Tax Replace: Withholding Tax Charges On Dividend, Curiosity And Royalty Fee To Residents Of Nigeria Treaty Companions – Withholding Tax

Introduction

In 1999 the Federal Government of Nigeria (“FGN”), in

its budget statement, indicated that a recipient of interest,

dividend and royalty income who is resident in a country with which

Nigeria has an effective Double Taxation Agreement

(“DTA”) will pay withholding tax (“WHT”) at the

rate of 7.5% where such income is derived from Nigeria. On the

basis of the statement, Nigerian resident payers of interest,

dividend and royalty to treaty beneficiaries have been implementing

a uniform WHT rate of 7.5% on such passive incomes made to such

non-resident beneficiaries, whereas the maximum WHT rate specified

in the relevant domestic tax laws remains at 10%.

As of 1999, Nigeria had operational DTAs with ten countries,

namely the United Kingdom, France, Canada, Belgium, the

Netherlands, Pakistan, Czech, Slovakia, Romania, and Italy. The

treaty WHT rates in these DTA’s are 12.5% for dividends, where

the recipient controls at least 10% of the voting power of the

Nigerian company paying the dividend, and 15% in all other cases;

and 12.5% for interest and royalty payments. Nigeria has since 1999

signed additional DTA’s with other countries including China,

South Africa, Singapore, Spain, Sweden, the Philippines, all of

which are currently in force. Except for China and Singapore, which

apply a flat WHT rate of 7.5% to dividend payments, and the

Philippines which applies a flat WHT rate of 10% on dividends, the

treaty WHT rates for dividends under the post 1999 DTA’s is

7.5% for dividends where the recipient controls at least 10% of the

voting power of the Nigerian company paying the dividend, and 10%

in all other cases. The WHT rate for interest and royalty payments

under the post 1999 DTA’s is 7.5% except for the Philippines

which applies a WHT rate of 10% on interest payments.

In a circular published by the Federal Inland Revenue Service

(“FIRS“) titled “Information

Circular on the Claim of Tax Treaties Benefits and Commonwealth Tax

Relief in Nigeria” dated 11th May, 2022 (the

“Circular“) and a public notice titled

“Public Notice on Application of Withholding Tax on Dividends,

Interest and Royalties paid by Residents of Nigeria and

Beneficially Owned by Residents of Treaty Partners of Nigeria Under

the Double Taxation Agreements Between Nigeria and other

Countries” (the “Notice“), the FIRS

has stated that the Minister of Finance, Budget and National

Planning has now approved the discontinuation of (a) the unilateral

application of the 7.5% WHT rate and (b) the uniform application of

a WHT rate of 7.5% on dividend, interest and royalty payments to

treaty beneficiaries. On the basis of this discontinuation, with

effect from 1st July, 2022 (“Effective Date”),

the relevant WHT rate specified in Nigeria’s domestic tax laws

will now apply. The Circular and the Notice are to give effect to

the ministerial approval. Although the Circular covers other treaty

benefits, this update will focus on the application of the Circular

and the Notice to WHT rates on interest, dividends and

royalties.

The FIRS’ justification for the reversal of the existing

practice (which is based on the 1999 policy statement) is that the

policy statement of the FGN on unilateral reduction of WHT rate to

7.5% was not promulgated into a law and published in the Official

Gazette of the FGN. As a result, there was no reduction or any form

of amendment to the tax laws on the WHT rates applicable in Nigeria

to residents of Nigeria’s treaty partners. In addition, the

FIRS further stated that protocols were not executed between

Nigeria and the treaty partners to effect a reduction in the WHT

rates specified in the relevant DTAs to give effect to the policy

statement.

Summary of the Circular and Notice regarding WHT on Interest,

Dividends and Royalties

The FIRS states in the Notice that, from the Effective Date, the

WHT rate of 10% specified in Nigerian domestic tax laws will apply

on dividend, interest, or royalty payments to treaty beneficiaries.

Where, however, the rate specified in the domestic tax law exceeds

the maximum rate specified in the applicable DTA, the maximum rate

specified in that DTA will apply. Consequently, from the Effective

Date, in line with the provisions of the relevant DTA and those of

Nigerian domestic tax laws, the following WHT rates shall apply on

dividend, interest and royalty payments by residents of Nigeria to

(and beneficially owned by) residents of DTA partners and the

current application of a uniform WHT rate of 7.5% will cease to

apply.

The above treaty WHT rate cap is only applicable in Nigeria when

payments are made to non-residents and the payments are not

connected to a permanent establishment that the non-resident has in

Nigeria. The FIRS stated in paragraph 7 of the Notice that it has

withdrawn all previous rulings, directions or approval which it had

given in relation to the applicable WHT rate with respect to all

the DTAs.

From the Effective Date, interest or royalty payments to

beneficiaries who are resident in China, South Africa, Singapore,

Spain and Sweden will remain at the reduced WHT rate of 7.5%. For

dividend payments due to recipients resident in China and

Singapore, the applicable WHT rate will also remain 7.5%. On the

other hand, the WHT rate on dividend payments to recipients who are

resident in South Africa, Spain, and Sweden will generally be 10%

but will only reduce to 7.5% if the recipient holds at least 10% of

the share capital of the Nigerian company making the payment. The

continued application of the reduced WHT rate of 7.5% for residents

of these countries is because the relevant DTAs contain a maximum

WHT rate which is lower than that specified under Nigerian domestic

tax laws.

With respect to residents of countries with a WHT rate that is

higher than that specified under Nigerian domestic tax laws, the

lower rate of 10% specified in the domestic tax laws will

apply.

What would happen from the Effective Date?

From the Effective Date, Nigerian companies that pay dividend,

interest or royalty to treaty beneficiaries will have an obligation

to implement the changes introduced by the Circular and apply the

relevant WHT rate and remit the tax withheld to the FIRS. Failure

to do that could cause the FIRS to impose the penalties specified

in the domestic tax laws on defaulters.

Conclusion

Based on our reading of the DTAs and the domestic tax laws, the

change in the FGN’s position is not necessarily an increase in

the WHT rate applicable to treaty beneficiaries. Rather, it is a

withdrawal and discontinuation of the incentive of 2.5% reduction

in the WHT rate for treaty beneficiaries which was not passed into

law or implemented by way of a protocol between Nigeria and the

relevant countries. Therefore, unless there is a subsequent change

in the position of the FGN, it is unlikely that the reversal will

be suspended.

The changes introduced by the Circular will apply to all

existing transactions (such as lending, investment in debt

instruments (excluding those issued by the FGN), equity investments

etc), and to future ones. The implementation will bring the tax

cost of borrowings by Nigerian residents from treaty lenders

(excluding lenders resident in China, South Africa, Singapore,

Spain, and Sweden) to that of non-treaty lenders. The reduced rate

of 7.5% will continue to apply to interest payments on loans

obtained from lenders, and investments in debt instruments by

persons, resident in China, South Africa, Singapore, Spain, and

Sweden. Lastly, the reversal has no impact on the application of

gross up provisions in loan documents as such provisions remain

valid and enforceable.

The content of this article is intended to provide a general

guide to the subject matter. Specialist advice should be sought

about your specific circumstances.