In a bid to ensure that economic and financial challenges faced by the country are promptly managed and addressed through revised and definite economic policies, President Muhammadu Buhari signed the Finance Bill 2020 into law which is now known as the Finance Act 2020 ("The Act") on December 31, 2020 alongside the 2021 Appropriation Bill. This aligns with best practices in different jurisdictions across the world where existing tax legislations and framework are annually reviewed in order to support each year's budget and a major aspect of the initiatives suggested by the President Enabling Business Environment Council (PEBEC) and the National Tax Policy Implementation Committee.
The Act which takes effect from the 1st day of January 2021 amends several provisions of the Capital Gains Tax Act, Companies Income Tax Act, Industrial Development (Income Tax Relief) Act, Personal Income Tax Act, Tertiary Education Trust Fund Act, Customs & Excise Tariff (Consolidation) Act, Value Added Tax Act, Federal Inland Revenue Service (Establishment) Act, Companies and Allied Matters Act, the Fiscal Responsibility Act and the Public Procurement Act etc.
Some key changes introduced by the Act includes:
A. Tertiary Education Trust Fund (Establishment, etc) Act
Exemption of small companies from tertiary education tax
The Act exempts small companies1 with gross turnover2 of N25,000,000 or less from being charged tertiary education tax at the rate of 2% on the assessable profit of the company. Conversely, medium sized company with gross turnover greater than N25,000,000 but less than N100,000,000 and large company which is neither a small nor medium sized company are liable to pay tertiary education tax.
B. Value Added Tax (VAT) Act
1. Expansion of the scope of taxable goods and services
The Act provides that a taxable supply is deemed to have taken place in Nigeria in respect of an incorporeal if the exploitation of the right is made by a person in Nigeria or the right is registered in Nigeria, assigned to or acquired by a person in Nigeria regardless of whether payment for its exploitation is made within or outside Nigeria or, the incorporeal is connected with a tangible or immovable asset located in Nigeria. The foregoing appears to subject to VAT all intangible or intellectual property rights transactions such as trademarks, copy rights, royalties etc. which a taxable person undertakes.
On Service, the Act deems taxable supply of a "service" to have taken place in Nigeria if; the service is rendered in Nigeria by a person physically present in Nigeria at the time of providing the service, the service is provided to and consumed by a person in Nigeria, regardless of whether the service is rendered within or outside Nigeria or whether or not the legal or contractual obligation to render such service rests on person within or outside Nigeria, or, the service is connected with existing immovable property (including the services of agents, experts, engineers, architects, valuers, etc.), where the property is located in Nigeria.
Notably, the Act provides that the time of supply shall be the time an invoice or receipt is issued by the supplier, or payment of consideration is due to, or received by the supplier in respect of that supply, whichever occurs first.
2. Effective date for the new VAT rate
The Act further clarifies that the effective date for the new VAT rate of 7.5% as introduced by the Finance Act 2019 is the 1st February 2020. This entails that vatable transactions undertaken by the taxable persons from the 1st February 2020 must reflect VAT at 7.5%.
3. Registration by non-resident companies
The Act mandates non- resident companies (foreign companies) that make taxable supplies in Nigeria to register with the Federal Inland Revenue Service (FIRS) and obtain Tax Identification Number (TIN). The non- resident company is expected to include VAT on its invoice for all taxable goods or services. The Nigerian entity which is the recipient of the taxable goods or services from the non-resident company would be deemed an agent of the tax authority and consequently required to withhold and remit the tax to the tax authority in the currency of the transaction.
4. Definition of goods and services
Taxable goods was defined to include all forms of tangible properties, movable or immovable excluding land and building, money or securities while services means anything, other than goods, or services provided under a contract of employment and includes any intangible or incorporeal (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 building, money or security.
5. Exemption of taxable goods and services
The Act further amended the goods exempt from VAT to include commercial aircrafts, commercial aircraft engines, commercial aircraft spare parts and services exempt to include airline transportation tickets issued and sold by commercial airlines registered in Nigeria and hire, rental or lease of tractors, ploughs and also other agricultural equipment for agricultural purposes
C. Companies and Allied Matters Act (CAMA)
Limitation period on the right of a shareholder to claim for dividend
The Act stipulates that a shareholder shall have the right to claim and recover declared dividends within 12 years and dividends that are unclaimed after 12 years should be included in the profits that should be distributed to the other shareholders of the company. Usually withholding tax is deducted at source at the rate of 10% from dividends before distribution to shareholders. The instant limitation to the shareholder's right to claim and recover declared dividends does not detract from the company's obligation to deduct withholding tax from the dividends at source and remit same to the relevant tax authority.
