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Saturday
November 21, 2020 / 02:30 PM / by KPMG Nigeria / Header Image
Credit: NCR
Income Tax
Companies (other than those
engaged in petroleum operations) are subject to companies' income tax (CIT) on
their taxable profits. There are three (3) CIT rates applicable to companies
depending on their turnover. Companies resident in Nigeria are assessed to tax
on their worldwide income, whilst non-resident companies are subject to tax
only on profits accrued in or derived from Nigeria, to the extent that the
profits are not attributable to operations outside Nigeria. Further,
non-resident companies whose activities constitute a Significant Economic
Presence (SEP) in Nigeria are subject to income tax on profit attributable to
such activities in Nigeria.
Individuals are subject to
tax under the Personal Income Tax Act (as amended). Resident individuals are
subject to tax on all personal income, including income derived from outside
Nigeria (except those specifically exempted from tax). Generally, the tax is
collected by the government of the State in which the individual resides,
except for certain categories of individuals whose taxes are payable to the
Federal Government.
Non-resident individuals
are liable to tax on Nigerian-sourced income. The income of a non-resident from
an employment, profession, vocation or business in Nigeria is generally taxed
in the same manner as that of a resident, irrespective of where the income is
paid. However, investment income derived from Nigeria by a person resident
outside the country is only liable to withholding tax.
Rates
1. For a company in its first five years of petroleum
operations, the applicable rate is 65.75%. The petroleum profits tax rate for
companies operating in the deep offshore and inland basin areas under
Production Sharing Contracts with the Nigerian National Petroleum Corporation
is 50% flat for the contract area. There are plans to vary the tax rates
through the Petroleum Industry Bill, 2020 that is currently being reviewed by
the National Assembly. However, for the Bill to become law, it must be passed
by the National Assembly and assented to by the President.
2. This relates to withholding tax (WHT) deducted at source.Dividend
received after deduction of WHT is regarded as franked investment income and is
not liable to further income tax.
3. WHT deducted at source is the final income tax due
on the income.
4. The current PIT table for individuals and joint venturers
or partners in unincorporated entities is shown below:
The Federal Inland Revenue Service (FIRS) has the
discretion to assess non-resident companies (NRCs) to CIT at the higher of
actual profit basis (determined based on audited accounts) and deemed profit
basis (currently 20% of revenue). Until 2015, it was the practice of the FIRS
to assess non-resident companies to CIT on deemed profit basis only. However,
the FIRS in that year issued a public notice on the filing of Tax Returns by
NRCs under the CIT Act, Cap C21, Laws of the Federation of Nigeria (LFN) 2004
(as amended) requiring NRCs to file their tax returns on actual profit basis,
in compliance with Section 55 of the CIT Act. The tax returns would comprise of
the audited financial statements and income tax computations, showing the
taxable income, tax-deductible expenses and capital allowances of the NRC.
The notice issued by the FIRS specifies the
commencement date as 2015 year of assessment, covering the basis period of an
accounting period ending in 2014.
Transfer
Pricing (TP) and Thin Capitalisation Rules
The new FIRS' Income Tax (Transfer Pricing) Regulations, 2018("the new Regulations"), which
repealed the Income Tax (Transfer Pricing) Regulations, 2012 commenced on 12
March 2018 and is applicable to basis periods of taxpayers beginning after that
date. The Regulations require that transactions between related parties be
conducted at arm's length.
To satisfy
this requirement, taxpayers are required to provide documentation sufficient to
verify that the pricing of controlled transactions is consistent with the arm's
length principle. In addition, taxpayers are obligated to complete and file TP
declaration and disclosure forms with the FIRS in respect of their
related-party transactions, at the time of filing their tax returns. TP
policies and contemporaneous documentation are to be submitted to the FIRS when
requested.
Though the
new Regulations retained the scope of the defunct 2012 Regulations, it
introduced some major changes such as significant administrative penalties for
non-compliance, procurement arrangements, safe harbour, connected persons,
capital-rich-low-function companies, intragroup services and intangibles,
transfer pricing documentation.
Nigeria has
no specific thin capitalisation rules. Thus, generally speaking, there are no
ratios which may limit the amount of debt that may be applied to fund a
company. However, the Finance Act, 2019 introduced a new deductibility rule
limiting the deductible interest expense incurred by a Nigerian company in any
tax year on debts issued by a foreign connected person to 30% of Earnings
Before Interest, Tax, Depreciation and Amortization.
