The Finance Act 2019, which was signed into law on 13 January 2020, contains various tax changes with effect from 13 January 2020. We summarise the main business tax measures in this article.
New companies income tax rates
New CIT rates, based on turnover, have been introduced. The rates for Fiscal Year 2020 are as follows:
Category
|
Annual Turnover (NGN)
|
Tax Rate
|
|---|
Small Company
|
N25million or less
|
0%
|
Medium-sized company
|
More than N25million but less than N100million
|
20%
|
Large Company
|
N100m and above
|
30%
|
Exemptions from companies income tax
In order to encourage agricultural business, attract investors to the Real Estate Sector and encourage growth in the Nigerian Capital Market and exports, the profits of the following types businesses will be exempted from corporate tax:
- Agricultural businesses
Companies engaged in agricultural production will enjoy a five-year tax holiday and, upon satisfactory performance of agricultural production, the holiday will be renewed for an additional maximum period of 3 years. However, the company will not be granted similar incentives under any other Act, such as pioneer status under the Industrial Development (Income Tax Relief) Act. It is hoped that the holiday will encourage more entrants into the agricultural sector.
- Real estate investment companies
In line with the government objective to bridge the gap in housing needs, a new tax Incentive is introduced to investors in the Real Estate Sector. A Real Estate Investment Company will enjoy exemption of withholding tax (WHT) from dividend and rental income received by it, provided 75% of the dividend and rental income is distributed within 12 months after the end of the financial year. However, WHT will be deducted from the final dividend distributed to the shareholders of the investment company.
- Regulated security lending transactions
In support of the introduction of a new asset category in the Nigerian Capital Market, compensating payments which qualify as dividend or interest received by an approved agent from a lender or borrower in a Regulated Security Lending Transaction, and compensating payments which qualify as dividends received by a lender from its approved agent or borrower as defined in Section 9(1) ( c) of CITA, would also be exempted from tax.
Digital transactions and services rendered by non-resident companies
- Profits on digital transactions, as defined in Subsection 1(c) of Section 16 of CITA, of a company that has significant economic presence in Nigeria will be deemed to have been derived from Nigeria and will be taxable in Nigeria.
- Fees earned on transactions such as technical, management, consultancy or professional services rendered from abroad to a person in Nigeria, to the extent that the company has significant economic presence in Nigeria, will be taxable in Nigeria
The extent of significant economic presence would be defined by an Order of the Finance Minister. In any case, the WHT deducted from the above transactions will be the final tax on the transaction.
Expenses incurred in deriving tax-exempt income
Any expense incurred in deriving tax-exempt income will not be allowed for income tax purposes. In view of this, expenses of this nature should be segregated from other expenses so that the Federal Inland Revenue Service (FIRS) would not use its discretion to determine the expenses that would not be allowed for tax purposes.
Additional expenses that would not be allowed for tax purposes are:
- Penalty prescribed by the Act of National Assembly for violation of any statue
- Tax or penalty paid on behalf of another person.
Expenses involving related parties
Any expense incurred within or outside Nigeria involving related parties that is not in compliance with the Transfer Pricing Regulations would not be allowed for tax purposes. A taxable person should ensure that every expense involving related parties meets arm’s length principles in order not to be exposed to avoidable tax.
Tax bonus
In order to encourage early payment of corporate tax, the Finance Act reintroduced the tax bonus which was abolished in 2007. The rates are as follows:
Medium sized-company
|
2% of the tax due
|
Large company
|
1% of the tax due
|
The bonus will be available as a credit to be utilised against future tax, provided the tax due is remitted within three months after the company’s accounting year end. For instance, a company with a December accounting year end would enjoy the tax bonus if the tax due is paid on or before 31 March of the following year.
Commencement and cessation of business rules
In order to eliminate the excess tax charged because of overlapping periods on commencement and cessation of business, the basis periods of assessment in the first three years of commencement of business have been replaced with a new provision. The rules on cessation of a business have also been replaced.
