News & Publications

By: Emmanuel Adefeso (Esq.)

INTRODUCTION

The world over, it is an undisputable fact that government requires finance to discharge its manifold duties, which includes but not limited to, security of lives and properties, management of the economy and provision of basic infrastructures. Unsurprisingly, taxation is one of the assured and principal ways by which a government can raise funds to carry out its manifold functions. To have a good tax system, there must be tax laws which complies with the basic characteristics of a good tax system as it is not enough to have good tax laws without a paired and effective tax administrative machinery, because the provisions of the tax laws must be enforced as much as possible in order to ensure that the objectives of the tax system are achieved.

It is in line with the foregoing background that the Finance Act, 2020 (hereinafter referred to as “the Act”) which came into force on 1^st January, 2021 introduced certain changes into the Nigerian tax law landscape. The Act seeks to promote uniformity in the Nigerian tax environment and to improve the ease of doing business in Nigeria. Although, the Act contains provisions which amends certain tax and non-tax legislations, nonetheless, this paper highlights only the significant changes and their respective implication introduced by the Act into the Nigerian tax law landscape.

CAPITAL GAINS TAX ACT CAP C1, LFN 2004 AS AMENDED

The Finance Act, 2020 has amended the Capital Gains Tax Act CAP C1, LFN 2004 on matters majorly on computation of Capital Gains Tax, Location of Assets and Personal Injury. On computation of Capital Gains Tax, the tax is charged at a flat rate of 10% of chargeable gains. All chargeable assets are subject to Capital Gains Tax when disposed at a gain and computation for filing self – assessment returns by taxpayers would be executed twice within a year on June 30 and December 31, but the effective dates for year 2021 are June 30 and December 31 (Section 2 of the CGTA).

On location of assets, the Act has amended section 24(f) of CGTA by inserting after the word, ‘aircraft’ in line 1, the words, ‘used in international traffic’. Furthermore, on personal injury, sums received as compensation for loss of office up to ten million naira (N10m) are not chargeable to Capital Gains Tax (“CGT”) but where any sum received is above this threshold, the amount received in excess thereof, shall be construed and deemed to be chargeable gain and subject to CGT. (Sections 24 (f), and 36 (2), (3), and (4))

The implications of the amendment is that it is now the duty of the person who pays compensation for loss of office, to deduct CGT payable on such chargeable gain at source, and remit same to the appropriate tax authority, within the time prescribed under the Pay-As-You-Earn (PAYE) Regulations. Furthermore, CGT returns is now required to be filed, no later than June 30 and December 31 of the year, in which a chargeable asset is disposed. Also, any person who disposes an asset is required to compute the CGT payable thereon, file a self-assessment return in respect thereof, and pay the tax computed thereon within the specified period.

COMPANIES INCOME TAX ACT (“CITA”)

There are a lot of drastic amendments by the Finance Act on the CITA. There is now a reduction of rate for minimum tax payable by companies from 0.5% to 0.25% of the company’s gross turnover provided that the tax returns are prepared and filed in respect of a year of assessment. However, for companies in the insurance sector, the tax payable by a non-life insurance company for any year of assessment shall not be less than 0.5% of the company’s gross premium whilst, in relation to a company engaged in life insurance business, the applicable tax rate shall not be less than 0.5% of the company’s gross income.

Furthermore, pioneer status can now be granted to enterprises involved in primary agricultural production (“PAP”) (Section 11 of the CITA). However, the categories of such enterprises are Small or Medium companies which may be granted pioneer status for an initial period of four years and this can be renewed for an additional two years. The PAP shall not cover activities related to the intermediate or final processing of produce or any associated manufactured or derivative agricultural products. Also, tax exemption on bank loans granted for the purpose of “primary agricultural production” (Sections 13(2) (e), 14, 16(12), 23(1), 23(1) (c), 25, 27(k), 33, 39, 53, 55, 63, 68, 77(2) and 105) 

Similarly, interest payable on foreign and agricultural loans will remain exempted from tax, only if the moratorium is not less than twelve (12) months and the rate of interest applicable to such loan is not more than the base lending rate at the time of granting, refinancing or restructuring the loan. For companies engaged in shipping or air transport, income from leasing, containers, non-freight operations and any incidental income taxable under the CITA, is exempted from the tax. There is also a deductibility of donations made in cash or kind to the government in respect of any pandemic or natural disaster subject to a maximum of 10% of assessable profit after other allowable donations.