Further,
companies that intend to engage in the banking or insurance industry are
required to have specified minimum paid-up capital, capital adequacy ratios and/or
solvency margins. Resident companies that intend to employ expatriates are also
required by the Federal Ministry of Interior (FMI) to have a minimum authorised
share capital of N10 million (about
US$26,281.21 at US$1: N379.5) which must be issued
and fully paid up.
Country-By-Country
Reporting Regulations
The FIRS
published the Income Tax [Country-by-Country (CbC) Reporting (CbCR)]
Regulations, 2018 ("CbCR Regulations") on 19 June 2018, with the commencement
date of 1 January 2018. The CbCR Regulations require Multinational Enterprises
(MNE) Groups headquartered in Nigeria with a consolidated revenue of N160 billion or above to file CbCR with the FIRS
annually.
Nigerian
resident members of MNE Groups, headquartered outside Nigeria, are required to
notify the FIRS of the identity and tax jurisdiction of the entity that will be
responsible for filing the CbC report, where the Group has a consolidated
revenue of EUR750 million or near equivalent in the domestic currency of the
jurisdiction of the Ultimate Parent Entity (UPE) or surrogate parent entity.
However, where the CbCR Regulations have not been implemented in the
jurisdiction where the UPE is tax resident, the Nigerian entity is required to
file the CbC Report.
The due date
for filing the CbC report is not later than one year after the end of the accounting
period to which the report relates. The CbCR Regulations also impose stiff
penalties for non-compliance.
Income Tax (Common
Reporting Standard) Regulations
The FIRS issued the Income
Tax [Common Reporting Standard (CRS)] Regulations, 2019 ("the CRS
Regulations"), which commenced on 1 July 2019. The FIRS further published the
Income Tax (Common Reporting Standard) Implementation and Compliance
Guidelines, 2019 ("the CRS Guidelines") to supplement the CRS Regulations.
The CRS Regulations gives
effect to the:
The CRS Regulations aims to
improve international tax transparency and reduce tax evasion among taxable
Nigeria residents with income from other jurisdictions. In accordance with the
CRS Regulations, Nigerian Financial Institutions are required to submit certain
information on reportable accounts to the FIRS annually.
The due date for filing the
CRS returns is 31 May of the year following the calendar year to which the
returns relate. The CRS Regulations also impose stiff penalties for
noncompliance. Transaction Taxes These include value added tax, capital gains
tax, withholding tax and stamp duties.
Value Added
Tax (VAT)
VAT is a
consumption tax levied on the supply of all goods and services supplied in or
imported into Nigeria, except those specifically exempted from the tax by the
VAT Act and Executive Orders. The Finance Act, 2019 defined goods as "any
intangible product, asset or property over which a person has ownership or
rights, or from which he derives benefits, and which can be transferred from
one person to another, excluding interest in land", and services as "anything
other than goods, money or securities which is supplied excluding services
provided under a contract of employment". The Finance Act, 2019 also introduced
other significant amendments to the provisions of the VAT Act. The current VAT
rate is 7.5% effective from 1 February 2020.
VAT on goods
and services payable to the following persons is required to be deducted at
source by the recipient and remitted to the FIRS:
i. Non-resident companies
ii. Persons supplying goods and
services to companies operating in the oil and gas industry
iii. Persons supplying goods and
services to government ministries and parastatals
Capital Gains
Tax (CGT)
CGT is
imposed at a rate of 10% on capital gains accruing from the disposal of any
asset, corporeal or not, irrespective of where it is situated, and whether it
is owned by an individual or corporate entity.
Transactions
that are subject to income tax are usually excluded from the scope of CGT, as
are gains of exempt organisations and institutions. Where assets located outside
Nigeria (as defined in the CGT Act) are disposed of by a non-Nigerian company,
CGT is only charged in respect of that part of the gain which is brought into
or received in Nigeria.
Generally,
gains on transfer of stocks, shares and Nigerian Government securities are
exempt from CGT.
Withholding
Tax (WHT)
Generally,
WHT is an advance payment of income tax, deducted at source on qualifying
transactions. It may also represent the final tax liability on certain passive
and franked investment incomes.
Where WHT is
deemed to be an advance payment of income tax, it can be utilised as a credit
against the beneficiary's income tax liability for the relevant year(s) of
assessment.
