Investment-starved Nigeria may be shooting itself in the foot with a double taxation policy on holding companies that is deterring investment.
This year alone, a global car manufacturer and technology giant have shelved plans to make Nigeria the headquarters of a holding company (HoldCo) to manage their interests across Africa, according to sources familiar with the matter.
The latest casualty of the crushing double taxation which brings effective tax rate to 60 percent is a multinational oil and gas company that wanted to create a holding company for its Africa operations.
The company snubbed the chance to set up a holding company in Nigeria after tax experts broke down the implications of the excess dividend tax.
“Discussions broke down immediately after the excess dividend tax came up,” a source familiar with the matter told BusinessDay. He declined to name the company.
The discussions fell through last week, with the company opting to go to another African country with a more favourable tax regime, the source said.
Section 19 of the Nigerian Companies Income Tax Act (CITA) imposes what is generally known as excess dividend tax, which provides that where a dividend is paid out of profit on which no tax is payable due to no total (that is, taxable) profits, or taxable profits which are less than the amount of dividend paid, the company paying the dividend shall be charged to tax at 30 percent as if the dividend is the taxable profits of the company for the year of assessment.
This means the income of a company will be subjected to another round of taxation if the company declared dividend higher than its taxable profit. The double taxation is irrespective of whether the company already paid the nominal 30 percent corporate income tax.
The excess dividend tax was intended as a punitive measure for the prevention of tax avoidance mechanisms, but has also attracted wide criticism for overburdening the profits of tax abiding companies.
Tax experts say the controversial law deters investment into Nigeria and is particularly harsh for a holding company.
A holding company is a parent corporation, limited liability company, or limited partnership that owns enough voting stock in another company, that it can control that company’s policies and oversee its management decisions.
Although a holding company owns the assets of other companies, it merely maintains oversight capacities and therefore does not actively participate in running a business’ day-to-day operations.
It is not uncommon for a holding company to receive dividends from its subsidiary or subsidiaries. In fact, dividends received some time may be the only income accruing to such holding company in a year of assessment, thereby resulting into zero taxable income.
However, where such dividends are declared and distributed, such holding company will be liable to pay excess dividend tax, because its dividends would have become more than its taxable profit, thereby attracting the applicability of Section 19.
For multinationals and local investors unwilling to set up a holding company in Nigeria, finding another African country with a more favourable tax regime is very straightforward.
Nigeria’s nominal 30 percent tax rate compares to South Africa’s 28 percent, Egypt’s 22.5 percent and Ghana’s 25 percent.
None of the three countries subscribe to the excess dividend tax practice which means their effective tax rate is closer to the nominal rate, unlike in Nigeria where there is a 100 percent spread.
Nigeria’s review of the controversial tax rate has stalled for more than a decade, bucking the increasing trend of emerging markets lowering their tax rates to attract investment.
“Having an effective tax rate of 60 percent borders on the ridiculous for a country in dire need of investment to revive an underperforming economy and create jobs for a fast growing population,” said Taiwo Oyedele, a partner and head of tax at consulting firm, PricewaterhouseCoopers (PwC).
Such a tax regime renders the country uncompetitive in the global tussle for investment capital.
“It contradicts the country’s investment objective and shows the government is not walking the talk of attracting investment,” Oyedele said.
According to analysts, discouraging multinational HoldCos from setting up shop in Nigeria has negative implications on the economy because senior executives of such HoldCos usually reside in the country, pay taxes and consume goods and services, which Nigeria is currently losing out on.
HoldCos also often take decisions on which jurisdiction Research and Development (R&D) spending is channelled to, as well as help to consolidate and manage treasury operations of all subsidiaries.
Nigerian banks which were mandated by the central bank of Nigeria (CBN) to form holding companies if they wished to keep their non-bank subsidiaries were given a waiver on the excess dividend tax.
“Even with that, a lot of them chose to dispose of their subsidiaries, because they didn’t want to deal with the headache and tax issues that come with the HoldCo structure,” another source said.
LOLADE AKINMURELE
