions simplifies the tax process for both service providers and businesses. These sectors will benefit from reduced administrative work, leading to increased operational efficiency.
3. Impact of Early Adoption
   For companies subject to early adoption by state tax authorities, the challenge of managing different WHT commencement dates across jurisdictions could create accounting and software configuration issues. Businesses will need to stay vigilant and ensure their systems are flexible enough to accommodate these changes.

Conclusion

The regulations represent a significant step toward improving tax compliance and simplifying the tax environment for businesses in Nigeria. By introducing exemptions for small businesses and certain transactions, the regulations reduce administrative burdens and foster a more business-friendly environment. However, the transition to the new regulations requires careful planning, particularly for businesses operating in states that adopt an earlier implementation date. With the proper adjustments and proactive compliance, businesses can navigate these regulatory changes and benefit from the more streamlined tax process set to take effect in January 2025.

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