Below is a
table of the WHT rates applicable to various transactions:
Stamp Duty
The Stamp
Duties Act (SDA), Cap S8, LFN, 2004, as amended by the Finance Act, 2019 is the
legal basis for the imposition of stamp duties in Nigeria. The SDA provides
that dutiable instruments specified in the schedule to the SDA be stamped at
the applicable rate and the duty remitted to the relevant tax authorities.
Dutiable instruments include most legal instruments such as agreements, awards,
bonds, and leases. Stamp duty is payable at the rate of 0.75% on a company's
authorised share capital and any increase thereon. Instruments on which duty
would be payable by the government are exempt from duty.
Documents
relating to the transfer of stocks and shares are also exempt from stamp
duties. However, for transactions executed through brokers or agents, an ad-valorem
stamp duty applies on the contract note.
The Finance
Act, 2019 amended the SDA by including electronic and digital transactions in
the definition of "stamp", "stamped" and "instrument" and legalizing the
imposition of stamp duty of N50 on all electronic
receipts/ transfers from N10,000 and above for all
types of account. The SDA, as amended by Section 53 of Finance Act, 2019,
designates the FIRS and State Internal Revenue Service as the relevant
competent authorities responsible for collecting stamp duty on behalf of the
Federal Government and the State Governments, respectively.
Double Tax
Treaties and Reduced Tax Rates
Investment Information
Investment
Rules
Investment in
Nigeria is regulated by the Nigeria Investment Promotion Commission (NIPC) Act
1995, with limited restrictions on investors.
Foreigners
and their Nigerian counterparts can invest and participate in any enterprise in
Nigeria, except for those on the following 'negative list':
i. production of arms and
ammunition
ii. production and dealing in
narcotic drugs and psychotropic substances
iii. production of military and
parliamentary wear and accoutrement.
A foreign
investor is required to apply to the FMI for a Business Permit at the time of
applying for expatriate quota , which they will require to employ expatriates.
Foreign investors are required to bring in equity capital into the country on
the basis of which the receiving bank will issue a Certificate of Capital
Importation (CCI) in respect of equity investment in a Nigerian company. The
CCI is one of the documents required by the NIPC to register a foreign
enterprise in Nigeria. It is also required for remittance of dividends and
repatriation of capital and accretion thereto in the event of divestment.
Generally,
there are no restrictions on repatriation of profits by foreign investors as
long as the documentation requirements are met, and appropriate taxes are paid.
Investment
Incentives - General
i. Income in the form of
interest earned from Federal Government short-term securities is exempted from
CIT and PIT. Coupons paid on bonds issued by the Federal, State and Local
governments, and corporate bodies are also exempted from the taxes.
ii. Proceeds from the disposal
of the bonds and securities listed in (ii) above are exempted from VAT.
iii. Investment allowance of 10%
on qualifying expenditure on plant, machinery and equipment.
iv. Rural investment allowance
of between 15% and 100% of the cost incurred in providing
facilities/infrastructure in rural areas.
v. Capital allowance of 95% in
the first year in respect of plant and machinery purchased to replace old ones.
vi. Tax exemption of between
10% and 70% of the interest earned on foreign loans advanced to companies in
any industry, where the terms and tenor of the loan satisfy the conditions
specified in the law.
Incentives for 'Pioneer Companies'
Under certain
circumstances, pioneer status may be granted to companies (including
foreign-owned companies registered in Nigeria) involved in designated
industries. The fiscal incentives available to pioneer companies include:
i. Exemption from income tax
for three years with a possible extension for another two years.
ii. Capital expenditure on
qualifying assets incurred during the tax relief period is treated as having
been incurred on the first day following the tax relief period. Pioneer
companies are therefore able to fully claim capital allowances on such assets
after the pioneer period.
iii. Tax-free dividends during
the holiday period.
iv. Losses in the relief period
may be set off against profits after the end of the period.
Incentives
for the Agricultural Sector
i. Companies engaged in
agricultural trade or business are not liable to minimum tax.
ii. Exemption from restriction
of capital allowance claimable by the companies to 662 /3% of assessable
profit.
iii. Tax exemption of the
interest earned from agricultural loans, provided the moratorium is not less
than 18 months and the rate of interest is not more than the base lending rate
at the time of the loan.
iv. Exemption from income tax
for an initial of five years with a possible extension of three years based on
satisfactory performance of agricultural production.
