February 5, 2021
Nigeria: Highlights of Finance Act 2020
Nigeria's President Muhammadu Buhari, on 31 December 2020, signed the Finance Bill 2020 (the Finance Act or the Act) into law with an effective date of 1 January 2021.
The Finance Act introduced over 80 amendments to the existing tax and regulatory legislations in Nigeria, including the Capital Gains Tax Act, Companies Income Tax Act, Personal Income Tax Act, Value Added Tax Act, Nigeria Export Processing Zone Act, Oil and Gas Export Free Zone Act, Federal Inland Revenue Service (Establishment) Act, and Customs and Excise Duties Act, among others.
The aforementioned amendments were primarily aimed at addressing ambiguities and providing clarity to certain provisions in the laws, and also providing certain incentives to companies to mitigate the impact of COVID-19.
Additionally, the Act established "the Crisis Intervention Fund and the Unclaimed Funds Trust Fund." The Funds were setup in response to the COVID-19 pandemic and its impact on the government budget during the 2020 fiscal year, as well as to address all crisis-related expenditure/exigencies, going forward.
This Alert summarizes the revisions to the tax laws and regulatory legislations, as well as the Act's applicability to the various sectors.
Companies Income Tax Act (CITA) amendments
The amended term "primary agricultural production" defines what constitutes primary agricultural production as being production of crops, livestock, forestry and fishing, and excludes production at the intermediate/by-products or derivatives levels.
The amendment narrows the application of the tax exemption on bank loan interest for loans granted to "primary agricultural production," unlike the broad exemption that was previously applicable to bank loans to mostly all agricultural businesses.
The above change is aimed at promoting core agricultural production in Nigeria.
The reduction of the moratorium to period by six months further demonstrates the Government's commitment to support local businesses in Nigeria.
The former provision had erroneously included sub-paragraph "e," (i.e., the provision of management, consultancy, technical and professional services) as part of services to which withholding tax (WHT) was not the final tax.
The amendment has now corrected the over listing error. Thus, WHT remains the final tax for these categories of services.
This provision creates a distinction between revenue from core shipping/freight operations and air activities that should be subject to tax under section 14 of the CITA, and revenue from other incidental activities that should be subject to the general corporate income tax rate of 30%.
This amendment resolves the issue with respect to the taxation of ancillary income of nonresident airlines and shipping companies.
The amended minimum tax rate is in response to the impact of the COVID-19 pandemic on insurance companies. It is also intended to ensure alignment of tax treatment for all companies in this regard.
A new sub-paragraph (sub-paragraph 13) was introduced to section 16, for the purpose of defining "gross premium" and "gross Income" for minimum tax purposes, with regards to insurance businesses.
The amendment provides further clarity on relevant deductions that should be recognized in determining premiums and income subject to tax for insurance companies.
In the prior amendment to the CITA (i.e., the Finance Act 2019), there were two provisions (section 1(b)(c) and section 1(s)), stipulating varying conditions for exempting dividends and rental income earned by REITs from taxes.
However, the same has been clarified. Thus, dividend and rental income received by a REIT should only be tax exempt where such REIT distributes a minimum of 75% of such dividend/rental income within 12 months of earning the income.
The repeal of the tax exemption to agricultural companies for a period of up to eight years, appears to address the duplication of income tax incentives granted to agricultural businesses in Nigeria.
Under sub-paragraph 8, donations made to any Fund set up by the Federal Government or any State Government, or to any agency designated by the Federal Government or to any similar Fund or purpose in consultation with any Ministry, Department or Agency of the Federal Government, in respect of any pandemic, natural disaster or other exigency are deductible for tax purposes.
Under sub-paragraph 9, such deductions should not exceed 10% of the company's assessable profits.
This is an incentive to companies for the provision of COVID-19 pandemic (or other future exigencies) donations to the Government; such donations are now allowable deductions for tax purposes, subject to providing the requisite documentation evidencing same.
This amendment alters the provision of section 27 (k) to include penalties or fines pursuant to legislations enacted by the State House of Assembly, as opposed to the former section which provided for only those legislated by the National Assembly.
This provision is a response to the impact of the COVID-19 pandemic on businesses.
Furthermore, based on the timeline provided for the reduced minimum tax, it would appear that affected companies can file amended returns for the period already past to claim a refund or at the least establish a credit to be utilized for future tax obligations in respect of minimum tax already paid for the year.
This amendment provides a limitation as to incentives that may be claimed by companies engaging in gas utilization businesses, downstream operation.
