The Federal Inland Revenue Service (FIRS) has officially notified taxpayers that the newly gazetted withholding tax regime will come into effect on January 1, 2025. This announcement, signed by the Executive Chairman of FIRS, Zacch Adedeji, emphasizes that the current withholding tax system under the Companies Income Tax (CIT) regulation will remain in force until December 31, 2024.
The FIRS urges taxpayers and tax professionals to ensure compliance with the tax regulations during this transition period, as the new withholding tax framework is set to introduce significant changes aimed at modernizing Nigeria’s tax system.
FIRS Notice on New Regulations
In the notice, FIRS clarified the timeline and details of the new regime, stating:
1. The new Deduction of Tax at Source Withholding (WHT) Regulations, 2024 will take effect from January 1, 2025, following its publication in the Federal Government Gazette.
2. The existing withholding tax regime under the Companies Income Tax (Rates, ETC, of Taxes Deducted at Source (Withholding Tax) Regulations (S.I.10 of 1997) will remain valid up until December 31, 2024.
Background
The Federal Government recently gazetted the Deduction of Tax at Source (Withholding) Regulations, 2024, signaling the introduction of a more streamlined and updated withholding tax regime. This new regulation is part of the government’s broader tax reform efforts aimed at addressing the challenges associated with the outdated withholding tax system, which was initially introduced in 1978.
Over the years, the earlier withholding tax system faced several issues, including ambiguity due to the expanded scope of transactions, increasing the number of tax categories, creating inequities, and placing a heavy financial burden on low-margin businesses.
In June, the Chairman of the Presidential Committee on Fiscal Policy and Tax Reforms announced that the Federal Government had approved the new withholding tax regime, with the aim of addressing these long-standing issues and promoting a more equitable tax system.
Key Changes in the New Withholding Tax Regime
The updated regime introduces several key changes, including:
Reduced withholding tax rates for low-margin businesses, providing relief to enterprises with thinner profit margins.
Exemptions for small businesses from withholding tax obligations to ease their financial burden and promote growth.
Enhanced measures to tackle tax evasion and avoidance, strengthening the overall efficiency of the tax system.
Clearer guidelines on withholding tax deduction timing, improving transparency and reducing confusion for taxpayers.
Updated definitions of key terms and processes to streamline compliance.
What Taxpayers Should Know
The FIRS has reiterated that withholding tax (WHT) is an advance method of collecting income tax, with deductions typically ranging between 5% and 10%, depending on the nature of the transaction. Taxpayers are required to submit returns by the 21st of the following month. Failure to comply on time results in penalties: N25,000 for the first month of non-compliance and N5,000 for each subsequent month.
The FIRS is encouraging all businesses, especially those affected by the new regime, to familiarize themselves with the upcoming changes and prepare for the transition.
With these reforms, the Federal Government aims to create a more transparent, efficient, and equitable tax system that supports economic growth while ensuring that businesses across various sectors contribute their fair share of taxes.
