Big changes to Nigeria’s withholding tax regulations

We wrote on 15 August about the significant changes to Nigeria’s withholding tax Regulations.  That article was based on a copy of the new Regulations that had been signed by the Minister of Finance.  We also warned that the Regulations had not been gazetted, and this created some uncertainty.

The Regulations have now been gazetted, and so are official.  They take effect from 1 January 2025, so everybody has some time to get ready to implement the new rules.   There is a provision for tax authorities to allow early adoption, from 1 July 2024, which may have been intended to accommodate those who adopted the ungazetted version of the Regulations.  The Federal Inland Revenue Service has issued a Public Notice, stating that the new rules will come into effect on 1 January 2025, so this infers that it will not be permitting early adoption.  This creates yet more uncertainty for those who adopted early, and probably creates a need for some discussion with tax authorities if they demand withholding tax that was not deducted before 1 January 2025, and is likely to lead to some disputes.

We have reproduced our original newsletter below, with some extra commentary in bold, where the final Regulations differ or cause our views to change.  Where we have not commented, there is no change in the Regulation or in our views.

Like most countries in Africa, Nigeria loves withholding taxes (WHT), which apply to many types of transactions, whether these involve a supplier outside Nigeria, or only parties inside Nigeria.  Historically, WHT has caused a lot of problems for many businesses and even individuals.  Either customers forgot to deduct it when they were supposed to, or they did deduct it when suppliers were not expecting them to, or there was doubt about the rate that should apply, or whether WHT should apply at all, or the amount suffered exceeded the final tax liability for the year meaning money was locked up with the tax authority.

The Federal Inland Revenue Service (FIRS) has been talking about reforming the WHT system for some years, and the Presidential Commission on Fiscal Policy & Tax Reforms has also considered it.

Early in July, the Minister of Finance signed new regulations, to take effect from 1 July 2024. Astute readers will notice that this date has already passed!  Furthermore, the Regulations have not yet been gazetted, which all adds to the uncertainty around what are very big changes.

The Regulations have now been gazetted and take effect on 1 January 2025. There is still uncertainty!

Overview of the changes

We are not going to list every change made by these new regulations for fear of causing somnambulation.  There are a lot of changes.   To be positive, there are some very good changes included for which the business community should be grateful, and we will comment more on these below.  However, some other changes are not so good, or make the WHT system harder for businesses.  And some of the changes do not seem to have been thought through as carefully as they could have been.  In this newsletter, we list those changes which we think will have most impact on businesses, one way or another, and offer some comments on them.

We apologise that this newsletter is much longer than normal – but there was quite a lot to say, and we hope that the content is useful and interesting.

What is good?

