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Finance Act, 2020 Impact Analysis January 2020 home.kpmg/ng
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
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
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
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
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
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
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
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
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, 2020Finance 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 | 11Finance 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, 2020Finance 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 | 13Finance 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, 2020Finance 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 | 15Finance 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, 2020Finance 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 | 17Finance 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, 2020You can also read
