Banking sector and new tax regime

Going by the dictates of the new tax regime, which took effect January 1, 2022, Nigerian banks are going to pay 0.25 percent to the government through the Federal Inland Revenue Service (FIRS).

The 2021 Finance Bill was signed into law by the Nigerian President on December 31, 2021. It states that a science and engineering levy of 0.25 percent of profit before tax is payable by companies engaged in banking, mobile telecommunication, Information and Communication Technology (ICT), aviation, maritime, and oil and gas with turnover of N100m and above.

Pre-tax profit of banks is estimated to grow by 22.3 percent to N1.33 trillion in 2021 and forecast to grow by 16.2 percent to N1.55 trillion in 2022 by Afrinvest West Africa.

Taiwo Oyedele, head of Tax and Corporate Advisory Services at PwC, explained that the 0.25 percent of profit before tax is payable by companies in specified industries including banking.

“It’s a new tax introduced via the Finance Act 2021 to finance science and engineering”, he said, adding that this certainly increases the tax costs for affected companies while also compounding the problem of multiple taxation.

In his outlook for the banking sector, Bode Agusto, CEO, Agusto & Co, said net revenue from financial intermediation will remain depressed in 2022.

He said non-interest income of banks will rise but the CBN may further reduce rates charged by lenders for some services.

This would add more revenue to the government revenue. Meanwhile, the Service said it raked N6.4 trillion as revenue in 2021.

Muhammad Nami, executive chairman, said despite the global economic challenges occasioned by the Coronavirus pandemic, as well as the disruption of business activities in 2020 by nationwide protests, the FIRS achieved over a hundred percent of its collection target for the year 2021.

He disclosed this while giving the FIRS 2021 performance update, saying that FIRS received revenue of N6.405 trillion from a target of N6.401 trillion.

Nami noted that Companies Income Tax (CIT) amounted to N1.896 trillion; petroleum profits tax amounted to N2 trillion; Value Added Tax (VAT) amounted to N2.07 trillion; electronic money transfer levy amounted to N114 billion; earmarked taxes amounted to N208.8 billion; among others.

According to him, the non-oil sector contributed 68.64 per cent of the total collection in the year, while the oil sector’s contribution was 31.36 per cent of the total collection.

The new tax regime charges FIRS to assess tax on the turnover of a foreign digital company involved in transmitting, emitting, or receiving signals, sounds, messages, images or data of any kind including e-commerce, app stores, and online adverts. Such companies are also obliged to charge, collect and remit VAT to FIRS.

It also says capital gains tax at 10 percent is chargeable on the disposal of shares worth N100 million or above in any 12 consecutive months except to the extent that such proceeds are reinvested in the shares of any Nigerian company.

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The education tax payable by Nigerian companies has been increased from 2 percent to 2.5 percent of assessable profits.

Companies engaged in educational activities are now subject to corporate income tax regardless of whether such activities are of a public character.

Oyedele said that the Finance Act 2021, which has commenced is expected to generate an estimate of N60 billion in revenue yearly for the Federal Government. He however, warned that the development will impact tuition fees and further degenerate human capital in Nigeria in the long run.

“I struggle to understand why we are trying to tax educational institutions, educational institutions, I don’t understand why when every plan that we have speaks to the fact that we need more education not just in terms of the quantity, but the quality and depth of education for us to lead in this new age.

“So, the implications would be that you have increased funds and my estimation is that educational tax will go up by about N60 billion in a year, so that we agree is significant, but it means that higher burden for companies that have to pay this. Tuitions are likely to go up because if I have a school and I have to pay tax now I have to do my calculations, I need to still pay salaries of staffs, I need to do so many other things like infrastructure that you need to maintain, so I’ll just adjust my tuition, Oyedele said.“

Responding to the implication it would have for Nigeria in the long-term, he said, “We may have long-term impacts on human development if we don’t find other safeguards to ensure that these do not create a bigger problem than the solution we are hoping to address.”

FIRS is expected to assess, collect and enforce the payment of Nigerian Police Trust Fund levy. The tax was introduced in 2019 at the rate of 0.005 percent on the net profit of companies operating in Nigeria.

Another key change to the new tax is imposition of excise duty at N10 per litre on non-alcoholic, carbonated and sweetened beverages. This could translate to an increase in the retail price of products by up to 5 percent with lower end products bearing higher burden.

The reduction of minimum tax rate from 0.5 percent to 0.25 percent of turnover (less franked investment income) will apply to any two accounting periods between 1 Jan 2019 and 31 Dec 2021 as may be chosen by the taxpayer.

Only FIRS is to be responsible for the administration, assessment, collection, accounting and enforcement of taxes and levies due to the Federation, the Federal Government and any of its agencies except otherwise authorized.

All tiers of government are now empowered to borrow for “critical reforms of significant national impact” in addition to capital expenditure and human development.

A new report by Afrinvest West Africa said based on the recently passed Finance Bill 2021 (which became operational from 1st January 2022), the FG is expanding its tax net to new frontiers such as a 6.0 percent CIT charge on the Turnover of foreign e-commerce businesses and foreign digital companies attributable to the transmission/receiving of signals to/from Nigeria.

The Act also introduced an excise charge of N10.00/litre on non-alcoholic, carbonated and sweetened beverages, and a 0.25 percent Science and Engineering levy on the pre-tax profit of players in the banking, ICT and telecoms, aviation, maritime, and oil and gas sectors with turnover of N100.0m and above. Furthermore, the Act rollback a 10.0 percent capital gain (CG) tax on shares disposal transactions worth N100.0m and above in a calendar year, provided part or all of the proceed is not re-invested.

Similarly, the National Assembly (NASS) have hinted at the establishment of a tertiary hospital development fund levy and National Youth Service Corps (NYSC) Trust Fund levy (each taking 1.0 percent pre-tax profit of corporates) in 2022, while Godwin Emefiele, the Central Bank governor hinted at the full return of toll levy to major federal roads in 2022.

Although these new tax initiatives fall within the globally acceptable class and could help in closing FG’s deficit gap, the analysts think the FG (on its part) has not done enough in the area of providing basic infrastructure and security, social cover, and business enabling environment that could help mitigate the burden of these new and proposed tax levies on businesses and households.