By Eugene Onyeji
On January 13, 2020, President Muhammadu Buhari signed the Finance Bill, 2019 (now Finance Act) into law. The Finance Act was specially designed to support the implementation of the 2020 National Budget and to create an enabling environment for businesses, with extensive tax implications for the country.
Generally, the objective of the Act is to promote fiscal equity, align domestic laws with global best practices and support Micro, Small and Medium-sized businesses in line with the administration’s Ease of Doing Business Reforms. Other objectives include increasing government revenues for Federal, State and Local Governments and stakeholder investments in investment/capital market through the introduction of tax incentives.
The new Act, which took effect from February 1, 2020, indicates that it was the first legislation created to accompany an Appropriation Act since the return of democracy in 1999.
Some of the breakdown are as follows
1. Companies Income Tax (CIT)
Under the new law small companies – companies with less than N25 million in annual turnover are charged Zero CIT. CIT for Companies with revenues between N25 and N100 million (described in the Act as “medium-sized” companies) has been reduced from 30 per cent to 20 per cent. Large companies with an annual turnover greater than N100 million will continue to pay the standard 30 per cent CIT.
The Act introduces provisions that create a taxable presence for non-resident companies (NRCs) carrying on digital activities, consultancy, technical, management or professional services in Nigeria, provided that they have “significant economic presence” (SEP) in Nigeria; and profit can be attributable to such activity.
Insurance companies would be able to carry forward losses indefinitely as opposed to the 4-year restriction currently in place. Life and non-life businesses would no longer be liable to special minimum tax provision and all wholly, exclusively, reasonably and necessarily incurred expenses will be tax deductible.
Again, where a company pays dividend in excess of its taxable profits, such dividend is subject to CIT at 30%.
The new Act includes a provision that grants to all companies engaged in agricultural production in Nigeria, an initial tax-free period of five years renewable for an additional three years.
The new Act also provides incentives to promote tax compliance through bonus reductions in CIT for early remittance. Two per cent bonus for medium-size companies and one per cent bonus for other companies.
2. Value Added Tax Act (VATA)
The new Act raises VAT from five per cent to 7.5 per cent and Inclusion of the definition of “goods” and “services” to eliminate ambiguity with respect to the application of VAT to certain transactions.
To allay fears that low-income persons and companies will be marginalised, the Finance Act 2019 has extended the list of goods and services exempted from VAT.
The additional exemptions include the following:
Basic food items – additives (honey), bread, cereals, cooking oils, culinary herbs, fish, flour and starch, fruits (fresh or dried), live or raw meat and poultry, milk, nuts, pulses, roots, salt, vegetables, water (natural water and table water). Locally manufactured sanitary towels, pads or tampons. Services rendered by microfinance banks; tuition relating to the nursery, primary, secondary and tertiary education.
Nigeria’s new VAT rate of 7.5 per cent is still the lowest in Africa, and one of the lowest anywhere in the world. Under Nigeria’s revenue sharing formula, 85 per cent of collected VAT goes to States and Local Governments. This means that the bulk of additional VAT revenues accruing from the increase will go towards enabling States and Local Governments meet their obligations to citizens and pay the new minimum wage.
The Act exempts Businesses with turnover below N25 million from VAT payments and filing returns. Any business that falls within the N25 million threshold would be exempted from registering, remitting, issuing tax invoice and collecting VAT.
3. Personal Income Tax
The new Act now includes electronic mail as an acceptable form of correspondence for persons disputing assessments by the Tax Authorities.
Contributions to Pension and Retirement Funds, Societies and Schemes are now unconditionally tax-deductible.
Banks would be required to obtain TIN from corporate customers as a pre-condition for opening or maintaining bank accounts.
4. Stamp Duty Tax
The N50 Stamp duty charge is now applicable only to transactions amounting to N10,000 and above, a significant increase on the former threshold of N1,000. It also expanded the list of items exempted from stamp duty.
5. Customs and Excise Tariff
The Act also makes provisions for Customs and Excise Tariff. It stipulates that to reduce unfair advantages previously conferred on imported goods at the expense of locally manufactured ones, certain imported goods are now subject to excise duties similar to locally manufactured goods.
6. Capital Gains Tax (CGT) Act,
Transfer of assets during reorganization within a group of companies would be exempted from CGT. However, to ensure voidance, a provision was included to ensure companies do not create fictitious group structures to take advantage of the exemption.
Termination benefits Compensation received for loss of employment of up to ₦10million would be exempted from CGT.
7. Petroleum Profits Tax Act (PPTA)
The Act repealed the provision of PPTA that exempts dividends paid out of profits derived from petroleum operations from withholding tax. Taxpayers in this space would now be saddled with the responsibility of withholding tax when paying dividends.
Experts have said that the Act is a welcome development in the tax landscape of Nigeria as it has capacity to boost the economy by stimulating the growth of small and medium scale enterprises and elicit foreign direct investment (FDI) into Nigeria. Nigerians are now left to evaluate and review how the Act will affect their operations and strategise for effective tax management.