In the past, among the issues in Nigeria’s fiscal realm that discouraged investments, local and foreign, was multiple taxation. But more than that, Nigeria’s tax regime had been lopsided, where a small segment of the economic players shouldered much of the tax burden, with a large segment basking outside of the tax net.
The amended fiscal policies of the 2019 Finance Act may prove to be a brightener to Nigeria’s revenue future.
As presented by Proshare Economy, the Act makes substantial amendments to multiple legislation viz: the Companies Income Tax Act, Personal Income Tax Act, Value Added Tax Act, Petroleum Profits Tax Act, Capital Gains Tax Act, Customs and Excise Tariff (Consolidation) Act, and the Stamp Duties Act. The new Act aims to achieve, among other things, an increase in the tax base, provision of incentives for small businesses by a reduction in their tax burdens, the taxation of significant players in the digital economy, elimination of double taxation, and improving local production via the mechanism of excise duties.
The Act makes a fundamental provision relating to the taxation of non-resident companies. Companies that provide digital services are regarded as having a ‘significant economic presence’ in Nigeria and will be subject to companies’ income tax. The Significant Economic Presence Order issued by the Minister of Finance provides clarification on what a ‘significant economic presence’ constitutes, some of which include that the company offers its goods or services through a digital platform in naira, has a domain name ending in ‘.ng’, has a gross turnover equal to or surpassing N25 million derived from the activities listed in the order, etc. Companies such as Meta, Twitter, Amazon, Airbnb will be liable to pay tax in Nigeria. Although no enforcement mechanism is provided, it is expected that the Federal Inland Revenue Service (FIRS) will lay down a set of principles or guidelines in that regard. Additionally, 10 per cent final withholding tax is to be charged on any payments to foreign companies providing technical, management, consultancy, or professional services.
While small businesses are exempt from companies’ income tax, middle-sized businesses are charged at a rate of 20 per cent. It is expected that easing the tax burdens of small businesses will foster their growth. Companies participating in agribusiness are to enjoy a tax holiday of five years, and real estate investment companies will be exempt from withholding tax on dividend and rental income received by it as much as 75 per cent of that amount is distributed within 12 months after the end of the financial year. Compensating payments which qualify as dividend or interest received by an approved agent from a borrower or lender in a Regulated Security Lending Transaction and compensating payments which qualify as dividends under Section 9 of the Finance Act.
To encourage the prompt payment of taxes, middle-sized and large businesses which remit CIT 90 days before the due date are also granted 1 per cent and 2 per cent of the tax paid as credit against future taxes. The Act additionally makes further provisions under which CIT will not be paid on excess dividends and they include those paid out of retained earnings that have been taxed under the CITA, PITA, PPTA, and CGTA, paid out of tax-exempt and franked investment income by a real estate investment company from its rental or dividend incomes. Section 43 of the Companies Income Tax Act which imposed taxes on interim dividends was repealed.
The Petroleum Profits Tax Act also was amended to the extent that profits that have been subject to petroleum profits tax will be subject to 10 per cent withholding tax. However, shareholders who reside in a country that has signed a double tax treaty with Nigeria will be taxed at a reduced rate of 7.5 per cent.
Amendments were also made to the Personal Income Tax Act. Under the Finance Act, a Tax Identification Number is required to open or maintain a bank account. The Act also repeals references to the reliefs for dependents and children. Taxpayers are also permitted to deliver a notice of objection as a response to a notice of assessment.
The Value Added Tax Act was additionally amended. The VAT rate was increased from 5 per cent to 7.5 per cent and the category of goods and services subject to it was expanded under the recently passed law. Goods are liable to VAT if they are supplied in Nigeria and physically present at the time of supply, imported, installed, or assembled in Nigeria, and where the beneficial owner of the rights in or over the goods is in Nigeria. It is also applicable where the rights in relation to said goods are either exercisable, situate, or registered in Nigeria. Exported services which refer to those rendered by a resident of Nigeria to a person who is outside Nigeria will not be subject to VAT. Taxable persons (which includes businesses) are also required to register for VAT on the first day of business commencement, except small businesses that have a turnover of less than N25 million.
This clear-cut fiscal regime is a step in the right direction as it gives investors a clear vision into the Nigerian economic terrain foreign and local investors are delving into.
However, while the new Finance Act is a step in the right direction, Nigeria will benefit more from increased tax income when the tax net is widened, instead of deepened.
