Finance Act, 2020 Impact Analysis - assets.kpmg

Page created by Elizabeth Mason
 
CONTINUE READING
Finance Act, 2020 Impact Analysis - assets.kpmg
Finance
Act, 2020
Impact Analysis

January 2020

home.kpmg/ng
Finance Act, 2020 Impact Analysis - assets.kpmg
Finance Act, 2020 – Impact Analysis

Contents
 Chapter One
 1                      General Implications of the Finance Act, 2020                  4
                        on the Nigerian economy
 1.1.                   Tax-revenue gap                                                4
 1.2                    How the Finance Act seeks to address the tax-revenue gap       4
 Chapter Two
 2.                     Direct Tax
 2.1                    Capital Gains Tax Act                                          5
 2.2                    Companies Income Tax Act                                       5
 2.3                    Petroleum Profits Tax Act                                      10
 2.4                    Personal Income Tax Act                                        10

 Chapter Three
 3                      Indirect Taxes
 3.1                    Valued Added Tax Act                                           11
 3.2                    Customs and Excise Tariff etc. (Consolidated) Act,             13
 3.3                    Stamp Duties Act                                               13
 Chapter Four
 4                      Consumer Markets and Infrastructure Industry Impact Analysis   14
 4.1                    Consumer Markets                                               14
 4.2                    Construction Industry                                          15
 4.3                    Real Estate Investment Scheme                                  15
 Chapter Five
 5.                     Financial Services Industry Impact Analysis                    18
 5.1                    Banking Sector                                                 18
 5.2                    Insurance Sector                                               19
 5.3                    Capital Market                                                 20
 Chapter Six
 6                      Oil and Gas Industry Impact Analysis                           22
 6.1                    Removal of the tax exemption on petroleum profits dividends    22
 6.2                    Amendment of the Gas Utilization (Downstream Operations)       23
                        Incentive
 Chapter Seven
 7                      Impact on Business Reorganisations                             24
 7.1                    Introduction of minimum holding period                         24
 7.2                    Exemption of assets transferred from VAT and CGT Definition    24
 7.3                    of recognised group of companies                               25

 Chapter Eight
 8                      Impact on the Digital Economy                                  26
 8.1                    Establishment of Digital Permanent Establishment               26
 8.2                    Introduction of place of supply rules                          27

 Conclusion                                                                            28

2 | Finance Act, 2020
Finance Act, 2020 Impact Analysis - assets.kpmg
Finance Act, 2020 – Impact Analysis

                      Preface
                      On 13 January 2020, His Excellency, President Muhammadu Buhari, GCFR, signed the Finance
                      Bill, 2019 into law to become the Finance Act, 2020. Following the President's assent, the
                      Honorable Minister for Finance, Budget and National Planning announced 1 February 2020 as
Wole
                      the effective date for implementing the Value Added Tax rate increase from 5% to 7.5%. The
Obayomi               Federal Inland Revenue Service is expected to issue a clarifying circular in due course.

The Finance Bill was an Executive           The amendments made by the Finance
Bill prepared by the Honourable             Act are intended to raise necessary
Minister for Finance, Budget and            revenue required to defray public
National Planning, which was approved       expenditure, support sustainable
by His Excellency, the President,           increase in public revenue and ensure
Muhammadu Buhari and presented              that tax law provisions are consistent
together with the 2020 Budget               with the national tax policy objectives
proposals on 14 October 2019 to a           of the Federal Government of Nigeria.
joint sitting of the National Assembly.     The amendments are staged across
The Bill was subsequently reviewed by       five broad thematic areas to:
the National Assembly, passed
by the Senate on Wednesday, 20              a) promote fiscal equity by mitigating
November 2019 and the House of                 instances of regressive taxation.
Representatives on Wednesday 27             b) reform domestic tax law to align
November 2019, respectively, prior to          with global best practice.
assent by the President to culminate        c) introduce tax incentives for
into the Finance Act, 2020 (hereinafter        investment in infrastructure and
referred to as “the Finance Act”).             capital markets.
                                            d) support small businesses in line
The passage of the Finance Act is a            with the ease of doing business
significant milestone for Nigeria as           reforms and
it marks a return to an era of active       e) raise revenue for government, by
fiscal supervision motivating regular          various fiscal measures, including,
review of the macro environment and            for instance, increase in the VAT
stimulation of the economy on an               rate from 5% to 7.5%
annual or at least regular basis            This publication contains an analysis
by means of such instruments as a           of the amendments contained in the
Finance Act. It is instructive that the     Finance Act and the expected impact
Finance (Miscellaneous Provisions) Act      of these changes on tax administration,
No.30 of 1999 represents the last time      revenue generation and businesses
Nigeria utilised this budgetary fiscal      operating in various sectors of the
tool in moderating the tax environment      economy.
for business.

The Finance Act introduces changes to
the Companies Income Tax Act, Value
Added Tax Act, Petroleum Profits Tax
Act, Personal Income Tax Act, Capital
Gains Tax Act, Customs and Excise           Wole Obayomi
Tariff Etc. (Consolidation) Act and         Partner & Head, Tax, Regulatory &
Stamp Duties Act. Having now been           People Services
passed by both arms of the National
Assembly, and thereafter assented to
by the President, it is expected that its
provisions will come into force in 2020
calendar year together with the
Budget and the Appropriation Act that
was signed by the President in
December 2019.

                                                                                                          Finance Act, 2020 | 3
Finance Act, 2020 Impact Analysis - assets.kpmg
Finance Act, 2020 – Impact Analysis

    1    General Implications of the Finance                                                                          Ajibola
                                                                                                                      Olomola

         Act on the Nigerian economy                                                                                  Partner