Under the existing CITA, penalties were not provided for incorrect tax returns submitted.
This amendment raises the question of how to distinguish a deliberate act of non-compliance from an indeliberate act. Further clarity will be required.
Irrespective, companies should ensure that the information contained in tax returns filed is correct and in compliance with the relevant tax provisions, to avoid being deemed by the tax authority as "deliberately filing incorrect returns" and subjected to penalties and interests.
Clarification has been provided regarding the tax return requirements for NRCs with taxable presence in Nigeria.
Thus, based on the amendment (under section 55 of the CITA), such NRCs are now required to file income tax returns, along with their global audited financial statements, and audited financial statements for their Nigerian operations.
However, NRCs earning income from Nigeria, which is only subject to WHT (e.g., NRCs earning passive income or providing technical/professional management/technical services remotely) are exempted from the filing obligation.
To further simplify the tax administration requirements of small and medium companies, the FIRS may, by a notice, specify a different form of account to be included in tax returns of small and medium companies, other than audited financial statements.
Furthermore, such books of account should be written in English or translated on request of the FIRS.
The former section of the CITA; on keeping of accounting records, applied to "companies chargeable" to tax under the CITA.
However, the Act has amended this section and now requires all companies (including those exempted from incorporation and/or exempted from tax), are required to maintain books of accounts in English.
In line with international best practices, and in response to restrictions on physical interactions imposed by the COVID-19 pandemic, the FIRS may now correspond with companies and taxpayers via courier services, email or other electronic means for corresponding with taxpayers in respect of provisions of the CITA.
Companies should take note of the reduced timeline for payment of undisputed tax liabilities to avoid the imposition of penalties and interest on the principal amount.
The existing definition of gross turnover included all economic benefits arising from operating activities. However, the amended definition of "gross turnover" now provides that such economic benefits should result in an increase in equity, other than a capital injection from shareholders.
Nigerian company has been re-defined as any company formed or incorporated under any law in Nigeria.
Under section 23 (1) (c) of the CITA, the profits of any company engaged in ecclesiastical or educational activities of a public character are exempt from profit, subject to fulfilment of other conditions.
However, the CITA did not define what constitutes a "public character." This has resulted in controversies and public debates and even disputes in courts in the past.
Thus, by virtue of this amendment, clarity has now been provided as to what constitutes public character and thus companies and taxpayers that should qualify for the tax exemption under the provisions of section 23 (1) (c) of the CITA.
Prior to this amendment, the CITA did not provide for tax treatment with respect to costs of intangibles. However, in practice, companies mostly amortized such costs (in line with a circular issued by the tax authorities in this regard).
Although this amendment is a step in the right direction, it is unclear as to what the useful life of this intangible asset should be for tax purposes (i.e., the initial and annual allowance rates to be applied is not specifically provided for in the second schedule).
Capital Gains Tax (CGT) Act amendments
Prior to this amendment, the due date for filing CGT returns and payment of the applicable tax was aligned to the provisions of the CITA.
However, in order to foster better accountability and uniformity of CGT filings, CGT returns are now required to be filed not later than 30 June and 31 December of the year, in which the chargeable asset was disposed, and the applicable tax paid within the requisite timelines.
Following the amendment to section 24(f), in determining the location of ships and aircrafts for CGT purposes, only ships and aircrafts used in international traffic should be considered.
The above amendment limits the prior CGT provision, which provided a general application to all ships and aircrafts.
Prior to this amendment, the CGT Act was interpreted as being applicable to compensation for loss of office, where such compensation exceeded NGN10 million (i.e., the entire compensation was subject to CGT as long the amount exceeded the N10 million exemption benchmark).
However, per the clarity provided in the Finance Act, CGT should be applicable on only the amounts in excess of NGN10 million (i.e., irrespective of the amount of the compensation for loss of office, sums up to NGN10 million are exempted from CGT and CGT can only apply on sums in excess of NGN10 million).
The existing CGT Act was silent on who had the obligation to deduct and remit CGT on compensation for the loss of office.
Although, in practice, several companies had acted as self-appointed collection agents on behalf of the Government to ensure proper remittance, however, it was not a statutory obligation until this amendment.
Thus, the Finance Act has clarified that the responsibility to deduct and remit CGT on such qualifying payment for compensation for loss of office lies with the paying party and remittance in line with the PAYE Regulation.
The reliance on the CITA provision, as to assessment and filing of CGT, should no longer be applicable.
The amendment of the CGT Act to include its own unique filling period had rendered the reliance on the deleted CIT provisions redundant, hence its removal.
