Finance Bill 2019: Highlights of Major Reform to the Tax Laws in Nigeria

Finance Bill 2019: Highlights of major reform to the tax laws in Nigeria
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Nigeria’s Finance Bill also known as the Nigerian Tax and Fiscal Law (Amendment) Bill 2019 was signed into law on the 13th of January, 2020 by President Muhammadu Buhari. This took place after the passage of the Bill by the House of Representatives on the 28th of November, 2019 . It was preceded by the passage of the Bill by the Upper chamber of the National Assembly (the Senate) on 21 November, following a public hearing held on 19 November.

AIM
The aim of The Bill is to enact fiscal measures supporting the 2020 budget

OBJECTIVES
The bill has five (5) strategic objectives;
  1. Promoting fiscal equity by mitigating instances of regressive taxation
  2. Reforming domestic tax laws to align with global best practices
  3. Introducing tax incentives for investments in infrastructure and capital markets
  4. Supporting small businesses in line with the ongoing ease of doing business reforms
  5. Raising revenues for government, by various fiscal measures, including a proposed increase in the rate of the Value Added Tax (VAT) from 5% to 7.5%
Finance Bill 2019: Highlights of major reform to the tax laws in Nigeria


DIRECT TAXES
COMPANY INCOME TAX (CIT)
1. Charge of Tax- Section 9 of the Company Income Tax Act (CITA)
Subsection 1: Profit of companies subject to tax under the Capital Gain Tax Act (CGTA), Petroleum Profit Tax Act (PPTA), Personal Income Tax Act (PITA), are not taxed again on the same income stream under the CIT Act. This is done in a bid to promote fiscal equity.

Subsection 1(c): Expanded definition of interest and dividend

To implement proposals to promote investments in Securities Lending Transaction and stimulate activity in the Capital market.

Subsection 1 (g): Tax framework applicable to Securities Lending Transactions

To ensure that there is no double tax on such transactions, but that tax is collected once on the economic substance thereof.

2. Identification of a company- Section 10 of the CITA
It requires all companies to provide their Tax Identification Number (TIN) as a precondition for opening and continued operation of their bank accounts. This is done to synchronise tax payers banking and tax databases with a view to improving tax compliance and ease of tax administration.

3. Ascertainment of taxable income in Nigeria (Non-resident Companies) - Section 13 of the CITA
Subsection (2) new paragraph (c): Here, the income sources of digital services tax is distinctively defined. Taxable income derived by foreign companies now includes income from digital services. And as such, Income of non-resident companies providing digital services to Nigerians are to be liable to tax in Nigeria based on profits attributable to their significant economic presence in Nigeria.

Subsection (2) paragraph (f): Income of non-resident companies with respect to technical, consultancy, professional and management services performed outside Nigeria will be taxed at a final Withholding tax rate of 10%.

This section of the Bill also gives power to the Minister of Finance to determine what constitutes a significant economic presence of a non-Nigerian company.

4. INSURANCE COMPANIES- Section 16 of CITA
Subsection (7): Deletion of the four-year limitation on carry forward of losses such that insurance companies can carry losses forward indefinitely.

Subsection (8): Amendment of the provision that restrict allowable deductions on unexpired risks and other deductible gains and outgoings.

Subsection (9) (c): Deletion of the provision (phrase) which require an insurance company to have no less than an amount equal to 20% of gross incomes as total profit for tax purposes in a year.

This modification should encourage investment in the insurance sector.

5. Payment of dividend by a Nigerian company- Section 19
The addition of Subsection (2) in Section 19seeks to amend the excess dividend rules that currently results in double Taxation by excluding tax on;
  1. dividends paid out of retained earnings, provided that dividends are paid out of profits already subjected to tax under CIT, PPT or the CGT Act
  2. dividends paid out of profits that are exempted from Income tax by any legislation
  3. dividends from franked investment income or profits
  4. dividends from rental income distributed by Real Estate investment companies to their shareholders.
6. Profit Exempted- Section 7
Section 7 of the Finance bill provides a general exemption from corporation tax for companies earning lower than 25 million turnover in any tax year (i.e. a typical small company). However such companies would have to deduct withholding tax (WHT) on dividends distributed. This works in conjunction with the new tax relief granted to medium companies.

Finance Bill 2019: Highlights of major reform to the tax laws in Nigeria

Rate of tax
Section 40 of the CITA, Also Section 14 of the Finance bill provides a new tax rate as follows
• For Medium-sized company- tax rate of 20%
• Large-sized company- tax rate of 30%

N.B. Medium sized companies are companies with annual gross turnover of 25 to 100 million naira. While Large-sized companies are companies with annual gross turnover of over 100 million naira

7. Basis for computing Assessable profit – Section 29
Section 29 (3) is replaced to simplify and eliminate the risk of double taxation which exists under the current commencement and cessation provisions. This is done by eliminating Preceding Year Basis (PYB) and thereby making Actual Year Basis (AYB) the only means for calculating assessable profits during commencement and cessation of business.

It is worthy to note that the tax liability payable after cessation is to be made within six months from the date of cessation.

8. Total profit from all sources
Section 31 (2) (a) (ii) is amended by deleting the phrase which stipulates the 4 years limitation of carrying forward losses. The amendment allows company carry forward losses incurred in the course of their business in a fair and equitable manner.

9. Payment of minimum tax – Section 33
Subsection (2)– Deletion of the current basis for computing minimum tax and introducing the new minimum tax rate to 0.5 of the company turnover.

Subsection (3) (b) – Also companies with less than 25 million turnover are to be exempted from payment of minimum tax.