The Act has empowered the Federal Inland Revenue Service (FIRS) to prescribe the form of accounts other than the audited financial statements for small and medium companies as defined under the Company Income Tax Act (CITA). Also, there is now an acceptability of electronic filing of returns as the Act permits that notice of assessment and objections as stated in CITA may be done via courier, email or electronically as may be directed by FIRS in a notice. In addition, the Act has empowered the Tax Appeal Tribunal to conduct hearings remotely via virtual proceedings and where an objection is not raised in respect of an assessment served upon a company, the tax charged as shown in an assessment, shall now be paid by the company within thirty (30) days, instead of the 2-month period previously allowed. Capital expenditure incurred on the development and acquisition of software or other such capital deployed to acquire any electronic application, is now deemed a qualifying expenditure for the purpose of capital allowance under the Second Schedule to the CITA.

A company engaged in trade or business of gas utilization in downstream operations shall not be eligible for tax relief(s) and incentive(s) provided under section 39 of the CITA in respect of the same qualifying capital expenditure as such a company would have claimed incentives available to such business under the Petroleum Profits Tax Act, Industrial Development (Income Tax Relief) Act or under any law in Nigeria.

CUSTOMS AND EXCISE TARIFF, ETC. (CONSOLIDATION) ACT (“CETA”) 

The Finance Act, 2020 has amended the CETA to the effect that goods liable to excise duty in Nigeria now include goods imported into Nigeria as opposed to those goods locally produced in Nigeria. Also the importation of purchased or leased aircrafts, engines, spare parts and components by airlines registered in Nigeria, and which provide commercial air transport services, are now duty-free.

 Furthermore, telecommunication services provided in Nigeria shall henceforth be charged with excise duty, at a rate the President may specify by Order and Vehicles which were exempted from applicable duties and levies under the CETA, shall continue to have such exemption whilst, those liable to excise duty (specifically Tractors & Motor Vehicles for the transportation of persons and goods) shall now be liable to payment of significantly lesser rate(s) of duty and levies: from 35% to 10%, and in some other instances from 35% to 5%.

NIGERIA EXPORT PROCESSING ZONES ACT (“NEPZA”) AND OIL AND GAS EXPORT FREE ZONE ACT (“OGEFZA”)

The Finance Act, 2020 has introduced that Approved enterprises operating in an export/free trade zone are now obligated to comply with the provisions of section 55 of the CITA regarding the filing of returns with the FIRS in the prescribed form and containing appropriate information. This change was pursuant to Sections 58 & 59 of the Finance Act, 2020. In the event of default, there are penalties for non-compliance as specified in the CITA and the FIRS Act. Also, exemption from taxes, levies, duties and foreign exchange regulations currently enjoyed by enterprises operating within an export processing zone shall continue to apply.

PERSONAL INCOME TAX ACT (PITA)

The Finance Act, 2020 has replicated the concept of Significant Economic Presence (SEP) in the Personal Income Tax Act (PITA). No doubts, as the aim is to capture the income of non-resident individuals who are engaged as executors and trustees from technical, management, consultancy or professional services provided to a person resident in Nigeria, as income realised by such individuals under the SEP will now be subject to Withholding tax (WHT) at the rate of 10% but the WHT shall be a final tax on such income. However, the Minister of Finance may determine what constitutes significant economic presence of an individual, executor or trustee, by issuing a SEP Order specifying same (Section 2). Also, Low-income earners earning minimum wage or less are now completely exempted from the payment of personal income tax (including payment of minimum tax).

PETROLEUM PROFIT TAX ACT (PPTA)

Prior to the Act, Section 60 of PPTA provided no tax was chargeable in respect of income or dividends paid out of any profits which are taken into accounts in calculating the amount of any chargeable profits upon which tax is paid. However, the Act has amended this section has it now requires that dividends paid out of petroleum profits are now subject to withholding tax at the rate of 10%.