Export and
Mining Enterprises Incentives
i. A wholly-export-oriented
company established outside an export processing zone (EPZ) is exempt from CIT
for its first three tax years, provided the export proceeds constitute at least
75% of its turnover and it repatriates at least 75% of the export earnings to
Nigeria.
ii. Plant, machinery, equipment
and accessories imported exclusively for mining operations in Nigeria are
exempted from customs duties.
iii. A new company engaged in
the mining of solid minerals will enjoy a tax holiday of three years while
wholly-export companies with turnover of less than N1 million are subjected to CIT at 20% in the first
five years. However, such companies will now be eligible for income tax
exemption applicable to companies with less than N25 million
turnover introduced by Finance Act, 2019
iv. Free trade zones and EPZs
are designated from time to time and enterprises operating in such designated
zones enjoy tax exemption and liberalized exchange control measures.
Incentives
for the Power Sector
i. A three (3) year income tax
holiday, with possible renewal for additional two (2) years.
ii. Accelerated capital
allowances after the tax- free period in the form of a 90% annual allowance
with 10% retention for investment in plant and machinery.
iii. An additional investment
allowance (uplift on the cost of the asset) of 15 per cent which does not
reduce the value of the asset.
iv. Tax-free dividends during
the tax-free period where the investment for the business was made in foreign
currency.
v. Plant, machinery and
equipment purchased for utilisation of gas in downstream petroleum operations
are VAT-exempt.
vi. The Customs, Excise Tariff,
etc. (Consolidated) Act exempts from custom duties, “any machinery, equipment
or spare part imported into Nigeria by an industrial establishment engaged in
the exploration, processing or power generation through the utilization of
Nigerian gas, for its operation.
vii. Zero duty on the
importation of equipment and machinery
viii. The List of Pioneer
Industries and Products includes electricity power generation, transmission and
distribution as a pioneer industry. However, companies enjoying gas utilization
incentives in respect of their qualifying capital expenditure are ineligible
for any other tax incentive, including the Pioneer Status Incentive on the same
investment.
ix. WHT on power plant
construction contracts is reduced from 5 per cent to 2.5 per cent
Incentives
for Real Estate Investment Companies
The Finance
Act, 2019 introduced specialized rules for the taxation of real estate
investment companies (REICs) in Nigeria. Prior to the Finance Act, real estate
investment schemes were exposed to multiple levels of taxation, arising from
receipt and subsequent redistribution of dividends and rent to investors,
making them less attractive to investors. To manage the double tax exposure,
the Finance Act, 2019 introduced the following incentives for REICs:
i. Granting pass-through
status to REICs.
ii. Exemption of dividend and
rental income received by REICs on behalf of their shareholders from CIT,
provided that a minimum of 75% of the dividend or rental income earned is
distributed within 12 months of the end of the financial year in which the
income was earned. Any income earned by a REIC other than those collected on
behalf of investors is liable to income tax.
iii. Exemption of rental and
dividend income distributed by a REIC to its shareholders from excess dividend
tax.
iv. Dividends or mandatory
payments made by a REIC to its shareholders, and are duly approved by the
Securities and Exchange are deductible for income tax purposes.
v. Exemption of dividends
received by a REIC from WHT.
Road
Infrastructure Development and Refurbishment Investment Tax Credit Scheme
The Federal
Government on 25 January 2019 established a ten-year Road Infrastructure
Development and Refurbishment Investment Tax Credit Scheme ("the Scheme"). The
Scheme was set-up as a public-private intervention that enables the Federal
Government to leverage private sector capital and efficiency for the
construction, refurbishment and maintenance of critical road infrastructure in
key economic areas in Nigeria.
Participants
under the Scheme will be entitled to utilize the project cost incurred in the
construction or refurbishment of an eligible road as a tax credit against their
income tax liability, until full cost recovery is achieved.
The Scheme
grants additional incentive of a single nontaxable uplift on project cost, to
participants. The uplift, which is a percentage (monetary policy rate (MPR)+2%)
of the project cost, will be included in the total tax credit available to each
participant.
Exchange Controls
Exchange
controls are regulated by the Foreign Exchange (Monitoring and Miscellaneous
Provisions) Act, 1995. The Act creates an autonomous market in which
transactions may be conducted in any convertible currency through authorised
dealers. Investments may be made in foreign currency or imported capital and
the investor will be issued a CCI by the authorized dealer within 24 hours of
receipt of the capital and appropriate returns must be filed by the dealer with
the Central Bank of Nigeria (CBN).