1.1 Tax Revenue Gap                                   estimate of about 4.7%, which was       importance of the Finance Act
                                                      a decline from prior periods.           2020. The Finance Act is the first
      Nigeria’s domestic revenue                                                              of its kind in over two decades and
      mobilization has been one of                     Oil production disruptions and price   is intended to support the funding
      the lowest in the world. This has               shocks have accounted largely           of the 2020 budget. The Finance
      had a severely limiting impact on               for the unimpressive tax revenue        Act contains several long-awaited
      economic growth and creation                    return as the nation has largely        changes to the tax framework
      of an enabling framework for                    depended on revenue from oil            which seek to address issues of
      investments.                                                                            low tax revenue growth, such as
                                                      sources. Oil revenue remitted to        an increase in the VAT rate to 7.5%
                                                      the Federation Account has been         and the introduction of tighter
      According to the Organisation
                                                      lower than its potential level due      deductibility rules.
      for Economic Co-operation
                                                      to the cost of petrol price subsidy
      and Development (OECD)’s
                                                      and insufficient contributions from     In view of global economic and
      Revenue Statistics in Africa 2019                                                       tax trends, the Finance Act also
                                                      Nigerian National petroleum
      report, Nigeria’s tax-to-Gross                                                          seeks to modernize the Nigerian
                                                      Commission. Other factors, such
      Domestic Product (GDP) in 2017                                                          tax system by incorporating
                                                      as legislative uncertainty, have also
      was 5.7%. This was a moderate                                                           recommendations of the OECD on
                                                      impacted investment in the sector.
      increase from the figures reported                                                      taxation of the digital economy and
                                                      Non-oil revenues have been              profits earned
      in 2016 (5.3%). However, when
                                                      stagnant at less than 4% of GDP,        by non-resident companies.
      compared with the same index
                                                      offering no buffer against oil          These proposals have been
      across other African countries over
                                                      revenue volatility.                     recommended for global adoption
      the same period, it was apparent
                                                                                              in recognition of the impact of
      that Nigeria’s tax revenue                                                              globalization and technology,
      generation was significantly low             1.2 How the Finance Act seeks to
                                                      address tax revenue gap                 whereby trade flows increasingly
      for the level of economic activities                                                    transcend traditional and formal
      in the country. Specifically, the 26            Some of the factors highlighted         frameworks. Nigeria will thus be
      African countries (including Ghana              as contributing to the poor tax         one of the few early adopters of
      and Botswana) reviewed in the                   to GDP ratio are a sub-optimal          globally relevant tools for tracking
      OECD’s study reported an average                Value Added Tax (VAT) system            and harnessing tax revenue from
      tax to GDP ratio of 17.2% (11.5                 (which deviates from modern             economic activities that occur
                                                      consumption tax designs),               within our fiscal community.
      basis points higher than Nigeria’s
      ratio)1.                                        comprising a low standard VAT rate
                                                      of 5% and restricted recoverability     Furthermore, the Finance Act
                                                      of input VAT. Other factors, such as    seeks to provide a boost to small
       The Federal Government
                                                      extensive use of tax incentives to      and medium scale enterprises
      implemented tax amnesty                                                                 by reducing their tax burden. It
      initiatives between 2016 and 2018               encourage investment, have
                                                      resulted in a narrowing of the          also seeks to replace existing tax
      to drive up tax revenue and expand                                                      incentives with more targeted
                                                      corporate tax base. A weak tax
      the tax base. However, these                    administration system coupled           incentives to stimulate economic
      initiatives have proven insufficient            with high cost of taxpayer              activity in the capital market and
      to stimulate the type of revenue                compliance has also resulted in a       infrastructure sectors.
      growth required. As at 2018, the                systemic non-compliance and a
      nation’s tax to GDP ratio was                   lack of faith in the tax system.        Finally, the Finance Act amends
                                                      These challenges are typical of a       several onerous tax provisions
      estimated at roughly 6%, a slow
                                                      number of tax jurisdictions,            which have impeded investment
      and unimpressive growth from                                                            in Nigeria, such as the complex
      2016.                                           however, the lack of
                                                      responsiveness of the Nigerian tax      insurance tax rules and the excess
                                                      system in a dynamic and ever            and interim dividend tax rules that
       Recent data from the National                                                          limit the dividend available for
      Bureau of Statistics indicates                  changing economic and business
                                                      environment further exacerbate          distribution to shareholders as
      that Nigeria’s GDP was N31.79                   these issues.                           contained in the Companies
      trillion in the first quarter of 2019                                                   Income Tax Act.
      (Q1 2019), while the total                      It is imperative that the Nigerian
      government collection in taxes                  tax legislation is updated frequently   Overall, the provisions contained in
      was barely N1.5 trillion in that                to respond to the challenges of         the Finance Act are intended to
                                                      today’s business environment            incentivize economic activities to
      quarter. This produced a tax to GDP                                                     stimulate GDP growth and
                                                      which therefore underscores the
OECD Revenue Statistics in Africa 2019 ─ Nigeria
1                                                                                             facilitate increase in the revenue
                                                                                              generated.
4 | Finance Act, 2020
Finance Act, 2020 Impact Analysis - assets.kpmg
Finance Act, 2020– Impact Analysis

 2     Direct Taxes                                                                                    Wole
                                                                                                       Obayomi
                                                                                                       Partner & Head

The Finance Act 2020 provides            2.2 Companies Income Tax Act             commerce, application store,
amendments to the various pieces of          (CITA) Cap C4. Laws of the           high frequency trading,
Nigerian income tax legislation across       Federation (LFN) 2004 (as            electronic data storage,
the key thematic areas. These changes        amended)                             online adverts, participative
are discussed under the relevant tax                                              network platform, online
Acts as follows:                             2.2.1 Taxation of non-resident       payments and so on, to the
                                                   companies                      extent that the company has
2.1 Capital Gains Tax Act (CGTA)                                                  significant economic
                                                   (i) Introduction of Digital    presence in Nigeria and profit
    Cap C1, Laws of the Federation                     and Service Permanent
    of Nigeria (LFN) 2007                                                         can be attributable to such
                                                       Establishment              activity.” The Finance Act
     2.1.1 Restricted tax exemption                                               does not define what
           on compensation for loss of                                            constitutes “significant
           office                                    The Finance Act modifies     economic presence,” but
                                                     the provisions of Section
                                                     13 of the CITA to create a   empowers the Minister of
           The Capital Gains Tax Act                                              Finance to define the term.
           (CGTA) imposes tax at 10%                 nexus for the taxation of
                                                     income earned by foreign     The expectation is that
           on any capital sum received                                            ministerial guidance will be
                                                     companies from technical,
           as compensation for loss                  management, consultancy      provided now that the Act
           of office. The Finance                    or professional services     has been passed.
           Act, however, limits the                  that are remotely provided
           impact of this provision                  to a person resident in      We have discussed this
           by exempting any capital                  Nigeria. The tax payable     extensively in Chapter
           sum of N10 million or less                by such foreign companies    8: Impact on the Digital
           received as compensation                  will be limited to the       Economy.
           for loss of office.                       Withholding Tax
                                                     (WHT) deducted from
     2.1.2 Tax concessions on assets                 them on such payments.
           transferred pursuant to
           a related party business
           reorganisation                            The Finance Act also
                                                     introduces provisions to
           The Finance Act introduces                tax any foreign company
           tax concessions for                       that “transmits, emits or
           business reorganisations to               receives signals, sounds,
           exempt chargeable gains on                messages, images or data
           assets transferred pursuant               of any kind from cable,
           to a related party business               radio, electromagnetic
           reorganisation from CGT,                  systems or any other
           subject to meeting certain                electronic or wireless
           conditions.                               apparatus to Nigeria in
                                                     respect of any activity,
           We have discussed the                     including electronic
           details of this change and
           the impact thereof in
           Chapter 7: Impact on
           Business Reorganisation.

                                                                                                     Finance Act, 2020 | 5
Finance Act, 2020 Impact Analysis - assets.kpmg
Finance Act, 2020– Impact Analysis

