In a not-so-surprising twist, the Federal Government of Nigeria has unveiled its latest iteration of taxation rules, hidden within a gazette released quietly on the 2nd of October, 2024. This regulatory masterpiece, The Deduction of Tax at Source (Withholding) Regulations, 2024, outlines a new approach to tax payments for businesses, including Nigerian startups.
This time around, the government promises simplicity and ease, and why not? Titled with the familiar bureaucratic charm, the gazette outlines the application, remittance, and penalties associated with the new withholding tax regulations. The goals are lofty: reduce tax evasion, streamline compliance, and promote ease of doing business. But like any government regulation, what they say and what you experience are often two very different things.
The New Tax Reality
According to the government, the objectives of these regulations are manifold: to curb tax evasion, reduce arbitrage between corporate and non-corporate businesses, and adopt global best practices. They’ve even thrown in some goodies for sectors with low margins, like reduced tax rates, and exemptions for small businesses. Entrepreneurs who can’t find joy in these provisions should at least find solace in the idea that the government is (allegedly) making life easier for them.
The scope of the regulation applies to several types of income, including capital gains, personal income, and corporate income, affecting businesses across industries. Whether you’re running a scrappy tech startup or a more established enterprise, the rules apply to you. And as always, if you’re fortunate enough to be operating across borders, expect double taxation treaties to come into play — because one tax isn’t enough if you have the privilege of dealing with multiple jurisdictions.
Deducting at Source: Who Does What and When?
At the heart of these new regulations is the deduction of tax at source, meaning that taxes will be withheld from payments before they ever reach the bank accounts of Nigerian startups. The idea is simple: the entity making a payment, whether it’s a corporate body, a government agency, or even a public authority, is required to deduct tax before handing over the money.
For small businesses — those blessed with less than ₦2 million ($1,197) worth of transactions per month — this sounds like a reprieve. You’re off the hook, provided you can prove your Tax Identification Number (TIN) is valid and up to date. Otherwise, be ready for deductions at twice the normal rate, because nothing says “we care” like doubling your tax if you forget the paperwork.
The Dance of Deductions and Remittance
The process of remitting tax is where the real beauty of these regulations comes to life. Payments must be deducted and sent off to the tax authorities — either the Federal Inland Revenue Service (FIRS) or the State Internal Revenue Service, depending on where your business operates. FIRS gets the first crack at your hard-earned money, with remittances due no later than the 21st of the month following the deduction. For state tax authorities, the timelines are even tighter, with some remittances due as early as the 10th of the following month.
To top it off, businesses are required to submit detailed returns alongside the remittances, including the name, address, TIN, and gross payment information of the person or entity from whom the tax was deducted. Don’t have a TIN? No worries — the government will accept your National Identification Number (NIN), provided you can find it.
Receipts for the deducted tax must also be issued to the party paying the tax. You’ll have to document every payment and deduction meticulously. Yes, the government wants receipts too, in case you thought all those deductions were happening on the honor system.
Offences, Penalties, and Exemptions: The Usual Suspects
And what happens if you don’t comply with these shiny new regulations? Unsurprisingly, there are penalties. The regulations are quite clear: fail to deduct at source, and you’ll be slapped with fines according to either the Federal Inland Revenue Service (Establishment) Act or the Personal Income Tax Act. If you manage to deduct but fail to remit, expect administrative penalties and interest on top of the initial deduction.
Of course, not everything is doom and gloom. Certain transactions are exempt from the requirement to deduct at source, including payments related to Real Estate Investment Trusts, securities lending, and compensation payments. The government, in its magnanimity, has also exempted telephone charges, airline tickets, and internet data from withholding tax deductions — because, really, who would want to tax your mobile data?
When Does This All Take Effect?
For those who thought they had more time to prepare, surprise: implementation starts on the 1st of January, 2025. That means businesses have just under three months to get acquainted with these new regulations and ensure compliance. Early birds who like to get ahead of the game can even opt for early application of the regulations starting in July 2024, provided they have approval from the Minister of Finance.
This is, of course, all part of Nigeria’s ongoing quest to create a more business-friendly environment. While other countries grapple with complexities like corporate tax loopholes and offshoring, Nigeria takes a more direct approach: we’ll simply deduct it at source, thank you very much.
The Bigger Picture: Ease of Business or Burden of Bureaucracy?
So, what does this mean for the average Nigerian startup? In theory, it makes things easier. With taxes deducted at source, Nigerian startups won’t have to worry about setting aside funds for tax payments at the end of the year. In reality, it adds yet another layer of bureaucracy. Small businesses — especially those just getting off the ground — will now have to navigate an even more complex maze of tax filings, remittances, and paperwork.
For the government, this is a win-win. Not only does it guarantee tax revenue earlier in the business cycle, but it also simplifies (on their end) the enforcement of tax regulations. For the entrepreneur? Let’s just say that “ease of business” has never felt so bureaucratic.
But hey, what’s another form to fill out when you’re trying to build the next big thing in tech in Nigeria?
