Penalties for Failure to Deduct Withholding Tax in Nigeria: The Old Regime Vs The New Regulation
There’s something every Nigerian business owner, accountants, tax practitioners etc. needs to know about the new Withholding Tax (WHT) Regulations that kicked in on January 1, 2025: If you forget or inadvertently failed to deduct withholding tax at source from payments to your vendors, what’s the position under the old regime, and what’s the positions now with the arrival of the DEDUCTION OF TAX AT SOURCE (WITHHOLDING) REGULATIONS, 2024?
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Yes, you read that right. The days of heavy-handed
penalties for failing to deduct WHT are over. Thanks to the new “Deduction of
Tax at Source (Withholding) Regulations” made by Wale Edun, the Minister of
Finance and Coordinating Minister of the Economy, businesses that fail to
deduct WHT from payments will no longer suffer the same severe consequences
they did under the old WHT tax system.
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But before we get right into it, let’s examine what
WHT is, and how it works.
What is
Withholding Tax?
Withholding Tax (WHT) is a system used by governments to collect income tax at the source of payment rather than waiting for individuals or businesses to declare and pay their taxes later. This method ensures that taxes are deducted from the sources of income before the incomes reach their recipients. This is a system commonly used in Nigeria and many other parts of the world to improve tax compliance and reduce tax evasion. WHT is not a separate form of tax. It’s just an advance payment for a tax payer’s income tax.
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How Does
Withholding Tax Work?
When a company or government agency makes a payment to
a supplier, contractor, consultant, or professional service provider, it (the
company or government agency) is required to deduct a certain percentage of the
payment as WHT and remit it to the appropriate tax authority which could be (in
Nigeria), the Federal Inland Revenue Service (FIRS) or any of the states Internal
Revenue Services (IRSs).
Specifically, the system works like this: The payer
(the company or individual making the payment) withholds the tax from the total
amount due to the recipient based on the applicable rate. And the remittance is
done as a matter of necessity within a specified time frame to avoid penalties. The
deducted WHT amount must be sent to the Federal Inland Revenue Service (FIRS)
or the State Internal Revenue Service (State IRS), depending on the type of
transaction, the nature of the vendor (whether an incorporated business or
not), and/or the vendor’s state of residence. The tax authority i.e., FIRS or
IRS usually provides a credit note or receipt to the taxpayer as proof of the
deduction.
For example, if a company hires a consultant for ₦1,000,000. If
the applicable WHT rate is 10%, the company pays the consultant ₦900,000 and
remits ₦100,000 to the appropriate
tax authority as stated above.
The Old System: Harsh Penalties for Forgetfulness/Negligence
Under the previous WHT regime, failing to deduct WHT
at source was considered a serious offense. Businesses (whether incorporated or
not) that failed to comply faced stiff penalties, which could include paying
the entire WHT liability (i.e., the amount that ought to have been deducted at
the point of making the payments to the vendors) out of pocket plus penalties (usually
calculated as a percentage of the WHT amount), and interest on penalties
calculated daily at the prevailing interest rate. Besides, if you’re not
careful, additional fines might apply depending on the whims and caprices of the
overload called the Federal Inland Revenue Service (FIRS).
Under this dispensation, many organizations have had
to cough out more than could be justified because the WHT was (and still) is
not a separate tax but an advance payment against other taxes such as the company’s
income tax, personal income tax etc.
The old regulations treated withholding tax deductions
almost as a sacred duty. If you made a payment to a vendor or contractor but
forgot or neglected to deduct the appropriate WHT, you weren’t just required to
pay just penalties for violation. You would also be made to pay the WHT amount you
did not deduct, plus penalties and interest on penalties not minding the fact
that the vendor in filing its income tax returns will pay the full income tax.
The system was rigid, unforgiving, and did little to
encourage voluntary compliance. In fact, all the FIRS used to do was take the
financial statements of the taxpayer (i.e., company), simply compute 5% of all
other expenses in the financial report apart from directors’ emoluments, add
10% of the directors’ fees and allowances to arrive at their WHT amount for the
year—without considering that some of the expenses in those financial
statements were accrued expenses (i.e., payments yet to be made). The taxpayer
was then asked to pay the final amount to the tax authority, along with
penalties and interest.
The New System: A
Softer, More Business-Friendly Approach
The new Withholding Tax Regulations of 2024,
which came into effect on January 1, 2025, bring a major shift in how tax
deduction failures are handled. With this new WHT, If you, your business or
your client’s business (if you’re a tax consultant) fails or neglects to deduct
WHT but has already paid the full amount to the recipient, your business will
only be liable for an administrative penalty instead of being made to pay the
entire WHT amount with penalties and interest.
The new regulation is designed to make tax compliance
easier rather than scaring businesses into submission. The idea is that
businesses should be encouraged to remit taxes on time without the fear of
unfair financial burdens. Meanwhile, small businesses (as defined under the Companies
Income Tax Act (Read: Understanding
Nigerian Company Sizes and Tax Obligations) and certain manufacturers
are now exempt from some WHT deductions. This means fewer tax compliance
headaches for small enterprises.
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Final Thoughts: What
Does This Mean for You?
For many businesses, especially SMEs, these changes
are a breath of fresh air. No more living in constant fear of severe penalties
for minor errors such as WHT deduction. The shift from harsh penalties to a more
reasonable administrative fee for WHT deduction failures is a welcome relief. However,
this does not mean you can start ignoring WHT deduction obligations entirely.
Compliance is still essential.
You must be circumspect. Deduct WHT as prescribed in
the regulations. But where due to one reason or the other you fail to deduct; ensure
you’re not bamboozle by the FIRS or the state IRS into paying the WHT amount
you did not deduct together with other penalties and interest. Remember, only
administrative penalties are applicable.
BE WISE!
You can share your experience with the tax authorities under the old WHT regulations in the comment section below.
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