2.2.2      Taxation of Dividend

          (ii) Exemption of profits from
               Excess Dividend Tax rule           encouraged to properly track
                                                  the sources of the dividends
              The Excess Dividend Tax             they declare (and possibly
              (EDT) provision contained           disclose these sources on
              in the CITA is intended as          their financial statements) in
              an anti-tax avoidance rule          order to enjoy the
              that creates a minimum              exemptions. It may also be
              level of protection against         useful for some companies
              corporate tax avoidance             to update their current
              using aggressive tax planning       dividend policy to ensure
              schemes. According to the           alignment between the
              rule, dividends paid by a           dividend paid to shareholders
              company in any year should          and the tax payable to
              be deemed to be that                government.
              company’s taxable profit
              for the year, if the actual
              taxable profits is less than      (iii) Amendment of the               Thus, the FIRS’ Public Notice
              the dividend paid in the same           requirement to pay income      of 14 October 2015 on its
              year.                                   tax on interim dividend        decision to commence the
                                                      distributions.                 collection of advance CIT on
              A strict interpretation of this                                        interim dividend payment
              provision has sometimes              Every company liable to tax       came as a surprise to many tax
              resulted in further taxation         under the CITA is required to     professionals and might have
              of profits that have already         make an advance payment of        disrupted/ affected companies’
              suffered tax, i.e., after-tax        its CIT prior to paying interim   cash flows since then.
              profits transferred to retained      dividends. This requirement
              earnings account. In some            is generally regarded by          The repeal of this provision as
              other instances, this provision      taxpayers as moribund,            contained in the Finance Act is,
              has been applied to dividends        though it was not deleted         therefore, a welcome
              paid out of tax-exempt               from the law, after Nigeria       development to many
              profits, thereby, effectively        transitioned in 1993 from the     taxpayers. However, in
              rescinding the tax-exemption         provisional-tax-cum-              deleting the provision, the
                                                   government-assessment era         WHT exemption on dividends
              on those profits. The
                                                   to the self-assessment            in specie has also been
              unintended consequences
                                                   regime. It was in the same        removed. Taxpayers who
              of a strict interpretation of
                                                   year that the scope of            would typically pay dividends
              the rule has caused several                                            in the form of scrip issue are
                                                   transactions liable to WHT,
              disputes between taxpayers                                             therefore encouraged to take
                                                   which was limited at the time
              and the Federal Inland               to interest, royalty, rent and    note of this significant change.
              Revenue Service (FIRS),              dividend payment, was
              some of which have been              significantly expanded to
              adjudicated on by the courts         cover payments relating to
              in favor of the FIRS.                active business transactions.
                                                   Consequently, the general
              The Finance Act seeks to
                                                   view was that the WHT
              mitigate the above incidence
                                                   deducted from companies’
              of (double) taxation by              income from business
              excluding certain profits from       transactions, which is an
              the rule. These profits include      advance payment of their
              franked investment income,           CIT, made the requirement
              after-tax profits, tax-exempt        to pay advance CIT prior to
              income and distributions             paying interim dividend
              made by Real Estate                  redundant.
              Investment Companies etc.

              That said, companies are

6 | Finance Act, 2020
Finance Act, 2020 Impact Analysis - assets.kpmg
Finance Act, 2020– Impact Analysis

2.2.3   Introduction of new expense
        deductibility rules
                                                 It will become mandatory for
        (i)Expenses Incurred in respect          companies to properly track
           of exempt income                      and/or apportion the costs
                                                 relating to their tax-exempt
                                                 business segments and
         The underlying principle                revenue streams to ensure
         for the tax-deductibility of            that such expenses are
         expenses in Nigeria is that             disallowed for tax purposes.
         such expenses must have
         been wholly, reasonably,                Taxpayers are therefore
         exclusively and necessarily             advised to formulate a fair
         incurred for the purpose of             and equitable basis for cost
         the business. The Finance               apportionment.
         Act does not introduce any
         fundamental changes to
         this principle. However, it        (ii)Gross-up Clauses
         modifies the way the rules
         are applied with the intention
                                               The Finance Act seeks to
         of closing loopholes in the
                                               address the deductibility of
         application of expense
         deductibility rules.                  taxes borne by a company
                                               on behalf of another person.
                                               This, for instance, will affect
         One such loophole is that             Pay-As-You-Earn taxes
         a company may deduct                  borne by some companies
         expenses incurred to                  on behalf of their
         generate tax-exempt income            employees, transaction
         (such as foreign-sourced              taxes borne on behalf of
         dividend, interest, rental and        foreign service providers,
         royalty income brought into           landlords, etc. Thus, such
         Nigeria through government-           arrangements may need to
         approved channels, income             be reviewed to manage the
         on bonds, treasury bills etc.)        increased incidence of               Thus, the clarity the Finance
         from non-exempt income.               corporate tax they will              Act brings, by basing the tax-
         Consequently, the non-                create.                              deductibility of such related-
         exempt income is diminished
                                                                                    party expenses
         by an excessive expense
                                            (iii)Management Fees and                on their consistency with the
         deduction and, by extension,
                                                 other related party cost           Transfer Pricing (TP)
         the profits available for tax is
                                                                                    Regulations, would in
         significantly reduced.
                                               The Finance Act eliminates           large parts resolve these
                                               the bureaucracy associated           controversies.
         The Finance Act proposes to
         close this loophole by                with obtaining regulatory
         introducing expense                   approvals required to claim
         deductibility rules.                  management fee-related            (iv)Restriction of deductible
         Accordingly, companies are            expenses and expenses                 interest to 30% of EBITDA
         now permitted to only take a          incurred outside Nigeria for
                                                                                    The Finance Act introduces
         tax deduction for expenses            and on behalf of a company
                                                                                    interest deductibility rules
         incurred in the generation of         as a tax-deductible expense.
         non-exempt income.                    Deductibility of these
         Expenses incurred in the              expenses have been the
         generation of tax-exempt              subject of debate, and even
         income would no longer be             adjudication, in recent years.
         allowed as a tax deduction.

                                                                                                      Finance Act, 2020 | 7
Finance Act, 2020 Impact Analysis - assets.kpmg
Finance Act, 2020– Impact Analysis

              for Nigerian companies and                  deduction rule. This rule                 based on their first, second
              any fixed base of a foreign                 does not however apply                    and third sets of financial
              company in Nigeria. The                     to subsidiaries of foreign                statements thereby eliminating
              rules limit the deductibility               companies engaged in                      the double tax risk associated
              of interest and similar                     the business of banking or                with application of the
              expenses incurred by a                      insurance.                                erstwhile commencement and
              Nigerian company, in respect                                                          cessation rules.
              of debt issued by a foreign
                                                 2.2.4   Simplification of                  2.2.5   Moderation of Foreign Loan
              connected person, to 30%
                                                         commencement and cessation                 Exemption
              of the Nigerian company’s
                                                         rules and elimination of
              Earnings Before Interest,
                                                         the double taxation risks
              Tax, Depreciation and                                                                 Under the erstwhile provisions
                                                         associated with their
              Amortisation (EBITDA) in the                                                          of the CITA, foreign companies
                                                         application
              accounting period.                                                                    were allowed to enjoy full
                                                                                                    (100%) or partial (10%, 40% or
              Interest expense in excess                 The CITA hitherto provided
                                                                                                    70%) WHT exemption where
              of this cap will be disallowed             special rules for determining
                                                                                                    the terms of a loan provided
              in the current tax year but                the tax base of a company in
                                                                                                    to a Nigerian person meet the
              can be carried forward and                 the first three years of
                                                                                                    specific grace period and loan
              treated as tax-deductible for              business and in the last two
                                                                                                    tenor requirements under the
              a maximum of five tax years.               years
                                                                                                    CITA.
              Violation of the interest                  of business. These rules,
              deductibility rules will attract           which were referred to as                  However, the Finance Act
              penalty and interest charges               the “Commencement” and                     modifies this exemption by
              on any adjustments made                    “Cessation” rules,                         revising downward the WHT
              by the FIRS on the excess                  respectively, had often                    exemption applicable on
              interest deducted in a tax                 resulted in double taxation of             interest income on foreign
              year.                                      profits earned in one or more              loans. The revised exemption
                                                         financial years                            rates are now 70%, 40% and
              This provision is based on                 of the company during these                10%.
              Action 4 of the OECD/G20                   periods.
              Base Erosion and Profit                                                               Furthermore, the Finance Act
              Shifting (BEPS) report.                    The Finance Act modifies                   also attempts to resolve the
              Companies will therefore                   the commencement and                       extensive debate on the
              need to review the interest                cessation rules such that                  conditions for qualifying for the
              payable on their related                   companies pay taxes based on               exemption by providing a
              party loan arrangements,                   their accounting periods. The              definition for the terms,
              on an annual basis, to                     implication of this modification           “repayment period” and
              ensure consistency with                    is that companies will now be              “moratorium period”.
              the limitation of interest                 allowed to prepare and file tax
                                                         returns in their first, second             The impact of the modification
                                                         and third years of assessment              may be significant to several
                                                                                                    companies who have existing
                                                                                                    foreign loan facilities
                                                                                                    structured to enjoy the
                                                                                                    exemption. Thus, these
                                                                                                    companies may consider
                                                                                                    proactively evaluating the
                                                                                                    potential impact of the above
                                                                                                    change to their financing
                                                                                                    model.