Value Added Tax (VAT) Act amendments
Based on the amendment under the Finance Act 2019, incorporeal properties were classified as "goods," which created several controversies on the VAT treatment of incorporeal properties in Nigeria.
However, this has been addressed such that incorporeal properties are now classified as "services" for VAT purposes.
Consequently, where an incorporeal right is registered, assigned to, or acquired by, or exploited by a person in Nigeria, regardless of whether the payment for its exploitation is made within or outside Nigeria, such transaction would be regarded as a taxable supply of service.
The definition of the time of supply for VAT purposes, provides clarity as to when VAT should become due and payable.
The former provision appeared to be applicable to only taxable services. Thus, the amendment under the Finance Act 2020 clearly states that both taxable goods and services provided by NRCs should be subject to the provisions of section 10 of the VAT Act.
This amendment should potentially increase the administrative burden of NRCs, which are subject to VAT in Nigeria. Although the amendment also provides that the affected NRCs may appoint a representative to assist in fulfilling their tax obligation, and thus lessen such administrative burden.
The amendment also provides that the FIRS may issue further guidelines to give effect to the provisions of section 10 of the VAT Act.
The definition of goods (per the previous amendment under the Finance Act 2019) resulted in challenges, particularly as it relates to buildings; as the FIRS had issued a circular following the aforementioned amendment that buildings should qualify as a "good" for VAT purposes.
Thus, the Finance Act 2020 has now expressly clarified that goods for VAT purpose, should not include land and buildings. Thus, not VATable.
The expanded list of exempt goods under the VAT Act in favor of airline and agricultural businesses is expected to reduce the cost of air transportation and further encourage investment in agricultural in Nigeria.
Personal Income Tax Act (PITA) amendments
This amendment corrects the oversight of the Finance Act 2019 and aligns the relevant SEP provision of the CITA with the PITA. As such, just like companies, individuals providing technical/management/consultancy/professional services would also be subject to WHT at 5% as the final tax.
This amendment limits the former Finance Act provision by limiting the same to only a pension, provident or retirement benefit fund, society or scheme recognized under the Pension Reform Act (PRA).
The Finance Act 2020 aligns the provisions of the PITA with the current CITA provisions (as introduced by the Finance Act 2019). It simplifies the commencement and cessation rules for new and cessation businesses. Thus, eliminating the risk of double taxation for commencement and cessation of businesses.
Entities ceasing business are required to remit the tax liabilities due not later than three months from its date of cessation.
This amendment has clarified what constitutes "gross income" for the purpose of computing CRA.
Following the amendment, CRA is no longer calculated on non-taxable income, income on which no further tax is payable and tax-exempt items listed in paragraph (2) of the Sixth Schedule to the PITA and all allowable business expenses and capital allowance.
This amendment could result in an increase in tax payable by individuals.
This amendment reinstates treatment of life insurance premium as an allowable deduction. This was previously eliminated by the Finance Act 2019.
Individuals earning the National Minimum Wage or less from employment are exempt from income tax payment or any requirement to pay minimum tax.
This is a welcomed development to cushion the impact of taxation on low-income earners.
This represents a correction of the drafting error in the Finance Act 2019.
Stamp Duties Act (SDA) amendments
This is a clarification regarding the approved "Stamp" to be utilized by the FIRS, for the purpose of administering the SDA.
This should generate more revenue for the NIPOST and clearly define its responsibilities as the body responsible for "stamping" in Nigeria.
This should further enhance the use of the NIPOST stamps.
The applicability of stamp duty has been expunged on the electronic receipt and transfer of money.
This appears as an attempt to address the controversy as to the collecting agency i.e., FIRS or State Inland Revenue Service (SIRS) of the relevant States, being that such transactions are usually between individuals and should ordinarily be under the purview of the relevant SIRS.
However, for best practice purposes, being that the EMTL is a distinct levy from the stamp duty, it should be more appropriate for the same to be expunged from the Stamp Duty Act, and a new regulation or legislation enacted for the collection of the EMTL.
This is an attempt at centralizing the collection of the levy and also to address any controversy that could result between the FIRS and the relevant SIRS as to the collecting agent for EMTL purposes.
Tertiary Education Trust Fund (Establishment, etc.) Act (TETFA)
The exemption of small companies from Tertiary Education further affirms the Federal Government's commitment to promote the growth of small businesses in Nigeria.
This deletion now restricts the penalties imposed for the contravention of provisions of the Act to those contemplated under the provision of section 11 of the TETFA.
