The President of the Federal Republic of Nigeria, Muhammadu Buhari, recently (on the 13th of January 2020) signed the Nigerian Tax and Fiscal Law (Amendment) Bill 2019 otherwise known as the Finance Bill into law.
It was introduced to the legislature by the President for the purpose of making sweeping changes to the various tax laws in Nigeria.
The objectives of the Finance Bill (now an Act) include the following:
- Promotion of fiscal equity by mitigating instances of regressive taxation.
- Reformation of domestic tax laws to align with global best practices.
- Introduction of tax incentives for investments in infrastructure and capital markets.
- Generation of additional revenue for the Government through various fiscal measures, including a proposed increase in the rate of Value Added Tax (“VAT”) from 5% to 7.5%.
- Support small and medium sized enterprises in line with the Federal Government reforms on the Ease of Doing Business in Nigeria.
KEY HIGHLIGHTS FROM THE NEW LAW AND WHAT IT COULD MEAN FOR YOUR BUSINESS.
- ELIMINATION OF DOUBLE TAXATION
The new law intends to eliminate the incidences of double taxation by implementing the following:
- Modification of the commencement and cessation rules in CIT to eliminate overlap and gaps. This is to ensure that double tax is not charged on the same income due to overlapping period. As such, a small business may pay little or no tax in the third year of business.
- Removal of tax charged on dividends when it is paid out to the shareholders. If dividend is a residual income available to shareholders after tax has been charged, charging tax again when the dividend is paid out amounts to double taxation, this has been eliminated by the new law.
- EXEMPTION OF SMALL COMPANIES FROM PAYING COMPAY INCOME TAX
The new law divides companies into three categories which include the following:
- Small companies: these are companies with a yearly revenue of less than N25M and 0% rate of CIT hence no CIT payable.
- Medium companies: these are companies with a yearly revenue between the range of N25M and N100M and 20% rate of CIT payable.
- Big companies: these are companies with a yearly revenue of N100M and above and 30% rate of CIT payable.
The idea behind this is to encourage small and medium sized companies to come forward and disclose their revenue while also enjoying the benefits.
- MINIMUM TAX COMPUTATION TO BE BASED ON REVENUE ALONE
Going forward, minimum tax computation will be based on revenue alone. It will now be charged on 0.5% of turnover for the year in question. Small companies are exempted from this which impliedly means that the revenue mentioned here must be up to N25M and above.
- BONUS ON EARLY PAYMENT OF COMPANY INCOME TAX
Early payment of company income tax i.e. 90 day before the Due date for payment or 3 months after the end of the accounting year of the company will attract the following:
- 2% bonus for a medium sized company hence instead of paying tax at the rate of 20%, the tax rate applicable becomes 18%.
- 1% bonus for a big company hence instead of paying tax at the rate of 30%, the tax rate applicable becomes 29%.
- INCREMENT IN VALUE ADDDED TAX RATE (VAT) BY 50%
The VAT rate payable on goods and services has been increased from 5% to 7.5%. In order to generate more revenue for the Government, the new Act expands and clarifies the scope of VAT by stating that VAT shall be payable on the supply of all goods and services in Nigeria other than those exempted from VAT in the first schedule to the Act.
With respect to VAT, the following have also been introduced by the new Act:
- Where a taxable person permanently ceases to carry on a trade or business in Nigeria, the taxable person shall notify the service of its intention to deregister for tax purposes within 90 days of such cessation of the trade or business.
- Any company which does not generate a yearly revenue of at least N25M is exempted from registering, remitting, issuing tax invoice and collecting VAT. This will surely reduce the tax compliance burden for small companies.
- STAMP DUTY TO BE APPLIED TO ITEMS CUMMULATIVELY WORTH N10,000 AND ABOVE
The new Act increases the Stamp duty on receipts to N50 on every transaction from N10,000 and above as opposed to the former position of N1,000. This is inclusive of bank transfers. However, transfers between the same owner’s accounts in the same bank will be exempted.
- RECOGNITION OF EMAIL CORRESEPONDENCE WITH TAX AUTHORITY
Email communications with the tax authorities is now accepted as a valid and formal means of communication.
- REQUEST FOR TAX IDENTIFICATION NUMBER BY BANKS
Going forward, banks are to request for Tax Identification Number (TIN) before opening bank accounts for individuals/corporate customers, while existing account holders must provide their TIN in order to continue operating their accounts.
- CAPITAL GAINS TAX APPLICABLE ON COMPENSATION FOR LOSS OF EMPLOYMENT
Compensation received for loss of employment below N10M will be exempted from the payment of Capital Gains Tax.
With regard to Capital Gains Tax, transfer of assets during reorganization within a group of companies will be exempt from CGT. However, anti-avoidance provisions exist to ensure that companies do not create fictitious group structures to take advantage of this provision.
- INSURANCE COMPANIES TO CARRY FORWARD LOSSES INDEFINITELY
Just like other businesses, insurance companies now allowed to carry forward their losses indefinitely. This is as opposed to the former provision of the law which only allowed for the losses to be carried forward for four years after which any losses recouped are deemed lapsed.
Also, all life and non- life insurance businesses will no longer be liable to special minimum tax provision and all wholly, exclusively, reasonably and necessarily incurred expenses will be deductible.
- DIVIDENDS PAID FROM PETROLEUM PROFITS TO BE SUBJECT TO WITHHOLDING TAX
The new Act repeals the old provision of the Petroleum Profits Tax Act which exempts dividends paid out of profits derived from petroleum operations from withholding tax. As such, tax payers in this space will now be saddled with the responsibility of withholding tax when paying dividends.
WHEN WILL THE NEW LAW TAKE EFFECT?
It was intended that the new law will take effect from 1 January, 2020 along with the Appropriation Act, 2020. However, there have been delays due to the need for harmonization of changes introduced by the legislature and a further vetting process by the executive.
The commencement date of the Act presents an issue of concern to as to how it will affect suppliers of goods and services who will be required to charge VAT at the new rate of 7.5%. If the commencement date is back-dated, this will create an issue for collection and remittance of VAT at the new rate for transactions that have already occurred prior to its signing.
The Federal Ministry of Finance has released a statement to the effect that the implementation of the VAT increase is to take effect from February 1, 2020, after all the necessary administrative procedures and formalities have been completed. These include the publication of the Act by the Federal Ministry of Justice in the official gazette.
With the presidential assent, the Finance Act now has the force of law. This is a welcome development in the tax landscape of Nigeria as it contains provisions which have the capacity to boost the economy by stimulating the growth of small and medium sized enterprises in Nigeria while at the same time generating revenue for the government.
Owing to the fact that every new law comes with its challenges and opportunities, existing businesses and potential investors should seek professional guidance as to how the new law will impact their business operations and any new compliance requirements or benefits to be enjoyed regarding their tax obligations in Nigeria.
For more information please contact:
Blackwood & Stone LP
+234 903 3501 613