                                                                                            2.2.6   Minimum tax

                                                                                                    The Finance Act replaces the
                                                                                                    cumbersome procedure for
8 | Finance Act, 2020
Finance Act, 2020 Impact Analysis - assets.kpmg
Finance Act, 2020– Impact Analysis

                          2
        computing minimum tax, under
        the CITA, with a simplified base
        rate of 0.5% of the qualifying
                                                    In line with the Federal
                                                    Government of Nigeria’s
                                                    commitment to encourage
                                                                                           c) increasing the applicable
                                                                                              penalties and interest for late
                                                                                              payment of taxes
        company’s turnover less                     growth and development of the
        franked investment income.                  SEs and MSCs, the Finance Act          d) increasing the applicable
        This modification was made in               introduces a new progressive              penalties for late filing of
        recognition of the need to shift            CIT rate regime. Under the                tax returns to N50,000 in
        the impact of minimum tax                   revised regime:                           the first month and N25,000
        from capital basis to a purely                                                        subsequently.
        revenue-based approach.                 a) Start-ups and SEs with annual
                                                   gross turnover of not more than             These changes are intended to
        The more far-reaching                      N25 million would be                        improve taxpayer compliance,
        amendment of this section is               completely exempted from                    ease tax administration and
        the deletion of the previously             paying CIT subject to timely                enforce prompt payment of
        available exemption for                    filing of CIT returns.                      taxes. It is, however, unclear
        companies with at least 25%                                                            whether the early tax payment
        imported equity capital and             b) MSCs whose turnover exceeds                 incentive offered is significant
        the addition of a new class of             N25 million but is less than                enough to stimulate the type
        companies exempted from                    N100million will be subject to              of taxpayer behavior envisaged
        minimum tax, being small                   CIT at 20%.                                 by the government, or whether
        companies with an annual                                                               the penalties may be
                                                c) Every other companies with                  considered excessive.
        gross turnover of less than N25            annual gross turnover of
        million.                                   N100million and above, which
                                                   are defined by the Finance as       2.2.9   Other noteworthy changes
        In effect, all non-resident
        companies and many foreign-                “large companies,” will pay tax
                                                   at the standard CIT rate of                 a) Requirement for every
        owned companies operating                                                                 company to provide a Tax
        in Nigeria, which were hitherto            30%.
                                                                                                  Identification Number as a
        exempted from paying                                                                      precondition for opening or
        minimum tax, will now fall          2.2.8   Changes to Modalities for                     continued operations of an
        within the minimum tax net                  payment of tax                                account with a bank or any
        (unless they meet the other                                                               other financial institution.
        criteria for minimum tax                    Prior to enactment of the
        exemption). It is expected that             Finance Act, companies were                b) Non-deductibility of any
        this change will create equity              allowed to pay their taxes                    penalties prescribed by any Act
        between multinational and                   either in full, within 60 days                of the National Assembly for
        indigenous companies.                       of the due date of filing their               violation of any statute.
                                                    returns, or in a maximum of
                                                    six-monthly instalments with               c) Modification to the tax rules for
                                                    the final instalment being                    insurance companies. Please
2.2.7   Introduction of a progressive               paid before the 30th day of                   refer to Chapter 5: Financial
        CIT system                                  November in the relevant year                 Services Industry Impact
        Prior to the enactment of                   of assessment.                                Analysis for details.
        the Finance Act, the generally              However, the Finance Act                   d) Removal of the seeming
        applicable CIT rate in Nigeria              modifies the applicable                       restriction on the ability to carry
        was 30% of taxable profits.                 payment terms by:                             forward first year losses
        However, manufacturing and                                                                indefinitely.
        agric businesses in their first 5       a) requiring companies filing self-
        – 7 years were allowed to pay              assessment to pay their taxes               e) Introduction of a specialised tax
        tax at a reduced rate of 20%.              in full on or before the due date              framework for Securities
        Unfortunately, this incentive              of filing; and                                 Lending Transactions. Please
        did not apply to start-ups,                                                               refer to Chapter 5: Financial
        Small Enterprises (SEs) and             b) offering a tax credit equal to 1%              Services Industry Impact
        Medium-sized Companies                     (2% for medium-sized                           Analysis for details.
        (MSCs).                                    companies) of the amount of
                                                   tax paid, where a company pays
                                                   its taxes 90 days before its due
                                                   date for filing.
                                                                                                                        Finance Act 2020 | 9
Finance Act, 2020 Impact Analysis - assets.kpmg
Finance Act, 2020– Impact Analysis

       e) Introduction of specialised tax          j) Deletion of redundant provisions 2.4      Personal Income Tax Act
          rules for a Real Estate                     relating to replacement of                (PITA) Cap P8 Laws of the
          Investment Company.                         obsolete plant and machinery              Federation (LFN) 2004 (as
          Please refer to Chapter 4:                  under Section 41 of the CITA.             amended)
          Consumer Markets and
          Infrastructure Industry Impact           k) Exemption of unit trust dividend          The Finance Act provides the
          Analysis for details.                       from WHT. Please refer to                 following modifications to
                                                      Chapter 5: Financial Services             the PITA:
       f) Reduction of the WHT rate on                Industry Impact Analysis for
          road, bridges, building                     details.                               a. Requirement for every person
          and power plant construction
                                                                                                (body corporate, trustee,
          contracts from 5% to 2.5%.                 Petroleum Profits Tax Act
                                                                                                partnership, etc.) to provide a
          Please refer to Chapter 4:                 (PPTA) Cap C4. Laws of the
                                                                                                Tax Identification Number as a
          Consumer Markets and               2.3     Federation (LFN) 2004 (as
                                                                                                precondition for opening a bank
          Infrastructure Industry Impact             amended)
                                                                                                account and for continued
          Analysis for details.
                                                                                                operations of its bank account
                                                     Under the erstwhile PPTA
       g) Introduction of minimum                                                               in respect of its business
                                                     framework, dividends paid out of
          holding period rules for related                                                      operations.
                                                     after-tax profits were exempted
          party business reorganisations             from tax under                          b. Replacing reference to Federal
          under Section 29(9) of the                 any other taxing legislation.              Board of Inland Revenue
          CITA. Please refer to Chapter 7:           Consequently, investors in                 with Federal Inland Revenue
          Impact on Business                         upstream petroleum operations              Service.
          Reorganisation for details.                in Nigeria were allowed to enjoy
                                                     tax free returns on investment.         c. Removal of the requirement to
       h) Amendment to the export
                                                                                                obtain approval from the FIRS
          profit exemption rules. Please
                                                     The amendment revokes this                 as a precondition for claiming
          refer to Chapter 4: Consumer
                                                     exemption and subjects such                contributions made to a
          Markets and Infrastructure                 investors to WHT, which is                 pension, provident and other
          Industry Impact Analysis for               the final tax payable by the               retirement benefits fund as a
          details.                                   investors on those profits.                tax-deductible expense.
       i) Amendment of the incentives                Please refer to Chapter 6: Oil
                                                     and Gas Industry Impact                 d. Deletion of the provisions
          available under the Gas
                                                     Analysis for details.                      granting children and
          Utilisation (Downstream
                                                                                                dependent relative allowances.
          Sector) Incentive. Please refer
                                                                                                This amendment seeks to
          to Chapter 6: Oil and Gas
                                                                                                resolve the controversies
          Industry Impact Analysis for
                                                                                                surrounding the entitlement of
          details
                                                                                                chargeable persons to children
                                                                                                and dependent relative
                                                                                                allowances in addition to the
                                                                                                consolidated relief allowance
                                                                                                granted under the PITA.

