New Withholding Tax Regulations: Do All Businesses Need to Deduct?

 

Welcome back to our series on the Deduction of Tax at Source (Withholding) Regulations, 2024. Today, we’re tackling a question that’s been on many business owners’ minds: Are all incorporated businesses required to deduct withholding tax under the new regulations?

Get reliable & affordable domain name and web hosting in Nigeria! Click here for fast, secure cloud hosting 👉 TrueHost

If you’ve been following this series, you already know the basics of withholding tax (WHT). But for those who need a quick refresher, withholding tax is a method of collecting income tax in advance. It’s deducted at the source of income, meaning the payer deducts the tax before making payment to the recipient. 

This system helps the government ensure that taxes are collected efficiently and reduces the risk of tax evasion. You can as well check my earlier articles in this series: Penalties for Failure to Deduct Withholding Tax in Nigeria: The Old Regime Vs The New Regulation and What Businesses/Suppliers Need to Know About Withholding Tax in Nigeria, to bring yourself up to speed.

Now, let’s go straight to the specifics of the new regulations by examining their objectives, identifying who is required to deduct WHT, exploring exceptions to the rule, and ultimately answering the key question: Must all incorporated businesses deduct WHT?

Why the New WHT Regulations?

The new regulations were introduced with several key objectives in mind:

1. Simplify the Rules: The regulations aim to remove complexities in the deduction of tax at source, making it easier for businesses to comply. Before now, the rules around WHT were complex, more like a labyrinth.

2. Reduce Rates for Low-Margin Sectors: Certain sectors with low profit margins, like manufacturing and construction, now enjoy reduced WHT rates. This is unlike before. At those times, what would have constituted the profits for these companies would have been deducted in the form of WHT.

3. Exempt Small Businesses: Small businesses and manufacturers are exempt from certain WHT obligations, provided they meet specific criteria. Small businesses are like little chicks that must be cared for if they were to survive the harshness of the weather, and eventually grow into big hens. One of the ways to do this is to lower the applicable WHT rates for these classes of businesses.

4. Curb Tax Evasion: This is an ‘ancient’ objective of WHT. By ensuring taxes are deducted at source, the government hopes to reduce tax evasion and improve revenue collection.

5. Promote Ease of Compliance: The new rules are designed to make it easier for businesses to comply with tax obligations. A lower tax rate is an incentive. So also, the ease with which WHT is administered.

6. Adopt Global Best Practices: The old regulations were archaic. The regulations align Nigeria’s WHT system with international standards.

Who Must Deduct Withholding Tax Under the New Regulations?

Now, let’s get to the heart of the matter: Who is required to deduct WHT under the new regulations? According to Regulation 4 of the 2024 WHT Regulations, the following entities are required to deduct tax at source on eligible transactions:

1. Bodies Corporate or Unincorporated: This includes companies, partnerships, and other business entities whether they are incorporated or not. However, there’s an exception for small companies, which we’ll discuss later.

2. Government Ministries, Departments, and Agencies (MDAs): These are government entities. All government entities must deduct WHT on payments made to suppliers or contractors.

3. Statutory Bodies and Public Authorities: These include organizations established by law, such as regulatory agencies and public institutions e.g., Federal Inland Revenue Service (FIRS).

4. Other Institutions and Enterprises: This category covers a wide range of entities, including NGOs, educational institutions, and even tax-exempt organizations.

5. Payment Agents: If you’re acting as a payment agent for any of the above entities, you’re also required to deduct WHT.

Wait—Are All Businesses Required to Deduct WHT?

Here’s where things get interesting. Not all businesses are required to deduct WHT. The new regulations provide an exemption for small companies. According to Regulation 4(2), a small company, as defined under Section 105 of the Companies Income Tax Act, is exempt from the requirement to deduct WHT, provided that:

1. The supplier has a valid Tax Identification Number (TIN): This ensures that the supplier is registered with the tax authorities.

2. The value of the transaction is N2,000,000 or less during the relevant calendar month: This threshold is designed to ease the burden on small businesses.

For an expose on what a small company is, read my article on Understanding Nigerian Company Sizes and Tax Obligations.