• Individuals are not required to deduct withholding tax.  There was some uncertainty about this in the past, so this change should end arguments with landlords leasing residential property, and demanding withholding tax in addition to the rent agreed.
• So-called “across the counter” transactions are not subject to withholding tax.  This was already the case, but the meaning of the phrase “across the counter” has now been defined and brings some welcome clarity.  The parties should not have any pre-existing or established contractual relationship, and payment should be made immediately, in cash or electronically.  Regulation 8 which sets out the exemptions refers to a definition of Across the Counter transactions in Regulation 8, but this should rather refer to Regulation 9. The numbering error has been corrected, and the numbers of some of the individual regulations have also changed.
• Small companies and similar unincorporated bodies are not required to deduct WHT, if the supplier has a Taxpayer Identification Number (TIN), and the value of the transaction in question is less than NGN 2 million in a month. This helps reduce bureaucracy for smaller businesses.  However, it does not help small businesses with their cash flow, as they are still likely to suffer WHT on sales.
• Interest and fees paid to a Nigerian bank are exempt from WHT, if these are paid by the bank debiting the person’s account with that bank. This is in line with current practice, but it is good to see some legislative support for the practice.  If a person must pay interest of fees to a bank which they do not have an account with, they will need to deduct WHT.  We expect that this situation will not often arise.  Also, if a person must pay interest (or associated fees) to a person which is not a bank, then the person will have to deduct WHT.  Customers in this situation should ensure that the contract with the lender permits them to deduct WHT.
• A person deducting WHT is required to issue a receipt for the WHT, in a stipulated form.  This receipt can then be presented to the tax authority as evidence that WHT was suffered, so that the person who suffered the WHT can claim the tax credit.   This means that it will no longer be necessary to obtain a tax credit note for WHT suffered, which is a very welcome reduction in bureaucracy.  It also means that the person who suffered deduction of WHT will still be granted the credit even if the person who deducted the WHT failed to pay it to the tax authority.  This part is very welcome.  Overall, this is favourable to those who suffer WHT, and appears to be in line with the wording of the Income Tax Acts, whereas we have never been able to identify the statutory support for the requirement to obtain tax credit notes from tax authorities.  The wording of the Regulation indicates that the receipt must be issued in addition to loading the WHT deduction in the Tax ProMax system.
• Insurance premiums are exempt from withholding tax.  This should be welcomed by the insurance industry.
• Commission earned by a broker and retained by it from monies it collects for the principal, in line with industry norms, are exempt from WHT.  This should be welcome news for insurance brokers, and for insurance underwriters, who will no longer have to pay WHT on commission earned by their brokers, where the brokers retain the commission and pay premiums net of commission to the underwriter.  This also seems to apply to bookmaker and lottery company agents, who also retain their commission when paying amounts they have collected to their principals.  This is very good news for that part of the industry which uses agents and should encourage the continued existence of the agency method of serving the market.
• The supply of most liquid fuels (LPG, CNG, PMS, AGO, LPFO, DPK and Jet A1), is exempt from WHT.  This will be very welcome to petrol retailers, etc, who operate on very thin margins and for whom any WHT is a severe restraint on cash flow.
• It appears that reduced WHT rates provided by Double Taxation Agreements can now be applied, without prior approval from FIRS.  We recommend that the foreign recipient of the payment obtain proof of being resident in the DTA partner country concerned.
• Fees paid to telecommunications tower and colocation service providers are subject to WHT at 2%.  This should be useful for that industry and mitigates the lock-up of funds due to the WHT rate exceeding the likely income tax liability, given the normal margins in the industry.
• Businesses which build roads, bridges, power plants and buildings are liable to WHT at 2%.  Any other form of construction and related activities by a resident is subject to WHT at 5%.
• A person who failed to deduct withholding tax will have to pay interest and a penalty but will not be required to pay the WHT itself (as this was a form of double taxation, given that the supplier is required to include the amount in its income and will thus pay tax on it.  However, if that supplier or other recipient is not resident in Nigeria, it seems that the wording of the Regulations mean that any tax not deducted by the Nigerian customer or payer will not be collected.
• Interest and fees paid to a Nigerian bank are exempt from WHT, if these are paid by the bank debiting the person’s account with that bank. This is in line with current practice, but it is good to see some legislative support for the practice.  If a person must pay interest of fees to a bank which they do not have an account with, they will need to deduct WHT.  We expect that this situation will not often arise.  Also, if a person must pay interest (or associated fees) to a person which is not a bank, then the person will have to deduct WHT.  Customers in this situation should ensure that the contract with the lender permits them to deduct WHT.
• Professional fees are subject to withholding tax.  This has long been the case, but professional fees have now been defined, at length.  This should mean the end of arguments about whether security guards, for example, are professional, which is welcome.  The WHT rate has also been aligned for both corporate and non-corporate recipients, at 5%, or 10% for non-residents. However, any supply of services not otherwise listed is now subject to WHT at 2%, or 5% if paid to a non-resident. Brokerage fees have been specifically included, and subject to WHT at 5%, or 10% for non-residents.  These changes were included in the earlier version of the Regulations, but we thought it useful to mention them now.

What’s not so good?

