Taxes & Tariffs | |
Taxes & Tariffs | |
1125 VIEWS | |
![]() |
Friday, February 19, 2021 / 1:30PM / By PwC Nigeria / Header
Image Credit: PwC Nigeria
Overview
and General Implications
Economic Context
The outbreak of COVID-19
pandemic led to a contraction of the Nigerian economy by -6.1% in Q2 2020
compared to 2.1% in Q2 2019. Mining and Quarrying contracted by 6.6%,
Manufacturing by 8.8%, Real Estate by 22%, Insurance by 29.5%, Construction by
31.8%, and Trade by 16.6%. However, Information and Communication grew by
16.5%, Financial Institutions by 28.4%, and the agricultural sector remained
resilient as it grew by 1.6% in Q2 2020. The GDP growth trend continued in Q3
2020 and for the rest of 2020.
Many key economic
indicators did not move in the right direction. Inflation rose to 15.75% by the
end of 2020, the highest in almost 3 years while unemployment remained high at
over 27%.
Nigeria's total public
debt increased by 18% to over N32.2 trillion as at the end of 2020 from N27.4
trillion recorded as at 31 December 2019. Meanwhile, disruptions to
international trade flows as a result of the COVID-19 pandemic weighed heavily
on foreign trade in 2020, with exports posting a significant decline of 45.5%
in Q2.
Various monetary policy interventions and fiscal policy
measures introduced by the government helped cushion the severity of the
projected economic decline in 2020 while the Economic Sustainability Plan, the
2021 Appropriation Act and changes introduced via the Finance Act 2020, are
expected to facilitate economic recovery and boost inclusive growth in 2021.
Highlights of the Finance Act 2020
In what is becoming an annual tradition, the Finance Act 2020 ("FA 2020") was passed by the National Assembly and signed into law by the President on 31 December 2020. The FA 2020 which comes into effect from 1 January 2021 compliments the 2021 Federal Government's Budget of Economic Recovery and Resilience, anchored on the following key objectives:
Covid-19 responses, fiscal reliefs and counter-cyclical
measures
The FA 2020 provides for various reliefs in the form of
tax deduction for donations made by companies to Covid-19 intervention funds;
reduction of minimum tax payable by companies from 0.5% to 0.25% of turnover
for the two years of assessment due between 1 January 2020 and 31 December
2021; exemption of small companies from education tax; use of courier service,
email or any other electronic means for assessments and objections. Also, there
is an exemption of compensation for loss of office up to N10 million from tax;
exemption of low-income earners earning minimum wage or less from personal
income tax; reduction of import duties and levy on vehicles; exemption of
commercial flight tickets from VAT; and duty-free importation of aircraft and
aircraft components. These measures are designed to cushion the impact of the
economic challenges triggered by the COVID-19 pandemic.
Fiscal reform and policy coordination
Various
measures introduced by the FA 2020 in this regard include exemption of small
companies from mandatory preparation of audited accounts (this aligns with the
new provisions of CAMA 2020); use of technology by FIRS for tax administration
including accessing information directly from taxpayers' accounting systems.
Also, there is now a legal framework for the Tax Appeal Tribunal to conduct
virtual hearing.
Capital
allowance can now be claimed on software as a qualifying capital expenditure;
deduction for life assurance premium on the life of the insured and his/her
spouse has been reinstated after it was deleted by the Finance Act 2019. There
is a restriction of deductible pension contributions to only schemes approved
under the PRA; reform of commencement and cessation rules under the Personal
Income Tax Act; definition of time and place of supply for VAT purposes;
exemption of land and building from VAT; redesignation of stamp duty on bank
transfers as Electronic Money Transfer (EMT) levy with a new revenue sharing
formula (15% to federal government and the FCT, 85% to states). In addition,
the FA 2020 provides for the creation of dedicated accounts by tax types for
the payment of tax refunds; sanctions to ensure confidentiality of taxpayer
information by tax officers; and requirement for free zone enterprises to file
returns with the FIRS.
