FIRS seeks to increase withholding tax on payments to beneficiaries of treaty countries from 7.5% to 10%

The Federal Inland Revenue Service (FIRS) has issued public notices regarding major changes to the tax treaty benefits and procedures to claim such benefits.

Context

Many of the treaties for the avoidance of double taxation between Nigeria and other countries were concluded at the time when the WHT under Nigeria’s domestic law was 15% while the treaties provide for a reduction of 2.5% resulting in a maximum rate of 12.5%.

However, the domestic WHT rate was reduced to 10% and consequently the Federal Government via its Budget Statement in 1999 reduced the treaty WHT rate to 7.5%.

While the FIRS has honoured this reduced rate since 1999, it has now taken the view that since the pronouncement was not promulgated into law and published in the Official Gazette of the Federal Government, and no Protocols were executed between Nigeria and the treaty partners to effect the reduction, the 7.5% rate will no longer apply.

Key changes

• Effective 1 July 2022, the WHT rate on dividend, interest and royalties paid to residents of treaty countries will be the rate in the domestic law or the treaty, whichever is lower
• This effectively means that the WHT rate of 7.5% will increase to 10% with respect to dividend, interest and royalty
• Royalty excludes rental income on immovable property, such as land, for the purpose of reduced treaty WHT rate
• Countries affected include Italy, United Kingdom, Belgium, Pakistan, Czech Republic, Slovak Republic, France, Netherlands, Romania, Canada and the Philippines
• This effectively means there is no difference in the WHT rate for treaty and non-treaty countries except in respect of relatively recent treaties concluded with South Africa, China, Singapore, Sweden and Spain which contain the lower WHT rate
• Any claim for tax credit in respect of profits taxable in Nigeria must be made not later than two years after the end of the year of assessment in which the foreign tax was paid
• The circular also includes conditions for a company to claim the commonwealth tax relief.

Procedures for Claiming Treaty Benefits in Nigeria

Where a taxpayer has met all the criteria for eligibility for tax treaty benefits, such person may apply for treaty benefits in line with the following procedures:

1. Completion of Certificate of Residence
2. Submission of Formal Application to the Relevant Tax Authority
3. Submission of Claim for Tax Credit

Conclusion

Nigerian government needs revenue to balance the budget given its rising debt profile and high ratio of debt service cost to revenue. It is therefore not surprising that FIRS is exploring various avenues to increase domestic revenue mobilisation. This may also be connected to the global 2-Pillars deal to which Nigeria has declined to sign, hence ramping up taxes collectible under domestic legislation including implementation of unilateral measures.

Below is our Tax Alert on the topic, and copies of the circulars: 

Download PwC Tax Alert - FIRS reverses the practice of granting 7.5% WHT rate to treaty partners on passive income

Download FIRS CIRCULAR ON CLAIM OF TAX TREATY BENEFITS_REVISED

Download FIRS PUBLIC NOTICE ON TREATY WHT RATES