With just a step for Nigeria’s amended tax laws to become an Act, Nigerians need to keep tabs on the implications of the Finance Bill on the different sectors they play.
Signing the bill into law would mean Nigeria’s plan to consolidate on its slowly growing but stable economy, and reduce its budget deficits is in the offing. Amongst the ways to achieve these but with general implications is the amendment of the excess dividend tax rules to get rid of double taxation and help corporates retain profits, a move that could bolster investor confidence and deliver increased foreign direct investment for the country.
“This particularly affects holding companies on dividends received from their subsidiaries thereby making Nigeria unattractive as a headquarters or group holding company location,” Lagos-based advisory firm PwC said in a recent note. “The Finance Bill proposes changes to limit the application of the tax only to untaxed profits that are not exempt from tax.”
Also, the loopholes that currently exist under the commencement and cessation period – the beginning and the end of the reporting period – in the Companies Income Tax Act (CITA) were also addressed.
The amended Act deletes the old basis for computing basis periods for new businesses and ceasing periods. It further introduces a simplified “actual year basis” for computing basis period during commencement and cessation periods.
According to the Act, where a company permanently ceases to carry on a trade or business in an accounting period, its assessable profit shall be the amount of the profits from the beginning of the accounting period to the date of cessation and the tax shall be payable within six months from the date of cessation.
On the other hand, the tax reliefs of N2,500 per child and N2,000 for each dependent adult would cease to exist. Tax Identification Number will become a requirement to operate new and existing bank accounts, while the penalty for failure to register for value-added tax (VAT) was reviewed upwards to N50,000 for the first month of default N25,000 for each subsequent month of default.
Besides these general implications, the bill also proposes changes that affect some particular sectors of the economy such as the banking industry and capital markets, insurance, energy and utilities, consumer and industrial products, micro, small and medium-sized enterprises, real estate investment companies, and the digital economy.
The banking industry and capital markets
The new Finance Bill introduces ‘thin capitalisation’ benchmark of 30 percent of earnings before interest, taxes, depreciation and amortization (EBITDA) as the limit for interest deduction on loans by a foreign ‘connected person’.
While the bill exempts Nigerian subsidiaries of foreign companies engaged in banking and insurance from this rule, it provides that any excess interest expense can only be carried forward for five subsequent years.
Also, the government introduced an electronic payment option for stamp duty and also increased the stamp duty threshold to N10,000. This implies a one-off levy of N50 will apply to bank transfers on an amount from N10,000 and above.
Furthermore, some Nigerians currently feeling the pains of CBN’s recent directive of N50 on Point of Sale (POS) transactions of N1,000 and above, can now heave a sigh of relief when President Buhari finally assents to the bill.
Insurance companies
In a bid to ensure that insurance companies are taxed in a fair and equitable manner relative to other companies operating in other sectors of the economy, Section 16 of the CIT removed double tax provision and recognises regulatory cost that will be incurred by such companies in compliance with the conditions imposed by the insurance regulator this includes among others provision for outstanding claims.
For example, Section 16(9)(c) suggests that after all deductions have been granted to life insurance companies, the company must have 20percent of its gross income available as taxable profit. Also, for general insurance, tax deductions for other reserves, claims, and outgoings are capped at 25 percent of total premium. Restricting the tax deduction for claims is a significant disruption to insurance business as payment of claims drives customer confidence.
In a bid to ensure that tax deduction obtained is in line with the requirements of section 20(1)(a) of the National Insurance Act, the Finance Bill proposes that the claim for reserve for unexpired risks in a financial year, should be calculated on a time apportionment basis of the risks accepted during the financial year.
The Finance Bill eliminates the restriction of tax deduction for claims and outgoings to a cap of 25percent of total premium. The Finance Bill also introduces an additional allowance of 10percent of estimated outstanding claims for claims incurred but not reported at year-end. This is positive for the industry as valid business expenses of insurance companies would no longer be disallowed from a tax perspective.
Energy & Utility Firms
The Companies Income Tax Act provides that companies engaged in gas utilisation(downstream operation) are granted a series of incentives for utilisation of gas.
