Nigerian Startups Have Fresh Tax Headaches In New Strict Regime

Nigerian startups are facing new tax regulations introduced by the Federal Government following strict changes quietly unveiled this month. The rules, which will take effect on January 1, 2025, promise to simplify tax compliance but could create fresh challenges for the country’s burgeoning tech ecosystem.

At the heart of the regulations is a requirement for businesses, including startups, to have taxes deducted at the point of payment. Entities like corporations, government agencies, and public authorities must withhold taxes before transferring payments to businesses. This method is designed to reduce tax evasion and ensure compliance but could add new layers of complexity for startups already navigating Nigeria’s tough business environment.

Startups Not Spared from the Tax Burden

The scope of the regulation, known as the “Deduction of Tax at Source (Withholding) Regulations, 2024”, extends across various types of income—capital gains, corporate income, and personal income—and applies broadly to businesses, regardless of size or sector.

Nigerian startups, which often operate on slim margins, are not exempt. However, companies with less than NGN 2 M (USD 1,197) in monthly transactions may sigh a little relief. These businesses are exempt from withholding tax deductions, but only if they can prove their Tax Identification Number (TIN) is valid.

For startups without a valid TIN, the penalty is steep: double the normal withholding tax rate. This puts even greater pressure on smaller businesses to maintain up-to-date tax records.

Remitting the deducted taxes is another significant element of the new regulations. Businesses are expected to remit these deductions to either the Federal Inland Revenue Service (FIRS) or the relevant State Internal Revenue Service. The deadlines are tight: FIRS requires remittance by the 21st of the following month, while state authorities expect remittances as early as the 10th.

Failure to remit on time carries its own set of penalties, including fines and administrative charges, which could further erode startup cash flow.

New Rules, New Headaches

Though framed as a means to streamline tax compliance, the new withholding tax regulations add an extra administrative burden on startups. Businesses are required to submit detailed returns for each deduction, including the name, address, and TIN of the payer. Receipts for deducted taxes must also be issued, and any misstep in this meticulous process could invite penalties.

These regulations arrive at a time when Nigerian startups are already navigating a complex environment. While some companies have scaled rapidly, others face a tougher road ahead contending with funding woes, layoffs, and valuation cuts.

The government has included some exemptions to soften the blow. Payments related to Real Estate Investment Trusts, securities lending, and compensation payments are all exempt from withholding taxes. Even so, the exemptions may be too narrow to provide substantial relief for many tech companies.

Startups that rely on payments from across borders will also need to consider double taxation treaties. While these treaties are meant to prevent being taxed twice on the same income, navigating them can be tricky for smaller firms with limited resources.

The upcoming tax regime follows closely on the heels of a broader trend in Africa, where governments are tightening regulations and enforcement in the tech startup space. Cryptocurrency platforms like OKX have already felt the pinch, announcing plans to exit Nigeria’s market due to “unfavourable regulatory conditions.”

For Nigerian startups, the 2024 withholding tax regulations present a new set of challenges, adding to the existing struggles of scaling in a competitive and often unpredictable market. The government’s promise of simplicity and ease may fall short for those tasked with complying with these new requirements, especially if their resources are stretched thin by the need to keep up with their tax obligations.

As the January 2025 implementation deadline looms, startups will need to quickly adapt to these new regulations, or risk facing penalties that could stifle their growth. While the intent behind the law is to foster better compliance and align with global standards, it remains to be seen whether this will truly ease the burden on Nigeria’s tech ecosystem—or create more tax headaches for its most innovative players.

Featured Image Credits: Alexander Oamen/Medium