Nigeria’s federal government passed a new withholding tax regime on 2 July 2024, following the country’s ongoing efforts to reform its fiscal and taxation system.
The new withholding tax regime introduces exemptions for small businesses, reduced rates for low-margin businesses, and exemptions for manufacturers and producers like farmers. It includes measures to curb evasion, minimise tax avoidance, ease access to credit access, and utilisation of tax deducted at the source
Additionally, the regulations introduce a new withholding rate schedule for various payment types. This schedule includes distinct rates for resident and non-resident corporate recipients, as well as for resident and non-resident non-corporate recipients.
The regulations will take effect on 1 July, 2024.
Withholding rates for transactions involving corporate recipients
| Transactions | Residents | Non-residents |
| Dividends | 10% | 10% |
| Interest | 10% | 10% |
| Royalty | 10% | 10% |
| Commission, consultancy, technical, management, and professional fees | 5% | 10% |
| Supply of goods or materials (excluding manufacturer or producer) | 2% | N/A |
| Co-location and telecommunication tower services | 2% | 5% |
| Brokerage fees | 5% | 10% |
| Construction of roads, power plants, bridges, and buildings | 2% | 5% |
| Other construction activities | 5% | 10% |
| Supply or provision of services (other than those specifically listed) | 2% | 5% |
Background
Withholding tax was introduced into the Nigeria tax system in 1977 to serve as an advance payment of income tax on specified transactions. It was designed to provide the government with regular revenue flow and to serve as a means of curbing tax evasion.
As the regime expanded over time to cover more transactions, various ambiguities and complications crept in. This resulted in many businesses, especially SMEs, being exposed to excessive burden of compliance and a strain on the working capital of low-margin businesses.
Other unintended consequences include ambiguities regarding persons required to comply, eligible transactions, applicable rates, and timing of the obligation for remittance, among others; treatment of the deduction as a separate tax, thereby adding to the list of multiple taxes and cost of doing business; challenges regarding obtaining refunds for excess withholding tax; lack of exemption threshold making the cost of compliance by taxpayers and cost of enforcement by the tax authority uneconomical; some emerging and contemporary issues are not properly addressed; and the overall structure of the withholding tax regime promoted tax inequity.
As part of the ongoing fiscal policy and tax reforms, the new withholding tax regime was approved to curb these issues.
