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Thursday, November 21, 2019 /
07:00PM / Banwo & Ighodalo Grey Matter
Tax Digest / Header Image Credit: @SPNigeria
Introduction
On Thursday, November 21, 2019, the Finance Bill 2019 (the "Bill") was passed by the Senate after scaling through third reading on the floor of the Senate. The Bill had earlier, on October 14, 2019, been submitted to a joint session of the National Assembly (that is, the Senate and House of Representatives of the Federal Republic of Nigeria) alongside the 2020 Appropriation Bill (the "2020 Budget") by His Excellency, President Muhammadu Buhari.
The Bill proposes fiscal
measures in support of the 2020 Budget of the Federal Government of Nigeria
(the "FGN"), with extensive tax implications for the country. With a total
proposed expenditure of N10.33 trillion against total expected revenue of N8.15
trillion, resulting in a deficit of N2.18 trillion; the 2020 Budget is projected
to be financed partly by tax revenues expected to be generated through the key
fiscal changes introduced by the Bill.
This article provides a
summary of the reforms proposed in the Bill and highlights their likely impacts
on Nigerian entities.
Proposed Key
Reforms in the Bill
In the President's letter
of October 14, 2019 forwarding the Bill for legislative consideration, the
following are listed as the five (5) key strategic objectives of the
Bill:
The Bill, amongst other
things, generally amends certain key provisions of various tax legislation in
Nigeria, with a view to making them more responsive to the tax reform policies
of the FGN, and thereby enhance their implementation and effectiveness.
The key reforms proposed by the Bill include:
The
proposed definition of "exported service" in the Bill suggests that the service
provided must flow directly from the Nigerian resident to the person resident
outside Nigeria. This means that exported service, as contemplated by the
Bill, does not include a transaction where the service in question flows from a
Nigerian resident to another Nigerian resident third party on behalf of or for
the benefit of non-resident persons in Nigeria.
This
is consistent with the recent decision of the Tax Appeal Tribunal, Lagos Zone,
in Allan Gray Investment Management Limited v Federal Inland Revenue Service
(unreported judgment of the TAT delivered on Wednesday, November 13, 2019 in
Appeal No. TAT/LZ/VAT/019/2018), which held that:
i.
services which flow from service providers in Nigeria
to third parties (such as persons resident in Nigeria) on behalf of or for the
benefit of persons resident outside Nigeria do not constitute exported service
for tax purposes in Nigeria, and
ii.
a Nigerian resident through whom a non-resident person
carries on economic activity in Nigeria for profit-making purposes, is
effectively an agent of the non-resident person in Nigeria for tax purposes;
and, accordingly, liable to satisfy the tax obligations of that non-resident
person in Nigeria;
iii.
Increase in the VAT rate from 5% to 7.5%;
iv.
Introduction of the Reverse Charge Principle, which
charges the VAT due on imported supplies in Nigeria in the hands of the
recipients of such taxable supplies;
v.
Removal of the requirement for foreign entities
carrying on business in Nigeria to register for VAT in Nigeria and include VAT
charges in their invoices;
vi.
Exemption of companies with annual turnover of less
than Twenty-Five Million Naira (N25,000,000) from the requirement of filing VAT
returns;
vii.
Specific description of what constitutes basic food
items, within the meaning of the VAT Act, for VAT exemption purposes;
viii.
the definition of goods and services has been expanded
to cover intangible items that a person has ownership interest in, or derives
benefit from, and which can be transferred to another person, other than land;
ix.
Exemption of locally manufactured sanitary pads,
tampons, and towels from VAT; and
x.
Exemption of nursery, primary, secondary, and tertiary
education tuition levies from VAT.
i.
Exempt from Excess Dividend Tax ("EDT")
(a) dividends paid out of
exempted profits or retained earnings previously subjected to tax,
(b) distributions made by
real estate investment companies to their shareholders and dividend incomes
received on behalf of those shareholders, and
(c) franked investment
incomes;
ii.
Subject the digital economy to tax in Nigeria,
including prevention of artificial avoidance of tax by foreign entities which
have significant economic presence in Nigeria without maintaining any
identifiable physical presence in the country (the Minister of Finance is
empowered under the Bill to determine significant economic presence of foreign
companies in Nigeria);
iii. Amend
the existing commencement and cessation of business rules in order to eliminate
incidences of double taxation;
iv.
Require companies to produce their TINs before they
can operate new or existing banking accounts in Nigeria;
v.
Exempt companies with turnover of less than
Twenty-Five Million Naira (N25,000,000) from payment of minimum tax, delete the
current basis for computation of minimum tax, introduce minimum tax of 0.5% on
the turnover of companies that are subject to minimum tax in Nigeria, and
remove the exemption from minimum tax currently enjoyed by companies with
minimum twenty-five percent (25%) imported equity capital;
vi. Create a more favourable tax regime for insurance
companies in Nigeria by allowing the companies to carry their losses forward
indefinitely. The Bill seeks to achieve this by deleting the existing
four-year limitation on carry forward of losses by insurance companies in
Nigeria. Other provisions in the Bill impacting insurance companies
include:
(a) Restriction on
deductions allowed for insurance companies on unexpired risks and other
deductible gains and outgoings, and
(b) requirement for
insurance companies to have no less than twenty percent (20%) of their gross
incomes as their total profits for tax purposes in any relevant accounting
year;
vii. Prevent base erosion and profit shifting by
restricting (a) deductible dividends and mandatory contributions made by real
estate investment companies to their shareholders, to those duly approved by
the Securities and Exchange Commission, and (b) deductible compensating
payments made by lenders to those that qualify as interest and are paid to
their approved agents in RSL transactions;
viii. Reduce tax planning and management arbitrage practices
by disallowing the following expenses for tax deduction purposes:
(a) compensating payments
which qualify as dividends, made by borrowers to their approved agents or
lenders in regulated securities exchange transactions,
(b) federal statutory
penalties and taxes or penalties paid by a company on behalf of another,
(c) expenses involving
connected entities except such expenses comply with the Income Tax (Transfer
Pricing) Regulations,
(d) compensating payments
which qualify as dividends, made by approved agents to borrowers or lenders in
regulated securities exchange transactions, and
(e) expenses incurred in
deriving tax-exempt income and any expense that constitutes an allowable
deduction under the Capital Gains Tax Act;
ix. Reduce
tax burdens for small and medium companies by
(a)
exempting from tax, dividends and rental income received by real estate
companies provided that a minimum of seventy-five percent (75%) of such
dividends or rental incomes are distributed within twelve (12) months of the
accounting year in which they were earned, and
(b)
introducing a lower company income tax rate of twenty-percent (20%) on the
income of medium-sized companies with annual turnover of between Twenty Five
Million Naira and One Hundred Million Naira (N25,000,000 - N100,000,000), and
(c)
exempting small companies with annual turnover of less than N25,000,000 from
company income tax.