                                                                                             e. Clarification that a notice
                                                                                                of objection submitted via
                                                                                                electronic e-mail will be
                                                                                                considered valid.

10 | Finance Act, 2020
Finance Act, 2020 – Impact Analysis

 3     Indirect taxes                                                                                    Ajibola
                                                                                                         Olomola
                                                                                                         Partner

The Finance Act 2020 contains              increase to 7.5% and                 enjoying the tax benefits
amendments to the legislation on           facilitate economic growth           available. It is hoped that
indirect tax across the key thematic       and development through              once businesses then
areas. These changes are discussed         SMEs, the Finance Act                come into the tax net,
under the relevant Acts as follows:        introduces palliative                they would stay even after
                                           measures for micro and               their businesses grow
3.1 Value Added Tax Act (VATA), Cap        small enterprises.                   beyond the exemption
    V1, LFN 2007 (as amended)                                                   threshold thus allowing their
                                           One palliative measure is            contribution to the treasury
     3.1.1 Increase in VAT rate and        the introduction of a VAT            in future years.
           palliative measures to          compliance threshold. The
           manage its impact               threshold is to exempt               Another noteworthy
                                           companies with an annual             palliative is exemption
           A tenet of Nigeria’s National   turnover of N25,000,000              of services rendered by
           Tax Policy is a gradual shift   or less from registering for         microfinance banks (unit,
           from reliance on direct tax     the tax, charging the tax,           state and national) from VAT.
           to indirect tax for economic    rendering a monthly return           This will, hopefully, create
           growth. To achieve this,        of its sales and purchases           a wider opportunity for
           a progressive increase in       and from the penalties               growth and development of
           the VAT rate and a gradual      prescribed by the Act for            micro, small and medium
           reduction in income tax rate    non-compliance with the              enterprises.
           is recommended. According       administrative provisions.
           to the National Tax Policy,                                    3.1.2 Broadening the scope of
           indirect taxes are more         It is expected that,                 coverage of the Nigerian
           efficiently realised by the     by introducing a VAT                 VAT Act
           FIRS and, therefore, yield a    compliance threshold, the
           higher rate of return, when     cost of tax administration           The erstwhile provisions of
           compared to direct taxes.       will reduce because the              the VAT Act did not contain
                                           FIRS can now focus its               a definition of goods.
           The Finance Act provides        compliance monitoring                Consequently, VAT-able
           for a VAT rate increase         efforts on large businesses          goods had, in practice,
           by 50%, i.e., from 5% to        only. When combined                  been limited to tangible
           7.5%. The rate increase,        with an increased VAT                goods that are not
           when combined with other        rate, increased tax yield            exempted under the First
           VAT-related changes, is         may be achieved on an                Schedule to the Act.
           expected to increase VAT        overall basis. This measure          Incorporeal property was
           revenue significantly.          also encourages many                 generally accepted as non-
                                           more companies to come               VATable, by taxpayers, on
           To mitigate the impact          voluntarily into the formal
           of the revised VAT rate                                              the basis that such
                                           tax net for the purpose of           property neither constitute
                                                                                goods
                                                                                                Finance Act 2020 | 11
Finance Act, 2020 – Impact Analysis

           nor services and supply
           thereof cannot attract VAT.
           In fact, the Federal High
           Court had ruled in the
           case between CNOOC
           Exploration and Production
           Nigeria Limited and the
           FIRS that interest in rights
           in an oil concession is
           an incorporeal property;
           it is neither a good nor
           service, which are the two
           categories of taxable items
           under the VAT Act. This
           judgement further validated
           the view that transactions in
           incorporeal property should
           not attract VAT.
           The Finance Act seeks to                                                             within or outside Nigeria”.
                                                               Nigeria should not be liable     By implication, every
           expand the definition of                            to VAT in Nigeria simply
           “goods” to include ‘any                                                              service supplied (either
                                                               because it was enjoyed by a      locally or imported) to a
           intangible product, asset                           Nigerian-based customer.
           or property over which a                                                             Nigerian-based customer
           person has ownership or                             The differing views on the       and enjoyed in Nigeria
           rights, or from which he                            subject have been debated        becomes VATable in Nigeria.
           derives benefits, and which                         extensively by taxpayers
           can be transferred from                                                              Furthermore, the Finance
                                                               and the FIRS,and has             Act also seeks to resolve
           one person to another,                              even been submitted to
           excluding interest in land”.                                                         the current controversy on
                                                               the courts, including the        the definition of “exported
           Consequently, the VATability                        Court of Appeal (CoA), for
           of incorporeal property,                                                             service”, which is zero-
                                                               determination. According         rated for VAT purposes by
           such as rights, patents,                            to the CoA, in the case
           trademarks, royalty, etc.,                                                           redefining exported service
                                                               between Vodacom and the          as a “service rendered
           that was hitherto debated                           FIRS2, such services should
           has now been legislated in                                                           within or outside Nigeria by
                                                               be liable to VAT in Nigeria if   a person resident in Nigeria,
           favour of the treasury.                             provided to a Nigerian-based     to a non-resident person
                                                               customer and enjoyed in          outside Nigeria”.
                                                               Nigeria. It is noteworthy
                                                               that this conclusion aligns      These amendments would
    3.1.3 Place of supply rules                                with the Organisation of         align Nigeria’s VAT Act with
                                                               Economic Cooperation and         the global best practice of
           Another controversial issue                         Development’s Destination        subjecting a transaction to
           that may potentially be                             Principle.                       VAT only in the jurisdiction
           resolved by the Finance Act                                                          of consumption, i.e., the
           is the VAT-ability (in Nigeria)                     The Finance Act seeks            Destination Principle.
           of services provided                                to resolve this ambiguity
           outside Nigeria by a non-                           by introducing “place of         Certainty around taxation is
           resident company (NRC) to                           supply rules” for services.      critical for raising revenue
           a Nigerian company. One                             According to the Finance         and for business planning
           view on the subject is that                         Act, a service would be          purposes. It also gives the
           such transactions should                            deemed to be supplied in         FIRS the opportunity to
           be liable to VAT in Nigeria                         Nigeria if the “services are     collect revenue that would
           because the recipient is in,                        rendered in Nigeria by a         otherwise be lost simply
           and consumed the services,                          person physically present        because of the ambiguity in
           in Nigeria – meaning the                            in Nigeria at the time of        law and significantly reduce
           services were effectively                           service provision, or the        the costs incurred in
           supplied in Nigeria. The                            services are provided            adjudicating the matter.
           contrary view is that a                             to a person in Nigeria,
           service supplied outside                            regardless of whether
                                                               the services are rendered

