The Federal Inland Revenue Service (FIRS) has officially announced that the newly gazetted withholding tax regime will take effect from January 1, 2025, in a change that is poised to bring significant alterations to the current withholding tax system, which has been in place for decades.
In a notice signed by the Executive Chairman of FIRS, Zacch Adedeji, the service clarified that the existing withholding tax regime, outlined in the Company Income Tax (CIT) regulation, will remain in force until December 31, 2024. The FIRS emphasized the importance of compliance with tax regulations and urged taxpayers, tax practitioners, and the general public to prepare for the upcoming changes.
The notice states, “The Federal Inland Revenue Service (“the Service”) hereby notifies taxpayers, tax practitioners, and the general public as follows:
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“The Deduction of Tax at Source Withholding (WHT) Regulations, 2024 published in the Federal Government Gazette takes effect from January 1, 2025.
“The current WHT regime as enshrined in the Companies Income Tax (Rates, ETC, of Taxes Deducted at Source (Withholding Tax) Regulations (S.I.10 of 1997) and relevant WHT provisions remains in force up to and until December 31, 2024.”
The Evolution of Withholding Tax in Nigeria
The introduction of the new withholding tax regime marks a significant shift from a system that has largely remained unchanged since its establishment in 1978. The old regulations have faced increasing scrutiny for being outdated and ambiguous, particularly as the scope of taxable transactions has expanded over the years.
The previous system, known for its lack of clarity, led to complexities that created barriers for businesses, especially those operating on thin margins. Issues such as inequities in tax burden and the strain on working capital for low-margin businesses prompted the need for reform.
The Chairman of the Presidential Committee on Fiscal Policy and Tax Reforms, Taiwo Oyedele, had previously indicated in June that the government approved a new withholding tax regime, awaiting an official gazette, as a means to address these long-standing concerns.
Key Changes and Reforms
The new withholding tax regime, known as The Deduction of Tax at Source (Withholding) Regulations, 2024, seeks to overhaul the previous regulations by implementing the following key reforms.
Reduced Rates for Low-Margin Businesses
Recognizing the unique challenges faced by smaller businesses, the new regulations will feature reduced withholding tax rates for low-margin companies. This change aims to ease the tax burden on these entities, allowing them to maintain better cash flow.
Exemptions for Small Businesses
In a bid to foster growth and encourage entrepreneurship, the revised regime will exempt small businesses from withholding tax. This exemption is expected to stimulate economic activity by allowing smaller enterprises to reinvest more of their income back into their operations.
Measures Against Tax Evasion
The new regulations will introduce enhanced measures to combat tax evasion and avoidance, ensuring a more equitable tax system. These measures are crucial for maintaining public trust in the tax administration and ensuring that all taxpayers contribute fairly.
Deduction Timing and Key Terms
One of the significant criticisms of the previous system was its ambiguity regarding when tax deductions should occur. The updated regulations will provide clearer guidelines on deduction timing and important terms, helping taxpayers understand their obligations better.
Implications for Taxpayers and Businesses
The FIRS has reiterated that withholding tax (WHT) serves as an advance collection method for income tax, with rates ranging from 5% to 10%, depending on the nature of the transaction. Taxpayers will be required to submit returns by the 21st of the month following the deduction, with penalties for late filing set at N25,000 for the first month and N5,000 for each additional month of non-compliance.
Taxpayers are urged to familiarize themselves with the new regulations, as non-compliance can result in financial penalties. The FIRS’s proactive communication signals an effort to prepare businesses for a smooth transition to the new regime.
The new withholding tax regime is part of a broader strategy by the Nigerian government to modernize its tax system, ensuring it aligns with contemporary economic realities and promotes fairness.
The Presidential Tax Reform Committee was set up in 2023 with the aim of rectifying the inadequacies of the tax system. The reforms are expected to ease businesses of the burden of multiple taxation and foster a more conducive environment for businesses.