FEDERAL INLAND REVENUE SERVICE (ESTABLISHMENT) ACT (“FIRS ACT”)

The Act has empowered FIRS to provide assistance to the government of another country or any other persons or body but such assistance must be made under an arrangement/agreement in which the Federal Government of Nigeria is involved. Also, for tax refund purposes, the Accountant-General of the Federation is now required to open dedicated accounts for each tax-type into which money for settling tax refunds shall be paid and the dedicated accounts shall be funded from the respective accounts of Government into which revenue from each tax-type is remitted. Similarly, for purposes collecting and remitting tax due on international transactions in the supply of digital services, as well as automation of tax assessment and information gathering, the FIRS is now empowered to deploy either proprietary or third party digital application/technology. Also, the Act has now codify most of the extant international tax instruments (especially OECD documents) and existing FIRS’ Public Notices.

INDUSTRIAL DEVELOPMENT (INCOME TAX RELIEF) ACT (“IDITRA”)

Small or medium company engaged in primary agricultural production (PAP) shall now be granted pioneer status upon an application made to the President. Thus, Small or medium company may be granted an initial tax-free period of four (4) years and an additional maximum period of two (2) years but any eligible company that benefited from tax holiday under the IDITRA, shall not be qualified for any similar tax holiday incentive under any other law in force in Nigeria.

STAMP DUTIES ACT (“SDA”)

The Act introduced a singular/one-off electronic money transfer levy of Fifty Naira (N50) on all electronic receipt or transfer of the sum of Ten Thousand Naira (N10,000) or more, in relation to monies held and or deposited in any bank or financial institution. Also, subject to the approval of the National Assembly, the Minister of Finance shall make regulations for the imposition, administration, collection and remittance of the levy. The revenue accruing from the implementation of the electronic transfer levy shall be shared on the basis of derivation in a ratio of 15% and 85% between the FGN together with the Federal Capital Territory, Abuja on the one hand and the State Governments of Nigeria on the other hand.

TERTIARY EDUCATION TRUST FUND ACT (“TETFUND ACT”)

The Act has now introduced that Small companies are exempted from the application of the TETFUND Act. It should be noted that a small company for tax exemption purposes under the TETFUND Act, is as defined in the CITA.

VALUE ADDED TAX ACT (“VAT ACT”)

The Finance Act, 2020 has introduced changes to the effect that, in relation to the supply of goods, the supply shall be deemed to take place in Nigeria, where the goods are physically present in Nigeria at the time the goods were supplied in, imported into or installed in Nigeria. Similarly, the supply shall be deemed to take place in Nigeria, where the beneficial owner of the right in or over the goods is a taxable person in Nigeria, and the goods or right is situated, registered or exercisable in Nigeria.

On Services for the purposes of VAT, it shall include anything (excluding goods or services provided under a contract of employment), and include incorporeal or intangible property/assets over which a person has ownership or right or from which he derives benefits, and which is transferable from one person to another but excluding interest in land and building, money or securities. Also, taxable supply of services for VAT purposes shall be deemed to take place in Nigeria, where the service is rendered in Nigeria by a person physically present in Nigeria at the time of providing the service or the service is provided to and consumed by a person in Nigeria (whether or not the service is rendered within or outside Nigeria and whether the legal or contractual obligation to render the service rests on a person within or outside Nigeria) or the service is connected with existing immovable property located in Nigeria (including services provided by agents or professionals, such as engineers, architects, valuers, and other experts).

A non-resident person that makes a taxable supply to Nigeria is required to register with the FIRS for VAT purposes, and obtain a Tax Identification Number (TIN), to include VAT on its invoice for all chargeable goods and services, to withhold and remit the VAT payable to the FIRS in the currency of the transaction, and may appoint a representative in Nigeria for the purpose of its tax obligations.

CONCLUSION

The Finance Act, 2020 will have direct and indirect impact on individual taxpayers and corporate organisations as the Act has introduced plethora of amendments into Nigerian tax law landscape with a view to improving the tax laws, tax administration and the ease of doing business in Nigeria. It should also be noted that it is without doubt that many of the changes introduced were against the backdrop of government’s efforts at pulling the economy out of recession and to improve the tax system in Nigeria as the Act provided some new incentives to critical sectors of the economy. However, in order to actualize the innovations envisage by the Act, it is expedient that the government deploy the needed robust technological infrastructure with a determined executive impetuous to achieve the full implementation of the Act.

Disclaimer: this write-up is intended only to provide general information and does not by itself constitute or serve as legal advice. For further information, we are available to provide detailed legal advice. For more information, contact us at www.asalawpratice.org or email to info@asalawpractice.org; you can also call 09084820000, 08067498777