Vodacom Business Nigeria Limited vs FIRS; Appeal no. CA/L/556/2018) 12
2

12 | Finance Act, 2020
Finance Act, 2020 – Impact Analysis

3.1.4 Cash basis for accounting       3.1.5 Other noteworthy                 3.2   Customs and Excise Tariff
      for VAT and VAT refunds               amendments                             etc. (Consolidated) Act,
                                                                                   Cap C49, Laws of the
      The Finance Act provides          a) Removal of the requirement              Federation of Nigeria 2004
      clarification that VAT should        for an NRC to register for
      be accounted for on cash             VAT in Nigeria and the                  Prior to enactment of
      rather than accrual basis.           imposition of an obligation             the Finance Act, excise
                                           on a Nigerian customer                  duty (ED) was applicable on
      Accounting for VAT on cash           to self-account for VAT,                excisable goods However,
      basis means that a taxpayer          regardless of whether the               such goods when imported
      can only recover input VAT           NRC charges the VAT or not.             into Nigeria did not attract
      that has been “paid” against                                                 ED.
      output VAT that has been          b) Requirement for a customer
      “collected”. For taxpayers           to self-account for VAT                 The Finance Act seeks
      who do not have input                where the supplier of VAT-              to address this disparity
      VAT to claim, it is only VAT         able goods or services failed           by subjecting imported
      that has been collected              to charge VAT.                          excisable products to ED.
      that should be remitted to
      the FIRS. The amendment           c) VAT exemption on assets                 Please refer to Chapter 4:
      would help manage                    transferred pursuant to                 Consumer Markets and
      taxpayers’ cashflows and             a related-party business                Infrastructure Industry
      reduce the risk that a               reorganisation, subject to              Impact Analysis for details.
      business ultimately bears            satisfying the minimum
      the VAT burden for its               holding (of shares) period
      customers, particularly in           requirement.
      cases of bad debt.                                                     3.3   Stamp Duties Act (SDA)
                                        d) More punitive penalties                 S8, LFN 2007
      A taxpayer who is                    for non-compliance. For
      entitled to a VAT refund is          example, an increase in the             The Finance Act provides
      required to first recover its        penalty for failure to register         for modifications to the
      overpayment as a credit              for VAT as prescribed from              SDA that legalises the
      against subsequent VAT               N25,000 for the first month             charge of stamp duties on
      collections. Any excess              in which the default occurs             electronic receipts and also
      over and above the amount            and N5,000 in subsequent                appoints the FIRS and State
      credited against VAT                 months of default to                    Internal Revenue Service
      collections would then be            N50,000 in the first month,             as the relevant competent
      refunded. By so doing, the           and N25,000 in subsequent               authorities responsible
      current practice of applying         months.                                 for collecting stamp duty
      VAT overpayments as a                                                        on behalf of the Federal
                                        e) Introduction of a                       Government and the State
      credit would be prescribed
      into law. Furthermore,                requirement to deregister              Governments, respectively.
      the administrative cost               for VAT in the event of                This addresses the dispute
      to businesses for making              business cessation.                    between the NIPOST and
      refund claims should reduce       f) A definition of “basic food             the FIRS as to which body
      significantly.                                                               is responsible for collecting
                                           items” and an enumeration
                                                                                   the duties.
      Although the Act does not            of food items that qualify
      prescribe conditions under           as basic food items. For
      which a refund claim may be          example, a clear articulation
      made, it may be reasonable           that bottled water qualifies
      to conclude that refund              as a basic food item.
      claims should only be made        g) Widened scope of VAT
      after it has been determined         exempt items to include
      that the Company would               locally manufactured
      not collect enough output            sanitary towels, pads and
      tax from which recoveries            tampons, tuition relating to
      can be made. Such                    nursery, primary, secondary
      circumstances, in our view,          and tertiary education.
      would include dormancy,
      cessation or companies            h) Deletion of redundant
      whose inputs are used in             provisions in the VAT Act,
      the creation of zero-rated           such as section 32, which is
      goods, etc.                          a duplication of the penalty
                                           for failure to register stated
                                           in Section 8 of the VAT Act.

                                                                                                   Finance Act, 2020 | 13
Finance Act, 2020– Impact Analysis

    4     Consumer Markets and                                                                       Tayo
                                                                                                     Ogungbenro
                                                                                                                        Adetola Ehile
                                                                                                                        Aibangbee

          Infrastructure Industry Impact Analysis
                                                                                                     Partner            Partner

4.1 Consumer Markets                             for operators in retail and consumer          proceeds and the requirement
                                                 markets, is expected to increase              to use the proceeds only for
The Consumer and Industrial Markets              lending to players in the CIM industry        inventory and plant, equipment
(CIM) industry comprises the                     and possibly, reduce lending rates.           and spare parts. This is a
manufacturing and trade sectors of                                                             welcome development.
the Nigerian economy, and accounts               The Finance Act contains additional
for about 23.97% of the country’s real           fiscal measures by which the Federal          However, the Act has yet to
GDP3. While this is significant, it is a         Government seeks to stimulate the             address the constraints on
far cry from the full potential of the           CIM industry, some of which we have           export-oriented businesses
industry, considering Nigeria’s large            highlighted below:                            to declare dividends to its
and youthful population and growing                                                            investors. Considering that the
middle class. Unfortunately, the                                                               intent behind this incentive is to
sector’s growth has been stifled over            4.1.1 Change to the condition for             encourage local manufacturing
the years by the huge infrastructural                  the tax-exemption of export             and exportation out of Nigeria,
gap in the country, particularly in                    profits                                 it is important that the provision
relation to power and transportation.                                                          does not discourage investments
These factors, combined with the                       The CITA exempts the profits            by restricting the ability of such
tough macroeconomic environment,                       derived by a Nigerian company           companies to distribute profits.
low access to credit, uncertainty in                   from goods exported out of              Requiring 100% of export
government policies, dependence on                     Nigeria, “provided that the             proceeds to be reinvested and
foreign inputs, etc., have limited the                 proceeds of such exports are            utilized as contained in the
CIM industry’s ability to enable the                   repatriated to Nigeria and              Finance Act removes the ability
realization of the Federal Government’s                are used exclusively for the            of investors in such business to
economic diversification agenda.                       purchase of raw materials,              reap the rewards of their labour
                                                       plant, equipment and spare              and productivity by sharing or
The Federal Government has made                        parts”.                                 enjoying profits from such export
some efforts to address the above                      In practice, the requirement for        proceeds.
challenges in recent years. For                        repatriation imposes an
instance, it introduced the Road                       unnecessary administrative         4.1.2 Application of excise duties to
Infrastructure Development and                         burden on exporters.                     excisable imported goods
Refurbishment Investment Tax Credit
Scheme in January 2019, in a bid to                    The Finance Act intends                 Prior to enactment of
address road infrastructure deficit in                 to address this by simply               the Finance Act, excise duty
key economic areas of Nigeria. Also,                   requiring affected companies to         (ED) was is applicable on
the recent directive of the Central Bank               demonstrate that the proceeds           excisable goods, such as
of Nigeria to Deposit Money Banks                      were used to procure raw                cigarettes, wines, spirit, beer,
to increase their Loan-Deposit Ratio                   materials, plant, equipment and         stout etc., manufactured in
to 65%, with special consideration                     spare parts, thereby eliminating        Nigeria.
                                                       the need to first repatriate the
Nigerian Gross Domestic Product Report Q3 2019
3