Notwithstanding the above limitation period, the dividends of a public limited liability company quoted on the Nigerian Stock Exchange which has remained unclaimed for a period of six years or more from the date of declaring the dividend shall be immediately transferred to the Unclaimed Funds Trust Fund. The unclaimed dividends transferred to the Unclaimed Funds Trust Fund shall be a special debt owed by the Federal Government to the shareholders by virtue of perpetual trust and shall be available for claim by the shareholder at any time.
D. Capital Gains Tax Act
Exemption of Compensation for loss of employment/office up to a maximum of N10,000,000.00 from capital gains tax
The Act exempts sums obtained by way of compensation for loss of office, up to a maximum of N10,000,000.00 from capital gains tax. This purports that the excess of N10,000,000.00 paid by an employer as compensation for loss of office amounts to chargeable gains and is subject to capital gains tax at the rate of 10% which the employer is mandated, at the point of payment of such compensation, to deduct and remit to the relevant tax authority.
Timeline for the payment of capital gains tax and filing of returns
Any person having disposed a chargeable asset is expected to not later than 30 June and 31 December of that year, compute the capital gains tax, file self-assessment return, and pay the tax computed in respect of the chargeable assets disposed in the periods.
E Stamp Duties Act
Introduction of Electronic Money Transfer Levy
The Act scrapped payment of stamp duty on electronic transactions and introduced a singular and one-off levy of N50 known as "Electronic Money Transfer Levy" on electronic receipts and transfers of money deposited in any deposit money bank or financial institution, on any type of account. The N50 levy is to be imposed on electronic receipts or electronic transfer of money in the sum of N10,000.00 or more.The levy is to be accounted for by the person to whose favour the transfer or deposit is made.
F Companies Income Tax Act
Taxation of the profits of a non-resident company
The Finance Act 20193 stipulates that the profits of a non-resident company from any trade or business shall be deemed to be derived from Nigeria and hence subject to Companies Income Tax (CIT) if the trade or business comprises the furnishing of technical, management, consultancy, or professional services outside of Nigeria to a person resident in Nigeria to the extent that the company has significant economic presence in Nigeria. The Act further clarifies that the withholding tax applicable to the said income shall be the final tax on the income of the non-resident recipient who does not have a fixed base in Nigeria etc.
In respect of the above, the Companies Income Tax (Significant Economic Presence) Order 2020, provides that a non-resident company shall have a significant economic presence in Nigeria in an accounting year where it earns any income or receives any payment from a person resident in Nigeria; or a fixed base or agent of a non-resident company in Nigeria. The Order further provides that a company shall not have a significant economic presence in Nigeria in relation to a payment, where the payment is made by a foreign fixed base of a Nigerian company.
Donations as tax deductible
The Act permits as "allowable deductions"4 donations made by companies in cash or kind to any fund set up by the Federal Government or any State Government, or to any agency designated by the Federal Government or to any similar Fund or purpose in consultation with any Ministry, Department or Agency of the Federal Government, in respect of any pandemic, natural disaster or other exigency as cost of in-kind donations made to the Government and any designated agency; or items procured or manufactured for contribution, the cost of purchase, manufacture or supply of such in-kind contributions. Provided that requisite documentation evidencing the donation and the cost thereof are provided to the relevant tax authority and demonstrated to be wholly, reasonably, exclusively and necessarily incurred in relation to the procurement, manufacture or supply of the in-kind contributions. In a bid to reduce tax liability, companies can explore donations to the Government or any designated agency in respect of any pandemic (Covid 19), natural disaster or other exigency whilst ensuring that there are also relevant documentations to proof the donations and its attendant costs.
Reduction of Minimum Tax for returns prepared and filed any year of assessment falling due between 1 January 2020 and 31 December2021
The Act reiterates that the minimum tax5 to be levied and paid shall be 0.5% of gross turnover of the company less franked investment income and further provides that the applicable minimum tax shall be reduced to 0.25% for tax returns prepared and filed for any year of assessment falling due on any date between 1 January 2020 and 31 December 2021. Where a company makes gross turnover of more than N25,000,000 in 2020 and 2021 accounting year, the company should endeavour to prepare and file its returns timely to enjoy this incentive.