These incentives include a tax-free period for up to five years, Accelerated capital allowance after the tax-free period, Tax-free dividends during the tax-free period, Tax deductibility of interest payable on loans obtained with the prior approval of the Minister for a gas project
Until now, withholding tax was not charged on dividends from upstream operations, the new Finance Bill seeks to repeal Section 60 of the Petroleum Profit Tax Act (PPTA) and Section 43 of CITA. This means that dividends from upstream companies will henceforth be subject to withholding tax. The current rate is 10percent (or 7.5percent if payable to recipients of a treaty country).
The Bill creates a proxy for technical, professional and consultancy services performed outside Nigeria by oil and gas companies.
According to the bill, if there is a significant economic presence for the services provider in Nigeria. The Nigerian recipient of such services will now be required to deduct WHT from the applicable fees which will be regarded as the final tax in the hands of the recipients.
This could increase the costs of such services to Nigerian companies where the service providers pass on the withholding tax costs through “net of tax” clauses especially if there is no tax relief available to the foreign company in its home country.
Consumer & Industrial products players
The Bill includes a definition of “basic food items” for the purpose of VAT exemption. This is defined as “agro and aqua-based staple food” and include items such as bread, cereal (raw or semi-processed), cooking oil, culinary herbs (if raw and unprocessed), fish (other than ornamental), flour and starch (refined or unrefined), fruits (including dried), milk (including powdered), nuts and pulses (including roasted, fried, boiled, salted), roots (also in the form of flakes), salt (excluding industrial), vegetables (dried or ground), and water (excluding sparkling or flavoured). The Bill also includes sanitary items in the exemption list.
Section 41 of the Companies Income Tax Act (CITA) grants a 15 percent tax credit to a company that incurs capital expenditure to replace “obsolete” plant and machinery. This is in addition to the capital and investment allowances ordinarily available on such capital expenditure. The Bill has deleted this provision in order to rationalise incentives and due to the ambiguity on what constitutes an “obsolete” plant or machinery, making the incentive redundant in practice.
The Bill seeks to increase the VAT rate from 5 percent to 7.5 percent to help reduce budget deficits, fund the new minimum wage and provide social services. The implication is that the VAT rate increase will result in higher-cost production and investment, which will be passed on to the consumers.
Only a business that has an annual turnover of NGN 25 million and above, will be required to register for VAT, charge and collect VAT on its sales. This enhances the competitiveness of small businesses and avoids the burden of administering VAT on such small businesses by the
Micro, small and medium-sized enterprises
The micro, small and medium-sized enterprises are one of the biggest beneficiaries of the new finance bill.
One of such privileges is that, while CITA imposes 30 percent corporate income tax on the profits of a company, the bill exempts small businesses with turnover less than N25 million from the tax, and a lower corporate income tax rate of 20 percent will apply to medium-sized companies with turnover between N25 million and N100 million.
Companies that make CIT payment on or before 90 days from the due date for filing will be entitled to a bonus of 2 percent and 1 percent bonus for a medium-sized and a large firm, respectively.
Also, the bill introduces VAT registration threshold of N25 million turnover, implying that SMEs that do not meet the threshold would not need to register for VAT and as a result would not be able to recover input VAT on their purchases.
Real estate investment companies
The bill proposes to exempt dividend and rental income received by real estate investment companies on behalf of their unitholders from corporate income tax. However, this is based on the provision that a minimum of 75 percent of the dividend or rent earned is distributed within 12 months of the end of the financial year in which the income was earned.
Digital economy
The new Finance Bill introduces two additional categories of Fixed Base (FB) to capture e-commerce and technical/management/consultancy services provided remotely by non-resident companies (“NRCs”) to Nigerian consumers, to the extent that the providers have a significant economic presence in Nigeria.
The VAT Act requires a non-resident company that “carries on business in Nigeria” to register for VAT, and issue VAT invoices to its Nigerian customers. This VAT would be deducted by the Nigerian recipient and paid to the FIRS. Even where the NRC does not include VAT on its invoice, the Nigerian company is expected to now “self-charge” the VAT and remit.
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