• WHT is not to be added on to the contractual price.  This is in line with current law, which prohibits a tax deduction for any WHT not included in the contractual price. Nigerian businesses with foreign suppliers who are not willing to suffer WHT given their inability to claim a tax credit for it should explain the necessary format and content of the contract and invoice to their suppliers.
• The person deducting WHT must give a receipt in the stipulated form, as mentioned above.  The information to be shown includes a TIN, NIN (National Identification Number) or RC (Registered Company) number.  A Nigerian recipient should possess one of these numbers.  However, it is unlikely that a foreign recipient will have any of them, especially if what they earn in Nigeria is passive income or a one-off fee.  This may make it difficult for Nigerian businesses to issue the invoice, and/or lead to unnecessary and unproductive bureaucracy.  For foreign recipients, it would be useful if the foreign identification number or company registration number could be used instead. A withholding tax return, in stipulated format, must also be submitted every month to the tax authorities.  This return requires the TIN, NIN, or RC number of the recipient of the payment, or “an equivalent.”  So, it seems that a foreign company registration number could be used on this form.
• For sale of goods, provision of services or any other non-passive income, the stipulated rates of WHT are to be doubled, where the recipient of the money does not have a TIN. This reinforces the role of WHT in encouraging tax compliance.  This will not affect passive income and should not affect any foreign person selling goods as there is no withholding tax on sale of goods by a non-resident.  However, a foreign person providing services will be affected by this, unless they have a Nigerian TIN, or are resident in a country which has a DTA with Nigeria.  This will create unproductive bureaucracy, in that a person who provides a one-off service or any other type of service short of creating a PE will need to register with FIRS and obtain a TIN, without any increase in Nigeria’s tax revenues (given that the WHT deducted from a non-resident is a final tax unless that person has a taxable presence in Nigeria).
• Director’s fees earned by non-residents will be subject to withholding tax at 20%.  Again, this is not likely to apply to directors who are resident in DTA partner countries.   A rate of 20% exceeds the maximum possible rate of tax for an individual (which is 19,2% due to the way the consolidated relief allowance works), so this looks unreasonably high.  Finally, and definitively, the rate of WHT on director’s fees is 10% as provided by s 72 Personal Income Tax Act (PITA).  So, any change in the rate will need to be enacted as an amendment to PITA. For Nigerian resident directors, the withholding tax imposed by the Regulations is 15%. This is contrary to the Personal Income Tax Act (PITA), and we submit that the PITA rate is what is valid. Of course, this is just a timing issue, in that this withholding tax for a resident director is not a final tax, and the correct tax will be paid on self-assessment.
• A person who manufactures goods or produces materials is exempt from WHT on the sale of those goods. The production of energy, including electricity, gas, and petroleum products, is deemed to be manufacturing of goods.  This replaces the former exemption for the sale of goods in the normal course of business.  Much as that was a phrase that caused a lot of argument and uncertainty, it had received some useful clarification in recent case law – e.g., the Tetra Pak case.  The new provision means that a person which sells goods which it did not manufacture, or produce will now suffer WHT at 2% unless it qualifies for some exemption. Likewise, a person providing services will be subject to WHT at 2%, unless it qualifies for an exemption or for a specified higher rate of WHT.  WHT at 2% is certainly better than WHT at 5%, but this will still be detrimental to many businesses.  As the Company Income Tax (CIT) rate is 30%, and if we assume taxable profit is the same as commercial profit, a company needs to make a net margin of 6.67% to fully utilise its WHT credits against its CIT liability.
• A long-running problem with the Nigerian WHT system has been the way it deals with WHT credits that exceed the final CIT liability.   This requires the person to claim a refund. The tax authorities have not generally encouraged this. When a refund is claimed, the tax authority will subject the taxpayer to an audit. In our experience, this is often delayed, and then results in the tax authority asserting an additional liability. FIRS does pay refunds, eventually, if a taxpayer is sufficiently determined.  But it does not pay interest, even if the refund is delayed for some years.  This can have a very damaging effect on a business, as it has been deprived of money it needs to operate its business.  The effect is that either a company must borrow money (which increases its costs), or increase its prices, or go out of business – or some combination of these.  There is a good argument that s 81 Companies Income Tax Act (CITA) requires FIRS to refund excess withholding tax within 90 days of the assessment (which is the date the self-assessment return is filed), with the option (presumably an option for the taxpayer) to set the refund off against future taxes.   There is a similar provision in PITA (s 73).  These are sections which deal with very specific circumstances, and thus should over-ride the generic legislation on refunds contained in the Federal Inland Revenue Service (Establishment) Act.  Notwithstanding these legislative provisions, the tax authorities have continued to insist on auditing before refunding excess WHT, and they ignore the time limits for paying the refunds.  We feel that an opportunity to correct this has been missed in the drafting of these new Regulations.
