Breaking News: A Simplified and Business-Friendly Withholding Tax Regime Approved

Background

Withholding tax, introduced into Nigeria’s tax system in 1977, was initially designed to serve as an advance payment of income tax on specified transactions. It aimed to provide the government with a steady revenue stream and curb tax evasion. However, over time, the regime expanded to cover more transactions, resulting in ambiguities and complications that burden businesses, particularly small and medium-sized enterprises (SMEs).

Challenges

The complexities that arose within the withholding tax regime led to several unintended consequences:

1. Ambiguities: Confusion regarding who is required to comply, which transactions are eligible, applicable rates, and the timing of remittance obligations.
2. Multiple Taxation: The treatment of the deduction as a separate tax added to the list of multiple taxes, increasing the cost of doing business.
3. Refund Issues: Businesses faced difficulties in obtaining refunds for excess withholding tax.
4. No Exemption Threshold: The lack of an exemption threshold made the cost of compliance for taxpayers and enforcement by the tax authority uneconomical.
5. Emerging Issues: Contemporary issues were not adequately addressed.
6. Tax Inequity: The overall structure of the withholding tax regime promoted tax inequity.

Key Changes

In response to these challenges, the federal government has approved a new withholding tax regime as part of ongoing fiscal policy and tax reforms. The key changes are designed to address the identified challenges and include:

1. Exemption of Small Businesses: Small businesses are now exempt from withholding tax compliance.
2. Reduced Rates: Businesses with low margins will benefit from reduced withholding tax rates.
3. Exemptions for Manufacturers and Producers: Farmers and other manufacturers and producers are exempt from withholding tax.
4. Anti-Evasion Measures: New measures will curb evasion and minimize tax avoidance.
5. Ease of Obtaining Credit: Simplified processes for obtaining credit and utilizing tax deducted at source.
6. Emerging Issues: The new regime reflects emerging issues and adopts global best practices.
7. Clarity: Improved clarity on the timing of deductions and the definition of key terms.

The approved regulation is expected to be published in the official gazette in the coming days. These changes are anticipated to ease the burden on businesses, enhance compliance, and foster a more equitable and efficient tax system in Nigeria.