Dr. Titilayo Fowokan, a tax analyst, has expressed optimism regarding Nigeria’s newly gazetted withholding tax regulation known as ‘The Deduction of Tax at Source (Withholding) Regulations, 2024′. Set to take effect on January 1, 2025, this regulation aligns with international best practices in taxation, which Fowokan believes will significantly improve the efficiency and effectiveness of tax collection within the country. During her recent appearance on Radio Now in Lagos, Fowokan articulated the potential benefits of this regulation, which she believes would contribute positively to business operations and foster greater economic transparency.
One noteworthy aspect of the new regulation is its provision for tax rate reductions and full exemptions for businesses, particularly small and medium-sized enterprises (SMEs) with annual turnovers of up to N25 million. This adjustment aims to provide much-needed support to the burgeoning SME sector, enhancing their prospects and potentially facilitating job creation. Fowokan also pointed out that the regulation clarifies the application of withholding tax for unincorporated entities, particularly those within the informal sector, thus aiming to eliminate any existing confusion regarding tax obligations.
Fowokan highlighted that the regulation differentiates between resident and non-resident businesses operating in Nigeria, which will simplify compliance with tax laws for all entities involved. By making clear distinctions between Nigerian and foreign companies, the regulation improves the ease of conducting business in Nigeria. Additionally, it outlines specific procedures for transactions in Nigeria while emphasizing that the application of withholding tax differs between related and unrelated businesses. This nuanced understanding is essential for fostering a clearer tax environment in the country.
Public education is crucial for the successful implementation of the new withholding tax regime, according to Fowokan. She underscored the importance of informing taxpayers about their rights and responsibilities to promote higher compliance levels. It’s essential to clarify that withholding tax acts as an advance payment on income tax rather than being a standalone tax. Dr. Fowokan warned that even non-registered taxpayers still bear tax obligations and could face penalties for non-compliance, emphasizing the need for awareness and understanding among the populace regarding their tax responsibilities.
The newly established regime also works to ensure that withholding tax does not exceed a company’s profit margin, particularly benefiting low-margin firms that may pay as little as two percent on their transactions. This development is seen as a vital step toward recognizing and protecting low-income businesses, mirroring practices observed in various countries worldwide. By considering the financial capacities of smaller businesses, the regulation aims to create a more equitable tax environment.
While the new regulation may impose additional responsibilities on taxpayers, Fowokan argues that it ultimately offers valuable benefits. Taxpayers will now be required to differentiate between related-party and third-party transactions, track vendors from countries with double taxation agreements, and maintain thorough documentation of deductions. Withholding agents will also be expected to complete forms to verify their deductions and remittances for vendors’ tax credit claims. This increased accountability not only promotes compliance but also strengthens the overall integrity of Nigeria’s tax system.