Budget funding
and revenue mobilisation
New penalties have been introduced for violation of various requirements introduced
by the FA 2020 including deliberate or dishonest acts to falsify tax returns.
Other changes include provision of a legal framework for the introduction of
excise tax on telecommunications services; introduction of Significant Economic
Presence (SEP) rules for Technical, Management, Professional and Consultancy
services provided by non-resident individuals and other unincorporated entities
under PITA; expansion of VAT obligations of foreign companies doing business
with customers in Nigeria; legal framework to strengthen exchange of
information under various international treaties; redefinition of "gross
income" for the purpose of Consolidated Relief Allowance (CRA) as income from
all sources lessall tax-exempt income and other tax deduction; expansion
of the scope of taxable goods and services for VAT purposes; establishment of
unclaimed funds trust fund to manage unclaimed dividends and dormant accounts
balances; and clarification of the rules for the taxation of international
shipping companies and airlines under CITA and CGT Act.
Fiscal
responsibility and public procurement reforms
The FA 2020
introduced a limit of cost to revenue ratio at 50% for government owned
entities or such other ratios as the Finance Minister via a Gazette upon the
approval of the National Assembly may prescribe. In addition, government
corporations are required to remit the balance of their operating surpluses to
the Consolidated Revenue Fund of the Federation on a quarterly basis.
The Act also expands the definition of "contracts" by specifying parties
to a procurement contract as the procuring entity and a consultant, supplier or
contractor. The scope expansion of the Public Procurement Act and the
definition of contract seek to capture all forms of procurement of services,
goods and works by the public sector and all arms of government.
Takeaways
The Finance
Act 2020 continues the tax reform measures introduced by the Finance Act 2019
and provides different frameworks to respond to the economic challenges brought
about by the Covid-19 pandemic. The new finance act also clarifies a number of
ambiguities identified in the previous amendments as well as other extant
provisions of the various tax laws.
The changes underscore the government's resolve to continue to adopt and
leverage technology in tax administration. Beyond tax, the FA 2020 extends to other
legislation bothering on public procurement, fiscal responsibility, business
regulations and trade policies. It is expected that government will continue to
engage with key stakeholders to keep the reforms under constant review and make
further changes as may be necessary in order to meet the intended objectives.
Credit: The post Nigeria's Finance Act 2020: Insights Series and Sector
Analysis first appeared
in PwC Nigeria on February 01, 2021
This report has been republished with
the permission of PwC Nigeria.
Download Here - Finance
Act 2020
Related News
1. Finance Act, 2020: Impact Analysis
2. Finance Act 2020: Highlights of Latest Developments in Nigeria's Tax
Regime
3. Finance Act 2020 And Its Impact on Employment Tax
4. Implications of Finance Act 2020 for Individuals and Labour Employers
5. FHC Upholds the Illegality of Stamp Duty Deductions Prior to Amendment of
the SDA
6.
Finance Act 2020: Key Changes and
Implications
7.
Unclaimed Funds Trust Fund: We Can
Still Get It Right
8.
Finance Act 2020: Unclaimed Dividends
and Dormant Balances
9.
20 Key Changes in
the New Finance Act 2020
10. Senate Passes Finance Bill 2020
11.
Finance Bill 2021: Stakeholders Engagement Begins
12. Finance Act, 2019: Tax Implications for the Private Equity
Industry
13. Stamping of Electronic Documentations Under the Stamp
Duties ACT as Amended by the Finance ACT
14. FIRS Clarifies Changes Introduced to Nigerian VAT Regime
by the Finance ACT 2019
15. Matters Arising from Implementation of Finance Act 2019
16. Finance Act 2019: Minister Clarifies the Meaning of
Significant Economic Presence
17.
The Finance Act 2019 Introduced an Amendment to the CITA
to Tax a Foreign Entity
18. FIRS Finance Act Circular: Amendments to the Stamp Duties
Act
19. FIRS Issues Clarification on Sundry Provisions of The
Finance Act 2019 as it Relates to CIT Act