- Commencement of business
Year of Assessment
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Basis Period
|
|---|
1st year of assessment
|
From the date of commencement to the end of first accounting period
|
2nd year of assessment
|
From the beginning to the end of the second financial year
|
3rd year of assessment
|
From the beginning to the end of the third financial year
|
For example, if a company commences business in April 2020 and prepares Audited Financial Statements (AFS) to 31 December 2020, its first year of assessment will be 2021, which would be based on its AFS for the period to 31 December 2020. Its 2022 and 2023 years of assessment would be based on its AFS for the years ended 31 December 2021 and 2022 respectively.
- Cessation of business
In the year of cessation of business, the taxable profit will be the profit from the beginning of the last accounting period to the date of cessation. The tax computed must be remitted not later than six months from the date of cessation.
For example, if a company with a 31 December year end ceases operation in April, the profit to be assessed to tax will be for the period 1 January to 30 April, and the tax must be remitted to FIRS not later than 31 October of the same year.
Minimum tax
Minimum tax is pegged at a flat rate of 0.5% of turnover, which would be applicable to companies with no total profit or whose computed tax is less than the minimum tax. Franked investment income will be excluded for the purpose of the minimum tax computation,
Another amendment to the minimum tax rule is that a company with imported equity of at least 25% of its paid up capital would no longer enjoy the exemption.
Small companies with a turnover of less than NGN 25 million, companies carrying on an agricultural trade or business, and companies that have been in business for less than four calendar years would be exempted from the minimum tax.
The new provision on minimum tax will increase the tax collectible from companies, apart from simplifying the minimum tax calculation.
Pre-operation levy abolished
The Pre-operation levy of NGN 25,000 in the first year and NGN 20,000 in subsequent years before issue of a Tax Clearance Certificate (TCC) to companies who are yet to commence operation has been abolished.
Such companies can now apply to the FIRS for a TCC at no cost to them.
Thin capitalisation
In order to curb loss of taxes due to base erosion and profit shifting (BEPS), the Seventh Schedule to the CITA on deductible interest has been introduced. Henceforth, interest incurred by a Nigerian Company (excluding a company engaged in the business of banking and insurance) in respect of debt (as defined in paragraph 6b of the newly introduced Seventh Schedule to the Act) issued by a foreign connected person that would be allowed for tax purposes will be limited to 30% of earnings before interest, tax, depreciation and amortisation (EBITDA). Excess interest will be carried forward to the following year, subject to a maximum of five years. Any company that violates this provision will be liable to penalty of 10% plus interest, on the excess interest charged in the year.
This is a positive development to curb loss of tax due to thin capitalisation. However, the reason why the provision is targeted at interest on foreign loans only is unexplained. The implication of the provision is that the restriction will not apply to interest on loans sourced from unconnected persons abroad and loans obtained internally. In order to ensure a level playing ground, the provision ought to apply to all excess interest, no matter how and where the loan is sourced.
Tax incentives
The Finance Act introduced new incentives and modified existing ones, while some have been withdrawn. Apart from the new incentives for Real Estate Sector and Regulated Securities Lending Transaction (RSLT), the following incentives were modified:
The maximum exemption from tax of interest on foreign debt with a repayment period and moratorium period of not less than seven years will be reduced from 100% to 70%. The moratorium should not be less than two years, and the moratorium is the period at the beginning of the loan term during which the borrower is not expected to make any payment.
Henceforth, approval of the Minister of loan for a gas project will no longer be required.
This measure is necessary to remove the bureaucracy in obtaining the approval and also fast track processing of a loan.
A new subsection 2 was introduced to Section 39 of CITA “Gas Utililisation (downstream operation)” to the effect that the provisions of Section 39 will not apply to a company that has claimed or intends to claim the incentives under the Industrial Development (Income Tax Relief) Act in respect of the same qualifying capital expenditure.
The 15% investment allowance for the replacement of obsolete plant and machinery is also abolished.
Reduction of WHT rate on construction
The WHT rate on road, bridge, building and power plant contracts has been reduced from 5% to 2.5%. This is a positive development to ease the cash flow problem faced by contractors whose effective tax rate on turnover is less than 5%.