x. Reduce tax exemption granted in respect of interest on foreign loans, by removing the existing one hundred percent (100%) tax exemption on such incomes; and
xi. Introduce thin capitalization rules on loans issued to Nigerian companies by offshore related entities, by (a) restricting deductions of excess interest expenses which are not fully utilized to minimum periods of 5 years from the year in which the excess interest expenditure was first computed, and (b) limiting deductible interests paid by Nigerian companies to offshore connected entities to thirty percent (30%) of Earnings Before Interest, Tax, Depreciation, and Amortization (EBITDA).
Commentary
As evident from the
highlights above, the primary objective of the Bill is the generation of
additional revenues for the Government to potentially partly finance the
deficit in the 2020 Budget of the FGN.
Generally, the Bill seeks
to promote fiscal equity by mitigating instances of regressive taxation, reform
domestic tax legislation in line with global best practices, and introduce tax
incentives particularly for investments in infrastructure and thereby engender,
to an extent, the legislative framework necessary for the development and
growth of micro, small, and medium enterprises (in support of the FGN’s ongoing
ease of doing business reforms). By the same token, the Bill imposes
higher rates for certain existing taxes and subjects some previously exempted
incomes to tax.
One of the key reforms
introduced by the Bill relates to EDT risks to which Nigerian entities are
currently exposed. By the provisions of section 19 of the CITA, any
dividend declared and paid by a company in excess of the total taxable profit
declared in any accounting year ("excess dividend") is subject to EDT,
regardless of the source or nature of the dividend paid.
By virtue of these
provisions, most companies who paid out excess dividend out of income earned
from investments exempted from tax by declarations contained in Executive
Orders or Administrative Instruments, have been unable to enjoy such exemption
as recent judicial pronouncements have declared such Orders or Instruments void
in the light of the provisions of section 19 of the CITA. The
proposed amendment in the Bill regarding EDT is thus a welcome development and
we note that it is in line with our recommendation on the issue, in an earlier
publication.
In like manner, the
proposed amendments to sections 78 and 80 of the CITA are expected to encourage
investments in both debt and equity transactions in the capital-market with a
focus on regulated securities lending transactions and dividend distribution to
a real estate investment company. It is interesting to note that the Bill
is silent on the existing withholding tax exemption on corporate and State Government
bonds mindful that the exemption will expire in January 2022.
Another significant reform
seen in the proposed amendment in the Bill, legalizing service by aggrieved
taxpayers on relevant tax authorities, of objections against tax assessments
through electronic means, is in conformity with emerging trends and embraces
contemporary technological innovations. This proposed amendment is in line with
a recent decision of the Tax Appeal Tribunal, declaring such electronic means
of service as valid and legally binding.
Furthermore, the proposal
for taxation of the digital economy and introduction of the reverse charge
principle into the Nigerian tax system, readily call to mind the recent
decision of the Court of Appeal where it was established that:
(a) Whilst the reverse
charge principle of international tax is not expressly mentioned in the VAT
Act, the philosophy attending the principle is envisaged in the VAT Act and
therefore applicable in Nigeria, and
(b) the supply of
satellite network bandwidth capacities qualifies as "imported service" subject
to VAT in Nigeria.
However, we note the
widespread concern that the introduction of 10% WHT on dividends paid out of
the profits of companies engaged in petroleum operations may be excessive;
since such incomes would have already been subjected to 85% petroleum profits
tax prior to payment of the dividends. Also, the proposed VAT hike from
5% to 7.5% may likely drive up the prices of consumables as the additional tax
will surely be passed by suppliers of goods and services to the final consumers
or end users. An increase in VAT rate may also result in a corresponding
rise in the cost of inputs used in the production of goods and services
generally, where such inputs are not specifically included in the exemption
list specified in the First Schedule to the VAT Act.
We also note that in order
to maximally achieve the planned boosting of investment in infrastructure and
the capital market (one of the stated objectives of the Bill), section 102 of
the Stamp Duties Act should be amended to exempt from ad valorem stamp duties
rate, trust deeds issued in respect of bonds transactions. Currently, the
applicable stamp duties on this set of capital market transactions raise costs
for bond issuers and make compliance with the SEC Rule on limitation on total
cost of offer difficult, if not impossible, for the issuers.
It remains to be seen if the House of Representatives would concur with the Senate and pass the Bill in its current form or whether further legislative actions would be considered to address some of the concerns that have been raised by Nigerian businesses and entities.
The Grey
Matter Concept is an initiative of the law firm, Banwo & Ighodalo.
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This article is only intended to provide general information on the subject
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