In 2014 and
2015, the CBN, in an attempt to ensure efficient utilization of foreign
exchange in the light of dwindling foreign reserves issued several circulars,
to the effect that certain services, which hitherto qualified for foreign
exchange, are no longer eligible transactions. However, on 15 June 2016, the
CBN released revised guidelines on the operations of the Nigerian Interbank
Foreign Exchange Market (IFEM) which superseded its circular of October 28,
2014 and all other prior circulars and guidelines on the subject matter. The
summary of the guidelines for the operation of the new foreign exchange regime
are detailed below:
Non-oil
exporters are allowed unfettered access to their FX proceeds, which shall be
sold on the IFEM.
Any person
may open, maintain and operate a foreign currency account with an authorised
dealer (bank).
Investors and
Exporters FX Window
In April
2017, the CBN established the Investors and Exporters FX Window ("the I&E
Window") to boost liquidity in the FX market and ensure timely execution and
settlement of eligible transactions.
Transactions
eligible to access the I&E Window include:
1. Invisible
transactions (excluding international airline ticket sales remittance) such as
loan repayments, capital repatriation, management services fees, consultancy
fees, software subscription fees, technology transfer agreements, personal home
remittances and "Miscellaneous Payments" listed under Memorandum 14 of the CBN
FX Manual, March 2018.
2. Bills for
collection.
3. Any other
trade-related obligations (at the instance of the customers).
The I&E
Window authorizes importers, exporters, endusers, and CBN-licenced authorised
dealers to trade FX at exchange rates determined by the prevailing market
circumstances determined by the FMDQ.
Residence and Work
Permits
All foreigners are required to obtain work permits,
which are generally granted on the basis of expatriate quota for long term
employment approved for their employers, if it can be demonstrated that a
Nigerian citizen does not have the required expertise to perform the job. A
foreigner that intends to work in Nigeria on short-term basis needs to obtain a
Temporary Work Permit (TWP) Visa. The maximum duration for any TWP is less than
three (3) months. However, where there are compelling reasons for the continued
stay of a foreigner on TWP, perhaps due to extension of the project being executed,
the TWP visa will be extended accordingly.
Annual Budget
Announcement
The President presents the annual budget for the
fiscal year commencing on 1 January to the joint session of the National
Assembly. Thereafter, the Minister of Finance, Budget and National Planning
will provide a detailed breakdown of the budget.
Trade and Bilateral
Agreements
Membership:
Africa, Caribbean and Pacific (ACP), European Union (EU) Partnership Agreement,
Organisation of Petroleum Exporting Companies (OPEC), World Trade Organisation
(WTO), African Union (AU) and Economic Community of West African States
(ECOWAS).
Investment
treaties are in force with France, Netherlands, Germany, Switzerland, Romania,
Spain and the UK. Nigeria has signed the 1965 Convention on the Settlement of
Investment Disputes.
Economic Statistics
Economic Statistics (2020)
Nigeria's
Gross Domestic Product (GDP) decreased by -6.10% (year-on-year) in real terms
in the second quarter of 2020, ending the 3-year trend of low but positive real
growth rates recorded since the 2016/17 recession. The decline was largely
attributable to significantly lower levels of both domestic and international
economic activities during the quarter, which resulted from nationwide
lockdown; aimed at containing the COVID-19 pandemic.
Contribution
from the oil sector fell from 9.50% in Q1 to 8.93% in Q2 2020, while non-oil
contribution rose from 90.5% in Q1 to 91.07% in Q2, 2020. Some activities with
positive growth contributions are financial services (28.41%),
telecommunications and information services (18.10%), information and
communication (15.09%), coal mining (10.53%), motor vehicles and assembly
(6.95%) fishing (5.68%) and chemical, pharmaceutical products (3.79%), amongst
others.
Despite the
current economic realities, Nigeria's economy has remained the largest in
Africa, with its 2019 GDP of US$448.12 billion.
Travel Information
Currency
The Nigerian currency is
the Naira (N or NGN). It is divided into 100 kobo.
Languages
English is the official
language. Hausa, Igbo and Yoruba are the main languages of the North, South-
East and SouthWest, respectively.
Official Holidays (2020)
*Movable holidays,
subject to ratification by the Federal Government
**The National Assembly,
on 16 May 2019, passed the Public Holiday Act (Amendment) Bill. The Act
replaced 29 May with 12 June as the new official Democracy Day. However, 29 May
will remain a public holiday to celebrate transition to a new national
government following general elections every four years.
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