Capital Gains Tax changes
The Finance Act exempts the following transactions from Capital Gains Tax (CGT):
- Loss of employment
Recognising the need for an employee to have adequate funds to start a new lease of life after loss of employment, CGT will now be charged on an amount in excess of NGN 10,000,000, as against NGN 10,000 in the old Section 36(2) of the CGT Act.
- Mergers and acquisitions
In furtherance of the Government’s intention to encourage mergers and acquisitions, there will be no CGT on the sale or transfer of assets in a merger arrangement for better organisation of a business if the sale does not take place within 365 days prior to the reorganisation.
If the acquiring company makes a subsequent disposal within 365 days after the date of the transaction, the CGT exemption will be withdrawn.
Petroleum profit tax change
The provision of the PPT Act that exempts deduction of WHT from dividend declared by companies that are assessed to tax under the Act has been deleted. In order to ensure a level playing field for all investors, dividends declared by such companies will be subject to WHT deduction at the appropriate rate and remitted to the relevant tax authorities.
Stamp duty changes
- Electronic receipts or transfers above NGN 10,000 will attract a one-off stamp duty of NGN 50. However, the duty will not be applicable to transfers or payments into accounts owned by the same person within the same bank.
- The Stamp Duties Act was also amended to exempt transactions on Regulated Securities Lending Transactions (RSTL) which are exempted from stamp duties. The transactions are listed as additions in the Schedule to the Stamp Duties Act.
Taxation of insurance companies
The subsections in Section 16 of the Companies Income Tax Act, (CITA) on taxation of insurance business (life and general) that hitherto subjected insurance companies to excessive taxes are either now replaced or deleted. Other amendments in the Act relating to Insurance businesses are:
- Life assurance businesses - Investment income taxable on life assurance businesses will be based on income derived from the Shareholders Fund. For this purpose, it is necessary for the Insurance Companies to properly document investment income from the Shareholders’ Fund.
- Non-life assurance businesses - The cap on reserve for unexpired risks and claims and outgoings has been relaxed. Henceforth, reserve for unexpired risks will be calculated on a time basis of the risks accepted during the year. With respect to outstanding claims and other outgoings, an estimated amount of all outstanding claims and outgoings will be allowed except that those not utilised for the settlement of claims and outgoings will be added back to total profit.
The basis of calculating minimum tax of insurance companies is also stated in the Act as follows:
- 0.5% of gross premium for non-life insurance businesses
- 0.5% of gross income for life assurance businesses.
Adjusted Losses of insurance companies can now be carried forward.
Value Added Tax changes
There have been a number of VAT changes, some of which are briefly summarised as follows:
- The VAT rate has been increased from 5% to 7.5% with effect from 1 February 2020
- Companies with turnover of less than NGN 25 million are exempt from charging VAT on their goods and services and filing VAT returns
- VAT remittance is now to be ‘cash based’ as against ‘invoice based’
- A new reverse charge provision has been introduced so that any taxpayer that receives services from non-resident persons (legal or natural) who did not add VAT to the invoice, must self-account for the VAT and remit the same to the FIRS in the currency of the transaction.
- To encourage mergers and acquisitions, there will be VAT exemption on proceeds of mergers or acquisitions, provided the assets acquired are not disposed of within the succeeding 365 days prior to the date of reorganisation, failing which the concession would be withdrawn.
- To serve as a deterrent for non-compliant by taxpayers, penalty and interest for various offences committed under the VAT Act have been reviewed upward as follows:
Offence
|
1st month
|
Every subsequent month
|
|---|
Failure to Register for VAT return
|
NGN 50,000
|
NGN 25,000
|
Failure to notify the FIRS of change of address, or cessation of trade or business
|
NGN 50,000
|
NGN 25,000
|
Failure to submit VAT returns
|
NGN 50,000
|
NGN 25,000
|
'Segun-Martins Ogunyemi
contactus@prologicideas.com