14 | Finance Act, 2020
Finance Act, 2020 – Impact Analysis

      However, such goods when                   a) Brown and white bread;                 While the decision to exempt
      imported into Nigeria does not                                                       agricultural businesses from tax is
      currently attract ED. The Finance          b) Cereals including maize, rice,         a welcome development, it is
      Act seeks to address this                     wheat, millet, barley and              important that a clear framework
      disparity by subjecting imported              sorghum;                               for implementation is defined.
      excisable products                         c) Fish of all kinds, other than
      to ED. Therefore, importers of                ornamental;
      these products will be required                                                4.2     Construction Industry
      to account for the duty to the             d) Flour and starch meals;
      Nigeria Customs Service , going                                                         The Finance Act introduces a
      forward as required under the              e) Fruits, nuts, pulses and                  cap on the withholding tax rate
      Finance Act.                                  vegetables;                               applicable to road, bridges,
                                                                                              building and power construction
      The Act, however, exempts                  f) Roots such as yam, cocoyam,               contracts up to a maximum
      categories of imported                        sweet and Irish potatoes;                 2.5%. This amendment returns
      goods which are not locally                                                             the WHT rate applicable to all
      manufactured/available from                g) Meat and poultry products                 aspects of building, construction
      being charged to excise duties.               including eggs;                           and related activities (excluding
                                                 h) Milk;                                     survey, design and deliveries)
4.1.4 Value Added Tax (VAT)                                                                   from 5% to 2.5% following a
      compliance threshold                                                                    reversal of the 2.5% rate in
                                                 i) Salt and herbs of various
                                                    kinds; and                                November 2016 by a Ministerial
     In keeping with global best                                                              Order in the Federal Republic of
     practice, the Act introduces a              j) Natural water and table water.            Nigeria Official Gazette No. 168
     VAT compliance threshold of                                                              issued pursuant to Section 81 of
     N25 million for taxable persons                In addition, the Finance Act              the CITA.
     in Nigeria. By implication, Small              also expands the list of VAT-
     enterprises with cumulative                    exempt services to include                This amendment contained in
     taxable supplies of less than N25              tuition relating to nursery,              the Finance Act addresses the
     million in a calendar year will                primary, secondary and                    challenges of the recoverability
     not be required to charge output               tertiary education.                       of WHT deducted on payments
     VAT on their invoices or file VAT                                                        to construction companies due
     returns with the FIRS, thereby                 The above measures are                    to the thin margins (typically
     reducing the compliance burden                 aimed at alleviating the                  between 2% and 3%) earned
     on such companies.                             impact of the increase in VAT             by companies operating in this
                                                    rate on the populace.                     space.
     While this is a welcome initiative,
     it will potentially affect the cash
     flow of small manufacturing           4.1.6 Tax Holiday for Agric
                                                                                     4.3      Real Estate Investment
     or trading companies. This is               Business
                                                                                              Scheme
     because such companies would
     be constrained to treat their               The Finance Act amends
     erstwhile allowable input VAT               Section 23(1) of the CITA to                 The Securities and Exchange
     as an additional business cost,             grant tax exemption to                       Commission (SEC) had in
     rather than recover it through the          companies engaged in                         2017 introduced Regulations
     input-output mechanism.                     agricultural production from tax             for the operation of a Real
                                                 for a period of five year(s),                Estate Investment Scheme
     Nevertheless, the potential                 which can be extended for                    (REIS) in Nigeria. According
     impact of this should be                    another three years subject to               to the Regulations, a REIS
     moderated by the tax savings                the determination of                         may be setup as a Trust (Real
     that affected small enterprises             satisfactory performance of                  Estate Investment Trust -
     would enjoy by virtue of their              such business.                               “REIT”) or a Company (Real
     exemption from CIT.                                                                      Estate Investment Company –
                                                 However, the Act does not                    “REICO”).
4.1.5 Expansion of the list of VAT-              stipulate a framework for
      exempt goods and services                  granting this incentive, which is            REISs are investment vehicles
                                                 probably better placed in the                which pool funds from investors
      The Finance Act expands the                Industrial Development (Income               comprising individuals,
      list of VAT-exempt goods in the            Tax Relief) Act (IDITRA) as an               companies, pension funds,
      First Schedule to include locally          incentive that can be granted by             institutional investors etc. for
      manufactured sanitary towels,              the President on the
      pads and tampons, as well as               recommendation of the Nigerian
      the following broad categories of          Investment Promotion Council
      “Basic Food Items”:                        through the Minister for
                                                 Industry, Trade and Investment.
                                                                                                                  Finance Act 2020 | 15
Finance Act, 2020– Impact Analysis

                                                                                        4.3.2 Exemption from Excess Dividend
                                                                                              Tax
                                                                                             A REICO that earns dividend
                                                                                             income that has been subject
                                                                                             to WHT, which is considered
                                                                                             franked investment income,
                                                                                             was predisposed, by virtue of
                                                                                             its portfolio structure, to suffer
                                                                                             double tax on such dividends
                                                                                             in the form of Excess Dividend
                                                                                             Tax, upon further redistribution
                                                                                             of these dividends to its
                                                                                             beneficiaries. Such profits, which
                                                                                             would otherwise not have been
                                                                                             taxed, are exposed to further
                                                                                             CIT at 30%. This means that the
                                                                                             dividend income is essentially
                                                                                             taxed twice. This risk is especially
                                                                                             material since REIS are mandated
                                                                                             by SEC to distribute at least 75%
                                                                                             of their income.
        investments in real estates, such          The tax issues faced by a REICO
        as airports, housing, shopping             and the revised provisions                By amending the CITA provision
        malls, etc. as an asset class.             contained in the Finance Act are          on “Payment of Dividends by a
        REISs are usually established              as follows:                               Nigerian Company” and including
        to acquire, develop and hold                                                         an exemption for distributions
        portfolios of real estate assets,                                                    made by a REICO, this risk, and
                                              4.3.1 Granting REICOs pass-through             the obvious disincentive to invest
        and do not generally hold single
                                                    status                                   in REICOs, is managed.
        assets. While some REISs focus
        their investment according to              Typically, rental, dividend or            A REIS provides a practical,
        geographic location, others are            any other income received by a            effective and efficient avenue for
        structured to invest in specific           REICO on behalf of its investors          investing in real estate through
        property types.                            (beneficiaries) must first suffer         the transfer of legal interests
                                                   tax at 32% (CIT and Tertiary              and has an enormous impact
        A REIT, being a pass-through
                                                   Education Tax) in the books of the        on economic performance as a
        entity, would appear to be
                                                   REICO, before redistribution to           result of increased activities in
        the more suitable vehicle for
                                                   its investors – as dividends. Upon        both the capital markets and the
        operating a REIS from a tax
                                                   distribution of dividends, a REICO        real estate sector.
        perspective. However, despite
                                                   would be statutorily required to
        the tax benefits of operating a                                                      Based on a study conducted on
                                                   deduct 10% WHT.
        REIT over a REICO, a trust has                                                       the impact of REITs in the United
        certain legal constraints that             To manage the double tax risk             States, it was estimated that
        make it unsuitable for the large-          and ensure each investor is taxed         the total economic contribution
        scale investments required for             in their various capacities under         of the US REITs in 2017 was an
        financing the development of               the relevant tax framework,               estimated 2.3 million full time
        infrastructure. Due to the variety,        the Finance Act provides for              jobs and $140.4 billion of labour
        size and value of such properties,         the treatment of a REICO as a             income. REITs directly employed
        investors prefer to diversify              pass-through vehicle. As a pass-          265,000 full time employees who
        their risk by acquiring securities         through, the REICO would be               earned $15.2 billion of labour
        or other interests in a REICO,             exempted from paying tax on               income in the US. REITS also
        despite the tax limitations of             the income received on behalf             contributed approximately $19
        using a company.                           of its beneficiaries, whereas the         billion in property taxes in 2017.
                                                   beneficiaries of the income would         Clearly, REITs are a significant
        The erstwhile tax framework
                                                   suffer tax under the relevant             contributor to the US economy
        for operating a REICO in Nigeria
                                                   tax framework on the income               in terms of jobs, economic
        exposed investors to multiple
                                                   received from the REICO. By so            activities and tax generation. The
        layers of taxation, arising
                                                   doing, the risk of double taxation        impact of REITs in other African
        from receipt and subsequent
                                                   is significantly minimised. For           economies, such as South Africa
        redistribution of dividends and
                                                   clarity, any incomes earned by a          and India, is also worthy of note.
        rent to investors, thereby making
                                                   REICO other than those collected
        investment in a REICO potentially
                                                   on behalf of investors would be
        economically unviable.
                                                   subject to tax.