• The Regulations deal explicitly with the sale of goods, and of services.  We are not sure how the sale of securities or money (such as foreign currency) will be dealt with.  Any fee paid for a service of buying of selling a security or currency will be subject to WHT. It would have been useful if the Regulations confirmed that no WHT should be deducted from the purchase price of a security or currency, etc., on the grounds that these are not goods, for example.
• Our understanding of the Regulations is that an electricity distribution company will be subject to 2% WHT on the sale of electricity to customers who are not individuals. Sales of energy in certain liquid or gaseous forms (that is, Liquified Petroleum Gas, Compressed Natural Gas, Premium Motor Spirit, Advanced Gas Oil, Low Pour Fuel Oil, Dual Purpose Kerosene and Jet A1) is exempt from WHT, which should be very welcome by retailers and distributors of these products.  But electricity distributors will still suffer WHT which will affect their cash flow.
• The reimbursement of out-of-pocket expenses is exempt from WHT.  The regulations contain some clarification of what these are, and it seems that the ambit of the exemption is narrower than under the previous regulations.  The definition is an expense “that is normally expected to be incurred directly by the supplier and is distinguishable from the contract fees.”
• Winnings from participating in a reality show will be subject to WHT, from 1 October 2024. Now 1 January 2025. This is not a final tax but will be set off against the final income tax liability.  There is an exemption if the reality show has content that is designed to promote entrepreneurship, academics, technological or scientific innovation.  We predict that promotors and participants of reality shows will try to argue that they fit within the definition, but our understanding is that such winnings are still subject to Personal Income Tax.
• Winnings from lotteries, gaming etc will be subject to a 5% WHT from 1 October 2024. Winnings are defined as the net pay-out, so we submit that this means that the stake that is returned to winning customers is not subject to WHT. The WHT is to be paid at the end of each “session” (which has not been defined and thus may lead to some uncertainty), but a session cannot last longer than a calendar month.  It is unclear how this will operate in practice, given the different types of gambling, and the different lengths of time customers wait before withdrawing from electronic wallets, or converting chips into cash.  We expect that this will need to be discussed by the industry and the state tax authorities, to devise a practical method that is acceptable to both sides.
• The withholding tax on betting winnings is not a final withholding tax.  From a tax policy point of view, we are not sure that this is wise.  Some customers win bets from time to time, but very few win consistently.  Most customers lose money overall.  The turnover figure in betting companies’ accounts is, broadly, the money lost by their customers. So, betting is more of a hobby or entertainment than a trade.  There is a risk that customers will claim their losses from betting, seek to offset these against their other income, and claim refunds of tax from the tax authorities, which will lead to extra administrative effort for the tax authorities, and a diminution in their revenue.  The normal approach by countries which decide to impose a WHT on betting winnings is to make it a final tax.  This may need a change in legislation.  We recommend that persons who place bets keep an accurate record of all the bets they place, and the winnings they earn.
• We could not see any exemption for airlines, or indeed any other transport businesses. The regulations seem to require them to suffer 5% WHT when dealing with customers which are not individuals.  Some foreign airlines should have some protection against this, from any relevant DTAs. This has been changed. Airline tickets, telephone charges and internet data are all exempt from WHT under the new Regulations. This should be particularly good news for airlines.

As we said at the beginning, there are a lot of changes to Nigeria’s withholding taxes.  Some of these changes are very welcome.  Others are not so useful or are unhelpful to business. Overall, we feel that the changes are not as wide-reaching as we had hoped for.  It is possible that there will be further changes, especially as we think some of these changes will not work in the way that they were probably intended. Our author of this article, Russell Eastaugh, is a recognised Fellow of the Chartered Institute of Nigeria and makes him a formidable force in the know-how of Nigeria’s tax regulations.