Filing of returns by non-resident companies
The Act further reiterates the need for a Nigerian company to self-assess and file its tax returns while a non-resident company which have derived profit from Nigeria from any trade or business is now expected to also self-assess and file its returns including the company's full audited financial statements and the financial statements of the Nigerian operations, attested by an independent qualified or certified accountant in Nigeria6. Taxable entities are to ensure that its non-resident clients which have derived profit from Nigeria from any trade or business files it tax returns in Nigeria except where the non-resident company only earned income on which withholding tax is the final tax.
Obligation to maintain books of accounts
The Act provides that every company including a company exempt from paying tax such as a small company shall maintain books or records of accounts containing sufficient information or data of all transactions and the said book or record shall be kept for a period of at least six years after the year of assessment in which the income relates.
G Personal Income Tax Act
Expansion of persons or individuals who are subject to taxation in Nigeria under the Significant Economic Presence (SEP) Rule.
The Act introduces the concept to Significant Economic Presence (SEP) to taxation of non-resident individuals, executor or trustee. The effect of this is that profit or income generated from supply of services to a person resident in Nigeria by an individual who is not resident in Nigeria would be deemed subject to tax in Nigeria to the extent of the non-resident individual's significant economic presence in Nigeria. However, the Minister of Finance is yet to release an Order which will clearly define what and how significant economic presence would be determined for a non-resident individuals, executor or trustee.
Pension Contribution as a tax-deductible expense
Another innovation under the Act is the recognition of pension contribution as a deductible expense. The effect of this is that employers must deduct pension contributions in computation of Pay As You Earn to be remitted by employees.
Expansion of gross income and the recognition of life insurance as an allowable deduction
In computing the Consolidated Relief Allowance (CRA) of N200,000 or 1% of gross income whichever is higher plus 20% of the gross income, the Act defines gross income to include income from all sources less all non-taxable income, income on which no further tax is payable, tax-exempt items listed in paragraph (2) of the Sixth Schedule and all allowable business expenses and capital allowance. The Act further provides as an "allowable deduction" the annual amount of any premium paid by the individual during the year preceding the year of assessment to an insurance company in respect of insurance on his life or the life of his spouse or of a contract for a deferred annuity on his own life or the life of his spouse.
Exemption of minimum wage earners from payment of personal income tax
The Act now provides that the income of individuals whose gross income is the national minimum wage or less i.e. N30,000.00 or less, are exempt from tax under the Personal Income Tax Act.
H Customs and Excise Tariff, etc (Consolidation) Act
Introduction of Excise duty on telecommunication services
The Act provides that telecommunication services provided in Nigeria shall be charged with excise duty at a rate to be prescribed by the President.
Downward Review of Excise duty rates on tractors, motor vehicles etc and introduction of duty-free importation for commercial airlines
The Act reduced duties on tractors from 35% to 5%, motor vehicles for the transportation of goods from 35% to 10%, motor vehicles for the transportation of persons from 30% to 5%, motor vehicles for the transportation of more than ten persons from 35% to 10%. The Act further introduced duty-free importation of aircrafts, engines, spare parts and components whether purchased or leased of commercial airlines registered in Nigeria.
I Federal Inland Revenue Service (Establishment) Act
Automation of the tax administration process and information gathering
The Act provides that the FIRS may deploy proprietary technology to automate the tax administration process including tax assessment and information gathering provided it gives 30 days' notice to the taxpayer.
Conduct of virtual hearings and proceedings by the Tax Appeal Tribunal TAT)
The Act empowers the TAT to conduct its hearing remotely via virtual means, using such technology or application as may be necessary to ensure fair hearing.
1 As defined by the Finance Act 2019
2 Gross turnover as defined by the Finance Act 2020 means the gross inflow of economic benefits during the period arising in the course of the operating activities of an entity when those inflows result in increases in equity, other than increases relating to contributions from equity participants, including sales of goods, supply of services, receipt of interest, rents, royalties or dividends.
4 amounts allowable for deduction in any year of assessment shall be limited to 10% of assessable profits after deduction of other allowable donations made by the company."
6 The obligation on non-resident companies to file tax return shall not apply where in any year of assessment the non-resident company only earns income on which withholding tax is the final tax.
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