Tax Law: Sectorial implications of Nigeria’s Proposed Tax Law on the economy

The coming into effect of Nigeria’s proposed new tax law is intended to reduce its budget deficit and consolidate the economy making it more stable. The new tax law will get rid of double taxation which over time has impacted negatively on businesses in the country. This move according to financial analysts, will increase investors’ confidence and increase foreign direct investment for the country

The old method for computing basis periods for new businesses and ceasing periods  have been amended in the new law with the introduction of actual year basis.

To operate bank accounts in the country, possession of Tax Identification Number will become a requirement while the penalty for failure to register for value-added tax (VAT) was reviewed upwards to N50,000 for the first month of default N25,000 for each subsequent month of default

The banking industry and capital markets

Electronic payment option for stamp duty was introduced.  The Stamp duty threshold was increased to N10,000 from N1,000. This implies a one-off levy of N50 will apply to bank transfers on an amount from N10,000 and above.

Insurance companies

In other to ensure fair and equitable taxation of insurance companies, double taxation was removed while recognizing regulatory cost that will be incurred by such companies in compliance with the directives of the insurance regulatory body.

For example, Section 16(9)(c) suggests that after all deductions have been granted to life insurance companies, the company must have 20percent of its gross income available as taxable profit. Also, for general insurance, tax deductions for other reserves, claims, and outgoings are capped at 25 percent of total premium. Restricting the tax deduction for claims is a significant disruption to insurance business as payment of claims drives customer confidence.

The Finance Bill eliminates the restriction of tax deduction for claims and outgoings to a cap of 25 percent of total premium. The Finance Bill also introduces an additional allowance of 10 percent of estimated outstanding claims for claims incurred but not reported at year-end. This is positive for the industry as valid business expenses of insurance companies would no longer be disallowed from a tax perspective.

Energy & Utility Firms

The new law proposes that dividends from upstream companies will henceforth be subject to withholding tax which was previously not the case.

The new law could see an increase in the costs of services to Nigerian companies where the service providers pass on the withholding tax costs especially if there is no tax relief available to the foreign company in its home country.

Consumer & Industrial products players

The Bill includes a definition of “basic food items” for the purpose of VAT exemption. This is defined as “agro and aqua-based staple food” and include items such as bread, cereal (raw or semi-processed), cooking oil, culinary herbs (if raw and unprocessed), fish (other than ornamental), flour and starch (refined or unrefined), fruits (including dried), milk (including powdered), nuts and pulses (including roasted, fried, boiled, salted), roots (also in the form of flakes), salt (excluding industrial), vegetables (dried or ground), and water (excluding sparkling or flavoured). The Bill also includes sanitary items in the exemption list.

Section 41 of the Companies Income Tax Act (CITA) grants a 15 percent tax credit to a company that incurs capital expenditure to replace “obsolete” plant and machinery. This is in addition to the capital and investment allowances ordinarily available on such capital expenditure. The Bill has deleted this provision in order to rationalise incentives and due to the ambiguity on what constitutes an “obsolete” plant or machinery, making the incentive redundant in practice.

The Bill seeks to increase the VAT rate from 5 percent to 7.5 percent to help reduce budget deficits, fund the new minimum wage and provide social services. The implication is that the VAT rate increase will result in higher-cost production and investment, which will be passed on to the consumers.Only a business that has an annual turnover of NGN 25 million and above, will be required to register for VAT, charge and collect VAT on its sales. This enhances the competitiveness of small businesses and avoids the burden of administering VAT on such small businesses by the

Micro, small and medium-sized enterprises

The micro, small and medium-sized enterprises are one of the biggest beneficiaries of the new finance bill.

One of such privileges is that, while CITA imposes 30 percent corporate income tax on the profits of a company, the bill exempts small businesses with turnover less than N25 million from the tax, and a lower corporate income tax rate of 20 percent will apply to medium-sized companies with turnover between N25 million and N100 million.

Companies that make CIT payment on or before 90 days from the due date for filing will be entitled to a bonus of 2 percent and 1 percent bonus for a medium-sized and a large firm, respectively.

Also, the bill introduces VAT registration threshold of N25 million turnover, implying that SMEs that do not meet the threshold would not need to register for VAT and as a result would not be able to recover input VAT on their purchases.

Real estate investment companies

The bill proposes to exempt dividend and rental income received by real estate investment companies on behalf of their unitholders from corporate income tax. However, this is based on the provision that a minimum of 75 percent of the dividend or rent earned is distributed within 12 months of the end of the financial year in which the income was earned.

Digital economy

The new Finance Bill introduces two additional categories of Fixed Base  to capture e-commerce and technical/management/consultancy services provided remotely by non-resident companies  to Nigerian consumers, to the extent that the providers have a significant economic presence in Nigeria.

The VAT Act requires a non-resident company that “carries on business in Nigeria” to register for VAT, and issue VAT invoices to its Nigerian customers. This VAT would be deducted by the Nigerian recipient and paid to the FIRS. Even where the NRC does not include VAT on its invoice, the Nigerian company is expected to now “self-charge” the VAT and remit.