Industrial Development (Income Tax Relief) Act (IDITRA)
The inclusion of small and medium agricultural companies, under the IDITRA further shows the efforts of the Government in encouraging agricultural production in Nigeria and the role of small and medium sized firms.
For clarity, the definition of small and medium sized companies under the CITA, has been replicated in the IDITRA for tax incentive purposes.
Only primary agricultural companies, as defined under the CITA are eligible for the tax holiday incentive.
Customs and Excise Tariff, etc. (Consolidation) Act amendments
This addresses the issues generated by the former provision of Finance Act 2019, which excluded imported goods that were not locally produced and raw materials not readily available in Nigeria from excise duties.
Consequently, imported goods which are specified in the Fifth Schedule of the Customs and Excise Tariff etc. (Consolidation) Act would be subject to excise duties at the same rates as locally manufactured goods irrespective of whether they can be locally produced, or the raw materials are readily available in Nigeria.
The above should further encourage local production in Nigeria.
Excise duties are generally charged on harmful or luxurious products. As such, there are concerns as to the scope of telecommunication services that should be subject to excise duties and the practicability of administering such duties.
The reduction of the import duties on tractors and motor vehicles should further encourage agricultural production and car importation through the appropriate channels as opposed to smuggling, which results in loss of revenue to the Government.
Prior to the Finance Act 2020 amendment, the import duty exemption for airlines was solely on the aircraft. Thus, airlines were required to pay duty on imported spare parts and components.
As such, this amendment reduces the tax burden on airline businesses.
Federal Inland Revenue Service (FIRS) Establishment Act amendments
The expansion of the FIRS functions to include revenue collection from foreign governments and persons should further encourage transparency in that regard.
This should further improve the tax refund administration in Nigeria.
This is in line with international best practices and standards and further reduces tax administrative burdens.
This provides ample time for companies to provide adequate information to the FIRS.
This should assist in curbing tax evasion and avoidance. The information received can also aid the FIRS during tax audits.
Nigeria Export Processing Zone Act (NEPZA) and Oil and Gas Export Free Zone Act (OGEFZA) amendments
This should further ensure transparency in activities being performed by companies in an FTZ.
However, clarity should be provided as to the requisite returns to be filed by such companies, especially with regards to transfer pricing requirements.
Companies and Allied Matters Act (CAMA) amendments
Based on the amended CAMA 2020, unclaimed dividends of all companies were required to be added back to the such company's profits for distribution to the other shareholders of the company if they remain unclaimed after 12 years.
However, pursuant to the Finance Act 2020 amendment, where dividends of a public company quoted on the Nigeria Stock Exchange remain unclaimed for a period of six years or more, the unclaimed dividends should be immediately transferred to the Unclaimed Funds Trust Fund of the Government and remain a debt owed by the Federal Government to the shareholders and be available for a claim by the shareholder(s) at any time.
The Unclaimed Funds Trust Fund is to be used by the Government in financing its budget. The practicability and public acceptance of this provision is still uncertain.
There is also uncertainty as to the process for making the claim by a shareholder(s) from the Fund.
Crisis Intervention Fund and Unclaimed Funds Trust Fund Act amendments
The amendment provides for the establishment of the Fund from the Consolidated Revenue Fund and special accounts in sum of NGN500 billion or any other sum as may be approved by the National Assembly.
Sectorial key changes
i. Agricultural sector
In recent years, the agricultural sector has been a major focus area of the Government for improvement. The amendment to the tax laws provides for reduced tax burdens for companies in the sector and reflects the commitment of the Federal Government to encourage large scale agricultural production in Nigeria. Below are specific changes introduced in the Act:
ii. Financial services
iii. Small companies
iv. Shipping and air transport
v. Oil, gas and energy sector
vi. Oil and gas free trade zone entities
vii. Telecommunications, media and technology
Following the enactment of the Finance Act, all companies (including, foreign companies that have a taxable presence in Nigeria) should analyze the provisions of the Act to understand its impact on their businesses' and take advantage of the relevant tax incentives and reduced tax burdens.
In addition, companies should be aware of their tax obligations to avoid penalties for non-compliance.
For additional information with respect to this Alert, please contact the following:
Ernst & Young Nigeria, Lagos
Ernst & Young Société d'Avocats, Pan African Tax – Transfer Pricing Desk, Paris
Ernst & Young LLP (United Kingdom), Pan African Tax Desk, London
Ernst & Young LLP (United States), Pan African Tax Desk, New York
PDF version of this Tax Alert