10. Gas Utilization (Downstream Operations) – Section 39
Paragraph (c) in Subsection (1)- Capital allowances incurred during the pioneer period, such that only the Tax Written Down Value of the qualifying capital expenditure shall be carried forward to the post- pioneer period.

11. Time within which tax is to be paid – Section 77
Section 77 (5) - Companies will be entitled to a bonus if they pay their tax 90 days before due date. (2% for medium-sized company and 1% for any other Company). The bonus is to be used to offset future tax liabilities. This introduction will serve as an incentive for early payment of tax under the current self-assessment framework.

PENALTIES
Returns and Provisional Accounts: The penalty for late filing of income tax returns is to be increased to NGN50,000 (previously NGN25,000) for the first month of defaulting and NGN25,000 (previously NGN5,000) for each subsequent month until the returns are filed.

THIRD SCHEDULE (CIT)Tax exemption on certain interests
Interest on Foreign loans: The tax exemptions available for foreign loans have been modified, such that a 100% tax exemption no longer applies (maximum exemption reduced to 70%). The updated repayment period (including Moratorium) and the new rate of tax exemption allowed are as follows;
1. For Seven (7) years and above- 70%
2.For 5 – 7 years- 40%
3.For 2 – 4 years- 10%
4. Below 2 years- Nil percent (0%)

SEVENTH SCHEDULEDeductible interest (Introduction of Thin Capitalization rule)
Introduction of thin capitalisation rules on loans issued to Nigerian companies by their foreign connected parties by:
• Limiting deductible interest paid by the Nigerian companies to the foreign companies to 30% of earnings before interest, tax, depreciation and amortization (EBITDA). However, Nigerian subsidiaries of foreign companies engaged in banking or insurance, are exempt from the new thin capitalization rules.
• Restricting deductions of any excess interest expense which is not fully utilized to a maximum period of 5 years from the year in which the excess interest expenditure was first computed.
• Excess interest not deductible can however be carried forward to the next assessment year but to a maximum of five (5) years from when the excess interest expenditure was first incurred.

PETROLEUM PROFIT TAX ACT
Section 60 of the PPTA is repealed. Dividends paid out of petroleum profits will now be subjected to withholding tax of 10%.

PERSONAL INCOME TAX
Here, a new subsection (1) in Section (49) of the Personal Income Tax Act (PITA) is introduced, it requires individuals to provide their TIN as a precondition for opening a bank account or for the continued operation of a bank account intended for business operations.

INDIRECT TAX
VALUE ADDED TAX
1. Rate of tax- (Section 4 of the Value Added Tax Act (VAT Act). Increase in VAT rate from 5% to 7.5%. This is one of the major highlight and controversies of the Finance bill.

2. Non-Resident Companies to include tax on its invoice- (Section 10)
Introduction of requirement for recipients of a non-resident company's taxable supplies in Nigeria to self account for the VAT payable and remit VAT on the transaction whether or not VAT is included in the supplier's (Non-resident company's) invoice.

3. Taxable person to render returns- (Section 15(1)
Introduction of VAT compliance threshold, exempting companies with less than ₦25million annual turnover of taxable supplies from filing of VAT returns. Also, the value from the sales of a company’s capital asset is excluded from the determination of the VAT threshold. Hence, Small Companies with turnover less than NGN25million are not required to file VAT returns.

FIRST SCHEDULE (VAT)
In the First schedule, locally manufactured sanitary towels, pads or tampons, and tuition fees relating to nursery, primary, secondary and tertiary education are included in the VAT exemption list.

PENALTIES
Registration and deregistration requirements: The penalty for non-compliance is NGN50,000 for the first month and NGN25,000 for each subsequent month in which the failure continues.

Failure to notify of change of address or permanent cessation of trade or business: The penalty for failure to notify the service of change of address within 30 (thirty) days or cessation of business is now N50,000 for first month and N25,000 for each subsequent month in which the failure occurs.

Failure to submit returns: The penalty for non-compliance is NGN50,000 for the first month and NGN25,000 for each subsequent month in which the failure continues.

CUSTOMS AND EXCISE DUTIES
1. Goods liable to excise duty- (Part III, Section 23 of the Custom and Excise Tariff etc. (Consolidated) Act (CET Act)

Goods manufactured in Nigeria, as well as goods imported into Nigeria will be subjected to excise duties.

CAPITAL GAINS TAX
1. Business Reorganisation - Exemption of tax on gains arising from take-overs- (Section 32 of the Capital Gains Tax (CGT) Act)

Introduction of CGT exemption on Group reorganisations, provided that the following conditions are met:

• The sales or transfer of business or trade and its asset is to a Nigerian company and it is for the better organisation of the trade or business;

• The entities involved are part of a recognised group of companies 365 days before the transaction, and there is no disposal of asset within 365 days from the date of the reorganisation.

2. Personal injury- Section 36 (2) of the CGT Act
Compensation for loss of office below NGN10 million is now exempted from capital gains tax.

STAMP DUTY
Definition of stamp and instrument to include electronic means.

1. Provisions as to duty upon receipt - Section 89
Bank transfers from NGN10,000 upwards to attract a one-off duty of NGN50 with the exception of transfer between accounts of the same owner within the same bank.

CONCLUSION
It can be inferred that although the Bill profers some joy, especially for MSMEs, it is obvious that the bill main purpose is to widen the tax rate and base, affecting mostly large companies and individuals. The Government should ensure that the taxpayers' money is utilised properly to create an enabling environment for businesses to flourish, as this would serve as a source of encourage for tax payers and businesses at large.

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