The President of the Federal Republic of Nigeria, Muhammadu Buhari, signed the Finance Bill, 2019 into law on 13 January 2020.
The amendments announced by the Finance Act, 2020 (the “Act”) intend to increase revenue collection to fund public expenditure; ensure that tax laws are consistent with national tax policy objectives; and incentivise investment in infrastructure and capital markets.
Significant amendments introduced by the Act include:
- an increase in the value-added tax (“VAT”) rate from 5% to 7.5%, effective from 1 February 2020;
- taxing foreign companies involved in the digital economy, including those transmitting or receiving signals in respect of, inter alia, electronic commerce, high frequency trading, electronic data storage, online adverts, participative network platform and online payments, to the extent that the company has significant economic presence in Nigeria and profit can be attributable to such activity;
- levying a final withholding tax on income earned by foreign companies from technical, management, consultancy or professional services that are remotely provided to a person resident in Nigeria;
- reducing the withholding tax rate on certain construction contracts from 5% to 2.5%;
- exempting unit trust dividends from withholding tax;
- exempting franked investment income, after-tax profits, tax-exempt income and distributions made by real estate investment companies from excess dividend tax;
- exempting profits arising from the transfer of assets pursuant to a related party business reorganisation from capital gains tax, subject to certain conditions;
- removing the requirement that every company liable to companies income tax is required to make an advance payment of its companies income tax prior to paying interim dividends;
- scrapping the withholding tax exemption for dividends in specie;
- modifying the rules applicable to determining the deductibility of expenses to limit deductions to expenses incurred in the production of taxable income;
- removing the requirement that the deductibility of management fees and other related party costs be subject to regulatory approval;
- restricting deductible interest to 30% of earnings before interest, tax, depreciation and amortisation (EBITDA), with any excess deduction to be carried forward for five years;
- simplifying the base for minimum tax to 0.5% of a company’s turnover less franked investment income and removing the exemption for companies with at least 25% imported capital;
- requiring companies filing self-assessment returns to pay their taxes in full on or before the due date for filing, but offering a 1% tax credit (2% for medium-sized companies) to those paying 90 days before their due date for filing;
- requiring every company to provide a tax identification number as a prerequisite to opening or continuing to operate a bank account;
- introducing specialised tax rules for real estate investment companies;
- allowing insurance companies to carry forward tax losses indefinitely, deduct the reserve for unexpired risks on a time apportionment bases and abolishing special minimum tax for insurance companies;
- levying 10% withholding tax on dividends distributed from petroleum profits;
- introducing an annual VAT registration threshold of NGN25-million turnover;
- introducing VAT “place of supply” rules for services, and deeming any service supplied to a Nigerian-based customer and enjoyed in Nigeria to be VATable in Nigeria;
- defining zero-rated “exported services” for VAT purposes as a service rendered within or outside Nigeria by a person resident in Nigeria to a non-resident person outside of Nigeria, in line with the destination principle; and
- introducing a requirement for a customer to self-account for VAT where the supplier or VATable goods or services failed to charge VAT.
The amendments introduced by the Finance Act are expected to have significant implications, particularly for foreign groups doing business in Nigeria. An immediate practical challenge is the increase in VAT rate which becomes effective on 1 February 2020 already, not allowing taxpayers much time to update their systems to accommodate the change.
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