On 1st July 2024, the Federal Ministry of Finance issued the Deduction of Tax at Source (Withholding) Regulations 2024. This Regulation was made based on the authorities exercisable by the Minister of Finance under Section 81 (9) of the Companies Income Tax Act and Section 73 (6) of the Personal Income Tax Act.
It provides clarity and a framework within which WHT that will be deducted in Nigeria can be identified.
Withholding Tax Understanding
WHT is a withholding tax mechanism whereby some portion of a payment, usually from contracts, services, and dividends, is withheld at the source and forwarded to the tax authorities on behalf of the recipient. In principle, it is a system designed for tax compliance by catching the tax liabilities at the point of payment and significantly reducing the risk of evasion, securing a steady stream of revenue accruing to the government.
Main Highlights of the Regulation
It is important to note that the WHT Regulation also introduces several key provisions that are expected to impact taxpayers and the general tax system in Nigeria.
1. Consistency in Deductions: The Regulation ushers in standard rates and procedures for WHT deductions, irrespective of the type of income and sectors, thereby striking out differences and ambiguities prevailing earlier.
2. More Rigorous Compliance Requirements: Taxpayers today must abide by improved documentation and reporting standards that ensure more transparency and detailed and sustained precision in WHT deductions and remittances.
3. Penalties for Late/Incorrect Remittance: The Regulation provides for express penalties in case of late or incorrect remittance of WHT, which places greater emphasis on timely and correct deductions.
4. Increased Collaboration with the Tax Authorities: It furthers the approach to cooperation between taxpayers and the tax authorities to dispute mechanisms and to complex WHT issues.
Legal and Economic Effects
There are far-reaching legal and economic consequences that will be occasioned by the introduction of the WHT Regulation:
1. To Taxpayers
The Regulation empowers the taxpayers with clear clarification of what to expect and helps in taking out the element of unintentional non-compliance. On the other hand, however, the increasing strictness of compliance criteria might as well give a heavier administrative burden on the companies.
2. To the Tax System
The Regulation is likely to improve the efficiency of tax collection, reducing leakages in revenues and hence increasing overall tax compliance.
3. For the Nigerian Economy
It could contribute to the fiscal stability of the economy with more consistent and predictable flows of tax revenues and certainly attract greater levels of foreign investment, since it would be a signal of a sound and transparent tax regime.
The Deduction of Tax at Source {Withholding} Regulations 2024, therefore, mark a very huge leap in the administration of withholding tax in Nigeria. There is hope that this regulation is going to further enhance the current strength and credibility of the country’s tax system by providing the proper framework for withholding tax and enhancing compliance: it would prove to be of support, respectively, in the course of economic development.