Nigerian govt streamlines withholding tax regime, aims to ease business burden

In a move aimed at stimulating business activity and reducing compliance hurdles, Nigeria has approved a simplified withholding tax regime.

This announcement came from Taiwo Oyedele, Chairman of the Presidential Committee on Fiscal Policy and Tax Reforms, via his official X handle, on Tuesday.

Background:

Withholding tax, introduced in 1977, acts as an advance payment on income tax for specific transactions. Its purpose was twofold: generating consistent tax revenue for the government and deterring tax evasion.

Challenges and Reforms:

However, Oyedele acknowledges that the regime’s expansion over time led to “ambiguities and complications.” This resulted in an “excessive burden” on businesses, particularly small and medium-sized enterprises (SMEs).

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Difficulties included:

• Unclear guidelines regarding who must comply, transactions covered, applicable rates, and remittance timing.
• Treating deductions as separate taxes, increasing the tax burden and business costs.
• Challenges in obtaining refunds for excess withholding tax.
• Lack of exemption thresholds, making compliance costly for both businesses and tax authorities.
• Inadequate response to emerging business models and contemporary tax issues.
• An overall structure promoting tax inequity.

Key Changes:

To address these concerns, the newly approved regime introduces several key changes:

• Exemption for Small Businesses: SMEs will be exempt from withholding tax compliance, potentially easing their financial burden.
• Reduced Rates for Low-Margin Businesses: Businesses with lower profit margins will benefit from reduced withholding tax rates.
• Exemption for Manufacturers and Producers: Farmers and other manufacturers will be exempt from withholding tax.
• Focus on Evasion and Avoidance: Measures to curb tax evasion and minimize tax avoidance are included in the reforms.
• Improved Credit Access: The reforms aim to facilitate easier credit access for businesses through the use of deducted withholding tax.
• Alignment with Global Practices: The regime will be updated to reflect modern business practices and international tax standards.
• Clarity and Transparency: Clear definitions of key terms and standardized timing for tax deductions are intended to improve transparency.

Publication and Implementation:

The official gazette is expected to publish the approved regulations within the coming days, outlining the specific details of the reformed withholding tax regime.

Impact and Analysis:

This reform represents a significant shift in Nigeria’s tax policy, potentially leading to a more business-friendly environment. Reduced compliance burdens and exemptions for specific sectors could stimulate entrepreneurial activity and economic growth.

However, the success of these reforms will hinge on clear communication and efficient implementation by the relevant authorities. Businesses and tax professionals will be watching closely to understand the full scope of these changes and their impact on the overall tax landscape in Nigeria.

 

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