Nigeria’s Federal Inland Revenue Service (FIRS) recently introduced new withholding tax (WHT) regulations aimed at improving tax compliance and reducing the financial burden on businesses.
The updated system includes changes to tax rates, stricter enforcement mechanisms, and the integration of tax identification numbers (TINs) in transactions.
To understand the implications of these changes, we spoke with the CITN Chairman, Port Harcourt District, Dr. Victoria Okokon, about how the new system affects companies, compliance, and Nigeria’s broader tax landscape.
Can you shed some light on the notable changes in the new withholding tax system recently announced by the FIRS?
Before now, the withholding tax system required businesses to deduct a certain percentage from payments made for goods or services.
The deducted amount served as an advance payment of tax, ensuring that businesses paid taxes on their income before filing their returns.
However, one major issue with the previous system was that taxpayers often found it difficult to obtain credit notes from the tax authorities, making it harder to offset their tax liabilities.
The new regulations address this by allowing businesses to issue withholding tax receipts directly to their suppliers.
These receipts serve as proof of tax payments and can be used to offset tax liabilities when filing returns.
Another significant change is the reduction in withholding tax rates. Previously, the minimum rate was 5%, but the new system lowers it to 2% for certain transactions.
This reduction is expected to ease cash flow pressures on businesses.
With some companies now required to deduct taxes directly from payments like salaries, rent, and professional fees, how do you think this will affect daily business operations?
Salaries are not affected by the new withholding tax regulations, as they fall under the Pay-As-You-Earn (PAYE) system.
However, payments for other taxable transactions, such as professional fees and rent, are now subject to withholding tax deductions. Despite these changes, businesses are unlikely to face any major operational disruptions.
The new system actually reduces the withholding tax burden on many transactions, making it easier for businesses to comply. The main goal is to reduce tax evasion and encourage more structured tax remittances.
The FIRS has mentioned integrating tax identification numbers (TINs) with transactions. How do you see this improving tax compliance?
Integrating TINs with transactions is a major step towards improving tax compliance. With this system in place, it becomes harder for businesses and individuals to evade taxes, as their financial activities will be more traceable.
Over time, this will strengthen Nigeria’s tax administration by ensuring that all taxable transactions are properly documented and assessed.
The new regulations include penalties for non-compliance. How fair do you think this is, considering that some companies might struggle with awareness or technical capacity?
While some businesses might initially struggle with understanding the new rules, the FIRS has been proactive in releasing guidelines and conducting awareness campaigns.
These efforts should help businesses adjust to the new requirements.
Additionally, any expenses incurred in setting up compliance systems, such as investing in tax software or staff training, can be treated as deductible business expenses.
So, while there may be initial costs, businesses can recover them through tax deductions over time.
Considering that companies might need to invest in new software and staff training, do you think the FIRS has provided enough support to help with this transition?
The FIRS has released guidelines to help businesses understand the new regulations. However, whether this support is sufficient will depend on how well businesses engage with the materials provided.
Companies may still need to invest in additional training or software to ensure compliance, but these costs can be managed as part of their overall business expenses.
Do you think there’s a possibility for companies to find loopholes in the new regulation, especially concerning the vast number of amendments?
Taxpayers and businesses will always look for ways to minimise their tax liabilities, but the new regulation aims to close many gaps in the system.
Previously, taxpayers struggled to get credit notes from the FIRS, making it hard to offset taxes. Now, businesses must issue withholding tax receipts, reducing dependency on tax authorities.
A major loophole remains that many everyday purchases, like office supplies, don’t attract withholding tax unless tied to a contract or professional service.
This allows businesses to structure purchases in ways that lower their tax obligations, and tax authorities can’t do much about it.
To tighten compliance, the FIRS now requires businesses to provide suppliers’ TINs when withholding taxes. If unavailable, the supplier’s NIN will be used instead.
Will this new system create extra burdens for small businesses or institutions like universities that may not have proper tax systems in place?
The regulations explicitly exempt small businesses with an annual turnover below $16,292 (₦25 million) from withholding tax requirements. This ensures that micro and small enterprises are not overburdened.
As for universities and similar institutions, state governments may need to introduce additional guidelines to ensure smooth implementation at their level.
The federal guidelines provide a foundation, but state governments will play a role in tailoring the system to fit their specific contexts.
Universities and other educational institutions that already deduct withholding tax on certain transactions will likely need to adjust their processes to align with the new system.
Do you think this withholding tax reform signals a broader shift in Nigeria’s tax administration?
Yes, this reform is part of a larger effort by the FIRS to modernise Nigeria’s tax administration.
Over the past few years, we’ve seen a push for digitalisation, improved compliance mechanisms, and more streamlined tax processes.
The introduction of e-invoicing, the integration of TINs, and the push for better documentation all point to a tax system that is becoming more transparent and efficient.
If properly implemented, these reforms could help the government increase tax revenue without necessarily imposing new taxes.
What is the impact of Paragraph 10(m) of the withholding tax guidelines?
Paragraph 10(m) of the new withholding tax guidelines exempts winnings from games of chance or reality shows that are designed exclusively to promote entrepreneurship, academics, technology, or scientific innovation.
However, betting companies and shows like Big Brother Naija (BBN) do not fall under this exemption, meaning that their winnings will now be subject to withholding tax.
For betting companies, this means that officials will be required to deduct the tax at the source before paying out winnings.
This is a good development because it will encourage more people to register for a Taxpayer Identification Number (TIN) and could also help curb excessive betting.
Similarly, for shows like BBN, since the show does not strictly promote entrepreneurship or innovation, its winnings will also be taxed at the source. This ensures that high earnings from these platforms contribute to government revenue.
For businesses still unsure about how to navigate these changes, what’s your advice?
The first step is to read the official guidelines provided by the FIRS. Businesses should also seek professional tax advice to understand how the changes apply to their specific operations. Investing in tax compliance now will save them from penalties and complications in the future.
Ultimately, the new withholding tax system is designed to make compliance easier and reduce unnecessary tax burdens. Businesses that adapt quickly will benefit the most.