16 | Finance Act, 2020
Finance Act, 2020 – Impact Analysis

          Nigeria is one of Africa’s largest           The clarity provided by the Finance Act
          economies and the prospects                  on the non-applicability of EDT to
          for REIS in Nigeria is perceived             dividends declared from tax-exempt
          to be strong due to the high                 incomes is also a welcome
          demand for, and undersupply                  development for companies whose
          of, real estate assets, and                  dividend decisions have been adversely
          limited institutional investment.            impacted by the literal interpretation of
          However, the absence of an                   Section 19 of CITA. Also, the EDT-
          enabling tax framework had                   exemption of dividend paid from
          hindered investment in REITs                 retained earnings that have suffered
          and failed to unlock the potential           tax may encourage some companies to
          benefits attributable to REIT                increase the proportion of their current
          activities. It is expected that with         year earnings that is reinvested in the
          supporting tax legislation, a REIS           business, thereby reducing their
          can serve as a tax-efficient “pass           borrowing cost and promoting
          through” vehicle for investment              economic growth and development.
          in real estate and stimulate
          growth of the capital markets,               The changes to the conditions for the
          the real estate sector and the               tax-exemption of export profits may
          economy at large.                            indirectly encourage backward
                                                       integration and stimulate local demand
4.4 Conclusion                                         and capacity building for the production
                                                       of raw materials, plant, equipment and
        The amendments contained in the                spare parts that would otherwise have
        Finance Act should positively                  been procured abroad. This may result
        impact companies operating in                  in increased indigenous and foreign
        the CIM industry and thus spur                 direct investment in the industrial
        the growth of the industry. The                markets sector.
        tax-exemption of small companies
        and the reduced CIT rate for                   The taxation of foreign service
        medium-sized businesses, for                   providers, the restriction of interest
        instance, will increase their                  deductibility and the reduction of the
        capacity to absorb the shocks in               WHT exemption on interest payable on
        the Nigerian macroeconomic                     foreign loans are primarily intended to
        environment and improve their                  mitigate the risk of base erosion and
        cash flow position. These                      profit shifting by multinational
        changes, together with the                     enterprises operating in Nigeria.
        removal of the restriction on                  However, they may result in a
        carrying forward of losses and the             reduction in the volume of foreign
        revision of the                                services and loans, reduce the amount
        “commencement rule”, will                      of foreign exchange required to service
        reduce SMEs’ risk of failure                   them and, ultimately, strengthen the
        during the commencement                        Naira.
        period.
                                                       On the whole, the Finance Act should
        Considering that SMEs generally                result in a significant increase in CIT
        contribute about 45% of total                  (from foreign taxpayers), VAT and
        employment and 33% of GDP in                   excise duties, and thus boost
        emerging economies4, the                       government’s non-oil revenue. This
        expectation is that the above                  would, hopefully, reduce the need for
        incentives would enable Nigerian               increased borrowings to fund the 2020
        SMEs to create employment and                  Federal Government Budget, and
        wealth, thereby reducing the                   change the narrative around Nigeria’s
        rates of unemployment and                      dismal tax-to-GDP ratio.
        poverty in the country, which
        currently stand at 23.1%5 and
        46%6, respectively.
4
    https://www.oecd.org/mcm/documents/C-MIN-2017-8-EN.pdf
5
    NBS Labour Force Statistics for Q3 2018
6
    Global Multidimensional Poverty Index 2019 by United Nations Development Programme and Oxford Poverty & Human Development Initiative

                                                                                                                                           Finance Act, 2020 | 17
Finance Act, 2020 – Impact Analysis

 5        Financial Services                                                                     Ajibola
                                                                                                 Olomola
                                                                                                 Partner
                                                                                                                Nike
                                                                                                                James
                                                                                                                Partner

          Industry Impact Analysis

The financial services industry (FSI)       The depth of financial intermediation      to address the potentially inimical
covers a broad range of operations,         by the commercial banks for the real       existing tax law provisions. The
such as banking, insurance, asset and       sector of the economy has been a           Finance Act sets out to do this and
investment management, payment              major concern for the Central Bank of      we have examined the impact of the
and credit solutions, etc. The industry     Nigeria (CBN) as highlighted by its        relevant provisions on the industry
typically plays a pivotal role in the       recent policy to restrict participation    below.
development of any economy and              in the open market operations and
Nigeria is not an exception in              improve loan-to-deposit ratio to 65%
this regard. Notwithstanding this,          by 31 December 2019. It remains to be      5.1   Banking Sector
despite the strategic nature of the         seen how this directive will impact the
industry, some of its key performance       real sector. More so, the recent fall in   5.1.1 Requirement to obtain the Tax
indicators are yet to be met in Nigeria.    interest rates for bonds and treasury            Identification Number (TIN) of
For example, the insurance sector           bills have made the erstwhile lucrative          new and existing customers
penetration in Nigeria stands poorly at     bonds and treasury bills market, where
0.33% compared to South Africa,             banks invest heavily, less attractive.           The Finance Act imposes a
Morocco and Kenya which have                These interesting dynamics will                  requirement on banks and other
attained 12.89%, 3.88% and 2.37%,           automatically alter the income profile           financial institutions to request
respectively. This gives a broad            of many banks who typically have                 the TIN of a prospective business
indication that the Nigerian insurance      significant investment in these                  customers (companies and
sector is in dire need of stimulation to    instruments.                                     individuals), prior to opening
contribute to Nigeria’s economic                                                             any account for their business
growth. While the National Insurance        Similarly, the microfinance sector has           operations. For continued
Commission recently issued a directive      continued to lag behind in achieving its         operation of an account, banks
for the recapitalization of the insurance   core mandate of driving financial                and other financial institutions
sector by June 2020, the prognosis is       inclusion among artisans, traders and            are required, within three
that not many of the current insurance      other small/micro players. Hence, the            months from passage of the
companies can meet up with that             CBN has issued a directive requiring             Finance Act, to obtain the TIN
deadline. Hence, there have been            microfinance banks to recapitalise by            of business customers who had
ongoing waves of business                   April 2020 - 2021 with an objective to           not provided this information at
restructuring and reorganisation            deepen financial inclusion and ensure a          the time of opening the account.
by insurance companies, possible            more vibrant microfinance sector.                This requirement is not expected
mergers and acquisitions and more           The Government has set up several                to influence the activation or
inflow of foreign direct investments        regulatory measures to revamp the                maintenance of retail bank
are expected in the sector.                 Nigerian FSI. While these measures               accounts set up for personal,
                                            are commendable, it is also important            non-business-related uses.

18 | Finance Act, 2020
You can also read