So, if your business qualifies as a small company and meets these two conditions, you’re off the hook when it comes to deducting WHT. But remember, this exemption only applies to transactions worth N2,000,000 or less. If the transaction exceeds this amount, you’ll need to deduct WHT as usual.

To understand the logics of this regulation, consider this illustration:

In January 2025, ABC Supplies Ltd., a supplier of office equipment entered into a transaction with XYZ Consulting Ltd. for the supply of office furniture worth N1,800,000. Both companies are registered with the tax authorities and have valid Tax Identification Numbers (TINs).

XYZ Consulting Ltd. is a small company as defined under Section 105 of the Companies Income Tax Act, and both conditions of Regulation 4(2) are met (i.e., valid TIN and transaction value below N2,000,000). XYZ Consulting Ltd. is exempt from the requirement to deduct Withholding Tax (WHT) from the payment on this transaction to ABC Supplies Ltd.

The outcome is: XYZ Consulting Ltd. pays the full amount of N1,800,000 to ABC Supplies Ltd. without any deduction for WHT.

Exception to the Exception: When Small Companies Must Still Deduct WHT

While small companies are generally exempt from deducting WHT, there’s an important exception to this rule. Where one of the conditions mentioned in the section above is not meant, a small company must deduct WHT. If the recipient of the payment does not have a valid Tax Identification Number (TIN), the small company is still required to deduct WHT, regardless of the transaction amount. This provision ensures that all payments are properly documented and taxed, even if the recipient isn’t registered with the tax authorities. This rule guarantees that such an undocumented taxable person or entity will be brought into the tax net.

READ ALSO:  Personal Income Tax Exemptions Every Nigerian Should Know

In the same vein, if the supplier has a valid TIN, but the amount of the transaction is above N2,000,000, the small company must deduct WHT.

To illustrate, consider this scenario:

Scenario:

DEF Retailers Ltd. is a small company that purchases goods from various suppliers. In February 2025, DEF Retailers Ltd. enters into two separate transactions:

1. Transaction with Supplier A:

   - Supplier A does not have a valid Tax Identification Number (TIN).

   - The value of the transaction is N1,500,000.

2. Transaction with Supplier B:

   - Supplier B has a valid TIN.

   - The value of the transaction is N2,500,000.

Outcomes:

Even though DEF Retailers Ltd. is a small company and the transaction value is below N2,000,000, Supplier A’s lack of a valid TIN triggers the exception. Therefore, DEF Retailers Ltd. is required to deduct WHT from the payment to Supplier A at the applicable rate.

Even though Supplier B has a valid TIN, the transaction value exceeds the N2,000,000 threshold. DEF Retailers Ltd. is required to deduct WHT from the payment to Supplier B.

Though, DEF Retailers Ltd. Is a small company, it’s required to deduct WHT in both cases because one of the two conditions for exception from WHT deduction is not met by the suppliers (i.e., Supplier A and Supplier B).

READ ALSO: Understanding Minimum Tax in Nigeria for Companies: Old vs. New Rules

Key Takeaways:

Here are the key takeaways:

1. Not all incorporated businesses are required to deduct WHT: Small companies are exempt, provided the supplier has a valid TIN and the transaction is worth N2,000,000 or less.

2. No Valid TIN: If the supplier does not have a valid TIN, WHT must be deducted regardless of the transaction amount.

3. Transaction Above Threshold: If the transaction value exceeds N2,000,000, WHT must be deducted even if the supplier has a valid TIN.

4. Where the Two Conditions are Met: If the supplier has a valid TIN and the transaction value is N2,000,000 or less, WHT will NOT be deducted regardless of the size of the supplier (i.e., whether it’s a small or big company).

5. Purpose: These rules ensure that all payments are properly documented and taxed, bringing unregistered entities into the tax net.

Conclusion: Navigating the New WHT Regulations

The new Deduction of Tax at Source (Withholding) Regulations, 2024 have brought significant changes to Nigeria’s tax system. While the rules may seem complex at first, understanding who must deduct WHT and when can help your business stay compliant and avoid penalties.

If you’re a small company, you’re in luck—you’re generally exempt from deducting WHT, provided you meet the criteria. But if you’re a larger business or government entity, it’s crucial to ensure that you’re deducting and remitting WHT correctly.

Please let me know your thoughts in the comment section. Shalom!